EU loan to ease bank debt ‘never an option’

There was never any intention to allow Ireland use an EU loan to reschedule its banking debt, diplomats have said in the clearest warning yet that the country faces an uphill struggle to cut its enormous cost.

However, while Germany, the Netherlands, and Finland — who are insisting there can be no help for past debts — held fast to their shock statement of Tuesday, the European Commission says it is just a contribution to the debate on how the new rescue fund, the ESM, can be used.

The ramifications of the statement were still being teased out, with one economist pointing out that under these conditions, even if the ESM could buy AIB and the Government’s 15% share in Bank of Ireland, the State would get only a fraction of the money put into them.

An EU diplomat attached to one of the three countries that issued Tuesday’s statement said it was in line with the EU leaders’ June text, which said nothing about the ESM taking responsibility for legacy assets.

The intention was to break the link between banks and sovereigns, there was no time frame put on this. The principle for the three is that the ESM could only help banks that ran into trouble while under the supervision of the ECB — an issue that the June summit did not deal with.

“There has been no shift in position as regards Ireland,” the diplomat said.

“The clear position of the three Triple-A countries is that the ESM cannot be used to fund legacy debts. This is not a tactical position. It is a clear position on what the three countries want. They cannot dictate of course and the question will be dealt with in the coming weeks.”

The leaders’ text said that the matter of a single supervisor be considered as a matter of urgency which referred only to considering it urgently, and not putting it in place urgently.

Economist Tom McDonnell of the thinktank TASK, described the position of the three countries as “hostile and a deep setback”.

“Their position is not only that Ireland should take the full burden for its banking losses, but any future sale of equity in AIB will have to be at real economic value, as opposed to long-term economic value,” he said.

The real economic value of AIB is whatever the markets would be willing to pay. The book value at the end of last year was €14.6bn, but this is way too high.