Italy readies banking union proposals after winning ESM delay

By Giuseppe Fonte and Gavin Jones

ROME (Reuters) - Economy Minister Roberto Gualtieri said on Thursday Italy would present its own proposals on European banking union after the country blocked a euro zone reform of its bailout fund due to a dispute among Rome's ruling parties.

The anti-establishment 5-Star Movement is against signing off on it until plans for a wider European banking union become clearer, while the centre-left Democratic Party (PD) supports it.

On Wednesday the chairman of euro zone finance ministers Mario Centeno said the changes to the fund, known as the European Stability Mechanism (ESM), would probably be agreed early next year instead of next week as previously planned.

Gualtieri, who is from the PD and backs the ESM reform, said on Thursday Italy wanted a broader discussion on euro zone banking union and was ready to block proposals it did not like but also to be constructive.

"Italy will make an organic proposal on the subject of the completion of banking union and in general on the reform of economic and monetary union," he told reporters in Brussels.

He said "the most important question" was to prevent a German proposal to limit or risk-weight banks' holdings of sovereign bonds. This change is anathema to Rome, because most of Italy’s sovereign debt is held domestically by financial institutions and households.

Gualtieri said it "would have a negative effect on the competitiveness and stability of our financial system".

He said Italy would push for a common European deposit insurance scheme (EDIS), something Germany is reluctant to agree to without its own proposal on limits to sovereign debt holdings.

Meanwhile the 5-Star Movement celebrated the delay in approval of the ESM reform, which it says is not in Italy's interests and could make it more likely that it has to restructure its public debt.

5-Star's European Affairs junior minister Laura Agea said the party would not agree to the ESM reform until other issues on the table, such as EDIS, sovereign debt holdings and a proposal for a safe euro zone asset, had all been agreed.

"It will take months to understand whether the package is in Italy's favour," Agea said in a statement.

This position is likely to alarm Italy's partners, because the other proposals are at a far less advanced stage than the ESM reform, which was agreed in broad terms months ago.

It would probably also displease Gualtieri, who said the only sticking point on the ESM reform was a technical issue regarding procedures to facilitate debt restructuring.

The reform introduces new conditions attached to sovereign bond issues from 2022 called "single limb collective action clauses" (CACS) which would limit the ability of holdout investors to undermine the restructuring process.

Under the new system, restructuring would go ahead after a single, aggregate vote by bond-holders regarding all affected bonds. The clauses currently in place require an aggregate vote as well as an individual bond-by-bond vote.

A Treasury official said Italy is pressing its partners to accept a "sub-aggregation," allowing separate votes for different groups of bond issuances, to protect small investors.

(Additional reporting by Giselda Vagnoni; Editing by Gareth Jones and Angus MacSwan)