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Eurozone bank union problems "settled by June" at Luxembourg meeting
Economics

Eurozone bank union problems "settled by June" at Luxembourg meeting

3 min. 24.05.2013 From our online archive
Key obstacles to a banking union, seen as a keystone in locking down the debt crisis, should be resolved within the next few weeks at a Luxembourg meeting, the official in charge of the day-to-day operation of the eurozone stated.

(AFP) Key obstacles to a banking union, seen as a keystone in locking down the debt crisis, should be resolved within the next few weeks at a Luxembourg meeting, the official in charge of the day-to-day operation of the eurozone stated.

Thomas Wieser, who heads the working group of the 17-nation eurozone led by Dutch Finance Minister Jeroen Dijsselbloem, said the next group meeting in Luxembourg on June 20 should see the remaining problems settled.

"Come June we will have managed it" Wieser said, detailing three key areas of dispute over a banking union which is meant to prevent any repetition of failing banks coming close to causing systemic failure in the financial system and economy.

The first issue is to establish the hierarchy of creditors -- who is first, and then next in line to take the inevitable heavy losses when a bank is restructured or wound up.

This 'bail-in' process was central to the Cyprus debt rescue reached in March but proved hugely controversial when savers with bank deposits of less than 100,000 euros, a level supposedly protected by EU guarantees -- were told they would have to pay up too.

The bailout was subsequently changed to protect them, while savers with more than 100,000 euros were hit even harder as the country's bloated banking sector was cut back into line with its small economy.

The second area concerns to what extent the eurozone rescue backstop, the European Stability Mechanism (ESM) can directly recapitalise weak banks, since that involves taxpayers' money, and then overall supervision of the banking system to ensure that there is no repetition of a crisis now dating back to 2008.

"On creditor hierarchy you need more political push to get there and I think that as of June we will have managed" that, Wieser said.

"In terms of substance we are nearly there," he added.

"The big question of direct recapitalisation was how do you deal with so-called legacy assets?" or debt incurred before the ESM was set up.

-- Discouraging "reckless behaviour" --

Some member states such as bailed-out Ireland want the EMS to cover these liabilities but others, such as Germany, the EU's powerhouse economy and main paymaster, are opposed on the grounds the EMS is supposed mainly to help governments in need.

"That is an issue for the single supervisor," he said, referring to the Single Supervisory Mechanism, the incoming regime under which the European Central Bank will oversee the eurozone banking system.

With the SSM meant to be in place by the end of the year, it is hoped the ESM would be allowed to help the banks directly from March 2014.

Wieser said that "less than 80 billion euros" out of the amount of about 750-billion euros headline ESM war chest would be set aside for propping up failed banks. Member states could still be expected to assume 10-20 percent of the cost even well after the new supervisory regime enters force.

Wieser said it was "logical" that there would be "a declining scale of contributions from member states" over transitional years through, probably, to 2018.

"One wants to retain a certain incentive that the member state in question does not encourage a bank to engage in reckless behaviour because it figures the European taxpayer will pick up the tab anyway," Wieser said.

Supervision is just one spoke on a wheel that ends with bank "resolution," or winding-up.

The aim, for European political leaders, is to break the link whereby governments use taxpayer funds to bail out failing lenders, sometimes going broke themselves in the process, as in Ireland.

Governments broadly agree that deposits under the 100,000-euros line should remain safe but arguments persist over how fast and hard to hit other classes of creditors, from larger depositors through to bond- and shareholders.