Germany warns direct aid for banks is unlikely

Wolfgang Schaeuble says retroactive recapitalisation would require law change

German finance minister Wolfgang Schaeuble has reiterated German opposition to using the ESM fund to directly recapitalise Irish banks, saying that the current ESM treaty does not allow for retroactive action, and adding that the process would require a change in German legislation.

Speaking in Luxembourg this lunch time on the fringes of an EU finance ministers' meeting, the German finance minister said that retroactive direct recapitalisation for Ireland was "not probable". "Ireland did what Ireland had to do... now everything is fine," Mr Schauble said. His comments underline the growing sense in German circles that Ireland's strong performance under the bailout has lessened its case for further debt relief on its €64 billion bank bailout.

Ireland has been hopeful of securing direct recapitalisation of its banks from the euro zone’s permanent rescue fund, the European Stability Mechanism (ESM) . The €500 billion fund has €60 billion earmarked for direct bank recapitalisation, and in June euro zone finance ministers agreed in principle to consider requests for retroactive application of the instrument on a “case by case basis.”

However, any decision on deploying the fund retroactively needs unanimity from member states, effectively giving Germany a veto on a decision. Germany, Finland and the Netherlands have been consistently opposed to granting debt relief to so-called 'legacy' assets. In September 2012 the three countries issued a joint statement , arguing that legacy assets should be under the responsibility of national authorities, despite a commitment three months earlier to look at Ireland's specific situation.

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Ireland’s plea for further debt relief for its banks has emerged as a discussion point in German coalition negotiations. The left of centre Social Democrats party has argued that future decisions on Ireland’s financial situation would take into account its corporate tax rate and resistance to the Financial Transactions Tax (FTT), a tax on certain financial transactions such as bonds and derivatives that has been backed by 11 member states. It argues that future bank bailouts should be funded by the FTT.

As Angela Merkel’s Christian Democrats prepare for a further round of coalition discussions with the SPD, one possible outcome of a new government formation is that the SPD could assume responsibility for the finance ministry, as was the case in the last CDU-SPD coalition.

Yesterday, EU economics commissioner Olli Rehn said Ireland was on track to exit its three year bailout by the end of the year. However, he declined to comment on whether Ireland would need a precautionary credit line to help smooth its passage back to full private market funding.

Following today’s budget, Ireland will submit balance sheet assessments of its three main banks to European authorities for approval before any decision on a precautionary credit line is made.

Speaking after the euro group meeting in Luxembourg yesterday evening, EU Commissioner Olli Rehn declined to speculate on the outcome of the tests, but said the Commission was working closely with the Irish Central Bank on the review.

With discussions set to intensify between the Government and the troika following today’s budget, the balance sheet assessments of Bank of Ireland, AIB and Permanent TSB are the main remaining milestone for the State as it seeks to exit its three-year bailout in December.

Suzanne Lynch

Suzanne Lynch

Suzanne Lynch, a former Irish Times journalist, was Washington correspondent and, before that, Europe correspondent