Euro zone may scrap option of direct bank recapitalization in 10 years

BRUSSELS Mon Jan 27, 2014 11:13am EST

BRUSSELS (Reuters) - Euro zone governments are considering inserting a "review clause" into their agreement on the direct recapitalization of banks so that they can reverse or renegotiate the deal in the coming years, officials have told Reuters.

Under the proposal, governments would be able to review direct recapitalization - one of the most hard-fought-over principles of the debt crisis - after 10 years, once a single euro zone bank resolution fund (SRF) is in place.

The discussion shows how far policymakers have moved on from the height of the crisis in mid-2012, when the idea of direct recapitalization helped calm volatile markets.

Inserting a review clause would mark another victory for Germany. Although it initially came up with the idea of direct recapitalization, it has since grown concerned about German taxpayers having to stump up for banks in other countries.

The review clause is the initiative of Germany and Finland but is supported by several other states, officials say.

"Germany and Finland told other euro zone countries last week they would like direct bank recapitalization to be in place only for 10 years, starting from the date the SRF is set up," a euro zone official with knowledge of the talks told Reuters.

Leaders agreed in 2012 that the euro zone's bailout fund, the ESM, must have the option of directly buying a stake in a bank to break the 'doom loop' that binds indebted governments to

the unstable banks they are trying to prop up.

Despite German opposition to direct recapitalization, all euro zone ministers agreed last June on guidelines for when the 500 billion euro ESM would be allowed to buy a stake in a bank.

However, they decided to wait until the passage of a new EU law on bank recovery and resolution before turning those guidelines into a legal text.

With the law on bank resolution agreed last month, and talks underway on building a 55 billion euro bank resolution fund over the next 10 years, the ministers now want to finalize the guidelines on direct recapitalization.

Another official said Germany and Finland had support since ultimately there may be no need for the ESM to directly recapitalize a bank. New "bail-in" rules state that shareholders, bondholders and even large depositors in banks will be first in line for any bank rescue, not taxpayers, making direct recapitalization potentially unnecessary.

"After the full bail-in laws are in effect and enforced in every case and the SRF is fully funded, there should be very little need left for the use of the ESM direct recapitalization tool," the second official said.

"After the SRF is should be a more theoretical possibility at that point."

Yet while there is a push to insert a 10-year "review clause" on direct recapitalization, finance ministers are unlikely to agree on scraping the possibility of direct recaps altogether - a so-called "sunset clause".

"There may be a review clause, but there will not be a sunset clause," a third policymaker said.

(Editing by Luke Baker)