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Euro zone agrees ‘backstop’ for failing banks

Peter Spiegel
Tuesday, 17 Dec 2013 | 11:46 PM ET
Banking union looks complicated: Pro
Wednesday, 18 Dec 2013 | 1:30 AM ET
Christian Schulz, senior economist at Berenberg Bank, says the European Union's banking union plans look complicated and would not have prevented a collapse like that of Lehman Brothers had it been in place.

Euro zone finance ministers have reached a tentative agreement that would create a backstop to the EU's new bank rescue system in case it runs out of money in an emergency. The deal, characterised as a "crucial breakthrough", opens the way for an overall blueprint for dealing with failing lenders.

The "common position", reached after seven hours of talks that stretched into the early hours of Wednesday morning, will allow governments in need of extra funding to recapitalise or wind-down failing banks to access financing outside new bank-financed rescue funds – a key demand by a Paris-led group of euro zone countries that was resisted by Germany.

(Read more: Euro zone set for drawn-out battle over banking rules)

"We have reached a crucial breakthrough," said Olli Rehn, the EU commissioner in charge of economic affairs, adding that it should allow finance ministers from all 28 countries to reach a final deal on Wednesday and a "peaceful Christmas."

Although finance ministers did not disclose details, senior officials involved in the talks said the agreement is broken into two, with one backstop agreed for the "transition period" while a common EU bank rescue fund is built up – which could take as long as 10 years – and another for the "steady state" once the fund is in place.

Euro zone fiscal backstop is needed: Swedish Fin Min
Anders Borg, Sweden's finance minister, says it would be "logical" to have an euro zone fiscal backstop to accompany the region's asset quality review.

During the transitional phase, countries that need emergency funding could either get bridge financing from other countries' national rescue funds or, in exceptional cases, apply to the euro zone's €500 billion rescue fund, the European Stability Mechanism. The ability to access the ESM was a critical demand by several southern euro zone countries, particularly Italy.

It remained unclear how the ESM would be involved in the transition period, however. One official involved in the talks said it was likely to be in the form of previously "agreed procedures" similar to the recent Spanish bank rescue, in which ESM loans were made directly to national governments in need of help – in other words, only a small modification on existing rules.

The system for the "steady state" after the fund is up and running was left more vague, but could be more significant. The official said the agreement would allow the fund to borrow from outside sources if it needed extra cash. This borrowing system was not defined and it still must be agreed during the transition period. Still, it could allow the fund to raise money on the private markets or from the ESM.

(Read more: 'Doom loop' spells danger for Europe's debt markets)

Jeroen Dijsselbloem, the Dutch finance minister who chairs the euro group of fellow finance ministers, crafted the deal's language with Mr Rehn and Michel Barnier, the EU commissioner in change of banking regulations, the official said.

Mr Dijsselbloem said he believed the agreement would allow a final agreement to be reached before EU leaders gather on Thursday for their end-of-year summit. "We have come a very long way on the backstop that will be very helpful tomorrow," Mr Dijsselbloem said.

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The issue of the backstop was one of the last remaining hurdles to agreeing a new bank bailout system, the second leg of the EU's new banking union formally known as the "single resolution mechanism".

Because the system's resolution fund, which is to be financed solely through levies on European banks, will take 10 years to fill and may ultimately hold only €55 billion, France and Italy – with backing from Brussels – have insisted on an emergency backstop.

Germany has resisted any such backstop that can access taxpayer money, particularly the ESM, arguing it will create the wrong incentives for banks. Although the backstop during the steady state could borrow from sources outside the bank levy-financed rescue fund, such loans would have to be repaid by bank levies – a process that would ensure the system remains industry financed, a key demand by Berlin.

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