Europe Agrees on New Banking Rules

Instead of putting those losses on states, and taxpayers, the new system specifies the order in which banks’ investors and creditors, and then their uninsured depositors, will face losses.

“For the first time we agreed on a significant bail-in to shield taxpayers, to break the vicious circle of sovereigns and banks, and to induce banks to behave more responsibly,” Jeroen Dijsselbloem, the Dutch finance minister, said in a statement.

Margrethe Vestager, the Danish economics minister, reinforced the agreement on Twitter, writing that there was a “general political agreement” on “crisis management of banks.”

The agreement to “bail in” rather than bail out failing banks represented a revolution in the way that the European Union addresses the kinds of crises that have in recent years crippled places like Cyprus and Ireland and threatened to sink the euro.

The breakthrough allows leaders of the European Union’s 27 member states to endorse the deal at a summit meeting, which begins Thursday afternoon and is their last scheduled meeting before the summer hiatus.

The deal also avoids another impasse that would have reinforced the growing sense that Europe’s economic project has become unmanageable, even as the bloc is about to expand to 28 countries with the admission of Croatia next Monday.

It was the second time in the space of a week that ministers held a marathon, late-night meeting to reach a deal to curtail recourse to public money for bank rescues.

At the previous session last week in Luxembourg, ministers were divided sharply over how, and whether, to give countries discretion to protect certain classes of creditors. France, Britain and Sweden favored such flexibility.

But Germany and the Netherlands were wary of giving governments such wide discretion, fearing that it could induce risky behavior if bankers were overly confident of relying on mechanisms like national bailout funds to come to their rescue.

Germany was also wary of endorsing new rules that could eventually mean the use of shared European funds before national elections in September.

The banking effort by the ministers was aimed at curtailing the so-called doom loop, in which struggling governments take their states deeper into debt to shore up their banking systems. The initiatives under discussion could become important building blocks for the banking union, including establishing a single supervisor to oversee about 150 of the bloc’s largest lenders.

The uncertainty over the outcome — and the failure by leaders to live up to their stated commitment to agree on ways to further integrate the management of their economies — had been clouding the agenda for the meeting, which begins later on Thursday. Herman Van Rompuy, the president of the European Council, who sets the agendas for meetings of the bloc’s leaders, said on Wednesday that he planned to focus much of the attention on curbing high youth unemployment. Unemployment is more than 12 percent across the euro area, while youth unemployment is close to 60 percent in Spain and Greece.

During their meeting, the leaders are expected to discuss spending 6 billion euros, or $7.9 billion, over the next two years to fight youth joblessness, instead of over a seven-year period, according to a draft copy of the leaders’ conclusions. That money would help pay for what is described as a youth guarantee, which ensures that people under age 25 who lose their jobs, or do not find work after leaving school, get more education or training within four months.

Leaders, though, must reach a final deal with the European Parliament on the seven-year budget that is supposed to be source of that money. Even then, analysts say, they are skeptical about the leaders’ ability to significantly change the arc of youth joblessness during their two-day session in Brussels. In a bleak assessment, Marie Diron, a senior economic adviser at Ernst Young, forecast that euro area unemployment would peak at 20.5 million during the first quarter of next year, up from the current level of 19.4 million.

In Europe, “there is probably little that can be done that would significantly reduce youth unemployment in the short-term,” Ms. Diron wrote in a research note. The best medicine would be “better and wider use of apprenticeships” and “encouraging labor mobility between countries,” she wrote.

Article source: http://www.nytimes.com/2013/06/27/business/global/europe-agrees-on-new-banking-rules.html?partner=rss&emc=rss