EU Presses Ahead on Non-Euro Bank Backstop Over Objection

The European Commission is pressing ahead with plans to create a bank backstop for non-euro countries in a rebuff to German and British objections, European Union officials said.

The proposal would update the 50 billion-euro ($68 billion) balance-of-payments fund so that it can provide direct aid to banks if a nation’s financial stability is in jeopardy. The plan has met stiff opposition from the U.K. and Germany, who say countries should rely on existing resources if their banks run into trouble.

The commission wants a resource that can operate alongside the euro area’s 500 billion-euro firewall, the European Stability Mechanism, so that the entire 28-nation EU is braced for the results of stress tests planned for 2014.

France remains open to the idea and would like to get a deal on bank resolution soon, a French official said. Bank resolution talks will heat up in November as officials race to get a framework in place by the end of this year, a second French official said, speaking on condition of anonymity, like the other officials cited here, because the talks are private.

The balance-of-payments tool is one of several financial instruments foreseen, according to an official for the Lithuanian presidency of the EU. Other tools would include two types of credit lines and a “regular” macroeconomic adjustment program, in which a country receives aid in exchange for meeting a series of economic and fiscal conditions, the official said.

New Tools

Euro-area nations have a similar set of options via the ESM. Euro finance ministers have agreed on the possibility of direct bank aid and are now debating how and when it might be available. For non-euro nations, the balance-of-payments fund currently has about 40 billion euros available, after being used to help Latvia, Hungary and Romania.

Denmark, one of the non-euro nations that could be eligible to use the new tool, hasn’t taken a position on the issue yet, Economy Minister Margrethe Vestager said. Public backstops may take on particular importance if countries haven’t had time to build up resolution funds paid for by bank levies, she said.

“We haven’t decided what to think,” Vestager said in an interview. “We’re obviously concerned about what will happen if a non-euro country joins in to handle resolving a bank, and we won’t be able to draw upon the ESM for bridge financing if the industry can’t pay right away itself.”

The commission has revised its proposal to backstop the non-euro nations in part to address concerns expressed by lawyers for the Council of the European Union, which represents member states. The revised plan was accepted by the lawyers at a recent technical meeting on the subject, according to two EU officials.

Simon O’Connor, a spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn, declined to comment on the plans today.

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