It is in Europe's interest that Ireland's return to private funding goes smoothly

The deal struck last week to restructure the debt of Anglo Irish Bank marked a milestone in Ireland’s long journey to secure bank debt relief.

Precise estimates about the savings vary. Pat McArdle argued in these pages that the effect of the deal was to lower the burden of the promissory notes by a third, or €8 billion, in today’s money, while the Government estimated that the State’s borrowing requirement should drop by €20 billion over the next decade.

But as the Government was enjoying its moment in the sun, attention was already turning towards the next phase in the campaign to address the cost of bailing out Ireland’s banks as the State prepares to re-enter private debt markets by the end of the year.

First stop was this week’s gathering of euro zone finance ministers. As usual, the meeting took place on the eve of a meeting of finance ministers of all 27 EU member states (chaired in this instance by Minister for Finance Michael Noonan as president of the European Council), but as always the real action took place at the Eurogroup meeting on Monday – the place where strategies and decisions on the core euro zone countries are discussed and adopted.

While Cyprus was on the agenda – the working out of the bailout of the Mediterranean island is the single most pressing issue facing the euro zone – much of the discussion was dedicated to the working of the European Stability Mechanism (ESM), the EU’s pemanent bailout fund.

The successor to the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM), the ESM was officially established in September last year after Germany’s constitutional court approved the establishment of the permanent fund after a constitutional challenge.

While the fund has already been used to capitalise Spain’s banking sector via the sovereign, the more contentious issue of direct bank recapitalisation is now on the agenda.

Direct bank recapitalisation will happen only once the Single Supervisory Mechanism of Europe’s banking system is up and running. That is at least another year away.

Euro zone finance ministers have been given a deadline of the end of June to come up with an “operational framework” for the fund’s direct recapitalisation plan.

However, there are mounting divisions between the members over whether the ESM should shoulder the burden of existing impaired bank assets, and whether the fund should retrospectively apply to previous recapitalisations.

Ireland has consistently argued that AIB and Bank of Ireland should be eligible for direct recapitalisations but there are signs that this possibility is receding. Part of this reflects a general scaling back of the scope and ambition of the fund.

Sources in Brussels confirm that the portion of the fund dedicated to bank recapitalisations is to be capped at less than €80 million, the amount of paid-in capital contributed by the countries, with the cap likely to be lower.