EU ministers agree to crisis management blueprint

By Huw Jones

PORTO, Portugal (Reuters) - European Union finance ministers and central bankers agreed on Saturday to step up co-operation among themselves to improve their handling of cross-border financial crises.

But a detailed solution to the tricky question of which country's money would be used to bail out a cross-border bank remained to be thrashed out.

"Growing market integration in the European Union constitutes a factor for financial stability because a broader and more diversified financial system is better able to absorb potential shocks and to prevent them," Portuguese Finance Minister, Fernando Teixeira dos Santos told reporters.

"Nonetheless, the growing number of institutions operating across borders also face us with new financial stability challenges," said Teixeira dos Santos, whose country holds the rotating EU presidency.

Ministers agreed to extend a memorandum of understanding they signed in 2005 on cooperating in a cross-border financial market crisis to include common principles for crisis management, a common framework for assessing the fallout from a crisis and practical guidelines on handling a crisis.

Groups of EU states are also encouraged to work together on specific issues.

The move to deepen cooperation is part of a longstanding review after a group of finance ministry and central bank officials said the current cross-border crisis management system was not working well enough.

A senior euro zone source, who asked not to be named, said on Saturday the European Union was not prepared to handle a failure of a pan-European financial institution.

The issue is topical as the current credit squeeze due to problems in the U.S. subprime mortgage market has claimed two casualties in Germany, IKB (IKBG.DE) and SachsenLB, which needed bailing out.

And on Friday the Bank of England stepped in on Friday to rescue Northern Rock NRK.L, Britain's fifth-biggest mortgage provider, pledging to provide emergency funds.

NO DETAILED SOLUTIONS

But so far, the current turmoil has not sunk a cross-border investment firm to trigger the dilemma of whether taxpayers money should be used in a bail out and if so, which country or countries it should come from.

EU Internal Market Commissioner Charlie McCreevy welcomed the blueprint but said the burden-sharing issue needed sorting out.

"We are making progress but I would not want to put it any stronger than that," McCreevy told reporters on the sidelines of the meeting.

"We are moving to the next stage. You can only move as fast as you are allowed," McCreevy added.