22 January 2013

Bloomberg: Euro area grapples with ESM rules as legacy assets loom

Ministers seek an agreement in the first half of this year on how and when the €500 billion European Stability Mechanism can bypass governments and provide direct help to banks. Ireland and France led calls at a meeting of euro finance chiefs for work to proceed quickly so the new tool can be ready as quickly as possible. Some creditor nations countered that direct bank aid shouldn’t start until the European Central Bank takes up its new role as single supervisor within the currency zone, which isn’t expected until 2014. In the meantime, the ESM needs to leave its resources free to be a lender of last resort.

With no do-or-die decisions to make, ministers instead were able to take a first run at sorting out who should benefit from the prospect of direct bank aid. French Finance Minister Pierre Moscovici said the new ESM tool is important and needed to safeguard the financial system. “We can’t have a mechanism that is weak and unreadable”, Moscovici said. “Having that direct recap is part of this banking union. Priority means let’s go fast. Let’s be really ambitious.”

The actual amount of ESM funds available for direct aid to banks may be less than €100 billion because the fund needs to fulfil its main mission of lending to governments that lose market access. Incoming Eurogroup chief Dijsselbloem endorsed further progress on banking union, without taking a stand on the technical issues surrounding direct ESM aid. “The completion of the banking union is essential in my view”, Dijsselbloem said. He called for the EU to press ahead with efforts to create a single resolution mechanism, along with harmonised deposit guarantee schemes and work towards a “single rulebook” for financial regulation across the region.

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