* EU leaders agree legal framework to be completed this year
* ECB-led supervisor to oversee all 6,000 euro zone banks
* Day-to-day supervision of most to be delegated-French
* Little talk of Spain, Greece aid at summit
By Julien Toyer and Andreas Rinke
BRUSSELS, Oct 18 European Union leaders took a
big stride towards establishing a single banking supervisor for
the euro zone, striking a deal under which the bloc's rescue
fund could start recapitalising ailing banks next year, a French
government source said.
The source told reporters at an EU summit that all 6,000
banks in the single currency area would come under European
Central Bank supervision by 2014, but most day-to-day oversight
would be delegated to national bodies.
Creating an effective banking union, for which this deal is
just a first step, is regarded by the International Monetary
Fund and market economists as a key step to overcome the euro
zone's three-year-old debt crisis.
The French source said the agreement meant the European
Stability Mechanism (ESM) could start injecting capital into
troubled banks as early as the first quarter of 2013, but a
German source said it was "very unlikely" to happen so soon.
The German government source said the ECB would be
responsible for supervising systemically important banks and
could oversee others if necessary, emphasising that direct
recapitalisation of banks by the ESM could only happen once
cross-border banking supervision was firmly in place.
The point when the ECB will effectively become the bloc's
banking supervisor is important because it would open the way
for the euro zone's bailout fund to inject capital directly into
troubled banks, without adding to their host governments' debts.
EU Economic and Monetary Affairs Commissioner Olli Rehn said
this was vital "to break the vicious circle between sovereigns
The legal framework would be completed by the end of this
year so the ECB could begin working to implement supervision
arrangements from Jan. 1, 2013, starting with banks receiving
state aid, the French source told a midnight briefing.
"The entire banking supervision mechanism -- that means the
effective supervision of 6,000 banks -- will become reality on
Jan. 1, 2014," he said.
The agreement, still to be officially confirmed, appeared to
be a defeat for German Finance Minister Wolfgang Schaeuble's
efforts to limit the scope of European banking supervision.
The deal came after the leaders of France and Germany,
Europe's central powers, held a private meeting after clashing
in public over greater EU control of national budgets.
Germany has been reluctant to see its politically sensitive
savings and cooperative banks come under outside supervision. It
rejects any joint deposit guarantee under which richer countries
might have to underwrite banks in poorer states.
German Chancellor Angela Merkel earlier demanded stronger
authority for the executive European Commission to veto national
budgets that breach EU rules, but French President Francois
Hollande said the issue was not on the summit agenda and the
priority was to get moving on a European banking union.
For once, the summit was not under intense pressure from
financial markets, which have calmed since the ECB pledged last
month to intervene decisively if needed to buy bonds of troubled
euro zone states to preserve the euro.
Addressing parliament in Berlin earlier in the day, Merkel
skirted the issue of a possible credit line for Spain, which EU
officials expect Madrid to request within weeks, but reiterated
her desire to keep Greece in the currency area despite chronic
In Athens, police clashed with protesters hurling stones and
petrol bombs during a general strike that brought much of the
near-bankrupt country to a standstill.
"We have made good progress on strengthening fiscal
discipline with the fiscal pact but we are of the opinion, and I
speak for the whole German government on this, that we could go
a step further by giving Europe real rights of intervention in
national budgets," Merkel told the Bundestag lower house.
A proposal by Schaeuble to create a super-empowered European
currency commissioner was a possible way forward, she said, and
more European control called for a stronger European Parliament.
Merkel also advocated the creation of a European fund to
invest in specific projects in member states which she said
could be fuelled by a financial transaction tax which 11 euro
zone countries have said they will adopt.
Her call echoed a proposal for the 17-member euro zone to
have its own budget -- known in EU jargon as a "fiscal capacity"
-- on top of the 27-nation union's common budget, which mostly
funds agriculture and aid to poorer regions.
Several states, including the Netherlands, Finland and
Austria, were uneasy at the idea but none rejected it outright.
Decisions on institutional reforms are not expected until a
Since the ECB said last month it was ready to buy the bonds
of struggling euro zone states in unlimited amounts, state
borrowing costs have fallen sharply, easing the immediate
pressure for Spain to seek a bailout.
Spain's 10-year bond yields sank to their lowest since
February at an auction on Thursday, helped by Moody's decision
this week to leave its credit rating at investment grade.
But rather than signalling that Madrid does not need help,
Moody's verdict was predicated on Spain soon applying for a euro
zone assistance programme to trigger ECB intervention.
Italy raised a bumper 18 billion euros from a four-year
inflation-linked retail bond -- the most ever raised in a single
debt offering in European markets -- reducing its need to issue
debt before the end of this year.
The leaders agreed at their last summit in June to create a
single banking supervisor under the ECB, but tricky legal issues
remain and Germany and its north European allies had appeared to
be backtracking on elements of the June decision.
The deeper the discussion on banking union goes, the more
complex and problematic it will get.
Countries outside the euro zone -- particularly Britain,
which has Europe's biggest banking sector -- are concerned their
banks could be disadvantaged if a balance is not maintained
between the ECB and its oversight of euro zone banks and the
powers of other authorities to oversee non-euro zone banks.
And if non-euro zone countries such as Poland join the
banking union, as policymakers are hoping, it is unclear what
representation they would have within the ECB, since the central
bank is currently answerable only to euro zone member states.