Delay in banking union hits deal hopes

Delays to setting up a European banking union will have huge implications for the Government’s attempts to secure a deal on restructuring the €64 billion of bank debt.

The latest meeting of finance ministers in Brussels ended in disagreement about how a banking union would operate.

The German finance minister Wolfgang Schaeuble is implacably opposed to including 6,000 German regional banks in the banking union. Moreover, he has again publicly questioned the wisdom and viability of giving the responsibility of supervising European banks to the ECB — on the basis that it is not compatible with its mandate for price stability.

He has raised the possibility of treaty change as a necessary precondition for a fully functioning single banking supervisor falling under the remit of the ECB. If EU treaty change was required then it could delay the project by a number of years.

The Government is currently taking a twin track approach to reducing the bank debt burden. Of the total amount €34bn relates to promissory notes issued to plug massive losses in Anglo Irish Bank. A €3.1bn payment has to be paid every March until 2030 as part of this arrangement.

The Government pumped a further €30bn into AIB, Bank of Ireland and Permanent TSB. The Finance Minister Michael Noonan had been looking to recoup some of the €30bn through the European Stability Mechanism. However, this is not possible without a single banking supervisor in place.

Furthermore, the eurozone’s more influential members, Germany, Holland and Finland, insist that the ESM can only be used to recapitalise banks in the future. And even if the ESM was allowed to recapitalise banks for historical losses, it looks as if this could only be done on the basis of current market value. The National Pension Reserve Fund values AIB and Bank of Ireland at €8bn.

Mr Noonan has said he will not sell the pillar banks unless “the price is right.”

This has been interpreted in some quarters that the Government has given up on the prospect of securing debt relief through the ESM.

The secretary general of the Department of Finance, John Moran, upped the ante two weeks ago when he said the Government would agree a restructuring of the promissory note repayments before next March. However, that depends on whether the ECB prioritises the Government’s case.

As it stands, the issue of whether the Frankfurt- based institution is a suitable home for the single banking supervisor will be the subject of heated exchanges over the next number of months.