Bailout fund should not help clean up euro zone banks: German official

BRUSSELS (Reuters) - The euro zone's future mechanism to restructure or wind down weak banks should not use the bloc's bailout fund (ESM) as backstop for its actions, a German government official said on Thursday.

European finance ministers meet in Brussels on Thursday and Friday and will pledge to stand by banks that are exposed as being dangerously weak by health checks next year, but questions remain over countries unable to prop up them up alone.

The German comment is the latest sign of growing reluctance in the Europe's largest economy to join a scheme to pay for bank failures beyond its borders and could potentially be a hurdle to completing the banking union, for which the creation of a single resolution fund in any form is key.

"We are very clear that we don't want a mutualisation of bank risks," the official said, adding that if the money banks pay in levies were not sufficient to fill the fund, member states would be liable.

Last week the ECB said leaving countries to cope with their problem banks alone would defeat the point of banking union and added that the euro zone needed a single fund to break the debilitating link between countries and their troubled banks.

But the German official said: "From our point of view there can be no general ESM (European Stability Mechanism) credit line to a European resolution fund because that would be a mutualisation that would remove liability from the member states."

European Central Bank Executive Board member Joerg Asmussen has called for a common resolution mechanism to be funded through a levy on banks. In the meantime, the ESM should provide a backstop, he said.

The resolution fund is due to be filled with funds from a levy on banks over a period ten years until 2025.

The German official said if the money available in the fund was not sufficient, member states would have to provide money for the funds.

Should a government not be in a position to do so, it would have to go cap in hand to the ESM and that would come with conditions attached, as in the case of all ESM programs such as in Spain.

(Reporting by Michelle Martin)