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.