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Merkel dashes Irish bank deal hopes

Friday, October 19 14:40:41

German Chancellor Angela Merkel raised new hurdles today to using the euro zone's rescue fund to inject capital directly into ailing banks from next year, dashing Ireland and Spain's hopes of soon removing the cost from its strained national debt.

Merkel's move limited the impact of a key decision by European Union leaders struggling to overcome a three-year-old debt crisis in the 17-nation currency area -- an overnight agreement to establish a single banking supervisor from next year.

Spanish Prime Minister Mariano Rajoy, who received a euro zone pledge in June of up to 100 billion euros to recapitalise a banking sector hit by a burst real estate bubble, said he had still had not decided whether to request a sovereign bailout.

EU leaders agreed at a two-day summit that the European Central Bank will take responsibility for overseeing euro zone banks from next year, but Merkel said it would take time for the new supervisor to be fully effective.

She made clear that would not lead to the bloc's European Stability Mechanism (ESM) rescue fund taking over liability from member states such as Spain for past bank rescues, and she posed extra conditions that some diplomats said seemed designed to ensure there will be no capital injections before next September's German elections.

"There will not be any retroactive direct recapitalisation," Merkel told a news conference. "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."

The chancellor said the supervisory system would have to be effective and the euro zone would have to set up a bank resolution fund to which the banks would contribute if there was to be any direct capital assistance to troubled banks.

Merkel denied that the obstacles were intended to avoid any payments having to be approved by the German parliament before the 2013 election, saying the idea had never crossed her mind. French President Francois Hollande said on day one of the summit that Germany's lack of urgency could be related to its electoral calendar, adding that the two dominant EU powers had a duty to solve the crisis.

Despite Merkel's comments, euro zone officials said they were exploring the possibility of sharing the cost of dealing with "legacy" toxic bank assets between the ESM and host governments, a crucial step to break to so-called "doom loop" between sovereigns and banks.

Pressed to say whether Spain would request a precautionary credit line from the rescue fund to trigger ECB buying of its bonds, Rajoy said: "The decision is not taken yet. What is important is that if I need to take it, I will take it."

He gave no indication of when that might be, but euro zone officials pointed to a Nov. 12 finance ministers' meeting as the next potential date for decisions on aid to Spain and further assistance for Greece, which is struggling to implement a second bailout programme. (C ) Reuters