EXCLUSIVE - Euro zone may drop private sector from ESM bailout fund

Last Updated: Fri, Nov 25, 2011 16:10 hrs

Euro zone member states, mindful of flagging market confidence in euro zone debt, are considering dropping private sector involvement in the region's permanent bailout fund due to come into force in 2013, four EU officials said on Friday.

The discussions are taking place as part of wider negotiations over changing the EU treaty to introduce stricter fiscal rules, which Germany insists on as a precondition for deeper integration among euro zone states.

Commercial banks and insurance companies are expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalised for Athens.

But clauses relating to private sector involvement contained in the statutes of the European Stability Mechanism (ESM) - the permanent facility scheduled to start operating from mid-2013 - could be withdrawn, with the majority of euro zone states opposed to them.

The concern is that forcing the private sector to take losses if a country needs to restructure its debt is undermining market confidence in euro zone sovereign bonds. If clauses on private sector involvement are removed, most countries argue, market sentiment might improve.

"France, Italy, Spain and all the peripherals" are in favour of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands."

Another official said that while German insistence on retaining private sector involvement in the ESM was fading, so-called collective action clauses would only be removed as part of broader negotiations over changes to the EU treaty.

Berlin wants all 27 EU countries, or at least the 17 in the euro zone, to provide full backing for changes to the treaty before it will even consider giving ground on other issues that member states want it to change its stance on.

Germany is also under pressure to soften its opposition to the European Central Bank playing a more direct role in combating the debt crisis, and to give its backing to the idea of jointly issued euro zone bonds.

German officials dismiss any suggestion of a 'grand bargain' being put together, but officials in other euro zone capitals, including Brussels, say such a deal is taking shape and suggest Berlin will move when it has the commitments it is seeking.

Euro zone finance ministers will discuss the ESM at a meeting in Brussels on Nov. 29-30, including the implications of dropping collective action clauses from its statutes.

While most euro zone countries just want to forget about enforced private sector involvement, some are adamant there must be a way to ensure banks and not just taxpayers shoulder some of the costs of bailing countries out.

Austria's opposition Green Party, whose support the government needs to secure backing for the ESM in the Vienna parliament, insists collective action clauses must remain a part of the ESM.

Any changes to the ESM have to be approved by all member states and ratified by national parliaments before they can take effect, meaning Austrian opposition could derail the push for changes.

Germany and some other member states were pushing to bring the ESM, which is ehave a lending capacity of 500 billion euros, into force as early as July next year, but disagreement over its structure could delay that.

(Reporting by Julien Toyer, John O'Donnell and Luke Baker in Brussels and Mike Shields in Vienna; writing by Luke Baker; editing by Rex Merrifield, John Stonestreet)

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