Bailout urged to tackle bank debt

Tue, Nov 20, 2012, 00:00

Euro zone countries unable to shoulder their bank debt burden alone have only one other option: conditional assistance from the ESM bailout fund, Bundesbank president Jens Weidmann has said.

His remarks raise doubts about Ireland’s “special case” status as technical talks continue on whether the sovereign burden from banking debt can be reduced via EU instruments.

“The balance sheet risks were created in national responsibility, and have to be mastered by the respective member state,” said Mr Weidmann at the Euro Finance Week conference in Frankfurt.

The Bundesbank president said there were two kind of legacy debt categories: countries where the issue “could be easily borne by national finance policy” and other cases where “the rescue mechanisms would stand ready to link financial assistance to conditions”.

A Bundesbank spokesman said yesterday that Mr Weidmann was not commenting on Ireland’s financial prospects.

However, in Bundesbank eyes, the spokesman said, Ireland belonged to the second category: unable to bear its legacy debt and reliant on conditional external assistance.

In his speech the Bundesbank president recalled how, initially, Europe was unequipped to deal with systemic dangers at that time, forcing “banking risk to become state risk”.

“Ireland, for instance, had a balanced budget in the crisis,” he said.

After its crisis “the deficit rose at times to over 30 per cent of economic performance”.

But Mr Weidmann indicated the lesson learned was not one of solidarity with Ireland, but how unstable financial feedback in one “non panic-proof” national banking sector had the potential to burden taxpayers in all euro countries.

For Mr Weidmann, keeping alive expectations of pooled legacy debt was detrimental to essential bank restructuring as interested parties would hold out for a better deal in the banking union.

Financial solidarity

Once agreed this union would open the door to financial solidarity, he said, but also Brussels intervention in national budgets that breached agreed rules.

“This would reduce the danger problems in [one couintry’s] budget are passed onto taxpayers elswhere, he saidthat] problems in budget are passed on to taxpayers elsewhere.

“It would do the common currency a disservice if all a banking union did was to introduce joint liability by the back door and give states more opportunities to run up debt.

“This danger exists, and I don’t think it should be underestimated.”

Asserting his political independence, Mr Weidmann criticised what he perceived as the continued failure of politicians to overcome the euro crisis.

“The crisis has expanded common liability considerably, distancing itself from the Maastricht framework,” said Mr Weidmann. “Simultaneously, there is little readiness to give up core competences and the currency union is coming no closer to the fiscal union.”

On the banking union proposal for a pan-EU regulator, Mr Weidmann backed Berlin’s proposal for national responsibility to remain in place for banks without cross-border risks.

Under the latest EU bid to break the deadlocked banking union talks by granting nervous member states more safeguards against the European Central Bank, it faces checks on its powers as a single bank supervisor.

A compromise text circulated on Friday night, obtained by the Financial Times, proposes additional rights for nations inside and outside the new banking union aimed at reassuring the likes of Germany, Poland and Britain.

But significantly the single supervisor still holds unrivalled legal authority over all 6,000 euro zone banks – a concentration of power that is likely to rile Berlin, which jealously guards its dominion over smaller German lenders.

In his address yesterday, Mr Weidmann also backed the proposal by Germany’s opposition Social Democrat to set up a bank-financed rescue fund.

“This could cover in large part the cost of a wind-up or restructuring,” he said.

“The taxpayers would only be drawn on if the fund risks being overwhelmed.”

– (Additional reporting: Financial Times service)