European Commission calls for direct eurozone aid for banks in trouble

The European Commission called for direct eurozone aid for troubled banks, and touted a Europe-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis now threatening to overwhelm Spain.

The commission, the European Union’s central regulator, sided with Spain in proposing that the euro’s permanent bailout fund inject cash to banks instead of channelling the money via national governments. It also offered Spain extra time to squeeze the budget deficit.

The use of the rescue fund to recapitalise banks “might be envisaged” and would “sever the link between banks and the sovereigns,” the commission said in Brussels. Jose Barroso, the commission’s president, said “it is important to use all possibilities offered in terms of flexibility”.

Proposals for more liberal use of European bailout money are likely to face resistance in creditor countries such as Germany, Finland and the Netherlands, the scenes of growing taxpayer opposition to more aid.

After more than two crisis-filled years and €386 billion in loan pledges to Greece, Ireland and Portugal, “markets remain exceptionally tense and vigilant and confidence is still weak,” the commission said.

Spain, the 17-nation eurozone’s fourth-largest economy, is trying to plug holes in regional budgets and detoxify its banks, all while struggling to lift the economy out of a recession. Current EU plans call for the €500bn European Stability Mechanism, set to start up in July, to funnel bank-aid money through national governments and, ultimately, require those governments to pay it back.

Germany is spearheading resistance to direct European financing for banks.

Finland is in Germany’s camp, Martti Salmi, aFinance Ministry official, said.

The commission appealed for a “banking union” that would more tightly integrate supervision and create a pool of European funds to clean up banks with cross-border exposure and segregate their under-performing assets.

Economic and monetary commissioner Olli Rehn said Spain might be granted an extra year, until 2014, to bring its deficit down to the limit of 3% of gross domestic product.

The commission would only make that concession if Spanish prime minister Mariano Rajoy’s government delivers a “solid, two-year budget plan for 2013 and 2014,” Rehn told reporters.

Bloomberg


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