Breaking the Sovereign-Bank Link…Not

Prof. Peter Lindseth

This can be brief. Readers may recall how, with great fanfare, the June 2012 European Council Summit (or, more specifically, the Euro Area Summit) announced that it was ‘imperative to break the vicious circle between banks and sovereigns’. This raised the possibility that the European Stability Mechanism (ESM) might be used to recapitalize distressed banks, an idea that the summit conclusions specifically discussed. Peripheral countries were obviously overjoyed at the prospect that they might be relieved on the fiscal burden of recapitalization, thus breaking the dreaded ‘sovereign-bank link’ that were driving them into insolvency.

As many readers know, disappointment soon followed.  In a joint statement in September (previously discussed on this blog here), the finance ministers of Germany, the Netherlands, and Finland made clear that, in their view, ‘the ESM can [only] take direct responsibility of problems that occur’ after a country has relinquished fiscal control under an ESM bailout and supervision memorandum. Otherwise, ‘legacy assets should be under the responsibility of national authorities’.

So the announcement this week, that Eurozone finance ministers are considering whether to cap the total amount of direct assistance for bank recapitalization at €80 billion, should probably not come as a surprise.  As Reuters reports:

German Finance Minister Wolfgang Schaeuble said the ESM should ideally not be used at all and stressed that funds for banks were limited already.

“The ESM is primarily there in order not to be used, but to create confidence, and for that it needs a certain level of lending capacity,” Schaeuble told reporters after a meeting of euro zone finance ministers.

“Therefore what can be used for banking capitalisation is limited anyway, especially as we know that the funds used for banking recapitalisation must be backed by more capital.”

Commenting on a similar report in the FAZ, Wolfgang Münchau noted on his newsletter (alas, sub. req.): Schaeuble’s position ‘contains a whole number of outrages. It is clear, by now, that the June EU summit’s statement to separate the sovereign and banking risks is currently being turned into a straight-forward lie …. An €80bn allocation could be used up by a single bank rescue’.  Little more need be said, apart from quoting a previous statement by Münchau in the FT last week, noting ‘the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures’.

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