Political division on using ESM for banks

The head of the European Stability Mechanism, Klaus Regling, has warned of the difficulties in reaching political agreement on using the ESM to directly recapitalise banks, a key strand of Ireland’s bid for debt relief.

In an interview with German weekly Wirtschaftswoche ahead of today’s meeting of the euro zone’s finance ministers in Brussels, Mr Regling said there was significant political resistance from some states towards using the fund to directly recapitalise banks.

“In order to have direct bank recapitalisation by the ESM, a unanimous decision by the 17 euro members is required. Additionally in Germany and in other countries the agreement of parliament is necessary,” he said.

Pointing out that each country has a veto on the issue, he said that a “compromise” needs to be found that is “acceptable to all and that can be explained politically”.

“Each country, even a small country like Estonia, has a right of veto. And there are several countries where enthusiasm for direct bank recapitalisation by the ESM is rather limited.”

Mr Regling’s comments come as euro zone finance ministers gather in Brussels, amid divisions between member states about the scope and remit of the ESM fund’s capacity to directly recapitalise banks. Ireland’s bid to lengthen the maturities of some of its bailout loans also received a setback, with euro zone finance ministers delaying a decision on Ireland and Portugal’s request for an extension of the maturities of some of its bailout loans.

Mr Regling said there was also an argument for capping the sum that could be used to directly recapitalise banks. He pointed out that direct bank recapitalisation would negatively affect the ESM’s rating, as recapitalising banks is perceived as riskier than granting loans to countries.

While the 17 European states that share the single currency agreed last year that the ESM fund should be used to directly recapitalise banks, there is mounting disagreement between states about how this process should operate. Germany has indicated that it wants an €80 billion cap on bank recapitalisations.

Ireland is hoping the euro zone’s rescue fund can be used to directly recapitalise AIB and Bank of Ireland.

The possibility of the ESM setting up subsidiaries to directly recapitalise banks credit rating is also being considered, according to sources.