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26 September 2012

Irish Times: Cutting government-bank link decision stands - Kenny


Leaders' Questions in the Dáil was completely taken up with reaction to the demand by finance ministers from Germany, Finland and the Netherlands that the European Stability Mechanism should not take responsibility for bank losses that occurred before it was established.

The three states are insisting that governments remain on the hook for loss-making legacy assets even after any bank rescues by the ESM fund. This demand, laid down by the countries’ finance ministers, is in apparent defiance of the decision by EU leaders in June to break the link between sovereign and bank debt. “The ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities”, said German finance minister Wolfgang Schäuble, Finland’s Jutta Urpilainen and Dutch minister Jan Kees de Jager. This would appear to limit the benefit of any capital infusions from the ESM because a government would remain liable for losses that may yet materialise from existing loans.

The statement "will come as a disappointment to the Irish government, who have been hoping for a significant element of 'relief’ to their overall debt-sustainability from the deal currently being negotiated", said Owen Callan, an analyst at Danske Bank in Dublin.

The intervention comes as the Government faces persistent difficulty in its pursuit of a deal in Europe to ease the burden of the banking debt.

There is increasing concern in Dublin about German-led backsliding on the promise of a radical new deal to settle the banking crisis in Ireland and Spain. One of the Government’s core objectives is for the ESM to take direct equity stakes in the surviving banks: AIB, Bank of Ireland and Permanent TSB. “It leaves the situation extremely uncertain from an Irish point of view”, said John Fitzgerald of the Economic and Social Research Institute. “Depending on how it is interpreted, it may or may not allow the Irish government to sell its interests in the surviving Irish banks to the ESM.”

Germany is the dominant power in the eurozone and it frequently draws support from Finland and the Netherlands. They share an interest in limiting the burden on the ESM as they do not want their financial support for the fund to compromise their triple-A credit ratings. With Spain under pressure to accept increased bailout aid, the joint statement was seen as a hard-line gambit in looming ESM talks.

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© The Irish Times


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