Lack of direct capital a ‘missed chance’

Not allowing temporary or permanent bailout funds to directly recapitalise banks directly is a “missed opportunity”, Patrick Honohan, the governor of the Central Bank has said.

Mr Honohan, who is also a member of the ECB’s governing council, said that injections from the European funding mechanisms to governments inflated their debt, which in turn led to concerns among rating agencies.

“Using pooled European funding mechanisms directly as a means of recapitalising weak banks and acting as a backstop for future problems is an obvious way of pooling risk and breaking the sovereign-bank linkage,” said Mr Honohan, who was delivering the Mais lecture at Cass Business School in London.

“When I say directly, I mean without entailing a sovereign indebtedness,” the Central Bank governor added.

Eurozone officials have knocked back press speculation that the ECB and a group of eurozone countries were working on a possible initiative to enable crisis-stricken banks to have direct access to Europe’s permanent bailout fund.

The discussion stems from market concerns about the banking sector in Spain, where a sharp drop in real estate prices and a recession have triggered investor expectations that Spanish banks may need more money than was previously thought to recapitalise.

Olli Rehn, the European economic and monetary affairs commissioner, told Reuters in an interview last month that there were no plans to use the permanent European Stability Mechanism or the temporary European Financial Stability Facility to lend to recapitalise Spanish banks.

Mr Honohan said the €17bn injected into Ireland last year added some 13% of GNP to the country’s debt.

“The [European Financial Stability Facility] could look forward to upside in the recovery by being the owner of two banks with a substantial national franchise,” he said.

Mr Honohan also highlighted the need for a European-level resolution agency to cover bond-holders’ claims in bank resolutions among members states.

— Reuters