The Government will continue to make a "sustained case" in negotiations on refinancing banking debt despite an apparent rebuff yesterday by German chancellor Angela Merkel to claims of solid progress, Minister for Jobs Richard Bruton has insisted.
Dr Merkel upended a carefully crafted plan to resolve Europe’s banking crisis, delivering a sharp setback to Taoiseach Enda Kenny as he battles for a debt relief deal.
Moments after Mr Kenny declared in Brussels that he had achieved solid progress overnight at a tense EU summit, Dr Merkel moved abruptly to curtail the scope of the effort to break the link between bank and sovereign debt.
The chancellor’s intervention, which took high-level EU figures by surprise, has cast a new cloud of uncertainty over the feasibility of Mr Kenny’s demands.
For the first time in public, she backed her finance minister Wolfgang Schäuble in his assertion that national bodies must remain responsible for most banking debts.
This is markedly at odds with the push from Mr Kenny and the leaders of France, Italy and Spain for the European Stability Mechanism bailout fund to pay for historic banking losses.
Speaking on RTE radio today, Mr Bruton acknowledged it would be a “difficult negotiation” but he said an agreement made in June “absolutely still stands”. This meant there would be a separation of banking and government debt and there would be direct action on the sustainability of the Irish debt position.
Questioned on Dr Merkel’s contention that an agreement would not operate retrospectively, Mr Bruton said: “The truth is that what the council decided is that the EU finance ministers must now go and design what the European Stability Mechanism will do. That’s what they have to do - decide its mandate. And it will become effective once the bank supervision is in place.”
A deadline of January 1st had been put in place for the legislation on the banking supervision.
“Of course we’ve seen throughout this whole process for the last number of years countries expressing very trenchant views as to what’s the best way forward. But the truth is that we have evolved dramatically and many countries that initially took positions that ‘we won’t do this’have recognised that in the context of a number of things being done together they shift their position."
Mr Bruton said Ireland would work on the negotiations being undertaken by Minister for Finance Michael Noonan on both the two pillar banks and on the legacy of the Anglo Irish promissory note.
"So that continues to be entirely in place. The council has moved forward some of the deadlines so that continues. We are used to seeing expressions of disbelief in one route or another. But that’s in the course of negotiation and we also have many allies. On the very same day, others said directly the opposite. So I think there is a lot of work to be done here.”
Mr Bruton said no stone had been left unturned by the Taoiseach, the Tánaiste, the Minister for Finance and all other ministers. “This is a sustained case that Ireland is pursuing.”
“Countries take positions in negotiations but these are negotiations so there’s give and take and people look at different approaches.”
The question of who takes responsibility for “legacy” banking debts has emerged as one the most sensitive issues to be settled in complex talks on the recapitalisation of stricken banks by the ESM.
Although EU leaders decided at the summit to farm out this discussion to euro zone finance ministers, Dr Merkel pre-empted these talks even though the EU leaders did not address this question at the summit.
Their focus had been on fixing a January 1st deadline for a legal agreement on new powers for the European Central Bank to supervise commercial banks, a precondition for direct ESM aid to banks.
This was a “very progressive” step forward, Mr Kenny told reporters. “So that’s good news from that point of view for Ireland and for Europe.”
It was only shortly afterwards, in a briefing room down the corridor from where Mr Kenny held his own press conference, that Dr Merkel spoke.
Answering a reporter’s question about the possibility that any ESM rescue of Spain’s banks would damage her re-election campaign next year, she ruled out the fund taking on retrospective liabilities.
“I hadn’t even thought of the elections before hearing such ideas here. The capital needs of Spanish banks have just been evaluated and a programme for their recapitalisation has been agreed,” she said.
“Spain only needs to ask for the tranches of funds. There will be no retroactive direct recapitalisation, either.” These remarks were immediately seen as an implicit rebuff to the demands of Mr Kenny and his supporters for a mutualisation of banking debt.
A German government spokesman in Berlin later said her remarks were simply a reiteration of the current legal position and that there was nothing new in them; they were not about Ireland.
In Dublin last night, the Government spokesman also sought to play down the significance of her remarks.
“We understand that Chancellor Merkel was asked a direct question about the recapitalisation of Spanish banks and she replied in that context,” he said. His statement also noted that the pledge by EU leaders to sever the loop between bank and sovereign debt still stands.
The possibility of the ESM paying for existing bank debts is crucial for Spain, given fears that its banking crisis could overwhelm the government of premier Mariano Rajoy.
This, in turn, has prompted anxiety in France and Italy that any escalation of the Spanish banking emergency would affect them.
Meanwhile, IMF deputy director Ajai Chopra said putting the public finances on a sound footing and promoting a durable economic recovery were imperative for Ireland’s future.
In a statement today on the impact of fiscal adjustment on economic growth Mr Chopra said measures being taken were as "growth friendly" as possible.
“In the current discussion of the impact of fiscal adjustment on growth, it is important to note that no single fiscal multiplier is applicable to all countries and circumstances... With overburdened bank, household and SME balance sheets, and weak growth in trading partners, a number of factors besides fiscal consolidation have been a drag on growth in Ireland," he said.
“The pace of consolidation under the program has struck an appropriate balance and continues to do so for the period ahead, enabling Ireland to make steady progress in reducing fiscal imbalances while protecting the still fragile economic recovery."