Germany expresses doubt over support for Irish bank debt plan

DEREK SCALLY in Berlin

Fri, Aug 24, 2012

GERMANY HAS said it will oppose any Irish debt-relief proposal it believes sends a negative signal to financial markets.

Finance minister Wolfgang Schäuble has said Ireland’s “massive” reform progress should not be compromised by anything that would halt the “winning back of trust”.

His doubts pose a challenge to the Government, which expects a political agreement by October on relieving Ireland’s €64 billion bank debt burden.

“We cannot do anything that generates new uncertainty on the financial markets and lose trust, which Ireland is just at the point of winning back,” said Mr Schäuble in an interview with The Irish Times.

“Naturally we want to help each other but I am not yet convinced, by any means, that some of the measures which are mentioned would not have the opposite effect.”

Irish Government officials begin a tour of European capitals next week to discuss technical details of debt relief. Those talks now face the added hurdle of the public doubts of the EU largest member.

EU leaders meeting in June, as part of agreement on support for Spanish banks, promised to look again at technical measures to “further improve the sustainability” of the Irish programme.

Taoiseach Enda Kenny said the final arrangement would amount to a re-engineering of Ireland’s bank debt deal and “lessen the debt burden on our people”.

To win support, officials will tell European partners in the coming weeks that lower bond yields at recent debt auctions indicate both market satisfaction at Ireland’s reforms to date, but also a market expectation of a debt deal in October.

Mr Schäuble agreed lower interest rates showed markets were honouring Irish reform efforts. But there was a risk, he said, that markets would take a negative view of the need for further funding for Ireland.

“We will have to avoid generating a headline like ‘Aid programme for Ireland topped up’, because then investors in California or Shanghai might not understand that this top- up is a reward for Ireland, but might be tempted to conclude that what was agreed two years ago for Ireland was not enough. And that is surely not what we want.”

Irish officials insist leaders have committed to agreeing a political deal by October. One proposal would involve European bailout funds providing €20 billion-€30 billion to take direct stakes in AIB, Bank of Ireland and Permanent TSB, and to replace expensive State-funded promissory notes in Anglo Irish Bank.

Any further funding for Ireland, from the European Financial Stability Facility (EFSF), or its permanent successor the European Stability Mechanism (ESM), would require parliamentary approval in many countries. Opposition has been signalled in Finland, the Netherlands and Germany in the face of rising anti-bailout sentiment.

Mr Schäuble dismissed the idea that, with a general election looming in Germany next year, it was in Berlin’s interest to support a deal for Ireland to retain market confidence .

“It’s not about the German federal elections,” he said.“We don’t want that Ireland does worse but that the winning back of trust continues. That is the measure of all decisions we will take.” He said a similar situation applied to Greece’s reform programme.

German leader Angela Merkel said she would tell her Greek counterpart Antonis Samaras in Berlin this morning that it was “important that we all stay true to our commitments. “But we will, and I will, encourage Greece to continue on its path to reform, which has demanded a lot of the Greek people,” she said.

French president François Hollande, in Berlin for talks, said Greece’s euro zone future depended on “Greeks making the effort” to meet reform commitments.