Noonan plays down likelihood of applying to ESM to recapitalise banks

Minister for Finance Michael Noonan has played down the possibility that Ireland may apply to the euro zone's ESM in order to recoup some of the money the State put into AIB and Bank of Ireland, saying there may be other options available.

Speaking in Luxembourg this morning, where he will chair a meeting of all 27 EU finance ministers, Mr Noonan pointed out that the two pillar banks may have increased in value by the time the ESM direct recapitalisation instrument is available.

“I don’t want to tie the future of the banks or the Irish banking system solely to the ESM,” he said. “We have two banks that will be in profit next year, we have two banks that will be operating and having practically a monopoly in a growing economy. That’s value and the markets will see there’s value there, so if we’re looking for potential purchasers we may not go down the ESM route, but it’s vital that we have the option still in place.”

Any agreement to directly recapitalise banks would involve the ESM taking a direct stake in the two pillar banks, and would likely oblige the government to offload at least some of its holding in the banks. Direct recapitalisation by the ESM fund would also require states to contribute up to 20 per cent of the recapitalisation, also limiting the potential savings from any arrangement.

Last night, euro zone finance ministers agreed 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.

Ireland has consistently argued that the state should be entitled to recoup some of the investment it put into AIB and Bank of Ireland, as the ESM option was not available to Ireland during its bail-out.

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.

EU finance ministers will today discuss that banking resolution and recovery directive today in Luxembourg. The meeting of all 27 ministers traditionally follows the meeting of the 17 euro zone finance ministers, known as the eurogroup.

While the new directive aims to introduce pan-European rules on how banks are wound up, significant differences remain between member states, regarding which class of creditors should be bailed-in in the event of a wind-down, and the degree of flexibility member states will have in implementing the rules. The new banking rules – part of the so-called banking union – aim to shift the cost of future bank failures away from tax-papers and onto private creditors, something that was not available to Ireland during its bail-out. The proposed new system is known as a “bail-in” rather than a “bail-out” as the costs of winding down a bank are absorbed by the bank’s own resources. This could include a bail-in of depositors, though deposits under €100,000 will remain protected.

While Mr Noonan welcomed the fact that retroactivity had been written into last night’s agreement, a number of countries remain resistant to proposals. 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.”

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."