Bundesbank, Berlin deal further blow on bank debt


IRISH HOPES of securing bank debt relief through the European Stability Mechanism (ESM) were dealt a further setback in Germany yesterday.

Berlin and the Bundesbank set aside recent differences to rule out ESM assistance for debt accumulated before its activation, expected next month. This assertion by the EU’s largest member and its central bank raises further questions about a technical proposal by the Government to reduce Ireland’s debt burden with an ESM buy-up of stakes in nationalised banks.

The issue flared up on Tuesday evening after German, Finnish and Dutch finance ministers said that so-called “legacy assets” – such as old bank debt – should remain “under the responsibility of national authorities” with the bailout fund taking “direct responsibility” for problems occurring under the new supervision regime.

On Wednesday the Government and the European Commission dismissed this view, insisting that the Republic would secure financial benefit based on a June agreement of euro zone leaders which promised to “break the vicious circle between sovereign and banking debt”.

Irish officials said the EU leaders’ statement, promising to look again at the sustainability of Ireland’s reform programme, took political precedence over the views of three EU finance ministers.

However, senior Berlin sources indicated yesterday that the finance ministers’ views reflected official German policy.

Technical talks with the Republic are ongoing but German officials maintain that assistance from the ESM would require a new bailout programme. It can only come as a last resort, when private and national means are exhausted. No ESM assistance can be granted, Berlin insists, until agreement is reached on a new EU banking regulator for a European banking union.

Bundesbank president Jens Weidmann added his voice to the debate, warning against using a banking union as “cover” for pooling of old debt.

“In order to keep liability and control in balance, only risks that have arisen after common supervision is established can be taken under joint liability,” said Mr Weidmann in a Berlin speech.

“The legacy burdens on bank balance sheets have to be underwritten by the countries under whose supervision they have arisen.”

Mr Weidmann told the Neue Zürcher Zeitung daily that any EU banking regulator was part of a wider European banking union. This, he said, was “more a project for the future which is not suitable as a solution for current difficulties”.

Reaching agreement with Germany on a European financial regulator may prove even more complicated than initially thought.

The Berlin finance ministry had hoped to shift oversight responsibility from its national regulator, BaFin, to the ECB using a special provision of European treaties that allow such transfers of additional competences. However, an analysis by the Bundestag’s legal service has raised doubts about the legality of such a move.

The legal brief, commissioned by the ruling Free Democratic Party (FDP), concludes that “as far as new sovereign powers are transferred . . . a law must be adopted” by the German parliament.

“It could well be,” an FDP source said, “that this one will end up before the constitutional court in Karlsruhe.”