21 June 2013

FT: Eurozone bailout fund given power to 'directly recapitalise' banks

Eurozone finance ministers agreed to give their €500 billion bailout fund the power to pump cash directly into teetering banks on Thursday night, but only after national governments share the burden by first making their own capital investment.

The power to “directly recapitalise” banks through the fund, the European Stability Mechanism, was hailed by leaders as a key achievement to help eurozone countries avoid the fate of Ireland, Spain and Cyprus, where national governments were put at risk of a cut-off from financial markets when they were unable to deal with massive bank bailouts on their own.

“This instrument will help preserve the stability of the euro area and help remove the risk of contagion from the financial sector”, said Jeroen Dijsselbloem, chair of the group of eurozone finance ministers who brokered the agreement in Luxembourg.

Klaus Regling, head of the ESM, said he hoped the powers will be ready to use by the second half of 2014, after the European Central Bank and European Banking Authority conduct a series of asset checks and stress tests to determine whether eurozone banks are returning to health.

The agreement contains several conditions that would likely limit its attractiveness to some potential applicants because of the requirement, insisted on by a German-led group of creditor countries, that national governments share the burden of an ESM recapitalisation.

In addition, there is no guarantee that countries like Ireland and Spain, which were given rescue aid before the ESM had such powers, will be able to receive it. Mr Dijsselbloem said any “retroactive” application would be dealt with “on a case-by-case basis”.

The total amount of the ESM’s €500 billion in firepower that can be used for bank recapitalisations was capped at €60 billion, though the ESM’s board was given the ability to raise that limit.

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