* IMF's Lagarde calls on euro zone to stand by banks
* De Guindos says direct recapitalisation may be open to
* Finance ministers in Luxembourg to discuss banking union
By John O'Donnell and Robin Emmott
LUXEMBOURG, June 22 European finance ministers
examined ways to strengthen their banking sectors and break the
link between troubled banks and indebted countries on Friday,
with concerns about Spain's stricken banking system top of their
IMF Managing Director Christine Lagarde has urged the euro
zone to channel aid directly to struggling banks rather than via
governments, but Germany and others are opposed to such direct
lending, which is not possible under current rules.
The discussion is part of a broader debate about how the
European Union can move towards a 'banking union', including a
pan-EU deposit guarantee scheme and a fund to resolve bad banks,
to try to get on top of the 2-1/2-year sovereign debt crisis.
Lagarde said on Thursday that by allowing the euro zone's
rescue scheme, the European Stability Mechanism, to aid stricken
lenders directly rather than via a programme of aid to a
government, it would stop bank problems from exacerbating the
difficulties of countries.
Arriving at Friday's meeting, Luis de Guindos, Spain's
economy minister, said such a possibility may be open to Spain,
which is set to receive up to 100 billion euros ($126 billion)
of aid from the euro zone for its troubled banks.
"I think (direct bank recapitalisation) is a possibility,"
he told reporters. "It is one of the fundamental elements to
break the link between bank risk and sovereign risk."
"This possibility is absolutely open to Spain if there is
progress in the next few months (on the issue). The process of
recapitalisation is not instantaneous," he said.
Throughout the crisis, countries in the euro zone have been
left to resolve problems at their banks themselves. For those
for whom the burden was too great, such as Ireland, the
government received aid from the IMF and the EU to do it.
But after years in crisis, the problems in banks show no
sign of abating and Europe's leaders are under pressure to form
a united front to shield struggling lenders rather than leave
countries to cope with such problems alone.
At a summit in Brussels next week, EU leaders will examine
establishing a banking union that envisages a single supervisor
for big banks, a fund to wind down cross-border lenders in
trouble and the deposit guarantee scheme to protect savers.
Central to this is the idea is that stronger countries in
the euro zone such as Germany ultimately stand behind the
lenders of countries too weak to manage alone, although Berlin
does not want any such step in the short term because it is
opposed to bearing any liability for other countries.
"We need to break the poisonous link between sovereigns and
banks," said one EU diplomat close to discussions. "It's about
solidarity. It can't happen overnight. It is difficult stuff."
A banking union is also contentious because it will likely
shift power from national regulators to a higher authority, such
as the European Central Bank. France and Germany want the ECB to
take charge of major systemic banks, rather than leaving
oversight with the European Banking Authority.
One of the biggest divisions in the debate about such a
union is whether it will apply only to countries in the euro
zone, or to all 27 member states in the European Union.
Britain has said it will not join such a scheme, which it
believes should be limited to the single currency area.
The European Commission, the EU's executive, wants the union
to apply to all countries, because of concerns that scaling it
back would undermine the bloc's borderless single market.
Michel Barnier, the EU commissioner in charge of financial
regulation, will attend Friday's meeting to appeal again for all
countries to join.
In Luxembourg, ministers will also discuss warnings issued
to countries by the European Commission to countries on
improving the management of their economies to reach spending
goals laid down in EU law.
Spain may receive more time to reach the goal of cutting its
budget deficit to 3 percent of economic output although one
senior diplomat said this would only be discussed next week at
an EU leaders' summit in Brussels.
Germany will also push for the introduction of a tax on
financial transactions, a move demanded by the country's
opposition socialists in order to secure their backing in
parliament to sign off on the ESM.