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Merkel Prods EU Finance Chiefs as Bank-Failure Talks Heat

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Dec. 18 (Bloomberg) -- German Chancellor Angela Merkel called on European Union finance ministers to agree this week on a bank-failure plan for the euro area, as emergency talks that dragged into the night highlighted how much work remained.

Euro-area finance ministers emerged from talks at about 2:30 a.m. in Brussels today claiming victory on one sticking point -- how to connect a public backstop to their planned central resolution authority for euro-area banks. None of the ministers offered details of what EU Economic and Monetary Affairs Commissioner Olli Rehn called a “crucial breakthrough.”

“We have come a long way,” said Dutch Finance Minister Jeroen Dijsselbloem, who chaired the talks. “We have prepared the ground” for agreement on the proposed Single Resolution Mechanism among all 28 EU finance ministers in a meeting later today, he said.

The common resolution authority, to be backed by a fund that would cover the costs of saving or shutting lenders, is part of a euro-area effort to break the links between governments and banks that fueled the debt crisis.

EU leaders, who arrive in Brussels tomorrow for a two-day summit, want the ministers to settle on a negotiating position so they can pursue talks with the European Parliament on a compromise bank-failure bill before the assembly halts work ahead of elections in May.

Common Backstop

“I hope that we as heads of state and government won’t have to deal with it” at the summit, Merkel said yesterday. “We’ve been talking about banking union for months.”

It remains to be seen whether the leaders will be satisfied with the progress made this week. As French Finance Minister Pierre Moscovici made clear, a lot of heavy lifting remains to put the public-backstop plan in place.

“We reached an agreement on the backstop,” Moscovici said. “There is a common backstop, which can take several forms. That will have to be specified in the years to come. No form is excluded.”

German Finance Minister Wolfgang Schaeuble and his euro colleagues began their meeting yesterday hours after the European Parliament settled on its own negotiation position on the bill, giving broad backing to the European Commission’s initial proposal. Schaeuble has led opposition to the plan.

Bank Levies

Ministers clashed over how the resolution plan will work, offering fundamentally different starting points for what the new system and its fund are supposed to do. Michel Barnier, the EU financial-services chief, in July called for the resolution authority to come with a central fund filled by bank levies over a decade and able to tap public support in an emergency.

Irish Finance Minister Michael Noonan said the new system will need a public backstop to be credible, while Schaeuble focused on his opposition to any common use of the euro area’s firewall fund, the European Stability Mechanism.

The ESM is designed to provide aid to states and “is not what some want to make it, namely a general credit line for everybody, and it won’t be,” Schaeuble said as he entered the first day of meetings. Upon departing, he said only that “a good deal of progress” had been made.

Dijsselbloem declined to say if the backstop plan involved loans from the ESM.

‘Efficient and Quick’

Proposed voting procedures on the authority’s governing board also drew fire. Some ministers called for all nations to have equal weight, while Germany and its allies sought a weighted scheme that would give big countries a larger say when a sizeable infusion is needed from the central resolution fund.

ECB President Mario Draghi said Dec. 16 that voting procedures shouldn’t become so complicated they prevent swift decisions. Moscovici echoed these concerns yesterday.

The EU needs a system that is “as simple as possible,” Moscovici said. The SRM “needs to be efficient and quick,” and ministers “need to specify what will be the backstop, how it will function.”

While nations argued, the European Parliament solidified its support for a strong centralized system. Yesterday’s vote by the assembly’s Economic and Monetary Affairs Committee fired the first volley in the forthcoming skirmish with ministers, who have subjected the plan to an extensive overhaul as they wrestle over how to proceed.

Final Say

Finance ministers are moving toward a compartmentalized fund, in which the levies on each country’s banks would be separated at the start, then gradually merged over 10 years. The parliament has championed a common single resolution fund with an arsenal equivalent to 1 percent of banks’ covered deposits and the power to tap the ESM.

In the legislature’s proposal, as in Barnier’s, the European Commission, the EU’s executive arm, has the final say, while nations want to give more powers to the Council of the European union, which represents national governments. The parliament also opposes efforts to set up part of the system via an agreement among nations that is outside the EU legislative process.

EU governments seem to be “living in a parallel reality,” on the plan, said Elisa Ferreira, the assembly member leading work on the bill. “It is appropriate to reflect on whether no deal would be better than a very bad one.”

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net; Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Rainer Buergin in Brussels at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net