Wednesday, 26 September 2012

Stitched up yet again by Europe - No deal on bank debt

THE GOVERNMENT’S campaign for debt relief was dealt a fresh blow yesterday as Germany, Finland and the Netherlands said national bodies should remain liable for most bank losses. The three states are insisting that governments remain on the hook for loss-making legacy assets even after any bank rescues by the ESM fund.

This demand, laid down by the countries’ finance ministers, is in apparent defiance of the decision by EU leaders in June to break the link between sovereign and bank debt.

After talks near Helsinki, the ministers said the ESM should assume only a limited burden if it makes direct bank recapitalisations.

The intervention comes as the Government faces persistent difficulty in its pursuit of a deal in Europe to ease the burden of the banking debt.

There is increasing concern in Dublin about German-led backsliding on the promise of a radical new deal to settle the banking crisis in Ireland and Spain. One of the Government’s core objectives is for the ESM to take direct equity stakes in the surviving banks: AIB, Bank of Ireland and Permanent TSB.

“It leaves the situation extremely uncertain from an Irish point of view,” said John Fitzgerald of the Economic and Social Research Institute. “Depending on how it is interpreted, it may or may not allow the Irish government to sell its interests in the surviving Irish banks to the ESM.”

EU leaders agreed in principle three months ago to allow direct bank recapitalisations by the ESM, the basic idea being for the European fund to replace governments as the final backstop on banking losses.

However, German minister Wolfgang Schäuble, Finland’s Jutta Urpilainen and Dutch minister Jan Kees de Jager said they want to curtail the ESM’s exposure to bad debts. “The ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities,” they said.

This would appear to limit the benefit of any capital infusions from the ESM because a government would remain liable for losses that may yet materialise from existing loans.
Germany is the dominant power in the euro zone and it frequently draws support from Finland and the Netherlands
They share an interest in limiting the burden on the ESM as they do not want their financial support for the fund to compromise their triple-A credit ratings.

With Spain under pressure to accept increased bailout aid, the joint statement was seen as a hard-line gambit in looming ESM talks.

But anger on the streets of Madrid last night will serve as a counter-warning. Protesters clashed with police as the government planned more austerity measures for the 2013 budget to be announced tomorrow. In June, EU leaders resolved that direct bank aid from the ESM cannot go ahead until the European Central Bank takes over bank supervision in the euro zone.

The debate since then has been marred by dispute and division over the scope of the ECB’s powers, with Germany resisting a speedy deal.

Euro zone officials said the statement pointed to difficult talks in Luxembourg when the 17 euro zone finance ministers gather there for talks on Monday week. They also said the statement appeared deliberately ambiguous in parts.

While the three ministers said any ESM recapitalisation “should always occur using estimated real economic values”, officials said it was not at all clear what that meant.

The Department of Finance said last night that it welcomed the ideas put forward by Mr Schäuble and his allies. “These ideas will feed into our discussions . . . over the coming months,” it said.

While talks continue with the ECB on an arrangement to cut the cost of repaying the debts of Anglo Irish Bank, a well-placed source said no deal was imminent.

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