18th Mar 2018

Eurozone hawks deal blow to bank bailout plans

  • Investors are once more doubting eurozone politicians' conviction (Photo: Popicinio-01)

EU officials went into damage control mode on Wednesday (26 September) after the finance ministers of Germany, Finland and the Netherlands said the old debt of troubled banks should not be put on the eurozone bailout fund's books.

Earlier in the day, the value of Spanish bonds fell, as investors wondered yet again whether the country's bad banks will be saved by the richer eurozone countries using the so-called European Stability Mechanism (ESM), a €500 billion fund due to be inaugurated on 8 October.

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Back in June, during an all-night session among EU leaders, Spain and Italy were told the ESM would be able to recapitalise banks directly once a single supervisor for eurozone banks is in place.

It was also agreed that Spain's €100 billion bailout for its banking sector would be put on the ESM books once the supervisor is in place, so Madrid can get its balance sheet back on track.

But on Tuesday (26 September), Finland, Germany and the Netherlands - the acknowledged hawks of the eurozone - issued a joint statement suggesting old debt of troubled banks should not be taken up by the joint fund.

"The ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities," the statement reads.

A commission spokesman on Wednesday downplayed the statement as a "negotiating position" since the technicalities of the new supervisory body and the ESM are still to be ironed out.

"It's just a normal process that, after the political guidance that was given by the heads of state and government, there is technical work on the different elements, different details, and the different guidelines that have to be fleshed out to allow the proper implementation of this financial instrument at the beginning of next year," said Olivier Bailly.

He added the commission wants to see the new banking supervision rules agreed by the end of the year, as EU leaders had jointly stated in June.

But the three top-rated countries want to take things slowly.

"We agreed that it is important to achieve rapid progress on this issue, but it cannot happen at a cost of the quality of the new supervision," the joint statement reads.

They also indicated that direct recapitalisation of banks should happen not on day one of the new supervisor (based within the European Central Bank in Frankfurt), but only after this new body "is established and its effectiveness has been determined."

The "quality" of banks to be propped is also a sticking point.

The EU commission had suggested that the most troubled ones should be first to get direct help from the ESM. But the three ministers disagree: "The recapitalisation should always occur using estimated real economic values."

As one EU diplomat told this website: "We don't want to pump money into some bad banks, these have to be viable ones."

All decisions regarding the establishment of the new banking supervisor and of recapitalising banks directly through the ESM have to be taken by unanimity in the Council of finance ministers.

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