13 January 2013

FT: EU redrafts plan for bank rescue funding

The plan would force struggling countries either to invest in failing banks alongside the rescue fund, the European Stability Mechanism, or to guarantee the ESM against any losses. By forcing burden-sharing on struggling countries, the plan raises questions about EU leaders’ vow to “break the vicious circle” between failed banks and their host governments.

The proposal drafted by the European Commission would force countries that could afford it to inject their own national funds into failing banks to make them viable before the ESM would shell out any of its own cash. In the case of a country that would face insolvency after a bank bailout, the national government would still have to “indemnify the ESM for any loss”, or guarantee the ESM would get all its money back.

The issue is acute for Ireland, whose €67.5 billion bailout funding runs out in November. Irish officials have become increasingly vociferous that they would struggle to convince the bond market fully to fund the government this year without some relief on the €64 billion it has spent to rescue Irish banks.

Ireland could potentially get some relief from the ESM, although it is likely to be only a small portion of the €28 billion it used to bail out its two surviving big banks. Eurozone leaders have already ruled out using the ESM to help Dublin with banks that were wound down, including Anglo Irish Bank. Separate negotiations on Anglo Irish’s debt are on-going with the European Central Bank.

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