Germany challenges use of euro zone cash to repair banks

BRUSSELS Thu Nov 14, 2013 5:16pm EST

French President Francois Hollande (L) German Chancellor Angela Merkel (R) and European Commission President Jose Manuel Barroso leave after a news conference at the end of an international summit on youth unemployment attended by heads of states from EU countries at the Elysee Palace in Paris, November 12, 2013. REUTERS/Philippe Wojazer

French President Francois Hollande (L) German Chancellor Angela Merkel (R) and European Commission President Jose Manuel Barroso leave after a news conference at the end of an international summit on youth unemployment attended by heads of states from EU countries at the Elysee Palace in Paris, November 12, 2013.

Credit: Reuters/Philippe Wojazer

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BRUSSELS (Reuters) - Germany challenged a central plank of plans to forge a banking union in the euro zone on Thursday, arguing against the use of the currency bloc's funds to help lenders exposed as dangerously weak by health checks next year.

As finance ministers gathered in Brussels to outline plans to deal with banks still in difficulty, Germany's finance minister hardened his stance on the use of the bloc's emergency fund, according to people close to the talks.

Ministers had been drafting a joint statement to outline their plan of action after bank health tests next year to draw a line under the region's financial crisis.

But sharp divisions emerged between France, which wants a euro zone safety net, and Germany, which is worried that it will shoulder much of the burden if weak countries turn to the bloc's emergency fund.

Many consider a euro zone backstop central to building a banking union to avoid a repeat of events in Ireland, which required a sovereign bailout when it buckled under the weight of its banks' debts.

Earlier this year, euro zone countries agreed that their rescue fund, the European Stability Mechanism, could provide direct assistance to banks, not just indirectly by lending to governments.

This is a key demand of some of Europe's biggest countries - France, Italy and Spain. On Thursday, Germany called that into question.

Ahead of the meeting, French Finance Minister Pierre Moscovici told reporters: "France continues to believe that we ... must not exclude direct recapitalization by the European Stability Mechanism as a last resort."

Speaking just yards away, however, Wolfgang Schaeuble, Germany's finance minister, poured cold water on the idea.

"The German legal position rules it out now," said Schaeuble. "That's well known. I don't know if everyone has registered that."

Inside the meeting room, people close to the talks said the two clashed again, when Germany asked for the removal of any reference to ESM bank aid from the ministers' statement. He was challenged by Moscovici, who was backed by Spain's Economy Minister Luis de Guindos.

The statement is due to be made on Friday.


The dispute comes at a delicate moment in Europe's early economic recovery and could yet stymie the banking union reforms.

Ireland and Spain, which both required international emergency aid to tackle their banking problems, will end those programs in the coming weeks.

But bank health checks next year - by the European Central Bank and then by regulators across the wider European Union - could upset this fragile picture as they are likely to reveal losses on loans and capital holes at banks.

By explaining how the clean-up will be paid for, ministers had hoped to reassure investors that they are finally ready to come clean on the bank problems that have dogged them for more than half a decade.

But their promise to stand ready with national backstops will be a hollow one if it is unclear how countries who are too weak to prop up their banks alone can be helped.

A new pan-euro zone fund to pay for the costs of closing down or salvaging weak banks was intended to address this but Germany also made clear on Thursday that it did not want the ESM to lend to any such fund.

"We are very clear that we don't want a mutualisation of bank risks," one German government official said, adding that talks between political parties in Berlin to form the next government meant that Schaeuble had yet to receive a final mandate for negotiations.

Banking union, Europe's most ambitious reform since the start of the euro currency, would see the ECB policing lenders and should ultimately form a united front across the euro zone to back ailing banks or close them down.

But the path to completing it is strewn with obstacles, and time is running out for the ministers to strike agreement by their self-imposed deadline of the end of the year. One of the most sensitive questions is how to deal with banks so badly wounded that they need to be closed.

"We won't put a knife to our throats," said Moscovici. "It's unlikely we will reach agreement tomorrow."

The first pillar of banking union will see the ECB take on the supervision of big banks towards the end of next year.

In tandem, it will conduct a review of their balance sheets. Rating agency Standard & Poor's believes that the bank capital shortfall in the euro zone may total slightly more than 1 per cent of the region's economic output, or about 95 billion euros.

Before such a test result can be announced, the question of who pays for the costs of salvaging weak banks or shutting those not worth saving must be answered.

Any state help will come at a heavy cost by imposing losses on shareholders and junior bondholders. In time, possibly as soon as 2015, senior bondholders and even depositors with more than 100,000 euros will be forced to take losses.

(Additional reporting by Robin Emmott, Martin Santa and Jan Strupczewski; Editing by Will Waterman)

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Comments (4)
breezinthru wrote:
This is really a simple matter. Bank deposits should be insured up to 100,000 units of currency. If the bank takes losses to the extent that it becomes insolvent, the government should make good on its promise to depositors.

The bank’s investors however should make profits if the banks does well and investors who fully absorb losses. It would be investors then who would ensure that the bank’s officers carefully manage risk.

Passing losses off to ordinary citizens whether directly or through devaluation of the currency encourages reckless investing. There are no real consequences.

Nov 14, 2013 5:25pm EST  --  Report as abuse
JLWest wrote:
Breezinthru you are 65% correct.

If a bank is insolvent here are the steps that should be taken.

1. Raise additional capital in the open market. Not possible then.
2. Wipe out the stock holders. Not enough.
3. Wipe out the junior bond holders and preferred stock holders. Need more.
4. wipe out the remaining bond holders. Not enough.
5. Pay off all of the depositors up to 100,000. Close the bank.

Have all EU governments publish a quarterly rating of the financial health of every bank backed up by the rating agencies.

Why this is not done.

There would be a mass run on banks when the first financial report is released.

The banks own each other secured bonds and if two or three banks fail the domino effect will bring down the whole banking system. This is what Germany is really afraid of with the ECB lending directly to banks. Banks in Italy, France and Spain could bankrupt Germany.

Nov 14, 2013 11:34pm EST  --  Report as abuse
JLWest wrote:
The German official said if the money available in the fund was not sufficient, member states would have to provide money for the funds.

Should a government not be in a position to do so, it would have to go cap in hand to the ESM and that would come with conditions attached, as in the case of all ESM programs such as in Spain.”

How is that working out for you in Athens. They need more bailouts for as far as the eye can see and will suck you dry before you write it off. France and Spain both will miss there debt targets. You can’t get anything done in Porportugal on debt and they are sitting on a mountain of gold.

But don’t worry. Most of the Germans are to stupid to understand this. A lot like Americans in that respect.

Nov 14, 2013 11:54pm EST  --  Report as abuse
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