‘Almost impossible’ to get refund on bank bailout

Ireland recouping the money it put into its failing banks is a near impossibility as the rules on bank recapitalisation are finalised, a top EU official has admitted.

While the phrase insisted on by Taoiseach Enda Kenny two years ago about banks being recapitalised on a “case by case basis” still stands in the new rule book, it is virtually impossible that it could apply to Ireland.

It would be like trying to unscramble eggs, said one expert who has been very close to the whole process of creating the new banking rules.

“If your banking crisis happened two years later it would have been different”, he said. In 2007 the whole emphasis of the ECB and its president Jean Claude Trichet was on not letting banks collapse and Irish taxpayers were forced to rescue them.

About €41bn of the national debt — which amounted to 123.7% of GDP last year — is due to rescuing the financial sector according to the Department of Finance, and interest payments on this debt is costing the country €1.6bn a year. The total spent on recapitalising the sector since 2008 is €64.1bn.

The new rules on rescuing or winding-up EU banks in the future agreed by all member states are due to go before the European Parliament for its approval later this year.

From next year, where banks will be allowed crash but in a controlled way, the European Stability Mechanism will be the last resort.

Banks in trouble will first have to write off 8% of their debts, then ask private investors for money, and after that go to the state. But if the government could not provide the money — including through borrowing from the ESM — the bank would then have to call on the funds being set aside by the banking sector.

Only then, once all these steps have been exhausted, could the bail-in fund be tapped.

"The rules are all forward looking and there is no case for retroactivity”, said the EU official.

The Government disagrees and says the option of retroactive capitalisation remains part of the direct recapitalisation instrument.

“The minister for finance and his government colleagues ensure that Ireland’s case for retrospective direct recapitalisation is made at all levels as appropriate and remain confident that the commitment made by the Euro-area heads of state or government in June 2012 to break the vicious circle between banks and sovereigns, will be respected”.

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