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Giveth and taketh away

26 September 2012 By Hugo Dixon

The latest battle lines over euro zone bank recapitalisation show the limits of solidarity. The German, Finnish and Dutch finance ministers have made clear there won’t be a free lunch for Spain, Ireland or other countries if they need euro zone cash to shore up their banks.

Following last June’s euro summit, some investors briefly convinced themselves that Madrid had found a way of offloading the cost of recapitalising its lenders to the euro zone bailout fund, the European Stability Mechanism. There was also hope that Dublin would be able to shift the cost of rescuing its banks to the ESM retroactively. After all, the summiteers had agreed that the ESM would be able to recapitalise banks directly once an effective banking supervisor for the zone has been established.

Such optimistic thinking always seemed naive. But the finance ministers of the zone’s AAA-rate countries have now decisively poured cold water on it.

They have said that legacy assets should be the responsibility of national authorities. That would seem to squish the idea that Spain or Ireland (or, indeed, Greece or Cyprus) could shift their banking problems to the wider euro zone. They have also said that recapitalisation should always occur using “estimated real economic values”. Given that Dublin and Madrid have paid far more for banking stakes than they are now worth, a transfer of the responsibility to the ESM – even if it could be engineered – would crystallise big losses.

Although the three northern European countries aren’t the only voices in the euro zone, they probably can dictate terms. Such a hard line may, in turn, complicate plans to negotiate a single banking supervisor. After all, if the carrot of bank recapitalisation now seems a distant and less attractive prospect, southern countries may be less keen to submit themselves to the stick of centralised discipline.

The hard line may also unnerve investors. Spanish 10-year yields are nudging 6 percent, partly as a result of austerity fatigue. All the more reason for Madrid not to dither any longer before grasping its big remaining lifeline: the European Central Bank’s bond-buying programme.


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