ESM will be allowed to buy Irish banks
However, taxpayers will continue to be liable for unforeseen bank debts for a period of years afterwards.
This is according to plans being drawn up to allow the ESM to directly recapitalise banks — the details of which are hotly contested by the German, Dutch, and Finnish governments, and which will be discussed by eurozone finance ministers meeting on Monday.
The Government is waiting to see how Ireland can benefit from the arrangements to reduce debt before it proceeds with arrangements to reduce the impact of the €31bn Anglo Irish Bank promissory notes, according to EU officials.
Intense talks on what the ESM can and cannot do have been under way in Brussels for the past few days between representatives of the finance ministries of the member states, while in Luxembourg 60 staff are ready to transfer to the new ESM institution when it officially launches on Monday.
A statement from the finance ministers of Germany, the Netherlands, and Finland last week caused uproar when they appeared to suggest that the €500bn fund would not deal with legacy assets of troubled banks, but only debts incurred once the ECB takes over supervision of the eurozone’s banks.
While Irish bank debt has been taken over by the State at a cost of about €32bn, much of it from the pension reserve fund, the Government hopes to sell its 95% stake in AIB and its stake in Bank of Ireland.
However, it is likely to receive only the current value of the shareholding, likely to be no more than €8bn. The ESM’s shares will be senior, making the rest of the shares in the banks less attractive to investors.
The revelation that any unforeseen debt which arises for a specified period after the purchase would have to be picked up by the taxpayer, could make it less attractive to member states.
The plan for the ESM does not in effect break the link between the banks and the sovereign, but this may be the compromise the Germans will insist on for agreeing to the ESM dealing with legacy assets.
Decisions on taking over legacy assets or individual banks will be made on a bank by bank basis, the EU officials said. It could even cover bad banks, but only to the value of its good assets.
While the figures for any specific transaction will be important in reaching a decision on bailing out a bank, for which agreement of all EU states is required, the final decision will be a political one, officials say.
Plans for the ECB to take over the role of banking supervisor are proceeding but will not be ready by January and consequently the ESM will not be in a position to invest directly in banks before that happens.
Spain has not asked for a bailout and if it were to come, it is not imminent, said an official, adding that Spain was a long way away from being a concern. The markets had confidence in the country, he added.
“We need to remember that Spain has a thriving, world-class export sector.”
The measures being put forward by Spain on budget adjustment and implementing recommendations appeared to fulfil the necessary requirements, but given the economic circumstances, the budget target will not be easy to achieve, he said.
Talks were under way to allow the ESM the same flexibility as the EFSF in terms of lending to countries that do not need a bailout but are experiencing turbulence on the markets.
This will include guaranteeing up to 30% of bonds issued by the country — in effect the EU taxpayer would take the first loss for investors if a country found itself in a credit event.
Talks were under way between the troika and Greece about the adjustments they need to make and the next tranche of funding will not be paid out for at least the next few weeks.
It will receive the €900m which it must contribute to the ESM fund by way of a loan which would be added to its debt.
Ireland could make a similar arrangement if it wished for the €1.27bn it must pay in over the next three years, the official confirmed.
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