October 22, 2012 / 2:40 PM / in 5 years

UPDATE 2-France backs retroactive support for Irish banks

* French leaders says Ireland is “special case”

* Germany opposes using euro zone fund for legacy debt (Adds new details, German stance)

By Daniel Flynn

PARIS, Oct 22 (Reuters) - France backed on Monday a retroactive recapitalisation of Ireland’s banks with euro zone cash, highlighting uncertainties within the bloc over how to deal with existing bad debts racked up by its lenders.

Germany has opposed using the euro zone’s permanent bailout fund to cover such ‘legacy’ debts, though Chancellor Angela Merkel has acknowledged that Ireland is a special case.

French President Francois Hollande used the same phrase to describe Ireland after talks with the country’s Prime Minister Enda Kenny on Monday.

“The Irish specificity is that for several months there had already been a recapitalisation of banks via the budget which worsened Ireland’s debt and forced it to impose a tough plan,” Hollande said.

When asked specifically if recapitalisation could be back-dated Hollande said: “Yes, recapitalisation already took place through their own funds so the Euro Group will take that into account.” The Euro Group is the decision-making body of the 17-nation euro zone.

Germany has yet to go as far as saying Ireland’s banks could benefit from retroactive support.

Dublin has been in talks for almost 18 months to ease the burden placed on state finances by its failed lenders. An end-June agreement by EU leaders which cleared the way for rescue funds to be pumped directly into viable banks raised hopes in Dublin this could be backdated and applied to Irish banks.

Merkel and Kenny on Sunday issued a joint statement noting that Ireland was a special case. Merkel’s spokesman told a regular government briefing on Monday that this did not mean Merkel favoured back-dated recapitalisation.

But he noted that Ireland had already recapitalised its banks “with large amounts of taxpayers’ money” and that euro zone finance ministers would discuss how it could be helped.

He did not elaborate what sort of help that could be.

A commitment in June by EU leaders to look at easing the terms of Ireland’s bank bailout has helped push Irish bond yields down significantly, allowing Dublin to borrow on long-term debt markets for the first time since signing an EU/IMF bailout in November 2010.

Irish officials say that a renegotiation of the bank bailout - which added the equivalent of 40 percentage points of GDP to national debt - could allow Ireland to become the first country to successfully exit a rescue programme.

“The Irish taxpayer was required to service the full extent of that debt which is a situation we are trying to reduce by the negotiations going on and so in those circumstances Ireland’s case is different and special as recognised by President Hollande and Chancellor Merkel,” Kenny told reporters.

Dublin is exploring two avenues: a retroactive direct investment by the ESM in “good banks” and a restructuring of 31 billion euros in promissory notes given the former Anglo Irish Bank, now called the Irish Bank Resolution Corporation.

Asked if the Irish speciality applied to both the promissory notes and the bank capitalisation, Hollande added it was too soon to say “that is something for the Euro Group to decide”.

Irish Finance Minister Michael Noonan has said he would like to see a deal agreed by March when the next annual 3.1 billion euro instalment of the promissory notes is due - almost equivalent to the 3.5 billion euros in deficit cuts Ireland needs to find next year.

Ireland has been looking at restructuring this by issuing long term government debt but the ECB has so far opposed any restructuring. (Reporting By Daniel Flynn; writing by John Irish; editing by Mark John, John Stonestreet)

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