European countries pledged on Friday to stand by banks found to be struggling after health checks next year as Germany pushed for investors to bear the brunt of repairing lenders to spare the use of eurozone funds.
In a statement designed to underscore Europe’s readiness to act following the checks, ministers spelt out how they would have funds in place to help, overcoming German objections to eventually allow eurozone funds be used as a last resort.
The announcement came after two days of at times acrimonious talks, when Berlin had objected to using eurozone money in a clean-up of banks that ratings agency Standard & Poor’s estimates will cost roughly 95 billion euros (US$128 billion).
Germany is attempting to weaken a central plank of banking union, namely that the eurozone clubs together to tackle frail banks. Instead, Berlin wants losses imposed on bank creditors, including bondholders, once stress tests name the weaklings.
The reluctance of Germany, which is worried that it will shoulder much of the burden if weaker countries turn to the bloc’s emergency fund, put it at odds with France, which wants a eurozone-wide safety net.
In the meeting, German Finance Minister Wolfgang Schaeuble struck out at the idea of a eurozone backstop, seen as a way to avoid a repeat of what happened in Ireland, which needed an international bailout when it buckled under heavy bank debts.
He had challenged an earlier agreement that the eurozone’s rescue fund, the European Stability Mechanism (ESM), could provide aid directly to banks rather than via governments.
Speaking to journalists afterwards Schaeuble played down the chances for such a step.
“It was clear that we’d say direct bank recapitalization is not agreed ... and that’s what it says in this statement,” he said, referring to changes in German law first needed.
In a compromise, however, he agreed to include a reference to possible direct ESM bank aid in the statement — although only on condition that changes to national ‘procedures’ came first, a reference to the required changes to German law.
Schaeuble also flagged the need for early introduction of new “bail-in” rules that would allow Cyprus-style losses on the bondholders and big depositors of failing banks — a move that would reduce the burden on the taxpayer.
The debate about who pays for the clean up of Europe’s banks is set to continue to hamper Europe’s most ambitious reform since the inception of the euro currency in 1999.
Banking union would put the European Central Bank in charge of policing lenders from late next year and ultimately form a united front across the eurozone to back ailing banks or close them down.
Schaeuble’s message had earlier surprised many as the common backstop is a key demand of some of Europe’s biggest countries — France, Italy and Spain.
The debate comes at a delicate moment in Europe’s economic recovery and could yet foil the banking union.
Ireland and Spain, which both required international emergency aid to tackle their banking problems, will end those program in the coming weeks.
Bank health checks next year — by the ECB and regulators in the EU — could reveal losses on loans and capital holes at banks.