Germany eyes legislative change to allow expanded ESM role

Derek Scally in Berlin and
Suzanne Lynch in Luxembourg

Germany has conceded it will have to change its bailout laws to permit the ESM fund recapitalise crisis-hit banks directly, as agreed by finance ministers on Thursday night.

With Chancellor Angela Merkel unlikely to push for the necessary changes before September's general election, this creates uncertainty as to whether a new German government will find the necessary majority to extend the provisions for the already unpopular ESM bailout fund.

Four months after EU leaders agreed to the idea of bank recapitalisations last June, the Bundestag passed a bill stating that "no direct bank risks will be assumed" by the ESM bailout fund. With the Spanish banking crisis at its peak, this condition was inserted at the last minute to ensure the ESM bill passed the lower house of the German parliament.

On Thursday evening, euro zone finance ministers agreed to consider requests for retroactive application of the ESM's direct recapitalisation instrument on a case-by-case basis. Dublin has consistently argued that AIB and Bank of Ireland should be eligible for retroactive direct recapitalisation, as the instrument was not available to Ireland at the time of the bail-out.

However, finance Minister Michael Noonan played down the possibility.

“I don’t want to tie the future of the banks or the Irish banking system solely to the ESM,” the Minister 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. The instrument would also require an investment by the sovereign, diluting further the potential gains from the mechanism.