EU rescue fund should lend direct to banks - Rehn
By Sarah Collins | Tuesday 12 June 2012
Economic Affairs Commissioner Olli Rehn has said the eurozone’s future rescue fund, the €500 billion European Stability Mechanism, should be allowed to lend directly to banks in order to save taxpayers from funding future bank failures. “I find the possibility of direct bank recapitalisation as an instrument that should be considered to break the nexus between sovereigns and banks, which is currently creating and reinforcing the negative spiral in the European economy,” he told members of the European Parliament’s Committee on Economic and Monetary Affairs (ECON), on 11 June.
His call comes just days after Spain said it would need help from the EU for its weakened banking sector, a loan of up to €100 billion that will be channelled through the state, lumping the government with the full cost of the bailout. It will send government debt skyrocketing from 68.5% of GDP last year to 95% by 2015, ratings agency Fitch estimates.
Spain is the first country to tap the special credit line for banks provided for under the existing European Financial Stability Mechanism (EFSF), as well as under Article 15 of the ESM treaty. The government of Premier Mariano Rajoy had hoped the loan would not add to its debt load if it was funnelled through the Fund for Orderly Bank Restructuring (FROB), but eurozone finance ministers insisted during a conference call, on 9 June, that the government assume responsibility for the loan. Daniel Gros of the Centre for European Policy Studies (CEPS) in Brussels says this will put Spain in a difficult position in the markets and “reinforce” the bank-sovereign link, which the EU has said it is desperate to break. “A further small negative shock might lead to a loss of market access very quickly,” he said.
A proposal to allow the ESM to directly intervene in the banking sector was shot down when the ESM treaty was being drawn up last year, largely on the back of German fears that it would take the pressure off governments to reform. But the Commission is still keen to see the proposal pushed through, a position which is backed by Spain, Ireland and Portugal. Article 19 of the ESM treaty allows euro finance ministers - voting unanimously - to “review the list of financial assistance instruments provided for in Articles 14 to 18 and decide to make changes to it”.
However, it is not yet clear which fund - the EFSF or the ESM - will be used to come to Spain’s aid, as the country has not made a formal bailout request. The ESM treaty was due to come into force at the beginning of July, but so far only four countries - France, Greece, Portugal and Slovenia - have ratified it, representing just 26.1% of its capital base. To become law, it requires ratification in countries representing at least 90% of its capital base - effectively meaning Germany, Italy and Spain will have to vote in favour. “Now the immediate priority is to ratify the ESM treaty so we have the ESM at our disposal,” Rehn said. “Let’s see afterwards what possible improvements we will have to make to the ESM treaty.”