April 26, 2012 / 1:25 PM / 7 years ago

Direct bank recapitalisation by euro zone funds unlikely-officials

* No plans to allow ESM to directly recapitalise banks

* ESM direct recapitalisation would entail bank management by ESM

* Germany, the Netherlands, Finland opposed to such change

By Jan Strupczewski

BRUSSELS, April 26 (Reuters) - Euro zone countries are unlikely to agree to change current rules to allow their temporary or permanent bailout funds to directly recapitalise banks without the intermediation of governments, euro zone officials said on Thursday.

German daily Sueddeutsche Zeitung wrote on Thursday, without citing sources, that the European Central Bank and a group of euro zone countries were working on a possible initiative to enable crisis-stricken banks to have direct access to Europe’s permanent bailout fund.

The discussion stems from market concerns about the banking sector in Spain, where a sharp drop in real estate prices and a recession have triggered investor expectations that Spanish banks may need more money than previously thought to recapitalise.

“According to the Sueddeutsche Zeitung’s information, a group of euro zone countries will check in the next two weeks how credit could be directly transferred to banks that are strapped for cash but able to survive,” the paper said, noting, however, that Germany strongly opposed this.

EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview last Friday that there were no plans to use the permanent European Stability Mechanism (ESM) or the temporary European Financial Stability Facility (EFSF) to lend to recapitalise Spanish banks.

And EFSF Chief Executive Klaus Regling also said last week there were no talks to change the rules to allow the bailout funds to by-pass national governments and lend directly to banks.

“That’s the system, there’s no discussion at all about changing it,” Regling told a conference in Washington. “If I were asked to give money directly to banks I would have to manage banks... We are just not set up for that.”

“When banks need additional capital they are supposed to go to shareholders, if that doesn’t work they go to the national government, only as a third line of defence could there be a request to the ESM, EFSF,” he said.

Asked about the Sueddeutsche article, euro zone officials said on Thursday that while some may personally support the idea of direct recapitalisation, it was highly unlikely to become reality.


Euro zone officials are to discuss bank recapitalisation guidelines on Thursday, but no change to the current rules is foreseen, one official involved in the talks said.

“It (direct bank recapitalisation) has been discussed time and again. We don’t expect any change now and ECB representatives today do not have any instruction to that effect,” the official said.

The issue of whether to allow the ESM, the permanent 500 billion euro bailout fund that is to come online in July, to directly recapitalise banks had already been discussed extensively last year and rejected.

“Some people have this bee in their bonnet, but only on a personal basis. It will not happen,” a second, senior euro zone official said.

The ESM can lend to recapitalise banks, but only through a government, with which it signs an agreement that contains conditions under which the money is lent.

This rule is written down in the treaty establishing the ESM, which has already been ratified by some countries and should be legally valid by July.

To change it, the ESM rule book would need to be changed with the ensuing ratification, once more, in national parliaments.

“This was an issue that was fiercely debated during the preparatory stage of the ESM Treaty and I think that it has zero possibility to fly now, as either Finland, Germany or the Netherlands or, more likely, all of those would not agree to it,” a third euro zone official said.

The argument of the supporters of direct recapitalisation is that a ESM loan it would not further worsen the debt of the sovereign, like a loan for recapitalisation would.

Direct recapitalisation would also allow the government to avoid the stigma of a country under a bailout programme.

“It does not really make sense either: if a euro zone member state is in such a bad condition that it cannot capitalise its own banks, then surely it is in need of a programme?” the third official said.

“Then again, if the plan is to have free money from the euro zone without the need to agree to any real conditions, then this makes sense. But it sounds too naive to be true for anyone to be thinking that this could fly,” the official said.

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