European Commission pushes for bailout fund for banks

THE EUROPEAN Commission has thrown its weight behind the growing clamour for Europe’s bailout fund to be given powers to provide direct aid to stricken banks.

The move, on the eve of Ireland’s referendum on the fiscal treaty, reflects increasing pressure on Spain’s ailing banking system.

Any such departure could create a precedent for the Government, which has pledged more than €60 billion to rescue Ireland’s banks. Under the new proposals, bank bailouts would be funded by Europe rather than being added to national debt. Direct bailouts are not permitted under current EU rules.

Amid ongoing efforts to reduce the banking burden on the State, both Taoiseach Enda Kenny and Minister for Finance Michael Noonan have expressed keen interest in the notion of a European bank bailout.

In a further development yesterday, financial regulator Matthew Elderfield told a German paper that Ireland’s biggest banks were likely to need €3 billion-€4 billion in new capital to adhere to international banking rules.

Any direct capital infusion by the European Stability Mechanism fund would not be counted as national debt, easing pressure on the public finances of the country concerned.

This is forbidden at present and Germany remains opposed to the concept. However, it is supported by newly installed French president François Hollande, Italian leader Mario Monti and Spanish prime minister Mariano Rajoy.

The commission’s push for a European “banking union”, which marks a shift in its position, comes amid increasing concern that Spain may need external aid to overcome severe recession and huge property losses in its banks. Spain’s borrowing costs have risen to new records this week, prompting knock-on pressure on Italy at a time when Greece’s membership of the single currency is in the balance.

The commission’s suggestion on banks came as it offered the Spanish government a one-year extension to bring its budget deficit within EU limits.

Economics commissioner Olli Rehn said Dublin should continue to steadfastly execute the bailout plan to minimise Ireland’s vulnerability to the crisis. “Even though it is painful, often at the same time it is paying off because Irish exports and industrial production are growing,” Mr Rehn said.

“Our recommendation to Ireland and other programme countries is to stay the course and implement the programme.”

In a 1,000-page health check on the EU economy in which it warned of “financial disintegration”, the commission urged Germany to release more money into its domestic economy with wage increases.

This recommendation to Berlin is part of a new system to deepen the reach of Europe’s economic rules and ensure fiscal discipline.

These procedures and other measures are encapsulated in the fiscal treaty.

Although Mr Hollande faces a legislative election next month, the commission called on his government to provide fresh budget measures to tackle its deficit.

As the sovereign debt emergency worsens, the commission said “ambitious steps” may be needed to deepen financial integration.

“A closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden-sharing, towards a ‘banking union’ would be an important complement to the current structure of economic and monetary union,” it said.

“In the same vein, to sever the link between banks and sovereigns, direct recapitalisations by the ESM might be envisaged.”

However, Mr Rehn made a point of saying the ESM has no legal powers to directly boost the capital of banks.