UPDATE 1-Germans, Dutch and Finns reopen tricky EU bank deal

by on September 25, 2012 7:35 pm GMT

Tue Sep 25, 2012 3:35pm EDT

* Statement from finance ministers re-examines June deal

* Three countries want to separate “legacy” bank problems

* Position likely to frustrate Spain and Ireland

By Luke Baker

BRUSSELS, Sept 25 (Reuters) – Germany, the Netherlands and
Finland issued a joint declaration on Tuesday that appeared to
unravel much of what was agreed at the last European summit in
June, when EU leaders paved the way for the direct
recapitalisation of problem banks.

In a statement issued after a meeting of their finance
ministers in Helsinki, the three AAA-rated countries set out the
terms under which they would be willing to allow the euro zone’s
permanent rescue fund, the ESM, to recapitalise at-risk banks.

But the statement made a sharp distinction between future
banking problems and “legacy” difficulties – essentially saying
that highly indebted banks in Spain, Ireland and Greece will
remain the responsibility of those countries’ governments.

That is likely to frustrate Spain and Ireland in particular,
as both had interpreted the June summit as implying that a way
would be found to break the debilitating link between their
indebted banks and the debts of the government.

“The ESM can take direct responsibility of problems that
occur under the new supervision, but legacy assets should be
under the responsibility of national authorities,” read the
statement by the Dutch, Finns and Germans, the three countries
that have taken the hardest line during the debt crisis.

Asked for clarification, representatives of the three
governments were not prepared to elaborate on the record.

But one senior euro zone official familiar with the
discussions that took part in Helsinki said: “All I can say is
that the statement means that ESM direct recapitalisation should
not be used to take care of old problems.”


If it stands – and that depends on discussions that will
take place between heads of state in the coming days and weeks –
the position adopted by the Dutch, Finns and Germans is likely
to cause deep consternation in financial markets.

“It leaves the situation extremely uncertain from an Irish
point of view,” said John Fitzgerald of the Economic and Social
Research Institute, a Dublin-based think tank.

“Depending on how it is interpreted, it may or may not allow
the Irish government to sell its interests in the surviving
Irish banks to the ESM.”

A spokesman for Ireland’s Department of Finance said: “We
welcome their ideas on how to give effect to the decision of
Eurozone leaders that the ESM should have the capacity to
recapitalise banks directly.”

“In respect of Ireland, technical discussions remain
on-going on how we can improve the sustainability of Irish
financial system, in line with the June Summit mandate.”

The June summit agreement created the impression in markets
that the ESM, which should come into force on Oct. 8, would be
able to take direct stakes in Ireland’s and Spain’s troubled
banks in the coming months, taking the burden off the state.

Instead it now appears likely that Spain and Ireland could
remain saddled with vast amounts of bank debt that will make it
all the harder for their governments to resolve these banking
problems and get their own finances on track at the same time.

Spanish officials were not immediately reachable for
comment. But an official in Brussels interpreted the statement
as rowing back almost completely on the June deal, a move that
will undermine efforts to resolve a debt crisis that has rumbled
on for 2-1/2 and destablised global markets.

“There are a couple of countries that are trying to
backtrack but I don’t think they will be able to muster the
force to succeed,” the official said, referring to Finland and
the Netherlands.

“‘Legacy’ problems is a newcomer to the debate. It is one
more case of this habit of walking away from decisions taken.”

A representative from one of the three finance ministries
that issued the statement sought to play down its importance,
saying it merely clarified what was agreed in June.

The official said that once the ESM is able to directly
recapitalise banks – which will only happen once a new
supervisory authority under the ECB is established next year –
the aim was to establish which banks in the euro zone were
“viable” and which were “unviable”.

Only the viable banks would then qualify for
recapitalisation from the ESM. The rest would either have to
find a way to be recapitalised via the private sector or be
wound up by the national government.

The official said the issue was now “up for discussion”,
indicating that the statement was designed to reopen the debate,
an invitation Ireland and Spain will no doubt take up quickly.