France at odds with Germany over Irish bank 'legacy' debt

GERMANY AND France are heading for a clash over Ireland’s bank debts as divisions deepen over the scope of a plan to use the European Stability Mechanism bailout fund to rescue stricken banks.

With Germany holding fast to the line that the ESM must not take on “legacy” debts in Ireland or any other country, France is pushing hard for a bigger effort to break the link between bank and sovereign debt.

The French position will strengthen the Government’s hand after a week in which Germany aligned with Finland and the Netherlands to say the ESM should bear only losses incurred under the fund’s supervision.

At a time of strain in the Fine Gael-Labour Coalition, this marked a big setback to Dublin’s long campaign to ease the burden on the State of the €64 billion banking bailout.

The divisions between Germany and France over Ireland come as they move together to advance plans for a European tax on financial transactions. Following the failure to achieve unanimous EU backing for such a tax, the two countries sought support yesterday for an “enhanced co-operation” procedure in which a group of at least nine like-minded states would move ahead together.

With Britain pledged to shun such a tax, the Government has already indicated it will not participate due to fears the IFSC could lose business to the City of London.

However, Dublin’s stance sets it apart from some of the major euro zone powers at a time when the Government is facing difficulty in the campaign for bank debt relief.

Despite the hard line adopted by Germany and its allies on the deployment of the ESM to rescue banks, France remains hopeful Ireland can still secure a deal to ease the debt burden. A ranking French official said euro zone leaders were “very clear” last June when they pledged to decouple sovereign and bank debt.

The official added it was in the “spirit” of the leaders’ discussions that pre-existing or legacy losses would be dealt with.

This is the opposite of the German position, which was set out by finance minister Wolfgang Schäuble and which reflects the policy of chancellor Angela Merkel’s government.

Asked whether Ireland could still expect to secure agreement on bank debt relief, the French official said: “That’s our hope. It’s also the spirit of what was agreed in June. But there could be conditions. We have a lot of work ahead.”

The official said the June communique that cleared the way for the ESM to rescue banks took into account Ireland’s problems at that time. “That’s the spirit in which we’re working,” the official said. “For us, anything that would contradict what was agreed in June would not be right . . . We have to implement what was agreed in June.”

Like the Government and the European Commission, the French official said the statement issued by Mr Schäuble and his Finnish and Dutch counterparts should not dilute the commitment made by euro zone leaders in June.

“We are working on the basis of the statement of June 29th . . . It’s clear that it allows for the recapitalisation of banks,” the official said.

The official acknowledged legacy costs were not mentioned in the June statement, but added: “It’s not included or excluded, but it’s clear that in the spirit of the June discussions it was about the situation of the banks today. We cannot totally exclude legacy costs.”

Last night Spain said its banks would need about €60 billion in new capital after a stress test.

The completion of this exercise is the latest phase in a long process expected to culminate in an application from Madrid for further bailout aid from Europe.