MNI SOURCES: EU Works On Deal To Open Way To ESM Overhaul

By David Thomas and Silvia Marchetti

     BRUSSELS/ROME(MNI) - Eurozone finance officials are examining possible

compromises to end a dispute over collective action clauses setting out rules

for triggering debt restructuring which is stalling the planned overhaul of the

currency bloc's bailout fund, while also hoping an upcoming French court ruling

will pave the way for an informal deal between member states on the matter,

sources told MNI.

     France's State Council is looking into whether so-called single-limb CACs,

which would enable restructurings to be triggered via a single vote among

bondholders, must be written into an annexe of the ESM treaty in order to

satisfy French insolvency law. This is opposed by Italy, which wants to keep

CACs out of the treaty itself, allowing countries leeway to set their own rules.

     Eurozone officials have been told that the court should rule in time for

the Eurogroup of finance ministers to finalise the treaty draft in March, so

long as it allows CACs to be dealt with outside the ESM Treaty. Should the court

rule otherwise, however, it looks likely to further entrench Italian objections

to the single-limb CAC proposal and stall progress in the ESM reform talks

beyond the spring, officials fear.

     "Everyone is hoping that the French constitutional court will decide that a

formal treaty text on this is not needed," a source said, adding that, "Then the

hope is that these Italian concerns will be eased, allowing the issue to be

settled informally between euro member states."

     While the topic was not discussed at Monday's Eurogroup, solutions to

bridge the gap between France and Italy are being actively sought at the level

of deputies, sources said.

     One possible compromise which has been mooted - in the event that there is

such a requirement for formal treaty language from the French court -- is that

an opening clause could be included in the treaty which would allow for the CAC

issue to be resolved at a later date.

     While other officials expressed scepticism as to whether such a proposal

was workable, given that CACs are due to come into force in 2022, all appear

confident that a compromise will be found in time.

     --DEBT SEGMENTS

     The Italian government has said each country must be free to decide how to

aggregate its own debt securities' listings and how many sub-aggregations there

should be, arguing that debt structures are specific and vary significantly

between countries. These sub-divisions of debt would each require bondholder

votes before they could be included in restructurings.

     Italy wants to be able to sub-aggregate debt into segments determined by

maturities, whether they are inflation linked, and by the type of investor, said

a government source with ties to the centre-left Democrat party.

     "The decision over how many, and what type of debt categories there will be

must be the prerogative of each single issuing member state," said one Italian

source.

     Northern countries, led by Germany and the Netherlands, are pushing for

just two or three "universal" sub-aggregation categories at EU-level, said one

official, from the 5-Star Movement, which shares a coalition government with the

Democrats. Single-limb CACs could reduce demand for inflation-linked BTP Italia

bonds, which are sold to retail investors, the source added.

     The 5-Stars Movement also dislikes other aspects of the ESM reform, which

it argues imposes unrealistic conditions on bailouts, might block the treaty in

the Italian parliament even if it is amended to welcome Italy's requests,

particularly as political tensions within the ruling coalition mount ahead of

regional elections.

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

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