Germans make Kenny return empty-handed
TAOISEACH Enda Kenny is scrambling to protect Ireland's promised bank-debt deal after German Chancellor Angela Merkel closed the door on using the new EU bailout fund.
Mrs Merkel cast enormous doubt over the use of the new EU rescue money for a back-dated injection of funds into the banks.
Her comments appear to potentially shoot down a cash injection to compensate for the state funding that was put into AIB and Bank of Ireland.
Her surprise remarks were widely viewed as a setback for Ireland, although not the end of hopes for a bank-debt deal.
Mr Kenny had emerged from the EU summit claiming that the promise given in June to ease Ireland's €64bn debt burden still stood.
He said that EU leaders had agreed their decision in June to separate bank debt and sovereign debt, including giving Ireland a bank debt deal, and that this had not changed.
But after hailing a "seismic shift" on bank debt in the June agreement, Mr Kenny is now on the back foot, claiming that the deal is not dead.
The Taoiseach was unable to provide any clarity on when the deal would happen, what method would be used and how much it would be worth to Ireland.
This question of funding for the banks will now have to be resolved by EU finance ministers.
The long-term IOUs for Anglo Irish Bank are being dealt
with through a different process.
Ms Merkel said bad assets held by Spanish and Irish banks would not be cleaned up by the eurozone's new €500bn rescue fund -- the ESM -- and that it should only be used to shore up banks that were in trouble in the future.
Speaking at the end of the summit of EU leaders in Brussels, the German chancellor said: "There will not be any backdated direct recapitalisation.
"If recapitalisation is possible, it will only be possible for the future, so I think that when the banking supervisor is in place we won't have any more problems with the Spanish banks -- at least I hope not," she said.
Within EU circles, it was believed that Ms Merkel was talking more about Spain than about Ireland.
It was also reported that a compromise arrangement would see the legacy-debt issue negotiated on a country-by-country basis.
This would see the European Central Bank and national governments carrying some of the cost, with the rest being picked up by the new bailout fund.
Ms Merkel also said that banks could also only be directly recapitalised via the European Stability Mechanism (ESM) once a fund that banks pay into had been set up.
However, Irish government sources insisted that the bank debt deal was still on track.
"Do we believe retrospective debt is still alive for Ireland? Yes," said a source.
But Fianna Fail's finance spokesman Michael McGrath said the statement from Ms Merkel "completely undermines the credibility of the Government's approach to the negotiations on bank debt".
In a statement, the Fine Gael-Labour Coalition claimed that the promise to ease Ireland's debt burden was still there and that Ms Merkel was talking about Spain when she said that the fund could not be used retrospectively for bank injections.
A government spokesman said the EU summit "reaffirmed the commitments" made by leaders in the statement issued on June 29.
The spokesman said: "In that statement, European leaders agreed to enhance Ireland's debt sustainability and agreed to break the link between bank and sovereign debt. Those commitments stand.
"We understand that Chancellor Merkel was asked a direct question about the recapitalisation of Spanish banks and she replied in that context.
"We will continue to work with our partners on the implementation of what was agreed in June."
Nevertheless, Ms Merkel's intervention did cast a shadow over a summit at which EU leaders made progress on bringing forward a single bank supervisor.
At the end of the summit, Mr Kenny said EU leaders agreed that their decision in June to separate bank debt and sovereign debt -- including giving Ireland a bank debt deal -- still stood and that the summit was a "clear affirmation" of the commitment to use the new EU bailout fund to put money into banks.
The Taoiseach said the outcome of the summit was positive and progress had been made through the agreement to set up a new eurozone banking supervisor.
He said he had put the decision of June 29 on Ireland's bank debt on the record of the summit, adding: "That was accepted by everybody and that was very clear."
Mr Kenny said work was ongoing on Ireland's banking debt on two fronts.
He continued: "The Government is also continuing to work with our colleagues to improve the understanding of the sustainability of debt that we agreed in June.
"As I said before, these things are very complex and sensitive and I am not going to go into the detail of them here."
He added: "You are also aware that, separate from the break between the sovereign and the bank, discussions are going on in regard to the promissory note with the ECB."