MNI EXCLUSIVE: Italy Threatens to Block Reform Of ESM

By Silvia Marchetti

     ROME (MNI) - Italy could block reform of the European Stability Mechanism

if tighter fiscal requirements look to prevent it from accessing the common

backstop and no progress is made towards a guarantee scheme for eurozone bank

deposits, government officials told MNI.

     "We're ready to use our power of veto," said a source from the League

party, which shares Italy's governing coalition, following the EU negotiations.

     "The ESM reform draft is too strict on national budgets and needs to be

watered down. Also, any change to the ESM must go hand in hand with implementing

the missing third leg of the banking union, and a EU competitiveness budget to

fund investments in member states. Without a common guarantee scheme for

deposits, there will be no revamped ESM".

     By 2024 the ESM will provide the banking union's Single Resolution Fund

with a E60 billion backstop, funded by each member state depending upon its

size. But the ESM draft reform agreed by the Eurogroup in June sets out tight

budgetary requirements for member states who need to use the backstop.

     "Only fiscally solid countries can have access to it," complained the

official, "meaning Rome would be spending billions of euros in contribution to a

fund we wouldn't even be eligible to use anyway even in the worst-case scenario

--unless we submit to a debt-structuring plan."

     The League's coalition partner, the 5-Star Movement shares its opposition

to the ESM reform

     "It would be total folly if we gave the green light to such an

abomination," said a 5-Star official.

     ESM reform treaty cannot come into force if it has not been ratified by all

19 ESM members, requiring approval by national parliaments.

     One source close to the Eurogroup said that until now Italy's focus had

been more on winning more resources for the budgetary instrument for

competitiveness and convergence, rather than securing progress on deposit

insurance and more generous terms for the ESM backstop.

     "Everybody agrees it's a package. There is a question as to whether we can

move ahead if there is no progress on the budgetary instrument," the source

said.

     Discussions within the Eurogroup on deposit insurance or have been stalled

for some time, with northern member states, including Germany particularly,

unwilling to move ahead without parallel agreement on ending the 'zero risk

rating' of government bonds.

     A final deal at EU level on a new treaty is expected in December.

     Rome is concerned the new ESM will turn into a European Monetary Fund which

will subjugate vulnerable indebted countries like Italy to austere fiscal

programs in exchange for financial help. It also frets that the reform would

grant the ESM a role in deliberating over fiscal matters together with the EU

Commission.

     "Having Brussels as one watchdog is enough, we don't need another body

constantly finger-wagging and retaliating against us if any future help from the

ESM is bound to be subject to austere fiscal programs, " said the League source.

     (With additional reporting by David Thomas in Brussels)

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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