German finance minister Wolfgang Schäuble said it was unrealistic to expect direct bank recapitalisations by the European Stability Mechanism fund early next year as Spain resisted pressure to seek more aid from Europe.
At day-long talks in Nicosia, EU finance ministers gave themselves extra time to decide on a second bailout for Greece and debated a proposal to empower the European Central Bank to supervise the banking system in the euro zone.
EU leaders have said the new supervisor must be up and running within the ECB before the ESM can be deployed to recapitalise stricken euro zone banks.
While this is a core element of Ireland's campaign for bank debt relief, the Government's attention seems fixed on a deal to restructure the debts of Anglo Irish Bank.
Amid division over the scope of the ECB's new powers, Mr Schäuble questioned whether the new system could be in place by the end of this year and warned against creating unrealistic expectations in markets.
"I don't see that there can be direct recapitalisation through the ESM already by January 1st," he said.
"Aside from that you have to remember: even when you have a European banking supervision, the member state in question not only has to apply for bank recapitalisation, but also has to agree the memorandum of understanding with its appropriate macroeconomic agreements. Conditionality is not invalidated."
His remarks were at odds with those of his French counterpart, Pierre Moscovichi, who said: "The direction set by the European Council is very clear. It's to complete the discussion in 2012 and to go fast. Otherwise everything remains theoretical and our problems are concrete".
"The euro crisis is affecting everyone in the euro zone, including Germany. It is not a question of rushing but we must keep up the rhythm of reform," he added.
These tensions come amid doubt among top Europeans over Spain's prospects of avoiding a full-blown sovereign bailout, something the government insists it does not need. Although the announcement of the ECB's bond-buying initiative has helped ease Spanish bond yields, the country must still sign up to a formal aid programme before the central bank intervenes to buy its debt.
Spanish economy minister Luis de Guindos said Madrid will set new targets for structural reforms before October but maintained the move was not linked to any possible terms for a sovereign bailout.
"It is much more important to meet our public deficit targets and comply with our programme of reform than a potential rescue," he said. "We will adopt a new set of reforms to boost growth . . . "
The uncertainty over Spain's precise intentions came as ministers pushed back until the second half of October the timeline for the conclusion of the Greek bailout.
International Monetary Fund chief Christine Lagarde said it was worth examining whether the country should be given more time. "It seems to us quite clear that Greece has already produced a huge effort but will have to continue to do so," she said. "And the target when it comes to achieving debt sustainability is very high, so there are various ways to adjust: time is one and that needs to be considered as an option."
Establishing a common framework for dealing with problem banks would mark a departure from the previously haphazard approach taken by the euro zone's 17 members that has frustrated investors and helped drive up borrowing costs for weaker states.
A banking union foresees three steps: the ECB getting the power to monitor all euro zone banks and others in the wider EU that agree to the oversight; the establishment of a fund to close troubled banks; and a fully fledged scheme to protect citizens' deposits across the euro zone.
Given that day-to-day supervision of banks would remain the task of national regulators, some officials suspect that Berlin's real concern is that a banking union would see it paying the costs of propping up lenders in weak countries.
Joerg Asmussen, a member of the ECB's executive board which forms the nucleus of its policymaking, warned that a banking union could not work without a fund paid for by industry to cover the cost of closing banks and a deposit protection scheme.
Experts from think tank Bruegel delivered a similar message to ministers.
The close ties between governments and the banks they supervised and on whom they also relied to buy their debt, has dragged both ever deeper into crisis.
A banking union would break this link by making the policing of banks supranational and establishing central schemes paid into collectively to cover the costs of closing failed lenders.
Additional reporting: Agencies
