Germany Seeks ‘Last Resort’ Model for ESM Bank Recapitalization

Germany wants to model direct help for ailing banks from the euro area’s permanent rescue fund on national measures adopted at the height of the financial crisis in 2008, where state bailouts are a last resort, according to a Finance Ministry document.

In a letter sent today to a federal lawmaker, the ministry said efforts must be “exhausted” to tap help from banks’ owners and the states in which they’re headquartered before accessing the European Stability Mechanism as a “last resort.” The ESM will open its doors to direct help for lenders on March 1, 2014 at the earliest, pending the setting up of a European Union regulator, the ministry letter said.

“Strict conditions” must apply to access ESM aid, according to the letter signed by Deputy Finance Minister Steffen Kampeter in response to questions by Green Party lawmaker Priska Hinz, a copy of which was obtained by Bloomberg News. Banks’ “owners and creditors must be enrolled to share the rescue burden and a significant contribution made by the relevant member states.”

Cyprus may be the fifth euro-area state to gain bailout aid that includes help for its banks. Assistance sought by the divided island may match the size of its 18 billion-euro ($24 billion) economy.

Terms for German support for the ESM’s future role in bankrolling lenders mirrors operational clamps designed to limit taxpayers’ liabilities that were built into Germany’s Soffin fund, the 500 billion-euro rescue resource that bailed out Commerzbank AG and Hypo Real Estate Holding.

As in the case of Soffin, banks tapping aid must agree to cuts in board members’ rewards and aid-repayment incentives, Kampeter’s letter indicates.

Germany is “generally opposed” to banks gaining direct ESM help to address so-called legacy obligations, Kampeter said. Chancellor Angela Merkel’s government wants to await the outcome of a European Council report on how legacy debt is categorized and defined, the letter stated.

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