* Ministers to set cap on how much ESM can spend on
* Talks to finalise government contribution, bank
* ESM guidelines talks linked to negotiations on bank
By Jan Strupczewski
BRUSSELS, June 20 Euro zone finance ministers
will decide on Thursday when and how their bailout fund can
invest in a bank to save it from failure, laying a cornerstone
of the banking union seen as vital to restore economic growth.
Ministers from the 17 countries using the euro will also set
guidelines for how much a government would have to contribute to
such a bank rescue, which banks would be eligible, and who would
lose money in the process.
"We will reach a decision on all aspects of direct
recapitalisation," a senior European Union official involved in
preparations for the meeting said.
Euro zone leaders want the European Stability Mechanism
(ESM) bailout fund to be able to become a shareholder in a
systemically important bank so that the expense of saving the
institution does not fall just on the shoulders of a government
that may already be struggling with huge debts.
The possibility of such direct recapitalisation should help
boost confidence among euro zone banks, encouraging them to lend
to the real economy and so boost growth.
The discussions are closely linked to talks on Friday, when
the euro zone ministers will be joined by colleagues from other
European Union countries, on a broader law to rescue or close
down a failing bank.
The bank recovery and resolution directive covers some
similar ground to the ESM direct recapitalisation guidelines,
for example who loses money, and when, if a bank is rescued or
That is why guidelines for ESM, while expected to be agreed
in principle on Thursday, will only be finalised in a legal form
once the European Parliament votes through the directive.
The ministers will have to decide if they want the ESM rules
to match EU state aid law that comes into force in August and
foresees losses only for shareholders and junior bondholders, or
the still-not-finalised directive, under which also senior
bondholders and even large bank depositors could take a hit.
FROM AUTUMN 2014
The ESM will be able to become a shareholder in a failing,
but systemically important euro zone bank only in the second
half of the 2014, the senior EU official said.
This is in line with a decision by EU leaders that the
European Central Bank must first establish itself as the
supervisor of euro zone banks, which is now expected to take
place in September 2014.
On Thursday, the ministers will also decide exactly how much
money from the ESM's 500 billion euro war chest they want to
earmark for potential investment in banks. The range pencilled
in now is 50 to 70 billion euros.
To deal with banks that need recapitalising because of bad
assets accumulated earlier, or legacy assets, the guidelines
will say that before the ESM can invest, its national government
must top up the bank's capital so that it meets the legal
minimum of common equity Tier 1 ratio of 4.5 percent.
If a bank already meets that minimum requirement, the
government would still have to provide between 10 and 20 percent
of the needed capital increase so as to make sure that it is in
the sovereign's interest to keep the bank healthy.
On Thursday, the ministers are to decide more specifically
what number from the 10-20 percent range to pick.
They will also set a general rule on whether the ESM can
take a decision in the second half of 2014 to become a
shareholder in a bank that got into trouble before that date -
what EU policy-makers call retroactivity.
The options include all banks being eligible or none, or
that they be evaluated on a case-by-case basis.
Ireland may be interested in the ESM buying stakes in its
banks, as might Greece, Cyprus and Portugal, but Spain has said
it would not seek such an option so as not to send a signal to
the markets that the sovereign cannot cope on its own.