Ireland’s case for bank recapitalisations unlikely to improve following German election

The result of the German general election is unlikely to improve Ireland's chance of securing retroactive direct recapitalisation for AIB and Bank of Ireland through the ESM fund, EU sources suggested yesterday.

This comes amid continuing German resistance to the procedure.

In what was broadly seen as a nod to Ireland at the end of its EU council presidency, euro zone finance ministers agreed in June to consider retroactive application of the ESM direct recapitalisation instrument on a "case-by-case" basis.

Effective veto
However, any decision requires unanimity from all 17 euro zone countries, giving all countries, including Germany, an effective veto.

The prospect of Angela Merkel's Christian Democratic Union party teaming up with rival party the Social Democrats has prompted speculation that Germany could ease its economic policy of strict fiscal discipline.

The Social Democrats, led by Peer Steinbrück, have consistently criticised the chancellor’s austerity-based approach to the euro zone crisis.

However, the party opposes ESM direct retroactivity, making any reconsideration of Ireland’s plea for retrospective direct recapitalisation unlikely.

“As chancellor, I will not give any German taxpayers’ money to rescue foreign banks,” Mr Steinbrück said earlier this month.

“First of all, owners, shareholders and creditors of such banks must be made liable for banking losses.”

Dr Merkel yesterday praised Ireland’s economic performance, but said there would be no change on euro zone policy.

Tánaiste Eamon Gilmore said Ireland would "continue to work on the issue" of retroactive direct recapitalisation, as he played down the significance of the election result on Ireland's prospects of striking a deal.

“On the banking issue, we have never taken the view that it was dependent on an election in any individual country.

“Resolving that issue is dependent on the establishment of the single supervisory mechanism and the architecture of banking union,” he said, a reference to the fact that ESM direct recapitalisation can only take place once the European single supervisory mechanism is set up. “The expectation is that will come into effect in 2014 and it is at that point the issue of legacy bank debt will be dealt with.

“It is also fair to say that as a Government we have made other governments aware of our views on that and we have made the European institutions aware of that and we continue to work on that issue until we get a satisfactory resolution, as indeed we did on other issues related to banking matters.”

Meanwhile, Ireland’s government bonds outperformed all of their euro area counterparts yesterday, as markets reacted to Friday evening’s announcement by Moody’s of an upgrade to its outlook on Irish government debt.

The gains pushed the yield on Irish 10-year securities to the lowest level in two months. Ireland's 10-year bond yield decreased three basis points, or 0.03 percentage point, to 3.85 per cent during the morning, after falling to 3.84 per cent, the lowest since July 25th.

Banking union
The impact of the German general election outcome on the progress of the EU banking union is also expected to come into focus in the coming weeks.

Berlin has opposed a number of key elements of the union, including the Brussels plan for a centralised single resolution mechanism and a common deposit guarantee.

EU commissioner Michel Barnier yesterday played down the suggestion that the upcoming discussions on forming a government in Berlin would stall progress on banking union, saying that "work will continue." – (Additional reporting by Bloomberg)