* Euro zone ministers to discuss retroactive direct help for
* Germany, Netherlands, Finland see direct funding only in
* Ireland, others say idea should be used retroactively
By Jan Strupczewski
BRUSSELS, Jan 21 The euro zone bailout fund
should be allowed to buy stakes in banks in the region that are
still viable but need an injection of government money, Irish
Finance Minister Michael Noonan said.
Euro zone finance ministers will discuss at a meeting in
Brussels on Monday evening which financial institutions should
be eligible for direct recapitalisation with euro zone funds,
but no decisions will be taken.
Such recapitalisation is meant to break the vicious circle
between highly indebted governments that borrow more to
recapitalise banks that need support because they own bonds
issued by those states but which are liable to lose value.
Ireland invested 64 billion euros - 40 percent of its GDP -
in its banking sector to prevent its collapse, forcing it to
seek a euro zone bailout.
Greece will have borrowed 48 billion from the euro zone to
recapitalise its banks, while Portugal borrowed 12 billion euros
and Spain got almost 40 billion euros.
Euro zone leaders agreed on June 29 last year that the
bank-state loop must be broken and that the 500 billion euro
permanent ESM bailout fund should be able to buy bank equity to
ease the debt burden on already struggling sovereigns.
But there is no agreement on which banks are eligible.
Germany, Finland and the Netherlands believe the ESM should
be allowed to take stakes only in banks that get into trouble in
future, once the European Central Bank becomes their supervisor
in 2014. That would dramatically reduce the chances of the ESM
investing in any banks at all.
The three countries believe that any problems that have
arisen before the ECB takes over should be dealt with by
national governments as "legacy" assets.
Other countries, including those that borrowed heavily to
support their banking systems - like Greece, Ireland, Portugal
or Spain - believe the ESM should be allowed to act
retroactively. They take the view that the point of direct
recapitalisation is to ease the current debt burden on the
"We will be arguing what we understood the situation to be
on June 29, that banks that were still functioning, lending,
trading banks would be eligible, even though insolvent banks
might not be," Noonan told reporters before the meeting.
"My political input will be that these policy instruments...
should be applied retroactively to banks that are still trading,
like the Bank of Ireland, AIB and Permanent TSB," Noonan said.
He said there was about 7 billion euros in preference shares
and contingent capital in the institutions and that he would
"not be adverse to selling the preference shares and contingent
capital at par" to the ESM.
Even after the ECB takes over bank supervision in 2014, the
option of direct bank recapitalisation might be phased in
gradually, Noonan said.
"If a bank in country X goes bust four weeks after the new
rules are put in place, no one would expect that the European
authorities should carry the whole responsibility," he said.
"There would be some residual responsibility with the
sovereign country that allowed things to develop to that point.
But as time goes by, obviously the input by the sovereign would
diminish to virtually zero, and...whatever support is in place
for insolvent banks would carry the totality of the burden."
The ESM recapitalisation option was mainly agreed to help
Spain, where the banking sector had 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.
But since Spanish borrowing costs tumbled thanks to an ECB
promise to buy unlimited amounts of Spanish bonds, the issue
lost much of its urgency, officials said.
Further removing the need to hurry, euro zone leaders gave
ministers until June 2013 to sort out the operational details of
Because investment in equity is seen more risky than in
sovereign debt, direct recapitalisation would tie up more of the
ESM's resources than lending to governments.
The ESM would also 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 fiscally strong enough to help either.