Berlin's reservations on ESM aid for the liabilities complicate a difficult situation, writes ARTHUR BEESLEYin Brussels
IRELAND’S CAMPAIGN for debt relief took a big hit four days ago when Germany, Finland and the Netherlands said in Helsinki that national bodies should remain liable for most bank losses.
The démarche has thrown into question the scope of a deal in June in which EU leaders pledged to sever the loop between bank and sovereign debt.
The manoeuvre by German finance minister Wolfgang Schäuble and his allies illustrates just how vulnerable our cash-strapped Coalition is to the whims of its euro zone partners.
Soothing words were uttered in Brussels and beyond to the effect that the decisions of the June summit still stand. But the Helsinki statement still serves to limit potential benefit to the State from any deal in which the ESM fund would take shares in Allied Irish Banks, the Bank of Ireland and Permanent TSB.
Far from suggesting that an appreciable improvement in Ireland’s debt dynamics is in the store, Europe’s paymasters are moving to circumscribe the use of the ESM. Difficult as the Government’s task already was, this magnifies the challenge.
“The view was that this is irresponsible, yet again an example of people signing up to something and walking away from it later,” said a well-informed European source.
Such remarks reflect the view that the June summit promised something quite different from what countries like Germany are now willing to yield, namely the possibility of the ESM assuming some “legacy” banking debts.
This is disputed by other European figures, who argue there has been no retreat at all by Berlin. Yet that is not how the statement was received in Dublin, no matter what Taoiseach Enda Kenny and Minister for Finance Michael Noonan say about the inviolability of the summit conclusions in June.
The Coalition’s difficulty is that the ESM capital infusions into the surviving banks are a core objective as it strives to regain the confidence of private investors. With the European Central Bank unhappy with Dublin’s proposals to recast the Anglo Irish Bank promissory note scheme, the supersized debt load remains as crippling as ever.
This is damaging for the Government, which is facing into another harsh budget at a politically fraught time.
Worse still is the fact that the EU-IMF-ECB bailout will expire late next year, meaning the drive to improve the sustainability of the national debt will soon become a race against the clock. While the Government’s notional borrowing costs have declined since June, the fear must be that any failure to follow through with a sizeable debt-relief package would have the opposite effect. The urgency attaching to the all-important bond yields helps explain the summer push for an agreement in October, a deadline which soon faded away.
In Germany, however, the case is made that the fuss is overdone. The argument goes that the refusal to have the ESM take on retrospective debts is entirely in keeping with the June deal. To those who say not, the insistent Berliners respond that they cannot be held responsible for the wishful thinking of others.
Contrast that with the view in Paris. Senior French sources say it was clear from the talks in June – if not set down precisely in the summit communique – that the ESM would bear at least some legacy debts. France remains hopeful for a deal on this front and appears willing to fight for it.
Ahead of crucial talks next month, this means Kenny and Noonan are not battling on their own. Support from Italy and Spain should be forthcoming, but a clash now looms. The Helsinki statement demonstrates Dutch and Finnish support for Germany within the triple A-rated club.
And with the German election approaching, the more limited will be Angela Merkel’s room for manoeuvre.
This is the state of play. A few weeks ago, the Government might well have hoped to have a deal within its grasp by now. If only.