UPDATE 1-Germany puts brakes on EU bank union with treaty call

* Schaeuble says treaty change needed for bank closure rules

* Drawn-out changes to EU law would hamper banking union

* Says countries must pay into bad banks before ESM help

By Annika Breidthardt and John O'Donnell

DUBLIN, April 13 (Reuters) - Germany said European banking union will require changes to EU law, in a call that could slow completion of the plan designed to underpin the euro currency.

Speaking after a meeting of European Union finance ministers on Saturday, Germany Finance Minister Wolfgang Schaeuble said the EU's Lisbon treaty had to be changed to allow common rules on shutting troubled banks - a central element of the union.

"Banking union only makes sense ... if we also have rules for restructuring and resolving banks. But if we want European institutions for that, we will need a treaty change," he said.

Designed to ensure vulnerable countries do not have to tackle financial problems alone, the plan for banking union was one of the bloc's biggest political steps to stabilise the euro and prevent taxpayers from footing bills for bank rescues.

"We will not be able to take any steps on the basis of a doubtful legal basis," Schaeuble told reporters. "That's why it's also crucial that we strengthen the network of national restructuring funds and authorities."

As a first step towards the union, the European Central Bank is set to start supervising euro zone banks from July 2014.

This should be followed by a so-called bank resolution scheme to close or salvage struggling banks as well as pay for the costs involved. The third and final step would be a coherent framework across Europe for deposit protection.

Worried the supervisory role could compromise ECB monetary policy independence, Germany on Friday persuaded EU countries to sign a political declaration committing to future treaty change.

Schaeuble also made clear legal change would be necessary for the unified scheme for tackling failed banks.

Changing the Lisbon treaty, which underpins the bloc's law, would be a drawn-out process as it calls for the agreement of all member states - some of which require referenda.

It would raise particular problems for Britain, where eurosceptics have argued that the country should quit the bloc.

Schaeuble has long had reservations about banking union, which would be a step towards allowing the euro zone's rescue fund to directly assist banks, a move Germany fears might leave it facing the bill for reckless lending by foreign banks.

Schaeuble said the country of a bank in financial difficulty must first inject fresh capital before direct support from the European Stability Mechanism (ESM) is possible.

Spain's Finance Minister Luis de Guindos said member states would pay a minimum 4.5 percent of capital for troubled banks.

"From that point, there would be a burden sharing to converge towards 10 percent paid by the member state," de Guindos said. "This means the ESM will pay for around 90 percent and the member state for 10 percent."

Schaeuble also emphasised German opposition to the creation of a joint deposit guarantee scheme.

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Iran, Syria and North Korea Stall Arms Treaty

The three countries, often isolated as pariahs for their arms and human rights records, used their rejection of the treaty to lash out at what they see as their unfair treatment.

Achieving consensus among all 193 member states of the United Nations is considered a monumental task, but it was hoped that it would be possible in this case because so many countries supported the idea of trying to regulate the $70 billion annual industry at the root of much death and destruction.

The treaty would require states exporting conventional weapons to develop criteria that would link exports to avoiding human rights abuses, terrorism and organized crime. It would also ban shipments if they were deemed harmful to women and children.

After Iran and North Korea voted against the draft treaty, Peter Woolcott, the Australian ambassador who was the president of the treaty conference, suspended the meeting. When it resumed, Syria voted against the treaty as well.

In the absence of consensus, it was expected that the treaty would be sent to the General Assembly as early as next week for approval. That is considered a weaker, but no less binding, manner of getting it passed. After General Assembly passage, the treaty would still require ratification by 50 member states before it could take effect.

“We are certainly disappointed, because we could not achieve the expected result tonight,” said Juan M. Gómez-Robledo, vice minister of multilateral affairs and the head of the Mexican delegation, “but it is only a matter of days, because this conference has shown that the overwhelming majority wish to adopt this text.”

He rejected the three countries’ objections that not enough time or attention had been given to address their concerns, noting that the talks had been going on for seven years.

Most countries who spoke after the treaty stalled said they fully supported it, although some major ones, including India and Russia, voiced strong reservations about some provisions. India said the draft treaty favored exporters. Russia said it should be more specific about banning conventional weapons sales to nonstate actors.

Thomas M. Countryman, the assistant secretary of state who led the American delegation, said that the United States would support the treaty in the General Assembly based on the fact, he said, that the pact would promote global security, advance humanitarian objectives and curb illegal arms sales, all without affecting the constitutional right to bear arms.

Although opposition from Iran, North Korea and Syria had been expected, diplomats and outside proponents of the treaty had hoped the three countries would not block an accord that so many sought. All three belong to the roughly 120-member Nonaligned Movement — Iran is its current president — and the bulk of its members in Africa and Latin American strongly backed the treaty.

But in the end, the three went with their domestic concerns. They are each subject to arms embargoes already, and were concerned that the treaty would add muscle to such blockades.

After the consensus failed, one delegate after another, notably from Africa and Latin America, took to the floor to express disappointment that just three countries had stalled a treaty aimed at curbing violence globally.

Their frustration was echoed by rights groups that have long sought such a treaty. “The world has been held hostage by three states,” said Anna Macdonald, the head of arms control at Oxfam. “We have known all along that the consensus process was deeply flawed, and today we see it is actually dysfunctional.”

In rejecting the treaty, the Iranian ambassador, Mohammad Khazaee, said it left too much in doubt.

“While the rights of arms-exporting states is well preserved in this text,” he said, “the right of importing states to acquire and import arms for their security needs is subject to the discretionary judgment and subjective assessment of the exporting states.”

He said that the measure would leave the sale of conventional weapons covered by the text “highly susceptible to politicization, manipulation and discrimination.”

Iran also took a couple of indirect swipes at the United States and Israel.

First, Mr. Khazaee objected to the fact that the concerns of many states were not met while dedicated language in the treaty’s preamble — meant to mollify the National Rifle Association and other American gun-rights groups — stressed that the use of individual weapons for sporting or similar activities was protected.

Second, Both Iran and Syria suggested that there should have been a specific reference to the rights of states facing occupation to acquire arms, referring to the Palestinians.

Given the civil war in Syria, that country’s ambassador, Bashar Jaafari, also said arms shipments to terrorist groups and nonstate actors should have been banned. But the violence being visited on civilians in Syria by government forces means the treaty, if in effect, could well curb weapons supplies to the Damascus government, which Iran supports as its key Arab ally.

Rick Gladstone contributed reporting.

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