Blustering on bank debt shows desperation
AFTER THE EU summit on June 29th last a statement was issued stating it was “imperative” to break the “vicious” circle between banks and sovereign states, writes VINCENT BROWNE
It said that when an effective single supervisory mechanism (for the banks) was established involving the European Central Bank, the new bailout fund, the European Stability Mechanism (ESM), could be involved directly in the recapitalisation of banks.
If not quite seismic, this was certainly significant, for not until then was it suggested there would be any “burden-sharing” of the mountainous bank debt that had arisen throughout the EU since the financial crisis of 2008.
The communique continued, almost as an afterthought: “The euro group will examine the situation of the Irish financial sector with a view to further improving the sustainability of the well-performing adjustment programme.” It added: “Similar cases will be treated equally.”
The disconnectedness of this from the previous bit of that paragraph of the communique suggested it was a casual, hurried addition, unconnected to the earlier semi-seismic bit. But nonetheless significant, albeit in ways that were not clear.
Nearly 12 weeks later, asked about Spain, Angela Merkel said: “There will not be any retroactive direct recapitalisation. If recapitalisation is possible it will only be possible for the future, so I think that when the banking supervisor is in place we won’t have any more problems with the Spanish banks, at least I hope not.”
There was nothing in this remark inconsistent with the communique of June 29th, which did not refer to recapitalising banks retrospectively, nor did it imply that. It simply announced an initiative to establish an EU supervisory mechanism for banks throughout Europe, after which the ESM could be used to recapitalise banks.
Angela Merkel was not resiling from whatever commitment the June 29th communique made to Ireland for there was no commitment in it that Irish banks, which were already recapitalised, might be recapitalised again after the banking supervision was in place. The hissy fit engendered by Angela Merkel’s comments last Friday arose entirely from the ludicrous spin placed on the June 29th communique.
That hissy fit was defused a bit by the phone conversation between Enda Kenny and Angela Merkel last Sunday in the course of which little new was said or committed to. The tangled language of the June 29th communique about further “improving the sustainability of the well-performing adjustment programme” was repeated. The novel bit was in claiming “Ireland is a special case” and the euro group will take that into account”.
The clear implication of the June 29th communication was that Ireland was not a special case, otherwise why would it have included the bit: “Similar cases will be treated equally”?