Germany, Netherlands reject Irish debt fears

GERMANY AND the Netherlands dismissed as unfounded Irish concerns about a statement in which they and Finland cast doubt over the scope of any move to use the European Stability Mechanism (ESM) fund to rescue stricken banks.

Finance ministry officials in Berlin and The Hague denied that the statement, which suggested national bodies would remain liable for most banking losses, applied specifically to the Irish situation. “Ireland wasn’t even on our minds,” said a source close to talks outside Helsinki on Tuesday between the Finnish, Dutch and German finance ministers.

European and French sources adopted a similar stance, saying there was no dilution of the pledge euro zone leaders made in June to break the loop between sovereign and bank debt.

At the same time, a well-placed German government politician acknowledged Berlin was not enthused by the idea of the ESM taking stakes in the surviving Irish banks.

“The Irish should try another approach, such as a better interest rate deal on existing loans,” the politician said, citing concern about the German general election next year.

Another German official acknowledged previous interest rate concessions and said there was “no taboo” on that “but the financial gain would be minimal”.

Officials in Berlin said the ministers’ statement was not a final, legal reading of how the ESM will operate in the ministers’ view.

“It was a meeting of three countries and there really was no new position,” the German finance ministry said.

Similarly, the Dutch ministry said there was no intention to pre-empt ongoing political discussions. “The statement was about general principles for the future direct recapitalisation of viable financial institutions and was not about specific cases,” it said.

The three ministers said “legacy assets should be under the responsibility of national authorities” after any ESM rescue, with the bailout fund taking “direct responsibility” for problems occurring under the new supervision.

This suggested that states would still be liable for losses materialising from existing loans, limiting the potential benefit of any capital infusions from the ESM into AIB, Bank of Ireland and Permanent TSB.

The ministers’ statement led to pressure on notional Irish borrowing costs, with the interest rate on bonds due in 2020 rising 0.15 percentage points yesterday to 5.19 per cent. The rate on such debt was higher than 7 per cent before the summit pledge to review Ireland’s bank rescue.

“We don’t feel responsible for an expectation we didn’t create, that Ireland will be able to offload all the banks to the ESM in October,” said a German source.