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EU ministers to tackle Cyprus fallout, banking union at Dublin talks

A worker sweeps in front of a branch of Bank of Cyprus in Bucharest April 1, 2013. REUTERS/Bogdan Cristel
A worker sweeps in front of a branch of Bank of Cyprus in Bucharest April 1, 2013. REUTERS/Bogdan Cristel

By John O'Donnell and Jan Strupczewski

DUBLIN (Reuters) - Fallout from the messy bailout of Cyprus will top the agenda of a two-day EU finance ministers meeting in Dublin beginning on Friday, with focus also on growing German reluctance over euro zone banking reform.

Unease surrounding the rescue package for Cyprus grew on Wednesday after Reuters and other news organizations obtained documents detailing how the bailout will be financed and how much of the total Cyprus is now expected to contribute.

Whereas Cyprus was originally meant to come up with 7 billion euros, and the European Union and International Monetary Fund would provide 10 billion, the documents show the total package will now cost 23 billion euros, with Cyprus providing 13 billion of that.

What's more, Cyprus is expected to sell 400 million euros worth of its gold reserves, and will have to raise corporate tax and capital gains tax rates at a time when its economy is forecast to contract more than 12 percent in the next two years.

The complete winding up of one Cypriot bank, Popular, and the writing-off of a large portion of secured debt and uninsured deposits in the largest bank, Bank of Cyprus, will raise a total of 10.6 billion euros, the documents showed.

While the details of the program have already been agreed between Nicosia and the EU and IMF, Finland's finance minister said on Wednesday there was still the potential for minor adjustments. There is likely to be intense debate over whether the bailout has been successfully put together.

"Some details might still be changed on Friday," Jutta Urpilainen told reporters in Helsinki, emphasizing that she did not mean the headline figures but the internal numbers.

The Dublin meeting, an informal gathering of all 27 EU finance ministers at which no decisions are expected, will also examine the deepening problems in Slovenia and debate how to press ahead with setting up a fully-fledged "banking union" across the euro zone countries and wider EU.

In the long-run, it is the banking union debate that is most critical since it touches on issues such as how to resolve bad banks, how to put in place a single deposit-guarantee scheme and how to establish a single resolution fund.

In June last year, EU leaders agreed that establishing a banking union was an essential next step in breaking the "doom loop" between big, problem banks and indebted sovereign governments, so as to avoid one dragging the other down.

FOOT-DRAGGING?

But momentum towards banking union has slackened, especially among some German officials, as the complexities and potential difficulties of the plan have come into clearer focus.

Berlin's greatest concern, as the euro zone's largest and most successful economy, is being left on the hook to finance an endless series of banking bailouts across the euro zone.

"The Germans have raised obstacles all the way along," said one EU official, frustrated by the perceived foot-dragging. "Everyone is getting fed up with them."

German officials say they are fully engaged in the debate and are only concerned about ensuring that the right steps are taken at the right time - an overly hasty approach to creating a banking union will not be good in the long run, they say.

But other EU officials suggest there is a reluctance on Germany's part to get stuck into potentially divisive legislation before elections set for September, so as not to damage Chancellor Angela Merkel's chances of reelection.

One of the more sensitive issues to be discussed on Friday and Saturday will be a proposal from Ireland, which holds the rotating presidency of the EU, to impose losses on interbank deposits held by troubled banks as another way of resolving banking sector difficulties.

The proposal, parts of which have been seen by Reuters, has already caused concern in France and Italy and could be destabilizing for financial markets since it could cause interbank lending to suspect banks to freeze up.

Dirk Schoenmaker of the Duisenberg School of Finance who will take part in the discussions with ministers on the issue, has suggested countries put up to the equivalent of 10 percent of their economic output to help resolving bank problems.

In his presentation, seen by Reuters, Schoenmaker underlines the urgency of the situation facing Europe's banks.

"There is a sizeable group of banks which are thinly capitalized and have not fully recognized all loan losses," he writes. "This group has no incentive to grant new loans. This may cause a credit crunch and choke economic recovery."

The ministers will also discuss how to go about directly recapitalizing banks from the euro zone's bailout fund - another step meant to break the vicious circle between indebted sovereign governments and shaky banks.

Jeroen Dijsselbloem, the Dutch finance minister and president of euro zone finance ministers, told Reuters in an interview last month that it may never be necessary to recapitalize banks from the bailout fund, a comment that alarmed countries hoping to use the facility.

Although no formal decisions will be taken at the meeting, ministers are expected to give their endorsement to extending the time that Ireland and Portugal get to repay loans they have already received from the bailout funds.

This would be a significant concession to Ireland, helping to seal its return to normal borrowing on markets, as well a boost to Portugal as it struggles to push through spending cuts.

(Editing by Luke Baker and Jeremy Gaunt)

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