* Ministers gather for second day of negotiations
* Debate centres on scheme to close bad banks
* Spain's de Guindos hints at extra round of talks
By Annika Breidthardt and Robin Emmott
BRUSSELS, March 11 European ministers haggled
over how to build a safety net for failing banks on Tuesday,
redoubling efforts to avoid an embarrassing delay to the euro
zone's centrepiece crisis reform.
The protracted talks over a scheme to close troubled lenders
to complement European Central Bank supervision illustrates the
politically charged nature of the plan to disentangle states and
the banks from which they borrow.
An agreement between countries and the European Parliament
had been pencilled in for this week but ministers entering the
second day of talks on Tuesday conceded that it may take longer.
"This is important for the signal it sends to markets," said
Spain's Economy Minister Luis de Guindos. "I hope we will make
quite a bit of progress and if not, then next week we can finish
the negotiation. We still have time."
Although signed off by states in December, the fine print
governing how the new regime will work has reignited debate.
Meanwhile, time is running out to reach agreement with the
parliament, which must approve the law before disbanding for May
elections. Failure to seal a deal in time threatens further
months of delay and uncertainty given an expected rise in the
number of eurosceptic lawmakers after the poll.
Empowering the ECB to police banks as well as setting up an
agency to shut troubled lenders alongside a fund to cover the
costs - a project known as banking union - is the most ambitious
political project in Europe since the euro.
Yet it means different things for the countries involved.
While France and Spain see it as a step towards sharing bank
risks with Germany and advancing towards a common cost of
borrowing across the euro zone, Berlin places greater emphasis
on imposing losses on the creditors of laggard banks.
"We need to break the vicious circle between banking debt
and sovereign debt," French Finance Minister Pierre Moscovici
told reporters. "It's also a question of unifying the interest
rates in the European Union."
His German counterpart, Wolfgang Schaeuble, emphasised the
need for strict 'bail-in' rules to impose losses on bondholders
and other creditors of a failing bank.
"It's clear that the bail-in rules apply," said Schaeuble.
"They can't be weakened because it makes no sense to constantly
talk about the taxpayer no longer having to foot the bill and
then to begin not applying the rules about owners and creditors
taking the risk at the start."
These rules are due to come into force in 2016 but Germany
wants them to apply within the euro zone from when the ECB takes
on its role of watchdog, at the end of this year.
That would herald tougher treatment of investors in banks
found to be in poor health in ECB health checks.
The banking union, and the clean-up of lenders' books that
will accompany it, is intended to restore banks' confidence in
one another and boost lending across the currency bloc, helping
foster growth in the 18 economies that use the euro.
New lending has been throttled by banks' efforts to raise
capital and cut their risks during a recession, especially in
countries hit hardest by the sovereign debt crisis.
The banking union is supposed to break the link between
indebted states and the banks that buy their debt, treated in
law as 'risk-free' despite Greece's default in all but name.
Euro zone banks now hold about 1.75 trillion euros of
government debt, equivalent to 5.7 percent of their assets and
the highest relative exposure since 2006, according to the
European Central Bank. In Italy and Spain, roughly one in every
10 euros in the banking system is now on loan to governments.
At the heart of the dispute over the scheme is the complex
process of closing a bank. Countries are reluctant to cede
authority to Brussels and want a laborious system of checks
before any decision to shut a bank can be taken.
EU finance ministers agreed in early December that a
decision on closing down a bank in the euro zone would be taken
by the board of a 'resolution' agency, but that it must then be
approved by ministers.
The European Parliament, on the other hand, wants no
involvement of EU ministers, arguing it politicizes the process
and makes it cumbersome.
Governments and parliamentarians also disagree on how
quickly to build up the fund to cover the costs of shutting a
bank, and how soon countries should be able to dip into the pot.
The fund will be filled by euro zone banks and is slated to
reach around 55 billion euros ($76 billion).
Governments want the fund to reach full size over 10 years,
while the parliament wants the fund to be fully available to all
euro zone countries after just three years.