December 4, 2019 / 12:23 PM / 10 days ago

Euro zone ministers seek bank deal amid Italy, Germany obstacles

BRUSSELS (Reuters) - Euro zone finance ministers will seek broad agreement on Wednesday for a package of steps to make banks more stable, but Italy’s objections and the German finance minister’s weakened domestic position are likely to make a deal more difficult.

FILE PHOTO: A European flag is seen outside the EU Commission headquarters in Brussels, Belgium November 6, 2019. REUTERS/Yves Herman

Ministers from the 19 countries sharing the euro were asked by their leaders in June to come up with a package of reforms by Dec. 13 that included a euro zone budget, changes to the ESM regional bailout fund, and a deposit guarantee scheme.

They have reached a deal on the euro zone budget and the ESM reform, but agreement on the European Deposit Insurance Scheme (EDIS) has proved elusive as several northern countries want to reduce the risk of bank failures across the bloc before jointly guaranteeing deposits.

Germany, which has for years been the most reluctant to the EDIS idea, finally opened the way to progress last month after Finance Minister Olaf Scholz presented a paper outlining conditions for Berlin’s support.

These included setting regulatory limits on how many bonds of a single sovereign a bank can hold in its portfolio and attaching a risk weight to bonds, now treated as risk-free, that would entail keeping higher capital by banks.

This has triggered protests in Italy, because limits on sovereign bond holdings are hard to swallow for a country that has 2.3 trillion euros ($2.54 trillion) of public debt held mainly domestically.

In a further complication to a euro zone deal, Scholz’s domestic political position was severely weakened after he lost elections for the leadership of his Social Democrats party, putting a question mark on the future of the coalition government of Chancellor Angela Merkel.

“The change of leadership of the German SPD lowers the chances of a quick deal on the euro zone integration package,” one senior euro zone official said.

Meanwhile, Rome, to make sure Italian banks will not be forced to limit Italian government bond holdings in the future, is threatening to withhold its consent to the already agreed ESM reform, talks on which closed in June.

Planned changes to the ESM treaty would reduce the risk of investors holding out for a better deal in a potential sovereign debt restructuring and give the bailout fund the possibility to mediate between the sovereign and investors.

Italian Economy Minister Roberto Gualtieri said last week euro zone countries would probably sign off on a reform of the ESM only in February, rather than in December as previously planned.

($1 = 0.9073 euros)

Reporting by Jan Strupczewski; Editing by Andrew Cawthorne

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