BRUSSELS (Reuters) - European ministers agreed on Tuesday to strengthen a scheme to tackle troubled banks, seeking to win the blessing of EU lawmakers for a reform to fortify the euro zone against crises.
After two days spent trying to finalize the most ambitious political project in Europe since the euro, ministers said they disbanded with broad agreement on the final element of banking union, a scheme to tackle bad banks.
But officials said key questions remained open, including the degree to which countries would help each other tackle problem banks under the plan intended 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.
With conflicting accounts emerging from the room, one official said it had yet to be decided how much countries should be able to help one another in tackling problem banks - 'mutualisation' is a central plank of the 'banking union'.
This means crunch talks with the European Parliament, to take place in Strasbourg on Wednesday, may not succeed.
Should they get bogged down, it would cast a cloud over the project to allow the European Central Bank to supervise the sector, creating an agency to wind down failing banks and a fund to cover clean-up costs.
It could even fall to European Union leaders, who meet in Brussels on March 20-21, to decide.
"On the question of mutualisation there are very different positions," Wolfgang Schaeuble, Germany's finance minister, told journalists after the meeting, referring to the extent to which countries would club together in dealing with bad lenders.
Joining forces across the euro zone had been the original intention when banking union was pledged at the height of the bloc's sovereign debt crisis. But as markets have calmed, Germany, which does not want to be on the hook for problems in Spain or elsewhere, has dug in its heels.
Earlier, Spain and the Netherlands failed to win over a Germany to support the 'resolution' fund from its outset, when it will be small. Instead the fund will likely be allowed to borrow on the markets against future levies on banks but with no special government support.
Time is running out because the parliament is disbanding for May elections. Failure to seal a deal before then would mean months of delay and uncertainty given an expected rise in the number of eurosceptic lawmakers after the poll.
In a bid to reach a deal, EU ministers sought to reduce the scope of countries to meddle in decisions by the agency to shut a bank, as well as changing voting procedures to make it easier for the agency to operate. This appears unlikely to win over lawmakers, however.
"The countries are going to have to give us something pretty juicy on the speed of mutual use of the fund in order to get agreement," Sharon Bowles, an influential British member of the European Parliament, told Reuters, setting the tone for what will be difficult negotiations.
While France and Spain see banking union 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.
Germany's Schaeuble emphasized the need for strict 'bail-in' rules to impose losses on bondholders and other creditors of failing banks, as happened when Cyprus was bailed out last year.
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 banking watchdog, at the end of this year.
That would herald tougher treatment of investors in banks found to be in poor health in ECB checks.
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.
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.
This helps explain why countries are reluctant to cede authority to Brussels on closing a bank.
Writing by John O'Donnell; Additional reporting by Barbara Lewis and Robin Emmott; Editing by Catherine Evans/Ruth Pitchford