Schäuble pours cold water over idea of ESM relief for Ireland

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

“The retroactive bank recapitalisation is not probable for the time being. In Germany, we need a change of German legislation,” Mr Schäuble said, on the fringes of an EU finance ministers’ meeting in Luxembourg, adding that such a step could be “as difficult as a referendum in Ireland”.

Retroactive direct recapitalisation for Ireland was “not probable”, he said. “I don’t see any necessity for this. We think Ireland is doing very well. Ireland did what Ireland had to do . . . now everything is fine.”

His comments underline the growing sense in Germany that Ireland's strong performance under the bailout has lessened its case for further debt relief on its €64 billion bank bailout.

Ireland relief a hot topic
Ireland's plea for further debt relief has become a discussion point in German coalition negotiations, with the Social Democrats party arguing that future decisions on Ireland's financial situation should take into account its corporate tax rate and resistance to the Financial Transactions Tax (FTT). The SDP argues that the FTT, a tax on transactions such as bonds and derivatives that has been backed by only 11 member states, should be used to fund a common bank resolution fund.

Ireland has been hopeful of securing direct recapitalisation for Bank of Ireland and AIB 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 oppose granting debt relief to so-called ‘legacy’ assets. In September 2012 they issued a joint statement arguing that legacy assets should be the responsibility of national authorities, despite a commitment three months earlier to look at Ireland’s specific situation.

In addition, the ESM direct recapitalisation instrument will only be up and running once the Single Supervisory Mechanism (SSM) is established later next year, so any direct recapitalisation move is still some time away. Finance ministers discussed the concept of national backstops yesterday in the context of next year's European-wide banking stress tests by the ECB and the European Banking Authority.

German reluctance
Despite the intention to allow ESM direct bank recapitalisation once the SSM is set up, Germany is reluctant to use the fund to fill any capital shortfalls revealed. Under plans discussed by finance ministers yesterday, the ESM could be used to recapitalise banks in the event of a capital shortfall in a bank, but only if countries were deemed unable to fund shortfalls themselves and after private sector funding had been exhausted and junior bondholders and shareholders bailed in.

Following Monday's euro group meeting, EU commissioner Olli Rehn said Ireland and Spain were on track to exit their bailouts in the coming months, though he declined to comment on whether Ireland would need a precautionary credit line to help smooth its passage back to full private market funding.

Spain’s partial bailout, which saw the country draw down €40 billion from the ESM to directly recapitalise its banks, is due to expire in January.