EURO ZONE finance ministers will discuss Ireland’s request for bank debt relief at a meeting on Monday night but a swift political decision is unlikely in the wake of moves by EU leaders to reopen the bank deal.
A senior European official, who is heavily involved in preparations for the talks, said the talks would be dominated by the Spanish bailout and the situation in Greece and Cyprus.
Although EU leaders opened the door to directly recapitalise Spain’s banks without increasing the country’s national debt, this will not be done immediately and Madrid will have to guarantee the bank debt in the first phase of its bailout.
Even though the leaders’ intention was to rapidly increase confidence in the Spanish rescue, the senior official suggested any move to sever the link between sovereign and banking debt would be made only in the “very distant future”.
The ministers anticipate signing off on a draft memorandum of understanding with Spain but the final agreement cannot be settled until the completion of another stress test on its banks.
The meeting in Brussels comes 10 days after the leaders instructed ministers to examine the Irish bank rescue with a view to increasing the sustainability of the national debt.
While Minister for Finance Michael Noonan will set out the broad terms of the Government’s case and a range of possible solutions, the EU official said the issues were very technical and required detailed examination.
“You know that this is not just something where you just snap your fingers and you’ve got a political decision,” said the official, who spoke on condition of anonymity.
“But I do, yes, of course, expect Mr Noonan to make a strong presentation of the facts. There will be a reaction, but it’s not as if we’re now discussing a country case.”
EU leaders resolved at a summit last week to provide direct rescue aid to Spain’s banks from the permanent European Stability Mechanism fund once a new system of pan-European banking regulation is up and running.
The official emphasised that this would not happen immediately and said the fully fledged banking union or financial market union – which was a condition to break the link between sovereign and banking debt – was even further down the line.
As the new regulatory system will not be in place before next year, the banks will receive aid first via the Spanish state from the temporary European Financial Stability Facility fund and Madrid will remain on the hook for the debts.
Only later will the rescue transfer to the ESM. Even then, the link between the sovereign and the banks will remain in place. Although Spain’s obligations to the banks will not feature on its debt-to-gross domestic product ratio once the ESM takes over, the state guarantee will still be intact.
“The ESM is able if one were to decide ever on such an instrument to take an equity share in a bank but only against the full guarantee by the sovereign concerned,” the official said. “So what you have is that it cuts out the effect of that loan on the debt-to-GDP ratio of the sovereign.” The official placed great emphasis on the necessity to have a fully functioning pan-European regulatory system in place before the sovereign’s guarantee was quashed.
“In the very distant future . . . we have a single euro zone supervisor supervising all banks, would it then still be if there were to be direct banking recapitalisations – would this still require the counter-guarantee of the sovereign? My understanding is that it would not,” the official said.
“That’s why it’s so important to get all the financial market supervisory and regulatory affairs into a stringent overall mechanism and picture, not only on paper, not only in terms of organisational set-up but in terms of actually functioning and working.”
The official said the ministers do not expect to sign off on the release of new aid to Greece until its bailout was back on track. He suggested this matter – and the terms of the Cypriot bailout – will not be resolved for many weeks to come. “I expect decisions on Cyprus and Greece more towards the end of the summer,” he said.
