Lots of Talk, but Little Agreement, on How Europe Should Rescue Banks

The effort was aimed at breaking the so-called doom loop, in which struggling governments take their states deeper into debt to save their banking systems, only to face sky-high sovereign borrowing costs.

Diplomats said ministers would try to reach a deal at a meeting on Wednesday.

On Thursday, as part of the effort to address the banking issue, the 17 ministers from the euro area agreed to allow a rescue fund to pump money directly into failing banks during the second half of next year.

But in the second day of talks, as ministers from the 10 remaining non-euro countries in the European Union joined the meeting, there was deadlock over how to stop disorderly bank bailouts from turning into national fiascos.

Olli Rehn, the economic and monetary affairs commissioner for the European Union, said Friday that he expected the thorny issues to force the meeting to run into Saturday morning.

“Midsummer is the longest day of the year, so we have plenty of time for finding an agreement tonight,” Mr. Rehn said. But diplomats said later that there was a chance that ministers would need to reconvene next week to try to reach a deal.

The rules being discussed on Friday would specify the order in which investors and creditors have to absorb losses so taxpayers do not have to bear the burden. Delegates were divided over how, and whether, to allow countries discretion to protect certain classes of creditors.

A deal could help prevent a recurrence of the chaos that ensued during a bailout for Cyprus in March, when governments and international lenders argued over how to impose losses on investors in the country’s troubled banks. The Cypriot bailout was so chaotic that an initial plan to penalize savers with less than 100,000 euros was abandoned in favor of a deal that penalized only larger savers.

A deal also would allow the leaders of the European Union’s 27 member states to endorse the policies at their meeting late next week in Brussels, their last scheduled summit meeting before the summer.

The tools discussed on Friday would become important building blocks in the future for a possible banking union, which includes a single supervisor under the European Central Bank overseeing about 150 of the bloc’s largest lenders. It is supposed to go into force in the middle of next year.

The knottiest issue on Friday was a split between countries like Britain, which wants to retain some flexibility on how to impose losses, and those like Spain, which was demanding a fixed rule book. The worry for Britain is that automatic losses for some creditors could set off fears of losses at other institutions, which could start bank runs. But Spain wants to ensure that bank investors do not flee to more prosperous countries like Germany, where mechanisms for resolving bank problems might be better capitalized and could be used to shield creditors from losses.

A proposal put forward by the Irish delegation, led by Michael Noonan, the country’s finance minister, would give countries like Britain the flexibility to choose where losses would fall as long as 8 percent of a failing bank’s total liabilities were wiped out first.

But that proposal was failing to gain traction. Sweden protested that the figure was too high.

The Dutch and the Germans said the Irish figure was too low, and they complained it still could induce risky behavior if bankers were overly confident of relying on mechanisms like national bailout funds to come to their rescue.

Article source: http://www.nytimes.com/2013/06/22/business/global/lots-of-talk-but-little-agreement-on-how-europe-should-rescue-banks.html?partner=rss&emc=rss