Let's not get our hopes up for pot of gold at end of debt saga
OPINION:Any new accord on the promissory note used to inject capital into the two Irish ‘dead’ banks is unlikely to involve a reduction in our debt
THE DUST appears to have settled, at least for now, on the recent intense diplomatic interchanges between the Irish and German governments. The issues at stake have been temporarily delegated to the finance ministers to try to solve.
However, much ambiguity remains. Not for the first time, resort has been made to diplomatic language, such as Ireland’s “unique circumstances”, to paper over important substantive differences.
There are two avenues under discussion to address Ireland’s banking sector debt. The first involves the possible scope and timing of the plan agreed in principle at the June summit to allow the European Stability Mechanism to inject capital directly into banks (such as the Irish “pillar banks”). This would break the link between banking-related debt and the sovereign and thus improve the latter’s creditworthiness.
The second involves a possible renegotiation of the terms of the promissory note arrangement used to inject capital into the two Irish “dead” banks, Anglo and INBS.
It is no secret that German chancellor Angela Merkel reluctantly conceded the principle of direct ESM recapitalisation only after considerable pressure from the Italian and Spanish prime ministers, who warned of major bond market turmoil otherwise.
There remains considerable opposition to using ESM funds (that come mainly from German taxpayers) for this purpose. It is feared that with the debtor government “off the hook”, the banks in question will have less of an incentive to achieve profitability, including by means of aggressive loan recovery.
This may be a particular problem in the case of some Spanish banks where a good part of their excessive lending is believed to be associated with political intervention at the regional level.
The June summit communique reflected Merkel’s insistence that any ESM recapitalisation would require that a new pan-European financial regulator be in effect established beforehand. There are major substantive issues at stake here which go beyond what are sometimes wrongly dismissed as “technical details”.
These include the relationship between the new regulator and the European Central Bank (reflecting fears of a conflict between the ECB’s monetary policy mandate and potential pressures to “bail out” stricken banks), the treatment of non-euro zone EU banks, and the number and size of banks to come under the regulator’s umbrella. These aspects are unlikely to be resolved until well into next year at the earliest.
The German chancellor threw another spanner in the works by rejecting the use of ESM recapitalisation to deal with the problem of “legacy bank debt”, ie that incurred up to now. According to her, only when a pan-European regulator is in a position to ensure appropriate prudential behaviour should European-wide funds be available to take care of any regulatory mistakes. Until that point national governments should bear the financial responsibility for any failures that occurred on their watch.