France, after Germany, backs Ireland on bank debt deal

23 Oct

France on Monday boosted hopes for ailing Irish banks to benefit retroactively from a new eurozone bailout fund, by repeating the German position that the crisis-hit country was a “specific case”.

The support eased Irish fears that were sparked when German Chancellor Angela Merkel ruled out a similar proposal for troubled Spanish lenders.

But French President Francois Hollande hedged on whether Spain, whose banks have been bogged down with bad loans since a 2008 property crash, should also benefit from the same favour as the Irish.

“Ireland is a specific case and deserves to be regarded as such,” he told a press conference in Paris with Irish Prime Minister Enda Kenny, repeating a phrase used by Irish and German leaders in a joint statement on Sunday.

“This is the position that France and I also know Germany will adopt in regards to the situation in Ireland,” he said. “And the Eurogroup (the 17 EU states that use the euro) will need to take this dimension into account.”

But there was no such clear support for Spain, which, like Ireland, was rattled on Friday after Merkel ruled out a eurozone proposal to directly recapitalise old debts run up by ailing Spanish banks.

“As regards Spain, we shall see in the coming weeks what needs to be done,” Hollande replied when asked about Spain’s banks.

French Finance Minister Pierre Moscovici had previously said that France wants Spanish banks to be recapitalised retroactively via the new European Stability Mechanism (ESM) rescue fund, which was launched officially this month.

That would mean that Spanish banks could be rescued without the amounts being added to the country’s heavy national debt.

Kenny argued that Ireland was a special case because it was the “first and only country which had a European position imposed upon it, in the sense that there wasn’t the opportunity… (of) burning the bondholders.”

Private holders of Greek debt have agreed to write off the value of what they were owed by more than 100 billion euros ($130 billion).

Kenny pointed out that because Dublin had been granted a less favourable deal with its international creditors, “the Irish public and the Irish taxpayer were required therefore to service the full extent of that debt. Which is the situation that we are trying to reduce.”

“In those circumstances, Ireland’s case is different and therefore special,” he said.

On Sunday, Kenny had telephone talks with Merkel to discuss ways to decouple the problems of banks in Ireland from its sovereign debt.

Dublin had hailed an accord at the EU summit in June as offering a way of getting billions in guaranteed bank debt off its books, thereby strengthening its public finances and allowing itself some leeway to stimulate the economy.

Merkel’s comments on Friday on Spanish banks thus spooked many in Ireland.

Ireland had to seek an EU-IMF bailout in late 2010 after government efforts to keep its banking sector afloat left it virtually bankrupt, forcing it to seek outside help in return for tough and unpopular austerity measures.

Direct bank recapitalisation is meant to prevent banking crises from turning into national debt crises when governments are forced to bail out their financial sectors.

Spain is particularly concerned by the measures as it has been given a $100 billion line of credit by the eurozone for its banks, but is worried that using the funds could cause the excessive national debt to soar even higher.

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