ESM 'unlikely' to cover all of Ireland's bank debt

Friday 18 January 2013 18.45
There has been some support for the ESM assuming some, if not all, of the burden associated with the Government's recapitalisation of the surviving Irish banks
There has been some support for the ESM assuming some, if not all, of the burden associated with the Government's recapitalisation of the surviving Irish banks

It is understood that Irish aspirations to have legacy bank debt fully alleviated by the EU's permanent bailout fund may have to be tempered.

A senior EU official has suggested that the European Stability Mechanism is unlikely to cover all of the losses, including negative equity, associated with Ireland's surviving banks, and the Government's €30bn recapitalisation of those banks after the collapse of the property market.

He also confirmed that member states who want the ESM to take over sovereign bank debt may have to contribute themselves to the process.

It is not clear yet if that would also apply to Ireland.

The amount could range between 5% and 15% of the direct recapitalisation of banks by the ESM, but might diminish over time as the process of setting up a pan-European bank supervisor gathers pace.

The parameters of how the ESM is to be used in the context of historical or legacy bank debt will undergo their first political discussion when eurozone finance ministers meet in Brussels on Monday.

It follows some confusion and controversy last autumn over whether or not the ESM would be allowed to alleviate the burden of banking debt that was incurred in the past.

It is understood that during recent technical talks the issue has been fiercely divisive between creditor AAA-rated countries, such as Germany, the Netherlands and Finland, who want much tighter controls on the use of the ESM, and others, such as Ireland, France, Spain and Italy.

The latter group is anxious that the fund be given maximum scope to help with bank debt.

It is understood that as a result of those technical discussions, carried out between experts from eurozone finance ministries, the idea of member states having to "co-invest" alongside the ESM is likely to remain a part of ongoing discussions.

A compromise will have to be reached on the question of how much that contribution will be.

A senior EU official said that there was an expectation that member states seeking ESM help for their banks would "have to have skin in the game", a phrase usually meaning that someone who is running a company has invested in it.

On the question of Ireland, the senior EU official drew specific attention to actual and potential losses in Ireland's surviving banks; Bank of Ireland, AIB and Permanent TSB.

He said that these losses, including negative equity relating to mortgage arrears, may not qualify for ESM support.

However, it is understood that the ESM assuming some, if not all, of the burden associated with the Government's recapitalisation of the surviving banks is an idea that has gathered considerable ground among supporting member states.

This is because of the perceived importance of helping Ireland to recover its debt sustainability as it attempts to exit the EU bailout programme and return to fund itself in the markets later this year.

It is understood that the use of the ESM to assume the losses of a country that had undergone a bailout programme, which already included support for the banks, would require a separate "political decision" that would be distinct from the more forward-looking structure of the ESM as it related to recapitalising banks in non-programme countries.

The official also pointed out that there had been "an enormous gathering of political support" for Ireland to secure a deal on Anglo Irish Bank promissory notes, not just at Eurogroup level (the 17 eurozone finance ministers), but also across a number of member states.

The issue remains a bilateral one between the Government and the European Central Bank.

Last June, eurozone leaders pledged at a summit to break the "vicious circle" between bank debt and sovereign debt.

During the December 2012 summit in Brussels it was agreed that clarity should be reached within the first six months of this year on what exact role the ESM should play in this process, particularly as it related to legacy debt.

However, it is understood this target is non-binding and that it may not be reached before the German elections in September.

Keywords: esm, banks

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