MNI EXCLUSIVE: Italy Concern Germany May Halt Bank Union Moves

--Worries FDP May Rein Back On Risk-Sharing Progress   

--Possible CDU-FDP Coalition Might Shift Focus On High Debt Issue

By Silvia Marchetti

     ROME (MNI) - A likely German coalition between re-elected chancellor Angela

Merkel's Christian Democratic Union and the liberal Free Democratic Party could

put the completion of Europe's banking union in jeopardy, several concerned

Italian officials have told Market News.

     Policy-makers in Rome are troubled that the German Free Democrats' open

hostility to debt leniency across the EU could hamper a more burden-sharing

approach to bank resolution, thus delaying the implementation of the common

deposit scheme, the third missing leg of the banking union. 

     A newly FDP-tinted Germany "could make more pressing requests to

financially troubled peers like Italy, of greater bank risk reduction at

national level before moving on with a wider sharing of risks at European

level," a government source told Market News. 

     That would mean Italy and other southern members would first need to

address their elevated public debt and banking vulnerabilities in order to move

on with the banking union development. 

     This would further delay the common deposit guarantee scheme and the

EU-wide public backstop which Rome sees as priorities in further stabilizing

financial markets, effectively the "missing pieces" to complete the banking

union through the greater burden-sharing of risks, explained Democrat Marina

Berlinghieri, head of the Lower House EU Affairs committee. 

     To a more liberal-leaning Germany, the risk-sharing scheme would be

perceived as a real threat, argued the unnamed government source. 

     "For Berlin, it would mean, in the case of bank crises in the southern

periphery, carrying the burden and paying the price for those lesser-performing

countries with elevated, risky public debt and less solid financial sectors --

mainly Italy, Spain and Portugal," he said. 

     Berlinghieri warned that the principle of sharing resources and risks was

not put jeopardised.

     "European members must not only share financial resources, but also risks,

and I hope that no matter what government takes over in Germany, this principle

is not put into question as it would unwind the integration process," she said..

     But if this were the case, there would be a stalemate in banking union

progress, warned Democrat Giampaolo Galli, a member of the Lower House Budget

committee.  

     "we would face a stalemate in the banking union progress. Italy would be

requested to secure definitely its financial sector, which we are doing but

gradually and never enough for Berlin, and at the same time, drastically cut our

public debt," he said.

     GERMAN VOTE COULD SLOW EMU INTEGRATION

     Undersecretary of State for EU Affairs, Sandro Gozi, said the German vote

was not a "positive outcome" for Europe and urged Europe to move on with the

creation of a EU Finance Minister and a European Monetary Fund, as envisaged

recently by the European commission president Jean-Claude Juncker. 

     According to a Treasury source, if the "new German government exploits

austerity in the wrong way as its slogan, integration success will be tough; but

if the new coalition is pragmatic, then dialogue is possible".

     The chance that a member of the FDP will possibly be Germany's next finance

minister -- touted potentially as leader Christian Lidner -- isn't at all

reassuring to Rome, noted the government source. 

     The official however argued that once Berlin actually sees that Italy's

debt is indeed falling, its attitude will change and become "more open" to

burden-sharing, adding though that risk-sharing (at EU level) and risk-reduction

(at national level) must go hand in hand and support one another. 

     Rome has called for a revision of the new bail-in banking rules introduced

through the Bank Recovery and Resolution Directive (BRRD), and wants to fix the

current "over-lapping between the BRRD and the rules against state aid", aspects

which Germany might be even more unwilling to amend in the short-run, said the

government source. 

     Italy is also against abandoning the current "risk-free" policy regarding

the evaluation of government debt present in Italian lenders' portfolios, a

stance which has always been opposed by Germany and could now be even more so,

added the source. 

     As banks across Europe still remain free to assign "zero-risk" weightings

to sovereign bonds, and Italian banks are full of them, the source explained,

Germany could push harder for the elimination of this approach as a

pre-condition for burden-sharing and the creation of a common deposit insurance

scheme aimed at backstopping lenders in the event of bank defaults.

     If the existing Basel rules don't change, the common deposit scheme would

'shield' all government bonds from risk and Germany's FDP fears sharing the cost

of too much financial hazard with indebted southern peers like Italy, Spain and

Greece in the event of bank resolutions, the government official explained. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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