Chemistry Board

EU Closer to Bank Union

On the same day Cyprus’s parliament rejected a European Union bailout involving a tax on deposits, political leaders in the region reached a deal bringing the euro zone one step closer to a banking union.

The agreement to accept a common supervisor was the result of an idea hatched in Brussels in June to enable the direct use of EU funds to recapitalize banks without adding to a government’s debt. It was supposed to help countries such as Cyprus, whose failing banks threaten that nation’s solvency.

That goal is still out of reach. The EU offer that Cyprus spurned would have forced the government to borrow 10 billion euros ($13 billion) to recapitalize banks, pushing its debt load to about 140 percent of gross domestic product. Similar burdens led Ireland to seek a bailout in 2010 and Spain in 2012.

“Like Ireland, the banking system is bringing Cyprus down,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. “Germany asked for the banking union as a condition for allowing use of direct EU funds for banks, but the crises in Spain or Cyprus didn’t wait for the establishment of the new regime.”

Euro zone leaders agreed in June that a common emergency fund could be used for direct recapitalization of banks once a central supervisory structure was in place. Irish and Spanish politicians voiced optimism at the time that they could transfer some of their liabilities to the fund. Since then, those hopes have been dashed as Germany has made it clear it didn’t want legacy loans to be covered, according to Alberto Gallo, head of European credit research at Royal Bank of Scotland Group Plc.

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