BRUSSELS (MNI) – German Chancellor Angela Merkel on Friday said the
existing banking recapitalisation scheme for Spain under Europe’s
permanent bailout fund, the ESM, cannot be transformed into a direct ESM
banking recapitalisation once joint European banking supervision has
been put in place.

Spain’s Eurozone peers have granted the country up to E100 billion
from the ESM to recapitalize its banks. The Spanish government, though,
wants to get the aid off its books via direct ESM banking
recapitalisation.

Speaking after a two-day European summit meeting here, Merkel
argued that existing aid programs, such as for Spain, cannot be
transformed retroactively into a direct ESM bank aid scheme.

“The Spanish banks have a program for being recapitalised…and
Spain has only to draw on these funds,” the chancellor noted. “There
will be no retroactive direct recapitalisation…it will be only
possible for future” bank recapitalisation programs, she stressed.

“I think when the banking supervision is installed we will no
longer have any problems with the Spanish banks – at least that is my
hope,” she said.

EU leaders on Thursday night retreated from a commitment made last
June to have a single supervisory system for Eurozone banks operational
by January 1, 2013. Instead, they said they would now aim to agree on
the legal framework for the plan by the end of this year and then
gradually implement it next year.

Operational banking supervision is a precondition for the ESM to be
able to directly recapitalise banks.

German Finance Minister Wolfgang Schaeuble said last week that
there was some confusion about the exclusion of so-called “legacy
assets” from ESM bank recapitalisation programs.

This means only that existing rescue programs cannot be simply
transformed into a direct banking recapitalisation scheme under the ESM,
the minister explained.

However, if an Eurozone member state applies for direct banking
recapitalisation once the European banking supervision is working, then
the ESM will also cover bad bank debt contracted before the joint
banking supervision had been set up, Schaeuble stressed.

“If banks have problems, then they have problems, and they always
come somehow from the past,” the minister said.

Merkel expressed confidence in Brussels that the legal hurdles for
banking supervision under the helm of the European Central Bank can be
overcome.

“I heard from the ECB and the [European] Commission contributions
which make it appear as possible that this can be achieved,” the
chancellor remarked. “We want a supervision and we will find a way to
get it,” she vowed.

Merkel again urged fellow Eurozone leaders not to let up in their
efforts to reform the economic and monetary union. “The head of the ECB
and many others are right in saying that we need to find political
answers,” she said.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@mni-news.com

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