Senior eurozone official says bank recapitalisation 'extremely unlikely'

Monday 16 June 2014 20.19
An official said 'It would be like eating a pudding and then trying to put it back again'
An official said 'It would be like eating a pudding and then trying to put it back again'

A senior eurozone official has told RTÉ News that it is "extremely unlikely" that Ireland will be given retroactive support for its banks through Europe's permanent bailout fund.

The Government has long sought the direct recapitalisation of Irish banks which were bailed out in the aftermath of the property collapse.

The Government has pinned its hopes on the European Stability Mechanism (ESM) providing "retroactive" direct recapitalisation for the pillar banks which received tens of billions of euro of taxpayers' money at the height of the country's economic collapse.

However, a senior eurozone official has said that for legal and political reasons such a prospect was becoming "more and more unlikely by the month".

The Minister for Social Protection says she still believes that retroactive recapitalistation should still be sought.

Joan Burton said Ireland had been given assurances by EU heads of government two years ago that it was a special case, given the measures that had been taken here.

Ms Burton added this case still needed to be pressed, saying that a deal on bank recapitalisation would be a "win win for the EU" as it would increase the numbers at work and improve the domestic and European economy.

Last June eurozone finance ministers reached agreement on how the ESM could, in future, directly recapitalise eurozone banks that ran into trouble.

The idea remains that such direct recapitalisation would not become a liability for the sovereign, and would thus help break the link between banking and sovereign debt which bedevilled a number of countries at the height of the eurozone crisis.

The agreement also held out the prospect that such direct recapitalisation could apply to legacy banking debt, such as Ireland's.

But, critically, this would be looked at "on a case-by-case basis".

However, the senior eurozone official today stressed that a number of factors now made that prospect "extremely unlikely".

These relate to the ongoing creation of Europe's banking union, currently under construction.

Two key elements of banking union involve the so-called "bail in" of shareholders and bondholders, and the new role of the ECB in supervising Europe's banks.

In the first instance, the official stressed, any direct bank recapitalisation in future will be preconditional on the private sector – shareholders and bondholders - taking a hit if a bank gets into trouble.

In the second, any direct recapitalisation is conditional on banks having been subjected to stricter supervision through the new Single Supervisory Mechanism (SSM), effectively the European Central Bank (ECB).

Neither of these two requirements appear compatible with going back to the government's bailout of Irish banks in 2009/10, the official said.

"If you have retroactive direct recapitalisation, then you break this principle that a bank has been supervised by the Single Supervisory Mechanism [ie the ECB]," he said.

Furthermore, at the time the use of public money to rescue Irish banks had to be approved under the EU's state-aid rules.

However, those rules have also since been updated to take account of the new banking union structure.

"The rules of the game have completely changed a priori to 2010," he told RTÉ News.

"How do you unwind a situation to four years ago..?  The new rules refer to the present and the future, not to the past."

The Government's argument has been that the bail-in of creditors was not available as a eurozone instrument when Ireland ran into trouble, and that as such the ESM should provide support retroactively.

However, the official suggested that going back to unpick the bailout of Irish banks and to bail in creditors from four years ago would be next to impossible.

"It would be like eating a pudding and then trying to put it back again," he said.

Eurozone officials have in the past number of days drawn up technical guidelines on how the ESM might get involved in directly recapitalising banks.

These guidelines will then be sent to the parliaments of all 17 eurozone member states for approval.

Officials stress that nothing in the guidelines have altered the agreement of June 2013 as they apply to Ireland's aspirations.

However, officials say that despite the wording of the 2013 agreement, actual retroactive recapitalisation is becoming more and more unlikely.

The Government has insisted that the potential for retroactive support for Ireland's banks could be back on the table once the Single Supervisory Mechanism is up and running later this year, and when other new rules on how to deal with a bank collapse are also operational.

However, officials now appear to be pouring more cold water on the idea.

A Government source has pointed out that the guidelines agreed in June of 2013 on the potential use of ESM funds to retroactively recapitalise Irish banks are "still valid".

A spokesperson said:  "The agreement just reached last week confirms that the option of retroactive capitalisation remains part of the Direct Recapitalisation Instrument (DRI).

"As set out previously this is to be decided on a case by case basis.

"It is a question for ministers to decide on any application.  Nothing has changed in the last week in that regard.

"The Minister for Finance and his Government colleagues ensure that Ireland's case for retrospective direct recapitalisation is made at all levels as appropriate and remain confident that the commitment made by the euro-area heads of state or government in June 2012 to break the vicious circle between banks and sovereigns will be respected."