Merkel could scupper Irish bank plan

The Government’s aspirations to capitalise the Irish banks through the European Stability Mechanism (ESM) could be derailed by German chancellor Angela Merkel.

Thu, 06 Jun, 2013 - 01:00

John Walsh

Last weekend Ms Merkel and French president François Hollande called for the resolution of failing banks to remain the responsibility of individual member states.

The Franco-German position is at odds with the agreement reached at the EU Summit in Jun 2012, which pledged to break the link between the banking sector and sovereigns.

European finance ministers will meet later this month to discuss the next phase of EU banking union. The details of a single supervisory mechanism are close to being finalised. However, there is a clear fault line opening up between Brussels and Berlin over the next two stages.

The European Commission wants a single resolution authority for the eurozone, which would have the power to unilaterally close down failing banks. Moreover, the single resolution authority should have the power to recapitalise banks through a resolution fund and the ESM, according to the Commission.

But Ms Merkel, supported by France, wants the resolution of banks to remain a competence of national governments. The problem with this is that it will do nothing to break the link between the banking sector and sovereigns.

The average debt level among eurozone member states is close to 90%. It is much higher in the periphery countries where the banking systems are the most vulnerable.

EU-wide stress tests are scheduled for the first quarter of next year. These have to be credible to convince the markets that the eurozone is on the mend.

But if there is capital needed following the stress tests, then under the German model, individual governments will be forced to backstop the shortfall.

This has the potential to trigger a fresh round of the debt crisis.

The Central Bank of Ireland will conduct the stress tests in the autumn. The problem would be particularly acute for the Government if any of the banks have to be recapitalised following the stress tests.