Ministers to Reject Pan-Europe Bank Guarantees

European Union finance ministers at a meeting on Wednesday are set to reject calls for a pan-European system of bank-debt guarantees and instead are expected to back a plan for national governments to provide the guarantees.

But EU officials and banking experts doubt such a plan will address the root problem: Banks based in the bloc's troubled regions—the euro-zone periphery and Eastern Europe—won't benefit from guarantees from governments that are themselves facing grave funding problems. And with bond yields rising even in the euro-zone core, bank guarantees provided by these governments could inflame the fears now roiling euro-zone sovereign-bond markets.

"Given that so many sovereigns are themselves unable to borrow at sustainable rates, this national approach will not work at this time," said a letter sent to finance ministers on Monday by seven members of the Banking Stakeholder Group, an advisory panel to the European Banking Authority. "This is why we call on the [finance ministers]…to urgently adopt pan-EU measures to providing capital and term funding backstops for banks in all member states."

The European Banking Authority, the European Central Bank and the European Commission are pushing to create a "syndicate," jointly guaranteed by national governments, that would provide guarantees to debt issued by banks across the 27-nation bloc. This would allow, say, an Italian bank to issue guaranteed debt at a time when the Italian government is in no position to take on additional liabilities.

But the EU's most credit-worthy governments—the ones that would provide the muscle behind a joint-guarantee scheme—are set to reject this idea, officials familiar with the discussions said. The sheer size of bank liabilities, which for the largest banks can exceed the size of their home governments' economies, has spooked the EU governments that still hold triple-A credit ratings. They fear that guaranteeing bank debt could raise their funding costs and jeopardize their ratings.

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Every time you think, European politicians cannot top stupidity - they actually raise the bar...