Friday 30 September 2016

No certainty that banks will not need public funds again

Published 26/01/2016 | 02:30

Germany is looking at measures including an automatic maturity extension for bonds of nations that apply for ESM aid, financial newswire Bloomberg reported. Photo: Bloomberg
Germany is looking at measures including an automatic maturity extension for bonds of nations that apply for ESM aid, financial newswire Bloomberg reported. Photo: Bloomberg

The need for public money to deal with troubled banks in the future can't be ruled out, a top European Commission official has said.

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But if and when that's required, it has to be a last resort, and on a mutualised basis, said John Berrigan, the deputy director general for Financial Stability, Financial Services and Capital Markets Union at the European Commission.

"While the construction of Banking Union is predicated on the need to weaken the link between banks and sovereigns, we simply cannot assume that no public funding will ever again be needed in relation to banking," Mr Berrigan told the Institute of International and European Affairs (IIEA).

"The commission believes that such use of public funds must be a last and least resort. But to the extent that public funds are ever needed, they should be provided on a mutualised basis, via a common backstop, and no longer by national sovereigns."

The comments came as Germany pushes for new rules forcing a contribution from investors when cash-strapped eurozone states need to tap the European Stability Mechanism (ESM).

Germany is looking at measures including an automatic maturity extension for bonds of nations that apply for ESM aid, financial newswire Bloomberg reported.

The plan, part of Germany's push to limit public borrowing and EU banks' exposure to sovereigns, is in an early stage and can't be implemented by Germany alone, the country's finance ministry said.

The move adds to German opposition to plans for an EU deposit insurance system and its demand to end the risk-free treatment of sovereign bonds on banks' balance sheets.

Mr Berrigan told the IIEA that the common insurance scheme is controversial for some member states, but this alone cannot be a reason to leave the Banking Union project incomplete.

Meanwhile, a separate report from the European Commission points out that, although debt levels in Ireland are to fall over the coming years, they will remain high and represent a major source of vulnerability for the Irish economy.

It said that in the short term, there are no signs of fiscal stress, but risks appear to be high in the medium term from a debt sustainability analysis due to debt levels and the high sensitivity to possible shocks to growth and interest rates.

"Jointly simulated shocks to growth, interest rates and the primary balance point to a probability close to 30pc of a debt ratio in 2020 greater than in 2015, which entails risks given the high starting debt level," the report said.

Irish Independent

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