Commission: Changes to bailout funds not possible

Hopes to change the rules of the EU bailout funds to allow them directly fund bank rescues have been dashed, as the European Commission said it was not possible.

Taoiseach Enda Kenny said he would like to see the structure of the new permanent rescue fund, the ESM, change to allow this as he appealed to EU leaders for a political response to the debt crisis.

In a letter to the European Council ahead of next week’s summit in Brussels, Mr Kenny said they must avoid the mistake of allowing banking crises in some countries to develop into sovereign crises and beyond.

“Ireland has painful experience of that approach. It is not the way to help recovery,” he told them.

While the rescue funds were changed to allow governments to use them to recapitalise banks, “these do too little to break the vicious circle between the sovereign and banking crises at national level”, Mr Kenny said.

The insistence that taxpayers in each member state must stand behind the entire liabilities of banks regulated in their jurisdiction has aggravated the financial crisis, he said.

“The solution is, in Ireland’s view, to accelerate moves to develop a joint response to the banking crisis in Europe.”

Spokesman Amadeu Altafaj said the commission favours extra flexibility to enable the ESM directly recapitalise banks without it going on the debt and deficit of the government.

While the rules of the ESM allow the governing body composed of a representative from each eurozone country to change its rules, changes must be approved in advance by the member states.

Attempts to convince countries to change the rules had failed and pressure from Spain, in particular, over the past few weeks had been rejected.

“We would prefer Spanish taxpayers be on the hook for it rather than German taxpayers,” a German source said.