Merkel dents Kenny's hopes on debt

An appreciable deal for Ireland on debt would seem to be still a distant prospect

SUMMIT INSIDERS described this gathering as a “shambles” and a “mess”. In the account of one European official, the leaders of Europe laboured for eight hours to do something that should have taken one hour.

As the dust settled in Brussels, the sense that Dublin’s campaign for debt relief had taken a small step forward was dimmed by strident words from the German chancellor on the vexed question of legacy bank losses.

Although Enda Kenny declared a good result for Ireland, simultaneous remarks from Angela Merkel injected a corrective note of caution. The net result is not quite the stuff of heady optimism, but that can hardly be a surprise at this point in the saga.

So what exactly happened on Thursday night? And where to do we go from here?

In essence, this boils down to a clutch of inter-related questions. These centre on the development of a euro zone bank supervisor within the European Central Bank, a move that is a precondition for the ESM bailout fund to directly rescue stricken banks.

This is one of Kenny’s core objectives: he wants the ESM to take direct stakes in AIB, Bank of Ireland and Permanent TSB. Crucially, he also wants the ESM to pay for some of the historic, or legacy, losses that led those institutions to lean on the State.

Each one of these questions is riddled with uncertainty over the scope and timing of what exactly might happen. What the leaders set out to do on Thursday evening was to eliminate some of that doubt by dealing sequentially with each of the big issues that arise.

They did manage to achieve clarity over some of these questions by the time they emerged bag-eyed from the summit chamber at 3am yesterday. Less than 12 hours later, Merkel’s remarks raised fresh doubt as to whether Kenny would ever achieve his aim.

This is a question of sequencing. In June, EU leaders agree to aim for a deal this year on the ECB powers. This was called into question by Germany at the end of summer and repeatedly since. What the leaders agreed at the summit was that they would redouble efforts to agree the legislative framework for the new scheme by year-end.

This would release the ECB to assume its new role some time in 2013, in the expectation that the ESM would be allowed recapitalise banks whenever the new supervisor was declared “effective” by the EU authorities.