MNI SOURCES: Italy Sees Eurozone Bailout Fund Deal As Unlikely

By Silvia Marchetti and David Thomas

     ROME/BRUSSELS(MNI) - A deal to unlock the impasse on reforming the

eurozone's bailout fund looks unlikely at a meeting of senior finance officials

in Brussels on Wednesday, officials told MNI, with Italian government sources

saying disagreement persists on the key issue of collective action clauses which

could make debt restructurings easier.

     Italy, which already forced a delay in revamping the European Stability

Mechanism in December, wants the CACs to be watered down. Prospects also look

poor for moves towards strengthening banking union, on which Rome has

conditioned progress for the ESM, officials in Brussels said.

     Without some sort of compromise at Wednesday's Euro Working Group meeting,

there will be little chance of an ESM agreement at the Eurogroup gathering of

eurozone finance ministers later in the month, officials said. An ESM deal might

then take months or longer, Italian officials said.

     A protracted delay would further highlight the eurozone's inability to

overhaul its governance, even as its economic prospects dim, and has been made

more likely by the internal rivalries of Italy's fractious coalition government.

     "We're still far from reaching a deal on this at EU level that satisfies

everyone", said an official with ties to Italy's co-ruling centre-left Democrat

Party.

     The Democrats' allies in the populist 5-Stars Movement have been vocal in

their opposition to the ESM changes, and particularly to so-called "single-limb

CACs", which would allow a single vote by bondholders to authorise a

restructuring across several different series of bonds.

     --SOFTER CONDITIONS

     Italy wants a system closer to "double-limb CACs", which require votes by

investors in different instruments. Otherwise, it argues, its own outstanding

debts, such as its BTP inflation-indexed bonds targetted at retail investors,

might be vulnerable. Additional categories of debt, requiring separate votes,

must also be recognised, according to the Italians.

     Rome, unlike some other countries such as France, wants the CAC measures to

be simply adopted by the ESM, rather than incorporated in treaty changes, which

would then have to be ratified by all 19 member states. It also wants to soften

conditions for accessing the ESM's credit lines, which under the proposals call

for borrowers to comply with EU fiscal rules, and for the mechanism's managing

director to have less discretionary power in deciding who is eligible for a

loan.

     Hopes for progress on the key element of European towards eurozone-wide

bank deposit insurance, in line with Italy's call for a strengthened banking

union, briefly rose last November, when German Finance Minister Olaf Scholz

indicated support for the idea, but these have since faded, particularly

following Scholz's failure to win the leadership of his centre-left SPD party.

     "The idea was to unlock the first stage of discussing banking union, but it

is not now clear if we're ready for that," an official in Brussels told MNI. "So

now it's a German-Italian wrangle and that's what the EWG will discuss

tomorrow."

     Sources said that the EWG would decide tomorrow whether there is sufficient

agreement on the ESM for the issue to be considered at the Eurogroup meeting

later this month.

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

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