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EU ministers agree euro zone bailout fund can be used as ultimate backstop for banks

BRUSSELS (Reuters) - European Union finance ministers agreed on Friday that, as a last resort, the euro zone ESM bailout fund will be able to buy stakes in banks that need rescuing if neither investors nor the government are able to provide funds.

The decision appears to defuse a clash between Germany and other euro zone countries over whether the fund should be allowed to act as an ultimate backstop for banks that central bank health checks next year could find short of capital.

"The direct recapitalization instrument with its 60 billion euro ESM exposure limit... could also be used when adopted according to Euro Area and national procedures in line with the June 2013 Eurogroup agreement, following the establishment of the Single Supervisory Mechanism," the ministers said in a statement.

The caveats mean that before direct recapitalization becomes reality, the European Union must agree on a new law, now debated between governments and the European parliament, which envisages the possibility of imposing losses on senior bond holders of banks and even large depositors if a bank has to be closed.

The law is to be adopted by the end of the year.

Another condition is that the ESM direct recapitalization option will be open only when the European Central Bank takes over as the euro zone bank supervisor from November 2014.

Finally, Germany will have to change its national law, which now expressly forbids direct bank recapitalization by the ESM.

(Reporting By Jan Strupczewski; Editing by Adrian Croft)