European finance ministers gathered for the first time this year to begin the long march to enacting policies they promised to subdue the debt crisis, beginning with how to channel firewall funds directly to banks.
At a meeting in Brussels today, where an assessment of Spain, Cyprus and Greece also will feature, euro-area ministers are likely to clash over how and when the 500 billion-euro ($666 billion) European Stability Mechanism can bypass governments and provide direct help to banks.
“I attach a lot of importance to it, because it’s via this channel that we can progress in safeguarding the banking system,” French Finance Minister Pierre Moscovici told reporters on his way into the meeting.
With officials declaring the worst of the region’s three- year market emergency over, finance ministers are debating whether the ESM should take over earlier bank bailouts that were routed through governments and what to do with so-called legacy assets. A European Union aide who briefed reporters defined those as loans already on a bank’s balance sheet that could cause problems in the future.
Irish Finance minister Michael Noonan called for some aid to be available “retrospectively” to banks that have received aid and are still doing business, like Bank of Ireland Plc, Allied Irish Banks Plc (ALBK) and Permanent TSB Group Holdings Plc. (IPM)
“We’ll be arguing what we understood to be the situation,” Noonan said. “Banks that were still functioning, lending, trading banks would be eligible, even though insolvent banks on wind-downs mightn’t be.”
EU leaders dangled the prospect of direct bailouts as a way to assure investors that they’d protect the euro from an onslaught of banking problems that threatened to overwhelm individual nations. Since then, they’ve relied on announcements from the ECB to keep markets calm.
“It’s really about signaling,” said Nicolas Veron, senior economist at the Brussels-based Bruegel research group. “The only thing that really has an impact on markets is when the word unlimited is uttered by somebody in charge, so in the end it’s not a question of how high the big number should be.”
The actual amount of ESM funds available for direct aid to banks may be less than 100 billion euros because the fund needs to fulfill its main mission of lending to governments that lose market access, Veron said. Bank aid may also require additional set-asides for the ESM to maintain a high credit rating.
Borrowing costs in bailed-out and debt-laden euro nations have plummeted since the European Central Bank pledged to commit to backing their bond markets. Spain’s 10-year yield has declined more than 200 basis points. The cost of insuring Ireland against default has dropped 84 percent since July 2011.
Creditor nations such as Germany, the Netherlands and Finland have sought to limit the ESM’s availability to nations struggling to shore up their financial sectors. Finnish Prime Minister Jyrki Katainen said last week that bank shareholders and bondholders should bear the brunt of future rescues, bringing in taxpayer money to clean up troubled financial businesses only as a last resort.
Finnish Finance Minister Jutta Urpilainen said talks are just starting on the issue and no decisions would be taken today. She reiterated creditor nations’ call for a “marching order” of loss-taking. “Investor burden-sharing in the future must be increased,” she told reporters in Brussels.
The EU is pressing ahead with work to put the ECB in charge of banks in the euro region and in other nations that choose to participate. ECB oversight, slated to start in March 2014 unless an emergency requires it to act sooner, will be one requirement for any nation that asks the ESM to help its banks directly.
As part of the debate, ministers face whether to convert past bank bailouts such as those they routed through the Spanish, Irish and Greek governments. Delays risk spooking markets, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
“What was hailed as a breakthrough in tackling one of the principal causes of the euro-zone crisis has steadily unravelled due to a combination of complacency and political resistance on the part of creditor countries,” Spiro said by e-mail today.
Retroactive assistance is a political question, an EU official told reporters in Brussels on Jan. 18.
Ministers today are tasked with giving direction on how to proceed with technical issues, such as how to handle losses related to banks’ legacy assets and whether to make countries take a 5 percent or 15 percent stake in banks that get direct aid. Requiring countries to take on some of the risk of bank rescues might curb moral hazard for countries considering a request for aid, the official said.
Outgoing Cypriot President Demetris Christofias said his nation would push for the ESM’s direct bank aid tool to be “retroactive for those countries that have received indirect recapitalizations for their banking sectors.” He made the comment in a Jan. 11 letter to European Commission President Jose Barroso.
Euro-area ministers won’t decide on Cyprus at today’s meeting or before Cypriot elections in February, the euro-area official told reporters. He said Cyprus should have sufficient financing through March and could reach a deal with EU authorities in the second half of that month.
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