Direct benefits

21 Jun 2013 By George Hay

Germany has removed one of the barriers it had erected to euro zone banking union. The 17 finance ministers of the monetary union agreed on June 20 to allow their 500 billion euro European Stability Mechanism to recapitalise directly the banks of needy member states. That can be taken as a reassuring sign of Chancellor Angela Merkel’s pragmatism.

The agreement has two key benefits. Having a central pot of money will help ease the vicious “doom loop” whereby cash-strapped governments cannot afford to bail out swollen banking systems. ESM bank-dedicated funds could also potentially be used to ease the debt burdens of bailed-out countries like Ireland – although that is still shrouded in a cloud of ambiguity.

In an election year, committing to underwrite blank cheques to other euro zone countries is bound to raise German hackles. That may be why several safeguards have been put in place. Member states with banks whose core Tier 1 ratios are below the new legal minimum of 4.5 percent will have to supply the first slug of recapitalisation money themselves. Alternatively, 20 percent of any capital put in above the minimum will have to come from the country’s coffers. Germany has insisted that the total funds available for bank recapitalisations be limited to 60 billion euros, less than the ESM’s callable equity of 80 billion euros.

There are other reasons not to uncork the champagne just yet. ESM funds will not be ready for use until the second half of 2014, when the single supervisory mechanism begins to regulate and stress-test euro zone banks. Before then, European Union lawmakers need to make progress with controversial plans on a resolution scheme and a deposit guarantee fund. The German government will also need to get the ESM past the Bundestag. That could be tricky even if attempted after September’s general election.

Nervous depositors, mindful of the brutal bail-in of Cypriot depositors in March, may ask what happens if a big bank collapses before the ESM is ready. But the European Central Bank’s commitment last year to buy the bonds of struggling member states has succeeded in bringing sovereign yields down to manageable levels, giving national governments more leeway to deal with their own problems. And since protecting German taxpayers from further euro zone expenses is a key political factor in the forthcoming election, it is encouraging that Berlin remains keen on bringing the bloc closer together.


Email a friend

Please complete the form below.

Required fields *


(Separate multiple email addresses with commas)