Eurozone agrees 'backstop' for failing banks

Eurozone finance ministers have reached a tentative agreement to provide a common backstop by at least 2025 to the EU's new bank rescue system in case it runs out of money in an emergency and requires taxpayer support.

EU officials characterised the deal to provide a safety net for its new bank rescue fund as a "crucial breakthrough" as the use of public money had been resisted by Germany. It provides an additional funding stream to recapitalise or wind down failing banks, should the bank-paid resolution fund be overwhelmed.

However, the deal triggered sharp criticism within hours of the agreement being reached. Vitor Constancio, the European Central Bank's vice-president, argued it failed to provide any emergency funding during the 10-year "transition period" before a new €55bn resolution fund is fully in place, in 2025.

"You should flesh out this possibility of the fund borrowing in the markets, to have bridge financing to complete a resolution process, with the proper strength of guarantees to make that process very quick and as cheap as possible," Mr Constancio said at the opening of Wednesday's deliberations.

He urged EU finance ministers working to finalise the deal on Wednesday to provide the under-resourced fund with new government guarantees so it could borrow emergency financing in the private market if a bank collapse proved too big for the embryonic system's still-meagre resources.

This commitment to provide a backstop was a key demand from a Paris-led group of eurozone countries that Germany had opposed. "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 member states to reach a final deal on Wednesday and have a "peaceful Christmas".

A draft of the agreement, seen by the Financial Times, makes a distinction between the 10-year "transition period" when a common €55bn bank rescue fund is built up through levies on banks in the banking union, and the "steady state" once the fund is in place.

Berlin's objections to providing automatic emergency financing for the transition period largely prevailed. A country in need of extra funding could ask for an emergency loan from another nation's resolution fund - something already agreed by EU member states - or apply to the eurozone's €500bn rescue fund, the European Stability Mechanism, under its usual rules and conditions.

"In the transition period, bridge financing will be available either from national sources, backed by bank levies, or from the ESM in line with agreed procedures. The arrangements for the transition period will be operational by the time the [single resolution fund] is established, including the setting up of possibilities for lending between national compartments," the agreement said.

During the talks, Germany initially objected to any reference to the ESM being made in conjunction with the single resolution fund, even though it is the most obvious source of bridge financing at eurozone level for any big bank resolution. The ESM's funding comes from European taxpayers, of which German taxpayers are the largest contributors. Berlin has repeatedly insisted that no public money be used in the new bank bailout system.

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Mr Constancio said such a backstop was inadequate, however. He noted that the US's bank resolution agency, the FDIC, has a line of credit backed by the US government and urged ministers to adopt a similar system during the transition phase. "This credit line should exist," he said.

The agreement on the system for the "steady state" after the fund is up and running is more significant but the details have been left for future negotiation.

"A common backstop will be developed during the transition period. Such a backstop will facilitate borrowings by the [single resolution fund]," according to the draft agreement. "The banking sector will ultimately be liable for repayment by means of levies in all participating member states, including ex post. The backstop will be fully operational at the latest after 10 years."

Officials said the borrowing system was not defined and still had to be agreed during the transition period. Still, it could allow the fund to raise money on the private markets or from the ESM. Germany insisted that the loans be recouped through levies on industry, so that the backstop does not involve a fiscal transfer in the long term.

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

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

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