EU Leaders Try to Stave Off Bond Slump as Bank Talks Fail

European Union leaders will this week attempt to stave off a resurgence of market tremors following a breakdown in talks on setting up unified banking rules.

Euro-area bonds fell after negotiations among the 27-member bloc’s finance ministers stalled over the weekend in Luxembourg. They failed to agree on assigning losses at failing banks as part of proposed rules on bank resolution and recovery. They will regroup June 26, before EU leaders gather the next day for a summit in Brussels.

“We shouldn’t be lulled by the current calm in the markets,” German Finance Minister Wolfgang Schaeuble said in a statement after the meeting. “Rather, we should quickly ensure that we’re prepared for every eventuality.”

European leaders’ failure to forge ahead with a so-called banking union that was agreed on almost a year ago has underscored the frustrations in overcoming a crisis now in its fourth year. With global markets jolted last week on concern over the possible tapering of U.S. stimulus, euro-area leaders who have relied on market calm over the past year may have less leeway.

A potential snag also emerged in Greece, where one of Antonis Samaras’s coalition partners abandoned the government following a dispute over the closing of state broadcaster ERT, narrowing the premier’s majority in parliament to three seats.

Yields Rise

The single currency was little changed today, slipping 0.1 percent to $1.3112 at 12:45 p.m. in Brussels. It fell 2 percent last week. The yield on Spanish 10-year bonds, another yardstick of euro-crisis market turmoil, briefly jumped above 5 percent from the first time since April 2 before dipping back to 4.97 percent. Ten-year Italian yields rose 7 basis points to 4.69 percent.

The yield on Slovenia’s dollar-denominated securities maturing in 2022 surged 22 basis points, or 0.22 percentage points, to 7.093 percent at 11:31 a.m. in Ljubljana, according to data compiled by Bloomberg, the highest level since debt sold in October.

The banking-union talks collapsed early Saturday after 19 hours of negotiations on the question of which creditors face writedowns when banks fail, compounded by differences between euro-area countries and EU states outside the euro.

“There are still core issues outstanding,” Irish Finance Minister Michael Noonan told reporters as he left the meeting. “We have another meeting next week, and there’s no guarantee it’ll reach a conclusion.”

Recapitalize Banks

The banking union’s primary objective was to allow bailout funds to recapitalize banks directly rather than burdening states with debt, thus ending the cycle of contagion between banks and sovereign debt and offering a way out of the crisis.

French Finance Minister Pierre Moscovici said he had “no doubt” that ministers will reach an agreement this week, while Germany’s Schaeuble said a final deal must be constructed in a way that won’t burden taxpayers.

“The banking-union concept is a credibility test,” Irish Prime Minister Enda Kenny said at a European People’s Party meeting in Vienna June 20. Not going forward “would be a poor signal of both credibility and trust” of the EU, he said.

In Greece, the government was shaken as the Democratic Left, the smaller of Samaras’s two coalition partners, withdrew its ministers. The party had protested the prime minister’s decision to shut the public broadcaster, suspend 2,600 jobs there and create a new, smaller company.

Reduced Majority

The withdrawal leaves Samaras’s New Democracy party and the Socialist Pasok to run the government. Together, they hold 153 seats in the 300-member parliament, compared with the 167 they had when joined with the Democratic Left.

As Greece approaches its next aid disbursement from international lenders in July, the EU has urged the indebted nation to press ahead with its economic overhaul. The upheaval revived concern that Greece will slide back into the political turmoil that halted aid payments and raised the specter of the nation exiting the 17-member euro.

“It would be very important to stabilize the political situation in Greece now, immediately, and really concentrate all energy on implementation of the program,” EU Economic and Monetary Affairs Commissioner Olli Rehn said on June 21 in Luxembourg. “I appeal to the sense of political responsibility of all political leaders and the Greek people to ensure stability and concentrate on policy rather than politics.”

Fed Comments

The European ructions come after markets around the world tumbled last week in response to Fed Chairman Ben S. Bernanke’s announcement that the central bank may start reducing bond purchases that have fueled gains in markets globally.

The possible withdrawal of monetary support places the burden of resolving the euro crisis back onto the shoulders of European governments, according to Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

“The ‘tapering terror’ that is convulsing financial markets will throw the limited progress achieved in putting the governance of the euro zone on a firmer footing into sharper relief,” Spiro said in an e-mailed statement yesterday. “Euro-zone leaders can no longer count on market complacency to help them muddle their way through the crisis.”

Before it's here, it's on the Bloomberg Terminal.