June 26, 2018 / 10:10 AM / 24 days ago

EU leaders to boost bailout fund role, but duck talks on deposit insurance

BRUSSELS (Reuters) - European Union leaders are to agree on Friday on a bigger role for the euro zone bailout fund ESM, with details to be worked out by December, but will leave it to finance ministers when to start talks on a European Deposit Insurance Scheme (EDIS).

FILE PHOTO: European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium June 20, 2018. Picture taken June 20, 2018. REUTERS/Yves Herman

Draft conclusions of the leaders talks on Friday on deeper integration of the euro zone also makes no reference to the idea of a euro zone budget, championed by France, or to easier sovereign debt restructuring on which Germany is keen.

The draft showed the leaders would endorse the idea that the European Stability Mechanism (ESM), the bailout fund, should, in an emergency, lend to help resolve failing banks.

The help would take the form of a revolving credit line of the same size as the bank resolution fund itself — which is to be equal to 1 percent of covered deposits in the euro zone, or around 55 billion euros.

The ESM would also have a bigger role in designing and monitoring financial assistance programmes, the draft conclusions, seen by Reuters, said. But details would only be worked out by euro zone finance ministers, the Eurogroup, later.

“The Eurogroup is invited to agree on a term sheet for the further development of the ESM by December 2018,” the draft said. “The Euro Summit in an inclusive format will come back to these and other issues in December 2018,” it said.

NO MENTION OF DEBT RESTRUCTURING, BUDGET

The draft conclusions did not mention the Franco-German idea of introducing single-limb Collective Action Clauses (CACs) for new bond issuance to prevent hold-outs.

CACs in sovereign bond contracts make it easier for a government to override a minority of investors who oppose the terms of a proposed debt restructuring, and who can stop the whole process by holding out for a better deal.

Bonds issued in the euro zone since 2013 have included CACs. But the introduction of the “single-limb” measure would make the process easier, because it would allow for a single restructuring decision to encompass all bonds.

The chairman of euro zone finance ministers Mario Centeno asked, in a letter to the leaders on Monday, if they wanted to pursue the Franco-German idea which is vehemently opposed by highly indebted Italy.

The leaders were to also to endorse the completion of the EU’s banking union which is still missing an EU-wide deposit guarantee scheme that would make bank depositors equally safe across the 27-nation bloc.

But Germany and several other northern European countries oppose the introduction of such a scheme until risks that banks are taking, seen in the number of bad loans they have, are substantially reduced.

Following the wording of the Franco-German agreement from last week on how to proceed with the deeper integration of the euro zone, the draft EU leaders statement left the issue open, without mentioning any dates for EDIS.

“The Eurogroup is invited to work on a roadmap with a view to starting political negotiations on the European Deposit Insurance Scheme,” the draft said.

The statement also made no reference to the Franco-German idea of a euro zone budget — another highly controversial issue strongly backed by France, to which Germany is lukewarm and which is strongly opposed by countries like the Netherlands.

Reporting By Jan Strupczewski; Editing by Richard Balmforth

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