Ireland may have to fund part of €32bn bank debt

Ireland may receive substantially less from the EU’s rescue fund than the €32bn the country has ploughed into its banks.

While Germany, Finland and the Netherlands do not want to see any EU money going to recapitalise old bank debt, EU officials are trying to find a compromise. One suggestion on the table for months is that any country getting money for its banks past debt from the EU fund would have to shoulder at least some of the burden itself.

The IMF warned last month that Ireland should receive around €24bn in exchange for its bank shares, and not the €8bn that they are currently valued at.

This was especially important with the country coming out of the EU/IMF programme in November and depending on borrowing from the markets.

“Ireland’s market access is fragile,” it said, warning that it was partly dependent on an EU bank deal to cut the country’s debt.

The Department of Finance said its officials had not seen any such document suggesting burden sharing and so they could not comment on it.

However, a number of sources confirmed that the idea of having a country fund some of its bank debt was being debated as a way of winning around Germany, the Netherlands and Finland in particular.

“In broad terms this reflects the state of the debate, but the discussions are not yet concluded and have been taking place only at a technical level so far and not at a political level so the finance ministers have not been discussing it,” said one source.

The discussions still had some way to go and a leaked document with the burden sharing proposal was not the final version, the European Commission said.

“This is ongoing and no conclusion has been reached,” said Simon O’Connor, spokesperson for economics commissioner, Olli Rehn.

EU leaders said at their December summit that the details of direct bank recapitalising by the European Stability Mechanism should be finalised by June or sooner if possible.

They also agreed that the definition of legacy assets should be finalised at the same time. “These technical discussions are aimed at achieving this and are ongoing,” said Mr O’Connor.

Once this is agreed the finance ministers are likely to take each individual case and consider whether it will qualify, including Ireland’s €32bn put into the pillar banks including Allied Irish Bank and Bank of Ireland.

But there are a wide range of opinions among the different countries of the eurozone and they will need to agree unanimously before action can be taken.

Fears that these differences could in effect fail to break the link between sovereigns and their banks were hinted at by European Commission president Jose Manuel Barroso’s spokesperson yesterday.

“We are urging member states to comply with the spirit and the letter of the European Council decision in June about direct bank recapitalisation breaking the link between banks and sovereigns,” said Pia Ahrenkilde Hansen.