ESM funding may be applied retroactively

Ireland has secured a commitment from euro zone finance ministers that retroactive application of the European Stability Mechanism's direct recapitalisation instrument will be considered on a case-by-case basis, opening the door for future investment in AIB and Bank of Ireland by the euro zone's rescue fund.

Written agreement
Euro zone finance ministers agreed the framework of the ESM direct recapitalisation last night, including a written provision to consider potential retroactive direct recapitalisation. However, any agreement would require complete unanimity, and is at least a year away, as the ESM will not be operational until the EU banking resolution and recovery directive is agreed.

Speaking in Luxembourg last night, Minister for Finance Michael Noonan welcomed the written commitment. "We've kept it in the framework guidelines and it's important. It's the first time that it's appeared in any official document. Up to now, we have been talking about the ESM . . . So a long way to go of course , and a lot of negotiation has to be done, but if we had failed to get it in tonight, it would have been the end of the road."

A number of countries remain resistant. German finance minister Wolfgang Schäuble said there was “no great leeway” for the mechanism to be used retroactively. “It makes no sense to raise false expectations,” Mr Schäuble said. His comments were echoed by Dutch state secretary for finance Frans Weekers. “It is possible we discuss retroactive use of direct recap,” he said. “The Netherlands is not in favour of that. There are different thoughts about this.”

Specific situations
Speaking after last night's meeting, euro group president Jeroen Dijsselbloem said a decision on retroactive direct recapitalisation would be made on the basis of the specific situation of a particular country. "The option is available. That is the important decision tonight. Whether any country would like to make use of it – that's first of all up to the country to apply for it, and then we will make a decision on a case-by-case basis."

Any retroactive direct recapitalisation is likely to involve the ESM taking a direct stake in the banks, which could mean the Irish Government surrendering part of its shareholdings in the pillar banks.

Euro zone finance ministers also agreed last night to limit the direct recapitalisation fund to €60 billion, though this can be reviewed.

Operational framework
Member states will be required to contribute capital to bring core tier capital to 4.5 per cent. In the event this level is already reached, the government will have to provide 10-20 per cent of the capital. The operational framework for the instrument will be finalised when the banking resolution and recovery directive is agreed.

Ireland’s 10th troika review was also discussed by euro zone finance ministers last night, with officials praising Ireland’s “continued steadfast implementation of the programme”. “A satisfactory exit from the programme will benefit not only Ireland and Portugal, but the entire euro area,” EU economics commissioner Olli Rehn said.