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Draghi backs EU bank plan, critics raise concerns

European Council President Herman Van Rompuy listens to Italy's Prime Minister Enrico Letta (R) during a European Union leaders summit in Br
European Council President Herman Van Rompuy listens to Italy's Prime Minister Enrico Letta (R) during a European Union leaders summit in Br

By Noah Barkin and Martin Santa

BRUSSELS (Reuters) - European Central Bank President Mario Draghi endorsed a hard-fought EU agreement on how to close failing banks on Thursday, even as an array of critics branded the plan overcomplicated and underfunded.

The deal, clinched by European finance ministers after months of difficult negotiations, sets out a blueprint for shuttering troubled lenders, which at the height of the euro zone's debt crisis pushed countries like Ireland and Cyprus to the brink of bankruptcy.

But it falls short of what some nations, including France, Spain and Italy, had sought, by ruling out direct use of funds from Europe's rescue mechanism, the ESM, in the near-term, and setting up what could turn out to be a cumbersome decision-making process for winding down banks.

Earlier this week, Draghi had expressed concerns in a speech to the European Parliament that the compromise might prove overly complex and the financing arrangements inadequate.

But on Thursday he said he "strongly welcomed" the deal, calling it an important step towards completion of a banking union, the bloc's ambitious project to break the link between stricken banks and governments.

"It's an important step towards completion of our banking union," he said as he arrived at a summit in Brussels, where he is likely to discuss his thoughts in detail with EU leaders.

The ECB's backing is crucial as it takes over responsibility for supervising Europe's big banks from next year.

Other officials were more critical, with Martin Schulz, the German president of the European Parliament, promising to reject the deal in its current form. Under EU rules the parliament must approve the agreement for it to take effect.

"This is comparable to dealing with an emergency admission to hospital by first convening the hospital's board of directors instead of giving the patient immediate treatment," he said in the text of a speech given to EU leaders at a summit in Brussels on Thursday.

"If we were to implement the ECOFIN decisions on a banking union in this way, it would not only be a lost opportunity. It would be the biggest mistake yet in the resolution of the crisis," he said, referring to the body of EU finance ministers which cut the deal in the early morning hours of Thursday.

Guntram Wolff, director of the influential Bruegel think tank, described the funding approach as a major disappointment.

"The ESM is clearly out of the game, there will be no direct bank recapitalizations," Wolff told Reuters. "On this front we can say quite clearly that this deal is unsatisfactory and insufficient to break the vicious circle between banks and sovereigns."

GERMAN DEMANDS

In the talks, German Finance Minister Wolfgang Schaeuble refused to budge from his long-standing position that European taxpayer money, in the form of the ESM, not be used as a backstop during the initial phase of so-called "banking union".

Europe has agreed to build up a resolution fund of 55 billion euros by imposing a levy on banks, but that will take a decade. A crucial question in the talks was who pays during the period when the fund lacks sufficient cash.

Germany insisted that countries themselves be accountable once a bank's creditors and investors have taken a hit, while leaving the door ajar to mutualisation of risks over time.

It was also successful in its drive to prevent the European Commission from obtaining sole power to decide on the closure of banks. Instead, national governments will retain a say in such decisions, alongside a new Single Resolution Board (SRB).

At a news conference in Paris with his French counterpart Pierre Moscovici, Schaeuble described the result as "convincing".

Economists at J.P. Morgan also praised elements of the deal, saying those who may have expected large-scale taxpayer funded bank recapitalizations were bound to be disappointed.

"We continue to see the direction of travel more constructively," said Malcolm Barr in a research note.

"Germany has resisted the mutualisation of legacy banking exposures ex ante, as always seemed likely to us. But the commitment toward a metalized structure over time suggests to us that the German position would ease at the margin if market pressures were to be reignited." (Additional reporting by Robin Emmott, editing by Luke Baker)

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