| BRUSSELS, March 3
BRUSSELS, March 3 The ESM euro zone bailout fund
could set up subsidiaries to directly recapitalise banks to
limit the negative impact that buying bank equity would have on
its credit rating and lending capacity, a euro zone official
The Eurogroup of euro zone finance ministers meets on Monday
to discuss which banks should be eligible for direct
recapitalisation from the European Stability Mechanism (ESM).
"Setting up subsidiaries is one of the options that has been
discussed and will be discussed, although it is not on the
agenda for this Monday," said the official, who has knowledge of
Government leaders decided last year that the ESM could buy
stakes in banks that hit trouble because the value of the
government bonds on their books fell dramatically in the euro
Recapitalising banks via subsidiaries would help break the
circle of ever more indebted governments borrowing to
recapitalise banks, which need recapitalisation because they buy
bonds of the government.
"The option of subsidiaries would allow the ESM to fulfil
several goals at the same time -- break the negative loop
between sovereigns and banks, limit the impact of
recapitalisation on its lending capacity, keep as high a credit
rating as possible and not ask for more money from euro zone
governments," the official said.
Investing in equity is more risky than lending to
governments so the ESM, which has a 500 billion euro lending
capacity, would have to make provisions for the extra risk --
thus limiting its firepower over a normal loan.
The official said that according to some calculations, one
euro invested in bank equity reduced the ESM's lending power by
ESM subsidiaries for bank recapitalisation would be set up
using money raised on the market by the ESM via bonds, the
Recapitalisation via a subsidiary would mean that every euro
invested in a bank would reduce the ESM's firepower by only 1.5
euros, the official said.
The ESM can borrow on the market thanks to 80 billion euros
of paid-in capital and 620 billion of callable capital. This
arrangement also ensures the fund has the highest credit rating.
The official said ,however, that to safeguard the rating and
lending capacity, the governors of the ESM -- euro zone finance
ministers -- were also discussing a limit on the total amount
that the fund could spend on recapitalisation in general.
Germany favours a top limit of 80 billion euros.
A further safeguard would be that the country of the bank
would also have to participate in the recapitalisation to some
extent, "to retain some skin in the game" and create incentives
for the authorities to monitor the bank.