Merkel Forced to Confront EU Bank-Aid Pledge in Coalition Talks

Parties seeking to form Germany’s next government deadlocked on aid for failing European banks, forcing Chancellor Angela Merkel to revisit a pledge she made last year.

The Social Democratic Party opposes direct recapitalization of banks from the European Stability Mechanism firewall fund, saying it equates to pooling debt across the euro area. Second-tier negotiators for the SPD and Merkel’s Christian Democratic Union disagreed on the issue and decided to send it up for party leaders to discuss in coalition talks.

“The SPD doesn’t want direct banking recapitalization through the ESM,” Johannes Kahrs, an SPD lawmaker and coalition negotiator, said by telephone today. “‘This would be as bad as euro bonds. We don’t have a common position yet. We have to find common ground with the CDU.”

Pressure from Merkel’s prospective junior partner increases the probability that Germany will backtrack on the agreement she endorsed in June 2012 to allow the ESM directly to recapitalize banks. It may strengthen Finance Minister Wolfgang Schaeuble’s hand as he seeks to shield German taxpayers in Europe’s emerging banking union, the same aim the SPD says it is pursuing with its position.

The dispute means German domestic politics is clouding the euro-area agreement on bank aid, reached as the sovereign-debt crisis peaked last year before the European Central Bank pledged unlimited bond-buying to defend the euro.

Coalition Talks

Merkel, SPD head Sigmar Gabriel and Horst Seehofer, who heads Merkel’s Bavaria-based CSU affiliate, are scheduled to resume coalition talks tomorrow. Talks began on Oct. 23 with the goal of sealing Merkel’s third-term coalition by Christmas.

Merkel, whose victory in national elections on Sept. 22 was the biggest since German reunification in 1990, campaigned against joint euro-area debt and for extending her policy of aid to struggling countries in return for economic overhauls.

She hasn’t renounced the June 29, 2012, statement by euro-area leaders that opened the door to direct aid to banks by the ESM. The 500 billion-euro ($672 billion) fund, set up to bail out euro-area governments, would gain that power when ECB oversight of euro-area banks is deemed “effective,” according to that statement.

As the ECB presses European governments for a joint system to rescue or wind down failing lenders, Germany is objecting to cross-border backstops and has been looking at alternatives that rely on national resources instead of the ESM.

A sequence of liability that imposes losses on bank shareholders and creditors before putting taxpayers on the hook for rescues is a “prerequisite” for any central EU bank resolution system, German Deputy Finance Minister Thomas Steffen said on Nov. 8.

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