Eurozone finance ministers to discuss role of ESM in recapitalising banks

A decision on whether Ireland can recoup some of the €32bn it put into rescuing its banks should be made this week when eurozone finance ministers meet in Luxembourg.

They will discuss the role of the European Stability Mechanism — the EU’s rescue fund — in recapitalising banks in a step towards preventing bank failures and rescues affecting the sovereign in future.

No firm decision has been made yet, according to a senior EU source, on the thorny issue of retroactive banks funding — which Ireland has been pushing for.

There is a reference to it in the documents that will be before the ministers, which they will discuss. The expectation is, according to the sources, that they will agree that retrospection can be allowed in exceptional circumstances.

However there will be no blanket agreement to this, and the issue is likely to be left up to the ESM board to decide on a case by case basis.

The amount of money expected to be set aside in the ESM fund for bank recapitalisation is likely to be relatively small — around €70-€80bn.

With Spain having a possible claim on retroactive funds for its banks, many member states were against allowing such a move fearing it would reduce the fund too much.

However Ireland has been pushing for this feature to be included and has gained the support of the IMF in this.

Finance Minister Michael Noonan has been quite optimistic about winning this also, but he could have a battle on his hands over the amount with Germany and others insisting that a country could only receive the current value of its banks.

This could be as low as €4bn in Ireland’s case, and the expectation is that the money would be put into reducing the country’s debt, expected to peak at 124% of GDP this year. It would also mean losing control over Allied Irish Bank which is almost 100% owned by the State.

Further proposals suggest that such a deal would see an ESM member represented on the board of AIB, not interfering in the day to day running, but having an overview of it’s operation. The ESM would most likely sell on the bank.

The meeting will also decide who loses their investment when a bank is being resolved with the help of the ESM — whose role would be limited to banks considered systemically important.

Four choices are being put before the ministers ranging from protecting senior bondholders and all depositors or just those with less than €100,000 on deposit. Who decides on the contribution of the ESM, the investors and when and if the government would have to contribute is also on the table, with the choice between the ECB board — the eurozone finance ministers — deciding or the European Commission.

Finance Minister Michael Noonan will chair the EU ministers meeting on Friday when decisions are expected to be made on the bank recovery and resolution directive that would guide how EU countries manage arrangements to deal with failing banks at national level, including cross-border banks.