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Growing disunity threatens euro-zone plan to recapitalize struggling banks

Klaus Regling

Klaus Regling

Germany’s objections to the euro-zone plan to capitalize banks via the European Stability Mechanism could endanger the proposal.

Under the proposal, the ESM would inject capital into banks across the euro-zone to prevent further losses. Bailouts in Cyprus, Greece, Ireland and Spain have put pressure on euro-zone member states and contributed to rising national debts, The Wall Street Journal reports.

Growing disunity over the plan prompted ESM head Klaus Regling to warn over the weekend that the measure may never be implemented.

“There are several countries where enthusiasm for direct bank recapitalization by the ESM is limited,” Regling said, according to The Wall Street Journal, adding that he was unable to say whether or not “this new instrument will come into existence.”

In June, euro-zone leaders convening at a summit vowed to “break the vicious circle between banks and sovereigns,” and the summit ultimately agreed that the ESM would soon have the authority to capitalize struggling banks after the euro-zone established a common banking supervision entity.

Currently the ESM, which is guaranteed by euro-zone taxpayers, is only authorized to lend money to a national government, which will then be able to recapitalize banks on its own. Many European policymakers point to the system as contributing to the cycle of rising government debt and declining bank health, The Wall Street Journal reports.

German Chancellor Angela Merkel, however, took fire from critics at home over the deal, and Berlin lawmakers quickly sought to restrict it. Just after the June summit, German Finance Minister Wolfgang Schäuble said that countries whose banks receive ESM capital injections would ultimately be liable for any losses.

Since then, Berlin policymakers have insisted on a “sovereign guarantee,” which has led to frustration among euro-zone officials who maintain that Germany’s position undermines the aim of the ESM plan.

“European economies are stuck in a downward spiral where weak banks and weak states are pulling each other down,” Sony Kapoor, the head of non-partisan think tank Re-Define, said, according to The Wall Street Journal.

Kapoor said that ESM capital injections may be a solution to “break this downward spiral of debt,” but he added that “paying for losses incurred by banks in third countries” was always going to be a point of contention for Germany, The Wall Street Journal reports.

Political analysts maintain that Merkel’s administration is unlikely to make decisions in Europe that could ultimately cost votes in the upcoming German elections. Many German legislators oppose the idea and have pushed stricter financial regulation and forcing investors to take losses as possible solutions to keep banks from relying on their national governments.

European Union officials have attempted in recent weeks to determine which countries whose banks receive ESM capital injections should be forced to absorb a certain portion of losses. Spain, which received a $53 million loan from the ESM last year to reform its banking sector, had intended to take advantage of the ESM recapitalization plan, according to The Wall Street Journal.

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