By Jan Strupczewski
BRUSSELS (Reuters) - Euro zone finance ministers will seek agreement on Wednesday for a package of steps to make banks more stable, but Italy's objections and the German finance minister's weakened domestic position are likely to make it difficult.
Ministers from the 19 countries sharing the euro were asked by their leaders in June to come up with a package of reforms by Dec. 13 that included a euro zone budget, changes to the ESM regional bailout fund, and a deposit guarantee scheme.
They reached a deal on the euro zone budget and on the ESM reform in June, but last minute objections from Italy to the ESM treaty change will delay the final accord.
"We had a decision in June, technical work has been done since then. We will take stock of that today with a view to sign the treaty change very early next year," the chairman of euro zone finance ministers Mario Centeno told reporters.
Planned changes to the ESM treaty would reduce the risk of investors holding out for a better deal in a potential sovereign debt restructuring and give the bailout fund the possibility to mediate between the sovereign and investors.
It would also allow the ESM to lend to the euro zone's bank resolution fund to wind down failing banks if, in a major bank crisis, the resolution fund run out of money of its own.
Agreement on the European Deposit Insurance Scheme (EDIS) has proved even more elusive as several northern countries want to reduce the risk of bank failures across the bloc before jointly guaranteeing euro zone deposits.
Germany, which has for years been the most reluctant to the EDIS idea, opened the way to progress last month after Finance Minister Olaf Scholz presented conditions for Berlin's support.
These included setting regulatory limits on how many bonds of a single sovereign a bank can hold in its portfolio and attaching a risk weight to bonds, now treated as risk-free, that would entail keeping higher capital by banks.
This has triggered anger in Italy, because limits on sovereign bond holdings are hard to swallow for a country that has 2.3 trillion euros ($2.54 trillion) of public debt held mainly domestically.
Italy's central bank governor Ignazio Visco told parliament limits on banks' bond portfolios should only be considered if the euro zone created a "safe asset" - a bond backed by all euro zone countries. Germany is fiercely against that.
"Limits to the concentration of sovereign debt held by banks .... could be taken into consideration, but only if at the same time the euro zone decides to equip itself with a common safe asset," Visco said.
In a further complication to a euro zone deal, Scholz's domestic position was severely weakened after he lost elections for leadership of his Social Democrats party, putting a question mark on the future of the coalition government.
Officials said this meant that the backing of the whole German coalition for Scholz's proposal on the way forward with making banks stronger was now even less certain.
Italian Economy Minister Roberto Gualtieri said last week euro zone countries would probably sign off on a reform of the ESM only in February.
(Reporting by Jan Strupczewski; Additional reporting by Francesco Guarascio in Brussels, Giuseppe Fonte in Rome; Editing by Andrew Cawthorne)