European bank supervisor step closer but deal hazy

[October 19, 2012]  BRUSSELS (AP) -- European leaders took a step toward creating a single supervisor for banks in countries that use the euro on Friday but remained vague about its start date.

Although the leaders meeting in Brussels said their decisions were key to shoring up banks and eventually giving them access to loans from Europe's bailout fund, many observers were struggling to figure out exactly what had been achieved.

Rather than finding new measures to fight the crisis, the leaders focused on establishing a timeline for those they had already agreed to.

They decided to try to have the legal framework for the European banking supervisor in place by Jan. 1 and have it operational sometime in 2013. The supervisor needs to be in place before European countries can work on the next big step in their crisis-fighting plan -- giving their bailout fund, the ESM, the power to rescue banks directly, bypassing national governments.

That step is crucial because banks remain at the core of Europe's financial problems. Many are teetering on the brink of bankruptcy after the investments they made up in boom times -- including in government bonds and real estate -- have plummeted in value. Some governments have stepped in to save their banks, only worsening their own balance sheets in the process.

European leaders want to shield troubled governments from the burden of supporting their banks. That would be a huge relief to countries like Spain, which are facing the prospect of taking on enormous debts -- and worrying markets in the process -- in order to bail out their banks.

"The objective is simple: we want to break this relationship between the management -- often the poor management -- of banks and the consequences for state budgets," said Belgian Prime Minister Elio Di Rupo, as he headed into the second day of a summit meeting in Brussels.

But the answer is not simple. Some countries, led by France and Italy, are pushing for quickly giving the European bailout fund, the European Stability Mechanism, the power to directly loan money to banks. But in order to get that power, banks first need to be under the supervision of the European Central Bank -- hence the urgency of settling the supervisor question.

Leaders of those countries declared victory on the issue on Friday.

"The new system will begin in 2013, and by that year it will operate recapitalizing the banks without the direct participation of governments," said Italian Premier Mario Monti.

But German Chancellor Angela Merkel and her allies were singing a different tune. Merkel has repeatedly said that the quality of supervision should take precedence over speed.

In Berlin, lawmakers in her party were claiming they'd won.

"The chancellor said here yesterday that, as far as the banking union and banking supervision are concerned, thoroughness goes before speed," Norbert Barthle, a senior lawmaker with Merkel's Christian Democrats, said.

The compromise included something for both -- all 6,000 banks will be included, as France had wanted, and there was a mention that leaders would try to get a legal framework for the supervisor in place by Jan. 1. That allowed countries that are pushing for speed to say they'd held to the promise to get a deal by the end of the year.

But there is no firm deadline for the single supervisor to be up and running -- other than to say that work on its operational implementation "will take place during the course of 2013."

Analysts were struggling to see what was new.

"The real question then is whether this is a step towards allowing the European bailout funds to recapitalize banks directly and thus reduce the link between an individual sovereign and its banking system," said Gary Jenkins of Swordfish Research. "The answer appears to be `yes' although we have of course been here before."

Thorny questions still remain about which banks would be eligible for the direct loans. Ireland, for instance, was forced into a bailout because of the expense of saving its banks -- but it's unclear whether its banks would be eligible for relief from the bailout fund.

Leaders move into discussions on foreign policy on Friday, but economic issues were likely to overshadow those talks. On the agenda is how to deal with militants in Mali, a government crackdown in Syria and Iran's nuclear program.

[Associated Press; By SARAH DiLORENZO and RAF CASERT]

Don Melvin in Brussels and Geir Moulson in Berlin contributed to this report.

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