Merkel dents Kenny's hopes on debt

The boon here for Kenny was that it fixed a real deadline to meet a key precondition for ESM banking aid.

Although he took care to say there would be no ESM rescues on January 2nd, the development appeared to restore some of the initiative lost when the German, Finnish and Dutch finance ministers declared in Helsinki that the ESM would have no truck with legacy debt.

Adding to the sense of progress was an instruction to all euro zone finance ministers to draw up exact criteria for direct ESM recapitalisations. The Taoiseach flipped away questions as to when the ministers would have to deliver, but the message to them is to deliver by the end of the year.

For good measure, the draft summit communique was amended in the dead of night to reiterate the need to break the link between sovereign and bank debt. This was reassuring from an Irish perspective; likewise the fact that the chancellor apparently made no effort at the summit to win others over to a ban on ESM deals involving legacy debt.

The sense early yesterday was that the summit had restored the status quo disrupted by the Helsinki declaration, with the additional rider of a deadline for a deal on new ECB powers.

Sources involved in the summit accepted there was “weakness” in the result, inasmuch as the leaders did not delve into the legacy debt question. The compensation for that, however, was the instruction to finance ministers to quickly pin down the parameters for ESM recapitalisations.

In doing so it was recognised that this process will soon run into the German election campaign.

This gives Merkel a clear incentive to slow down the whole game, an accusation levelled bluntly at the chancellor by French president François Hollande.

It follows that speed is of the essence for Kenny. He was in upbeat mode as he left Brussels yesterday, but Merkel soon cast a cloud over the proceedings.

In her press conference, she said the ESM would not be taking on responsibility for “retrospective” bank debts.

The implication was clear, although she was answering a question posed in respect of Spain’s addled banks.

Even if this is but an opening position for the negotiation to come, it shows that an appreciable deal for Ireland still remains a distant prospect.

The Taoiseach travels to Paris on Monday for talks with Hollande, who is emerging as a key ally. Now more than ever, he needs all the help he can get.