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The Taoiseach wants Europe's new bailout fund to be able to lend to banks - but won't stop the current version from being ratified first. Niall Carson/PA Wire
ESM Treaty

Kenny wants ESM amended to allow direct loans to banks

The Taoiseach tells the German edition of the Financial Times: ‘There’s a widespread belief that the ESM should lend to banks.’

TAOISEACH ENDA KENNY has called for amendments to the European Stability Mechanism treaty, allowing the eurozone’s new permanent bailout fund to give loans directly to banks as well as member states.

In an interview with the Financial Times Deutschland, Kenny said there was “a widespread view” within Europe that the ESM, which is due to supersede the European Financial Stability Facility in three months’ time, “should be allowed to lend directly to banks in the Eurozone”.

He added that Ireland had already been long seeking support for the idea.

Crucially, however, the Taoiseach does not want the current treaty to be amended before it heads for ratification throughout Europe – but rather wants the possibility addressed only after the ESM has been formally established as expected  on July 1.

An amendment to the current draft, which has already been amended so that countries are required to ratify the fiscal compact before they can access its funds, would mean a delay of several months before its ratification.

It would also be considered a slight affront to France, which is the only country to have begun ratifying the treaty; both houses of parliament have already approved it, but Presidential ratification has been put on hold pending the outcome of the current election.

The FTD’s report says Spain and other southern European governments also support the proposal to let the ESM lend directly to banks; in Spain’s case, lending directly to banks would reduce the government’s own debt burdens and therefore lower the risk of needing a bailout.

Kenny told the paper:

If the Fiscal Compact and the ESM Treaty are ratified. I hope that a rational discussion between the heads of state and government will be possible. [...]

The ESM should have a role to play in any future settlement system for banks.

Both Germany and the European Commission are less open to the idea, however, with German finance minister Wolfgang Schauble saying the treaties were “pretty clear”.

The possibility of allowing banks to borrow directly from the fund would, the European Commission believe, undermine the agreements taken on by member countries under the Fiscal Compact.

That deal requires countries to keep their budget deficits within manageable annual limits, but it would be significantly more difficult for commercial lenders to tie themselves to the same rules.

This is a point made by Olli Rehn, who told the FTD that it was important “to agree conditionality before euro member states lend money to another euro member state.”

Other economists have previously argued that the EFSF should have been given a banking licence, thereby freeing it up to lend directly to banks and to take greater action in relieving the ongoing shortage of credit.

Eamon Gilmore last week said Ireland would publish its legislation ratifying the ESM treaty before the Fiscal Compact referendum on May 31, but insisted that the Dáil would not be asked to approve it before the referendum was held.

Read: Independent TD launches legal challenge against ESM treaty

More: Government defeats Sinn Féin motion on bailout fund ‘blackmail clause’

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