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.

In Brussels, the EU Commission said a communique issued by euro zone leaders still stands.

“I refer all of you to the text of the conclusion, which is extremely clear when it comes to the future use of the ESM and the direct recapitalisation of banks,” a spokesman told reporters.

A senior euro zone source played down the ministers’ intervention, saying there was no retreat by Germany and its allies.

“Media berserk, reason unknown. Nothing new or detrimental to Ireland in it,” the source said of the statement.

“[Recapitalisation] for Ireland would be able to go ahead at the given moment. But there never was anybody’s perception that ESM would bear all losses, past present and future, of the Irish banking system.

“I see no rowing back, just making sure that legacy assets are dealt with sensibly.”

A senior Élysée Palace official in Paris said the summit commitments made in June were still in place, adding that the communique was unambiguous on the need to break the link between bank and sovereign debt.

“It’s clear on the objective of putting in place a single European banking supervisor before the end of the year – and it’s clear that this will allow for direct recapitalisation of the banks. That’s the case for Spain and for Ireland.”

Asked about the reference to national bodies remaining responsible for “legacy costs”, the Élysée official said this was not dealt with in the communique.

“It’s clear that in the spirit of the June discussions, it was about the situation of the banks today. We can’t totally exclude legacy costs. I know the statement has created concerns in Dublin. But our guide is the June leaders’ statement,” the official said.

Sources who attended the talks on Tuesday said the purpose of the ministers’ statement was to dampen expectations that the ESM would be in a position to recapitalise banks soon after it becomes operational next month.

German, Dutch and Finnish leaders insist this can come only after stringent conditions are met, including a formal application for ESM assistance and the creation of a new bank supervisor within the European Central Bank.

Euro zone countries are divided over when this can come about, with Germany urging caution against a French-led push for a swift resolution. “Some expected it by the end of the year, but that’s not realistic,” said a German official. “Everyone is asking about Spain and Ireland, but they weren’t even the discussed.”