Ireland may get reprieve as EU allows bank rescues by ESM fund

Ministers finally agreed that the European Stability Mechanism (ESM) could be used to cover past bailouts, but insisted that such a decision would only be made on a case by case basis.

That means that there is still a chance that the fund could be used to cover at least part of the near €25bn recapitalisation of AIB and Bank of Ireland.

Such a move is considered critical to "breaking the link" between the sovereign and the banks, and would dramatically ease Ireland's debt position.

Hope

Finance minister Michael Noonan said the agreement meant there was still a hope the fund could be used for Ireland, but in notably low key comments he accepted it would still be some time before it could happen.

"[The terms] signed off on tonight set out how the ESM will operate and as part of that there is the potential for retroactive application of it to the recapitalisation of the banks.

"There is a long way to go of course, and a lot of negotiating will have to be done.

"But if we had failed to get it in tonight, it would have been the end of the road, so we have kept our case going forward pretty strongly," he added.

Mr Noonan said the government would "assess its options before deciding whether to apply for access to the ESM or not, but eurogroup president Jeroen Dijsselbloem made clear there was no guarantee that such an application will be successful.

"It is up to a country to apply for it and the ESM will then be used on a case by case basis.

"It is impossible to go into detail for how the instrument will be used at this time," he added.

The Government has spent huge political capital trying to get the ESM to be used to cover the rescues of AIB and Bank of Ireland, but has made little headway in getting a deal.

While ministers unanimously agreed that the option of retroactivity should be available, there is strong opposition among some ministers to the fund being used this way.

Arriving at yesterday's meeting German finance minister said there was "little leeway" for the fund to be used this way.

"The capacity of the ESM is limited," Mr Schaeuble said.

"It makes no sense to raise false expectations. That only leads to disappointment in markets."

His words were echoed by Holland's junior finance minister Frans Weekers, who claimed his country was "not in favour" of the fund being used retroactively either.

Meanwhile, EU finance ministers are expected to formally sign off on a deal to extend the maturities on Ireland's bailout loans by an average of seven years.

Ministers agreed to do this in April, but will formally rectify it today.