Finance ministers to focus on rescue fund and issue of inherited impaired assets

Euro zone finance ministers meeting in Brussels today will discuss the workings of the euro zone’s rescue fund, the ESM, though any discussion on its application to AIB and Bank of Ireland is likely to be some months away.

While the issue of legacy assets was discussed by euro zone finance ministers last month, senior EU sources have indicated the issue has been put on the back burner, and serious consideration of the question of retrospective recapitalisation will not be on the agenda until April at the earliest.

With Ireland having achieved a deal on the Anglo Irish promissory notes, attention is now turning to the possibility of achieving debt relief on the Government’s recapitalisation of AIB and Bank of Ireland. Key to this will be whether the two pillar banks qualify for retrospective recapitalisation by the euro zone’s €500 million rescue fund which was set up last September.

Fund’s responsibility

While the technicalities of the ESM are expected to be discussed at today’s meeting, focus is likely to be on the question of the level of the fund’s responsibility for impaired assets that it may inherit once the single supervisory mechanism commences. There are growing divisions within the 17-member bloc about the issue of retrospective legacy assets and the responsibility of the fund for debts acquired before the establishment of the Single Supervisory Mechanism.

The pledge to separate banking and sovereign debt, contained in the conclusions of last June’s EU summit, was interpreted by Ireland as offering the hope of retrospective debt relief for its State-recapitalised banks.

However, Germany, Finland and the Netherlands issued a statement in September saying that “legacy assets should be under the responsibility of national authorities”.

Asked whether a decision had been made on whether the ESM could retrospectively recapitalise banks in programme countries, a senior EU official close to the discussions said: “No . . . it is still open to discussion.”

Speaking in Brussels on Friday, Taoiseach Enda Kenny said the Anglo deal would not weaken parallel Irish demands for the ESM fund to bear some of the “legacy debts” of the surviving Irish banks. “I don’t see the promissory note decision diminishing that opportunity,” he said. He pointed out that discussions on AIB and Bank of Ireland recapitalisation would take place within the context of the euro group over the course of this year.

While any direct recapitalisation by the ESM would not take place until the single supervisory mechanism is established in March next year, in certain cases, at the request of the ESM, the European Central Bank would be able to take over supervision control of a bank in the interim allowing for an injection of capital.

Today’s meeting

Minister of Finance Michael Noonan will attend today’s meeting of euro zone finance ministers, before chairing tomorrow’s meeting of the European Union’s 27 finance ministers.

Today’s meeting will be the first under the chairmanship of Jeroen Dijsselbloem. The Dutch finance minister succeeded Jean-Claude Juncker as head of the euro group last month.