Merkel’s killer blow to hopes of debt cut

The Government was urgently seeking clarification from Berlin last night after Angela Merkel appeared to have dealt a death blow to hopes of cutting the country’s massive bank debt.

It has emerged that Taoiseach Enda Kenny at the two-day summit in Brussels did not even raise the issue of the EU’s rescue fund taking over the banks in exchange for up to €32bn that would be used to reduce the country’s debt of around €180bn.

While he would not go into detail about it after the meeting, he appeared confident the issue would be decided in Ireland’s favour by the eurozone finance ministers over the next few months.

But the German chancellor surprised everyone with her categorical statement to a press conference after the summit that ruled out the EU’s rescue fund dealing with old bank debt.

While she was asked about Spain, which also wants its bank debt recapitalised, Ms Merkel’s answer seemed to leave little room for the concept at all. “There will be no retroactive direct recapitalisation. Once recapitalisation will be possible, it will be for needs arising from that point onwards,” she said.

Finance Minister Michael Noonan admitted that the Government was perplexed by her statement and was seeking clarification. “In response to queries that the Irish Government is putting to the Chancery, we’re getting a different feedback so that has to be clarified as the night goes by into tomorrow morning. A lot of people take up positions after the council makes decisions.”

While he and the Taoiseach said EU leaders yesterday made an absolute commitment to abide by the June statement on breaking the link between sovereign and banking debt, neither meeting made any reference to funding legacy debt.

They did commit to creating a single bank supervisory system under the control of the ECB and once this is operating — over the next 12 months — the ESM rescue fund will be able to recapitalise banks directly, avoiding the need for national governments to bail them out.

Ireland was hoping to get agreement in principle that this would also cover Irish banks, preferably before Mr Noonan finalises his budget. The maximum he would hope to receive for the State’s shares in AIB, Bank of Ireland, and Permanent TSB would be about €22bn, which could cut the country’s debt by over 10%.

Ms Merkel was reiterating what her finance minister Wolfgang Schäuble said in a joint statement with his Finnish and Dutch colleagues earlier this month when all three triple-A countries ruled out funding legacy debts.

Taoiseach Mr Kenny said “it was just a statement” and “there was no reference, good, bad or indifferent” to it during the summit.

However, there was some cause for hope yesterday when the Dutch said they were not against the ESM rescue fund giving Ireland money for its banks.

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