Serious Money: No closer to bank debt deal as EU presidency ends
Recapitalisation accord could be a year away - if it happens at all
It is a year ago – June 29th, 2012 – since the euro area summit which agreed that “the Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme”.
This decision was seen as a game-changer for Ireland’s public finances and debt. A goodly chunk of the public debt incurred by government in saving our banks from insolvency (over €60 billion) would soon be retrospectively transferred to the new European Stability Mechanism (ESM).
This would do two things: first reduce the level of government debt; and second, greatly ease the Government’s return to the private debt market as the troika arrangement ended this year.
The problem was (and remains) that the ESM as established does not have the power to bail out banks (“direct recapitalisation” as it is called). It was established to lend to governments in trouble, not to invest in failing banks. So a change in the ESM’s statutes would be called for.
Last year’s agreement such as it was, was also conditional on the ECB becoming the single supervisor for euro zone banks; currently it has no such role. Finally there would be a need to develop a set of rules (conditionality) for the ESM becoming a bank recapitalisation fund as well as becoming retrospectively engaged in bank bailouts (the Irish case).
So where are we now?
In the European fashion we are nowhere near the promised “transfer” which is now at least another year away – if it is to happen at all. None of the required legislation (directives and regulations) has yet been adopted, although all of the key elements are in draft form. Working up the detailed scheme has led to a fiendishly complex proposal, which is likely to see additional political “horse trading” before it is adopted.
It also now appears that the Government may not even avail of the ESM mechanism if and when it becomes available. The Minister for Finance is reportedly holding in reserve the possibility of Ireland directly privatising the banks now in State control and ownership, and pocketing the proceeds, rather than turning to the ESM.
Finally, retrospective ESM involvement in bank bailouts is not to be automatic but on a case-by-case basis.
The ESM “banking fund” is currently shaping up to be a €60 billion pot in a total fund of €500 billion – small beer in the context of the scale of the EU’s banking crisis and banks’ capital needs. It will only become reality after the ECB has taken over the role of single supervisor and a European bank resolution authority and a European resolution fund have been established. The ESM must operate through a new subsidiary that must attract private capital.
As a condition of any involvement
the ESM will require governments to co-finance a bank’s recapitalisation
and there would be stress-tests and
other eligibility criteria. And all of this would have to be fully agreed and provided for in EU legislation. EU directives have to be agreed by four parties – government, the EU Commission and critically, the ECB and post-Lisbon, a quite powerful independent-minded European Parliament.
If this reads something like a legislative/political steeplechase, it is. Even with the decisions taken last week by finance ministers to approve – in principle – direct recapitalisation using the ESM and to provide for some limited conditional retrospection. According to Germany’s Wolfgang Schäuble, as reported in the Wall Street Journal, “I don’t think we have much leeway to use direct bank recapitalisation ... retrospectively”, and this is “a concession to our Irish friends”.
Even if everything is now heading into the home straight it is not obstacle-free. There are German elections in October. Further, the present commission and the parliament are now approaching end-of-life. Next summer will see a new commission proposed, European Parliament elections and the proposed commission facing confirmation hearings before the new parliament.
The biggest obstacle of all, however, may be the impact of revelations last week from Anglo Irish Bank on sentiment towards Ireland’s plans. The Minister for Finance will have to play a very tactical game if we are to realise the Government’s aspirations of a year ago.
Mark Kennedy is a partner in Mazars