Blustering on bank debt shows desperation

The hissy fit engendered by Angela Merkel’s comments on 19 October arose entirely from the ludicrous spin placed on the 29 June communique. By Vincent Browne.

After the EU summit on 29 June last a statement was issued stating it was “imperative” to break the “vicious” circle between banks and sovereign states.

It said that when an effective single supervisory mechanism (for the banks) was established involving the European Central Bank, the new bailout fund, the European Stability Mechanism (ESM), could be involved directly in the recapitalisation of banks.

If not quite seismic, this was certainly significant, for not until then was it suggested there would be any “burden-sharing” of the mountainous bank debt that had arisen throughout the EU since the financial crisis of 2008.

The communique continued, almost as an afterthought: “The euro group will examine the situation of the Irish financial sector with a view to further improving the sustainability of the well-performing adjustment programme.” It added: “Similar cases will be treated equally.”

The disconnectedness of this from the previous bit of that paragraph of the communique suggested it was a casual, hurried addition, unconnected to the earlier semi-seismic bit. But nonetheless significant, albeit in ways that were not clear.

Nearly 12 weeks later, asked about Spain, Angela Merkel said: “There will not be any retroactive direct recapitalisation. If recapitalisation is possible it will only be possible for the future, so I think that when the banking supervisor is in place we won’t have any more problems with the Spanish banks, at least I hope not.”

There was nothing in this remark inconsistent with the communique of 29 June, which did not refer to recapitalising banks retrospectively, nor did it imply that. It simply announced an initiative to establish an EU supervisory mechanism for banks throughout Europe, after which the ESM could be used to recapitalise banks.

Angela Merkel was not resiling from whatever commitment the 29 June communique made to Ireland for there was no commitment in it that Irish banks, which were already recapitalised, might be recapitalised again after the banking supervision was in place. The hissy fit engendered by Angela Merkel’s comments on 19 October arose entirely from the ludicrous spin placed on the 29 June communique.

That hissy fit was defused a bit by the phone conversation between Enda Kenny and Angela Merkel on 21 October, in the course of which little new was said or committed to. The tangled language of the 29 June communique about further “improving the sustainability of the well-performing adjustment programme” was repeated. The novel bit was in claiming “Ireland is a special case and that the Eurogroup will take that into account”.

The clear implication of the 29 June communication was that Ireland was not a special case, otherwise why would it have included the bit: “Similar cases will be treated equally”?

The sojourn in Paris on 22 October was more about Ireland being a special case and, amazingly, Enda came up with the line that Ireland had a European banking remedy “imposed upon it” (in September 2008) and “Ireland was the first and only country which had a European position imposed upon it, in the sense that there wasn’t the opportunity, if the government wished, to do it their way by burning bondholders”.

The EU was aghast with the scale of the Irish bank guarantee, to which, incidentally, Fine Gael, Labour and Sinn Féin signed up. (Labour voted against the Bill introducing the guarantee, not because of the guarantee but because it gave too much power to the minister for finance and didn’t put a cap on bankers’ pay.)

The guarantee was more extensive than that later offered by any EU state and there was dismay that Ireland had done a solo run. There was nothing to have stopped the government and Oireachtas in September 2008 from limiting the guarantee to future lending to Irish banks and restricting the guarantee to bondholders to a limit of €100,000 already in place.

The ECB seems to have exerted some pressure in September 2008 to ensure no bank failed but that is a different matter and, anyway, what could the ECB have done if we had let Anglo Irish Bank go at that stage? There was no treaty obligation to save Anglo, and no commitment otherwise to do so.

This blustering hardly matters except the deployment of blustering conveys a sense of desperation, desperation more to do with the standing of the Government than with the welfare of the country.

It is clear the efforts of Enda Kenny and Michael Noonan will result in some easing of our predicament from the EU, almost certainly by way of an extension of the period over which we have to pay back the Anglo promissory notes and maybe the sale of the State’s share in AIB and Bank of Ireland for slightly more than they are worth at present.

And there is the prospect that when the banks need a further recapitalisation, as seems more than likely, the ESM will inject funds and that would be welcome. This is more cosmetic than substantive but it is something and the Government deserves a modicum of credit for that.

However, in spite of the clear pre-election commitment by the two parties now in government to seek burden-sharing on our bank debt, there is no evidence they ever pursued this in office, preferring ingratiation to tough bargaining (for instance refusing to pay the unsecured bondholders). But then ingratiation to our betters, especially our richer betters, is part of what we are.