By MATINA STEVIS
BRUSSELS—The debate on when the euro-zone bailout fund will be able to directly recapitalize banks rumbled on Friday, with a senior euro-zone official saying it can only happen once the new banking supervisor has established a clear track record.
The comments chime with a German view that recapitalizations won't be possible from the start of next year even if member states can pull off what appears increasingly unlikely: overcoming their differences and setting up a single supervisor for the currency bloc's banks by January 2013.
This issue, as well as the near-frozen progress in Greece's bailout assessment, Spain's reform and fiscal program, and a decision on the size and conditions attached to a bailout for Cyprus, are due to be discussed at a meeting among euro-zone finance ministers in Luxembourg Monday. No decisions are expected on any of these fronts.
Speaking on condition of anonymity because talks are continuing, the senior official said the new banking supervisor would have to be assessed by an independent organization, citing the European Commission, the International Monetary Fund or a private-sector company as candidates. This means the supervisor would have to function for some time before it can be assessed, and only after that would the bailout fund be allowed to take on direct equity shares in troubled euro-zone banks.
This prolonged process isn't what market participants and many of the euro-zone countries had understood following what leaders presented as a watershed moment in the euro-zone crisis last June.
The decision to allow the European Stability Mechanism to bypass sovereigns and save banks without adding debt to the national governments, reached at a euro-zone leaders summit June 29, was touted as a breakthrough in severing the negative-feedback loop between weak financial systems and over-indebted sovereigns. The leaders had also said that it would be possible to transfer banking-sector bailout funds from countries to the ESM, provided the bank supervisor was operational.
Spain, Ireland, Portugal and Greece, having already received bailouts for their banks, would be affected by the eventual ability of the ESM to take on equity shares in their rescued banks.
But the official's comments will likely dampen hopes in these countries about a swift settlement of their bank-related debt: The supervisor "needs to be supervising banks and must have proven it is capable of this," he said. He didn't offer any detail on the length of time the supervisor needs to work before its effectiveness could be assessed.
These countries' hopes to unload bank debt on the ESM had already been tempered when in mid-September the Dutch, Finnish and German finance ministers released a statement saying the bailout fund shouldn't shoulder "legacy" risks. The lack of a definition as to what this means exactly led to wide speculation that the three hard-line creditor euro-zone countries were outright vetoing any transfers of past bank debt onto the ESM.
But a euro-zone government official said the statement wasn't taken as a "categorical rejection but as an opening position for the negotiations."
And the senior euro-zone official said that the three finance ministers were only trying to stress that a process should be in place to ensure rescued banks' balance sheets were purged of bad assets so that no opaque liabilities hiding in their books would blow up after they had been transferred to the bailout fund.
Following Monday's talks among the 17 euro-zone finance ministers, all 27 European Union finance ministers are set to meet Tuesday to discuss plans for some countries to move ahead with a financial transactions tax as well as the implementation of stricter capital and liquidity rules for the region's banks, that are still being debated between the European Parliament and EU member states.
—Laurence Norman contributed to this article.
Write to Matina Stevis at matina.stevis@dowjones.com
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