By Jan Strupczewski and John O'Donnell
BRUSSELS Jan 18 Euro zone finance ministers
will discuss on Monday which banks could be given direct aid
from the bloc's bailout fund, embarking on a divisive debate
that includes doubts about whether such a step should be taken.
Direct bank recapitalisation is meant to break the vicious
circle between highly indebted governments that borrow more to
recapitalise their banks which need support because they own
bonds of those states. But the Eurogroup of euro zone ministers
will confront deep divisions on the issue.
"There are still very divergent views between countries. The
Eurogroup next week is just a beginning of the discussion," one
euro zone official involved in the talks said. Others warned of
the heavy cost of the European Stability Mechanism
"This whole process will end with a compromise that nobody
will be fully satisfied with," the official said, adding some
progress could be made on the issue by March.
Euro zone leaders agreed last June that the bank-state loop
must be broken and that the 500 billion euro ESM bailout fund
should be able to buy bank equity to ease the debt burden on
already struggling sovereigns.
The decision was mainly meant to help Spain, where the
banking sector has been hit by the collapse of the property
market and the government was struggling to regain market
confidence amid a recession and record high unemployment.
Ireland, Greece and Portugal also have high hopes for the
recapitalisation tool because they borrowed billions from the
euro zone to recapitalise their banks.
But Germany, Finland and the Netherlands believe that the
ESM should be allowed to take stakes only in banks that get into
trouble in the future, once the European Central Bank becomes
their supervisor in 2014. All previous problems are labelled
"legacy" and should be dealt with by national governments, the
three countries have said.
This would mean that such direct assistance for banks would
only apply if banks ran into fresh difficulty in the future,
dramatically cutting the chance of such direct aid.
Such an interpretation could disappoint those who had been
under the impression that while the possibility of
recapitalisation may open only in a year or so, it could still
be applied, retroactively, to banks that are in trouble now.
"The whole point of direct recapitalisation was to solve the
current crisis, not a possible next one. That was the spirit of
the deal - that Spain would get the recapitalisation loan off
its books," a senior euro zone official said.
But officials also said the issue lost much of its urgency
because Spanish bank recapitalisation needs turned out much
lower than expected and the European Central Bank restored
confidence in Spanish debt by declaring it would buy a
potentially unlimited amount of it, if Spain asked.
Further removing the need to hurry, euro zone leaders gave
ministers until June 2013 to sort out the operational details of
Countries have also been warned by officials of the high
costs that come with any direct aid by the ESM for banks because
of the risks attached to becoming a shareholder.
"Essentially, bank equities are a more expensive asset to
hold than member states' bonds - you would have to put more
capital aside," said a second.
"So the question is whether you have the capacity to do a
lot of it. It's difficult to see how you would underwrite whole
banking systems. It's helpful because it breaks the link between
banks and sovereigns but it's expensive."
A second official said: "Banking recapitalisation should be
reduced to as little as possible."
Adding to the complexity is the fact that if the ESM becomes
the owner of banks, it could get sucked into the problems of
managing those institutions, such as addressing how the
different banks it owns compete with one another.
The prevailing view is that the ESM should only step in to
recapitalise a financial institution as a last resort, when the
bank has failed to raise the money from private investors and
the government is not fiscal strong enough to help either.
But the consensus seems to end here. Some officials would
like to see the most risky assets of the troubled banks moved to
a "bad bank", which would then be the responsibility of a
government, while the ESM recapitalised the viable rest.
Others point out that after a bank shifts loans at risk of
non-payment to a bad bank, it is likely to become attractive as
a business again, so there should be no obstacle to seeking
capital from private investors or even the government.