Germany knocks back Kenny's suggestion

GERMANY HAS knocked back Taoiseach Enda Kenny’s suggestion that the EU’s permanent bailout fund (ESM) should be modified to allow direct lending to struggling banks.

Mr Kenny told the Financial Times Deutschland yesterday there was a “widespread view” elsewhere in the euro zone on the need for such a move.

Mr Kenny’s remarks are timely, given the increasing funding pressure on Spain. Amid increasing investor nervousness, reflected in widening premiums charged for buying Spanish debt, Madrid is anxious to avoid submitting to a multi-year bailout programme.

International Monetary Fund (IMF) head Christine Lagarde also supports such a move and said abolishing such funding “detours via governments” would be a “welcome step to stronger and better integration”.

Both the European Financial Stability Fund and ESM bailout funds allow funding of banks only via participating states, reflecting a wish by Berlin and other capitals to ensure repayment via a state guarantee on all bail-out liabilities.

The reaction in Berlin to Mr Kenny’s remarks yesterday was clear and blunt. “That is not going to happen,” a spokesman said.

German finance minister Wolfgang Schäuble had already rejected the idea at the IMF spring meeting in Washington, saying: “The treaties are unambiguous, therefore there is no discussion.”

Berlin’s position is backed by the Bundesbank as well as the European Commission. “It is important to agree conditionality before euro member states lend one another money,” said Olli Rehn, EU commissioner for economic and financial affairs.

Ahead of next month’s referendum, Mr Kenny conceded that the fiscal treaty in its current form did not permit direct funding of banks. “When the fiscal pact and ESM treaty are ratified, I hope that a rational discussion will be possible among the heads of state and government,” he said. “The ESM should play a role in a future system for winding-up of banks.”