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Germany seeking early start for EU rules hitting creditors of failed banks

Germany's Finance Minister Wolfgang Schaeuble talks to his Finnish counterpart Jutta Urpilainen (R) during a European Union finance minister
Germany's Finance Minister Wolfgang Schaeuble talks to his Finnish counterpart Jutta Urpilainen (R) during a European Union finance minister

By John O'Donnell

BRUSSELS (Reuters) - Bondholders and large depositors in a failing bank could face losses as early as 2016 if Germany succeeds in accelerating tough new European rules to spare taxpayers from further bailouts.

A day after European Union finance ministers met to try to build a single banking framework for the euro zone, EU negotiators and members of the European Parliament were attempting on Wednesday to set out rules that will also provide the foundations for the so-called banking union.

The rules, which will apply across all 28 countries in the European Union, will make hitting bondholders and large savers a permanent feature of the bloc's response to banking crises.

It follows in the vein of losses imposed earlier this year on big depositors in Cyprus when the country's bailout broke a taboo that savers should be spared when a bank is in trouble.

While there is political agreement that savers with more than 100,000 euros and senior bondholders should suffer in the same way as shareholders did during the financial crisis, one central question remains open - when to start the regime.

Germany is seeking backing of other European countries to fast-track the law, originally penciled in for 2018.

A compromise is likely and officials see a start-date of 2016, two years earlier than planned and possibly in time to hit banks exposed by European Central Bank tests next year.

An early start date has won backing from the ECB, uneasy over banks' reliance on its own financial support.

But many European Union countries, including struggling Portugal, are nervous that an early introduction could rattle fragile markets, reviving memories of the debt crisis and the controversial Cyprus rescue.

At the meeting of finance ministers earlier in the week, many spoke out against Germany's suggestion to fast-track the law to 2015. They will likely take a final decision next week.

HIGH STAKES

The prospect of the new law has done little to curb enthusiasm for bank bonds. Nor has it prompted large savers to move their cash to safe havens.

But there is a lot at stake. Banks across the 17 countries in the euro zone have 860 billion euros ($1.18 trillion) of unsecured bonds, with German banks accounting for almost 200 billion euros, according to Thomson Reuters data.

At the same time, the size of banks' potential liabilities has long overtaken government's ability to save them.

ECB data shows that euro zone banks have issued more than 3.8 trillion euros of home loans - more than a third of the bloc's output and one-and-a-half times the German economy.

This helps explain why Germany, the euro zone's biggest economy and the country most likely to be called on to bear the brunt of bank clean-up costs, wants the tough rules early.

Progress on this point is a bellwether for negotiations over banking union because it forms an essential building block for the new system of policing by the ECB.

Germany wants its early introduction in return for giving its full backing for the project, which should also set up an agency to close failed banks and a fund to pay for the clean-up.

($1 = 0.7289 euros)

(Editing by Jeremy Gaunt)

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