No end in sight to Kenny's campaign for debt-relief deal
Despite support from Van Rompuy and Barroso, the Taoiseach faces several obstacles, writes ARTHUR BEESLEYin Brussels
FINANCE MINISTERS gather in Luxembourg on Monday for more talks on the crisis in the euro zone. Ireland is not on the agenda but the meeting comes as the Government fights a rearguard battle against any dilution of Europe’s plan to break the link between bank and sovereign, or state, debt.
EU leaders pledged at a summit in June to review the bailout of Ireland’s banks, under which bank debt became national debt. But the scope of that deal was thrown into question when the German, Finnish and Dutch finance ministers said national bodies should remain liable for most bank debts.
This sparked danger for the Government, which would face a double dose of political and economic risk if an appreciable debt-relief deal is not struck. For obvious reasons, Dublin is counting on a result.
In Brussels this week for talks with European Commission president José Manuel Barroso and European Council president Herman Van Rompuy, Taoiseach Enda Kenny pressed for an explicit reiteration of the promises made in the summer.
“He wants reassurance that what was agreed in June remains valid,” said a European source of the stance Kenny adopted when he met Van Rompuy. “Van Rompuy said: ‘Of course the decisions of the European Council remain valid.’ It’s clear that it is his job to defend those decisions.”
But what exactly was agreed in June? And why all the fuss over the intervention by German finance minister Wolfgang Schäuble and his colleagues? The June communique was a clear statement of intent but it was light on detail.
“We affirm that it is imperative to break the vicious circle between banks and sovereigns,” said the leaders of the 17 euro countries. “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly.
“The euro group will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.”
The subtext was pressure from Spain and its allies to allow the European Stability Mechanism to take equity stakes in ailing banks, the objective being to avoid a repeat of the Irish scenario in which the bank bailout overwhelmed the State.
The promise to review the Irish EU-IMF programme and the pledge to treat similar cases equally set up the possibility of the ESM taking shares in AIB, Bank of Ireland and Permanent TSB if a similar arrangement was made for Spain.
This was separate to ongoing discussions with the ECB to recast the €47 billion Anglo Irish Bank promissory note scheme, on which agreement remains elusive.
Kenny said in June that the communique was a big breakthrough but progress afterwards was slow, even after a unanimous decision by euro zone finance ministers to push for a deal in October. That deadline was already fading by the time the German-Dutch-Finnish trio issued a statement in Helsinki on any deployment of the ESM to rescue banks.
“The ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities,” they said.
By saying governments would remain on the hook for historic bank losses, they cast doubt over the possibility that an ESM deal would actually break the seal between bank and sovereign debt.
Cue distress in Dublin.
“The understanding here was that the decision of the council was to deal with problems on the table now and that have arisen in the past,” Kenny said in Brussels.
His message was well received. Barroso’s response was favourable, and Van Rompuy has circulated draft conclusions for the next summit – on Thursday week – which would tie leaders into the June deal again.
The draft suggests the leaders would “call on the euro group to agree on the exact operational criteria that will guide direct bank recapitalisations by the ESM in full respect of the 29 June euro area summit statement”.
Whether this survives the pre-summit diplomacy will be crucial. Despite claims in Berlin that the Helsinki declaration reflects the policy of the Merkel administration, certain people in Dublin believe the true position may be more nuanced.
We will learn the truth soon enough – but Kenny must also contend with Finnish and Dutch leaders.
This is to say nothing of the technical complexities which must be overcome in the allocation of responsibility for “legacy” assets. Brussels officials remain at an early stage in their thinking on this front.
“This is . . . a political decision which is strongly underpinned by a multitude of technical questions, so it’s not something where we just pose a question, throw it up into the political air and wait until it drops down on us,” said a high-ranking EU figure.
For the Government, there is no end in sight to this particular campaign.