EU's Barroso hints at direct support for European banks
LOS CABOS, Mexico
LOS CABOS, Mexico (Reuters) - The president of the European Commission suggested on Monday that a way needed to be found to provide direct support to Europe's banks rather than lending to governments so they can recapitalize distressed lenders.
Speaking ahead of a summit of the Group of 20 industrialized and developing countries, Jose Manuel Barroso said the link between highly indebted governments and bad banks needed to be broken, and suggested Spain could be a starting point, although it remains legally difficult to do it immediately.
The euro zone agreed on June 9 to provide up to 100 billion euros ($125 billion) to Madrid to recapitalize its banks, with the aid going to the government's bank rescue fund. That means the loans will accrue to Spain's sovereign debt, worsening its debt-to-GDP ratio and increasing its financing costs.
"What we expect now is that Spain will make the formal request, and then we will discuss between the euro area members the best way to do it," Barroso told reporters.
He said he didn't know exactly what mechanism would be agreed to support Spain's lenders, weighed down by a wealth of bad property loans, but said that the Commission favored a way that avoided saddling the government with more debt.
"Certainly the European Commission ... will be in favor of a system that avoids as far as possible any kind of contamination between debt - financial debt and sovereign debt - because we believe that this is one of the issues that can have a negative impact in terms of market reaction."
Germany is firmly opposed to direct recapitalization from the euro zone's rescue funds because it ultimately leaves member states on the hook for banks. The rescue funds, both the temporary EFSF and the permanent ESM, which launches in July, were set up as country-to-country lending mechanisms.
As a result, the legal agreements governing them would have to be changed to allow direct recapitalization, a time-consuming and divisive process.
Barroso said the issue needed to be discussed among euro zone finance ministers, and his staff indicated he was referring to longer-term plans, rather than to an immediate step that could apply to Spain in its current circumstances.
The issue will be a central to discussions among euro zone finance ministers at a meeting in Luxembourg on June 21-22.
"We have to still discuss this in the Eurogroup, that is why it would be premature from me to give you a definite answer on that matter," Barroso said, referring to the finance ministers' meeting.
SPAIN SET TO REQUEST HELP
Spain is expected to make a formal request for help as soon as the Luxembourg gathering, although any decision to request the aid may depend on how it will be delivered, since the government would prefer direct recapitalization.
A draft of the final communiqué to be agreed among the G20 leaders appeared to back Barroso's position, making a direct reference to the need to break the link between government debts and banking-sector debts.
"The euro area member states at the G20 will take all necessary policy measures to safeguard the integrity of the euro area," reads the draft communiqué, seen by Reuters, "including the functioning of financial markets and breaking the 'feedback loop' between sovereigns and banks."
EU leaders will discuss how to overhaul their crisis fighting measures, including steps to strengthen the banking system and provide a backstop for deposits, at a summit in Brussels on June 28-29.
No decisions are expected at that meeting, but it may agree that Herman Van Rompuy, the president of the European Council, should draw up a more detailed blueprint for how the EU can set up a banking union and move closer to a fiscal union in the coming years, which would help combat the debt crisis.
"Priority is given to banking integration and in the bank integration, I think we can reach, sooner than in other matters, an agreement on a more centralized and more common supervision," Van Rompuy told a news conference, speaking alongside Barroso.
"The timeline depends on the legal framework under which we have to work. We can do a lot in the current treaties, the framework of the current treaties. If we go beyond this, it takes of course much more time," he said.
(Writing by Luke Baker; Editing by Padraic Cassidy)
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