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Germans seek to curb EU banking union

Wednesday, December 18 14:10:26

Germany is standing firm against the use of euro zone money to back a scheme for tackling troubled banks, dousing hopes still harboured by its peers that the bloc will unite behind lenders in difficulty.

More than five years since a financial crisis struck, Europe is crafting its most ambitious reform since the launch of the euro - an agency and fund to shut problem banks as soon as the European Central Bank starts to police them next year.

European leaders - who meet at a summit on Thursday and Friday - want to sign off on a deal so that banking union can become reality from the start of 2015, raising investor confidence and fostering more lending.

The aim is to prevent a repeat of the turmoil when failing banks in countries from Ireland to Cyprus brought their states to the brink of bankruptcy. But just as talks reach a climax, central elements of the plan are disintegrating.

Arriving for a second day of negotiations in Brussels, Germany's finance minister said no money from the euro zone's rescue fund, the 500- billion-euro European Stability Mechanism (ESM), would be available directly to pay for bank clean-ups.

Instead, a government footing the bill for a failing bank and falling short, could apply for a bailout paid for by the ESM.

That deals a blow to a central tenet of banking union as it was originally conceived, namely that weak governments should not be left to cope with banks, whose problems can buckle a country.

"The only way to the ESM is through the nation states," Wolfgang Schaeuble told reporters, reiterating the long-held German view that such help can be given only to governments and not directly to banks.

Instead, he talked about unspecified "additional means of granting loans".

Unlike in the United States, where the federal government can transfer funds to help weaker states, countries in the euro zone do not send such aid. Germany, which makes up more than a third of the euro zone's economy, wants to keep it that way.

Euro zone finance ministers agreed on Tuesday night that banks will pay into funds for the closure of failed lenders, amassing roughly 55 billion euros ($76 billion) over 10 years in a Single Resolution Fund (SRF).

Until then, if there is not enough money available, governments will be able to impose more levies on banks. If that does not suffice, they would help with public money and after that turn to the ESM for help.

After 2025, when the SRF is full, it could borrow to raise additional emergency itself, the draft euro zone ministers' agreement said. That was put to a meeting of all 28 EU finance ministers on Wednesday. (Reuters)