UPDATE 3-ESM reform done in principle, no roadmap for euro zone deposit insurance

(Adds more detail, quotes, background)

By Jan Strupczewski and Francesco Guarascio

BRUSSELS, Dec 5 (Reuters) – Euro zone finance ministers reached a deal “in principle” on widening the responsibilities of the European Stability Mechanism, the euro zone bailout fund, but failed to tie off all loose ends or to make progress on a deposit insurance scheme, the group’s chairman said on Thursday, .

The reform of ESM is one of the measures for deeper economic integration of the euro zone, along with a miniscule euro zone budget and setting up a European Deposit Insurance Scheme (EDIS).

Changes to the ESM treaty are intended to reduce the risk of investors holding out for a better deal in a sovereign debt restructuring and give the bailout fund room to mediate between the sovereign and investors.

They would also allow the ESM to lend to the euro zone’s bank resolution fund to wind down failing banks if, in a major bank crisis, the resolution fund runs out of money of its own.

“We have reached an agreement in principle on a package of elements related to the ESM reform, and we laid the ground for upcoming decisions to complete the banking union, including the common deposit insurance,” Mario Centeno, head of the Eurogroup of euro zone finance ministers, told a news conference.

Euro zone ministers reached agreement on the ESM reform in June and even approved a draft text of the revised treaty on which the bailout fund is based. But Centeno said some “loose ends of a legal nature” still had to be clarified.

These include the legal nature of collective action clauses that would simplify future sovereign debt restructurings. That issue drew last-minute objections from highly indebted Italy, where some politicians believe they could make debt restructuring more likely.

The issue could be solved in January and the whole reform could then be signed off in the first quarter of next year, Centeno said.

Italy approved the ESM reform in June but has now decided it would hold off unless it was satisfied with other elements of the integration package — especially related to the deposit insurance scheme.

EU leaders have asked euro zone finance ministers to produce by mid-December a “a roadmap for beginning political discussions” on EDIS, the last missing element of the euro zone’s banking union, which Germany has blocked for years.

“We do not yet have a roadmap,” Centeno said.

EDIS would protect euro zone banks from bank runs by issuing a European guarantee to euro zone deposit holders that they would get their money back, up to 100,000 euros, no matter which country they lived in.

But in exchange for EDIS, Berlin wants steps to make banks less likely to collapse — limits on how many bonds of a single sovereign a bank can hold and risk weighting to bonds, now treated as risk-free, that would entail banks keeping higher capital.

This has triggered anger 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.

“We do not sign until we know the other reforms in detail. It will take months to understand whether the package is in Italy’s favour,” Italy’s European affairs undersecretary, Laurea Agea, said in a statement. (Reporting by Francesco Guarascio and Jan Strupczewski; additional reporting by Giuseppe Fonte in Rome; editing by Larry King)

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