By Alastair Macdonald
BRUSSELS (Reuters) - The European Union's Brexit negotiator Michel Barnier said on Saturday that the EU will demand "special vigilance" before letting British financial firms access the bloc because of the large risk London could pose to the EU's financial stability.
Responding to a report in the Guardian which said he had told EU lawmakers that he wanted a special deal to maintain EU firms' access to the City of London, Barnier tweeted: "When asked on equivalence I said: EU would need special vigilance on financial stability risk, not special deal to access the City."
An EU spokesman said the Guardian report did "not correctly reflect" Barnier's comments to a closed door meeting with members of the European Parliament last week.
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EU officials said the point Barnier was making when asked about Brussels' willingness after Brexit to recognize British financial regulations as "equivalent" in rigor to those of the EU was that, as a lot of EU business was likely to still pass through the City, EU equivalence rules would have to be much more tightly drafted compared to those for smaller centers.
The Guardian quoted minutes prepared by parliamentary aides as saying Barnier told lawmakers: "Some very specific work has to be done in this area ... There will be a special/specific relationship. There will need to be work outside of the negotiation box ... in order to avoid financial instability."
EU officials said Barnier, a Frenchman who ran EU financial services policy, was not speaking of a "special deal" to limit the impact of Brexit on financial services trade between Britain and the EU but rather emphasizing that Brussels would have to take special care not to ignore stability risks in London.
The officials said he responded to a question on equivalence by noting that the extent of EU rules governing relations with non-EU financial centers was proportional to the volume of EU business conducted in them -- and so to the risk of, say, a bank collapse in London destabilizing markets on the continent.
With, say, the United States, the EU has negotiated accords to recognize the "equivalence" of, for example, bank supervision standards to make it easier for European companies to use U.S. banks and let U.S. institutions sell services in the EU.
The extent of such equivalence agreements has been a major concern for British-based banks wanting continued access to the EU market. Other EU governments have said they will welcome financial firms moving out of London and say Britain's economy and its big services sector must pay a price for Brexit so that it does not inspire voters in other countries to follow suit.
EU ministers and officials acknowledge that damage to London's global financial center caused by Brexit will hurt not only Britain but the other 27 EU states.
"Both the UK and the EU will suffer," Maltese Finance Minister Edward Scicluna said on Thursday as Malta took on the rotating chair of EU councils.
"We will lose that efficient center," he told reporters, forecasting that many financial firms would relocate to various cities in the EU. "That will be a loss ... The EU will suffer once services are fragmented. It will be longer term."
Nonetheless, Scicluna said, the signs of banks and other City firms preparing to move operations to other parts of the EU amid uncertainty about the terms of Brexit showed that the immediate cost was much greater for Britain.
(Editing by Angus MacSwan)