On 25 September, the finance ministers of Germany, the Netherlands and Finland issued a joint statement putting forward two important principles. First, they reiterated that “direct ESM bank recapitalisation...can only take place once the single supervisory mechanism is established and its effectiveness determined”. Second, the finance ministers stated that “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”.
As far as the first point is concerned, we pretty much knew this already. According to the Euro area summit statement issued on 29 June, “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area, the ESM could, following a regular decision, have the possibility to recapitalize banks directly.”
Germany is dragging its feet on banking supervision and we doubt that a framework will be established until late 2013 at the earliest. Thus, we already knew that there would be no direct bank recapitalisation any time soon. The need for the effectiveness to be determined pushes direct ESM bank recapitalisation further into the future.
On the second point – “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” – it would appear that direct ESM bank recapitalisation thus seems to be for the distant future only. It will not be used for losses already recognised and probably only for losses incurred in 2014 at the earliest.
The reason for the AAA countries back-peddling on this issue appears to be that they see less urgency now that the ECB OMT is in place. In Germany, it is an unpopular instrument that politicians would probably prefer to delay until after the German 2013 autumn elections.
With regard to Spain, the Eurogroup had already stated on 20 July that “the Spanish government will retain the full responsibility of the financial assistance.”
Ireland is currently negotiating a deal on its bank debt with its European partners and a conclusion is expected before the end of the year. Ireland’s Prime Minister Enda Kenny said yesterday that the 29 June euro region leaders’ decision to cut the link between governments and banks and examine Ireland’s debt position “stands and will be implemented.” However, the link is unlikely to be broken any time soon.