Bloomberg News

German Officials Oppose Retroactive ESM Bank Recapitalizations

June 20, 2013

Germany’s finance minister and a Bundesbank board member opposed allowing nations like Ireland and Spain to offload bad debts accumulated in years past to a fund financed by all euro members.

German Finance Minister Wolfgang Schaeuble said he doesn’t see “great leeway” for retroactive direct bank recapitalization through the European Stability Mechanism, the region’s bailout fund. Bundesbank board member Andreas Dombret said the future banking union contains an insurance mechanism that can only cover new incidents.

“So-called legacy burdens, in other words, those risks that have arisen under national supervisors, must, if necessary, be shouldered by the member states,” Dombret said in a speech in Koenigstein near Frankfurt. “Anything else would amount to transfers among governments” -- which are forbidden by the currency region’s founding treaty.

Ireland is seeking the possibility of retroactive direct-bank recapitalization from the ESM once such aid becomes available. Finance ministers are working toward a mid-year deadline for designing how the program might work.

“I don’t think that we have great leeway for direct bank recapitalization, once we have it one day -- quite a bit of water will flow down the Moselle and other rivers by then --that we can apply this retroactively,” Schaeuble said today in Luxembourg when asked whether Ireland can hope for such relief. “The capacity of the ESM is limited.”

Before a two-day meeting of European Union finance ministers, Schaeuble said policy makers shouldn’t raise false expectations.

Transfers such as retroactive recapitalizations “should take place via national budgets and with the approval of national parliaments, and not under the guise of a banking union,” said Dombret. EU finance ministers should decide that direct recapitalization through the ESM “would be allowed only after exhausting all other means available,” he said.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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