June 22, 2018 / 12:41 PM / a month ago

EU backs bigger war chest for failing banks but split on budget, debt

LUXEMBOURG (Reuters) - European Union finance ministers agreed on Friday to double a war chest for dealing with failing banks and boost powers of the euro zone bailout fund, but were split over whether to have a mechanism to restructure government debt or a euro zone budget.

FILE PHOTO: Portugal's Finance Minister and Eurogroup President Mario Centeno attends a eurozone finance ministers meeting in Brussels, Belgium, May 24, 2018. REUTERS/Yves Herman/File Photo

All the EU’s finance ministers except Britain, which will leave the bloc in March, discussed ideas for deeper economic integration of the euro zone. Part of a process born of the global financial crisis, the aim is to make the currency area more resilient to future upheavals.

The ministers were preparing for an EU summit on June 29, when leaders will discuss strengthening the role of the ESM bailout fund and completing an EU banking union project intended to increase savers’ trust in euro zone banks.

“We have chosen to provide a credible safety net for the banks; we have set the right incentives for banks to continue deleveraging risks; we have decided to beef up the ESM to reinforce our lines of defense,” the chairman of euro zone finance ministers, Mario Centeno, told reporters.

The ministers agreed that the ESM should be able to lend to the euro zone’s Single Resolution Fund (SRF) for banks, if the SRF runs out of money in a major crisis.

The SRF is financed from bank contributions and should reach its maximum power of 55 billion euros by the end of 2023. The bailout fund could backstop it with another 60 billion.

There was also agreement that the bailout fund, run by euro zone governments, should monitor all economies in the currency bloc regularly to spot potential trouble early and design bailout programs of reforms in exchange for cheap loans.

“We agree that a reinforced ESM should take a stronger role in designing and monitoring programs,” Centeno said, noting that this should not duplicate the European Commission’s existing monitoring role.

France and Germany called on Tuesday for the ESM to act as an intermediary between any government that runs into a debt crisis and investors, should restructuring prove necessary.

But Italy, which at 132 percent of GDP has proportionately the second highest public debt in Europe after Greece, objected to setting up a Sovereign Debt Restructuring Mechanism in which the ESM would play a central role.

“On debt sustainability issues, there are still a range of views in the room,” Centeno said.

PRECAUTIONARY TOOLS

Paris and Berlin also want the new ESM to be able to extend a credit line with no strings attached to countries experiencing an economic shock, provided they have been observing all EU fiscal rules limiting the size of the deficit and debt.

This would be a new power for the ESM, which so far can lend to countries only if they agree to a reform program designed by the euro zone. The ministers gave a cautious backing to that idea, leaving room for changes.

“We agree to review the existing instruments, in particular the precautionary tools, and assess the need for new instruments,” Centeno said.

But a Franco-German idea of setting up a separate euro zone budget - funded by national contributions, a financial transaction levy and corporate taxes, including on firms’ digital revenues - did not win immediate support.

According to the proposal from Paris and Berlin the budget would be for promoting economic convergence and stabilization in the euro zone, new investments and as a substitute for national spending. It could also lend to help pay unemployment benefits.

“It is clear that our discussions are less advanced on possible fiscal instruments for convergence and stabilization,” Centeno said.

The ministers also kicked into the long grass the idea of setting up a European Deposit Insurance Scheme — a key element of completing the banking union — taking the cue from Germany which wants it to happen only once risks in the banking sector, seen in the number of bad loans, fall sharply.

Reporting By Jan Strupczewski; editing by David Stamp

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