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- The European Council deal last Friday opened the door to the prospect of the European Stability Mechanism (ESM) bailout fund directly recapitalising ailing Eurozone banks. This was a political victory for Madrid, and a potentially significant shift in the Eurozone’s approach to its problems.
- It also opened the prospect of revisiting Ireland’s bailout of its own financial sector, and ‘Europeanising’ some of the €64bn stake that the Irish state has taken in Irish banks. The deal was greeted as a ‘game changer’ by Dublin, which capitalised on a lift in investor confidence by returning to debt markets for the first time in two years.
- Such an assessment looks premature. The deal, while unquestionably good news for Ireland, is less of a game changer than it might look. The structure of the Irish bailout and the fact that much of it has been invested in institutions that have ceased to exist, makes it unlikely that other Eurozone states would contemplate Europeanising the associated debt. The requirement that banking supervision in the Eurozone be relocated to the ECB before the ESM undertakes any such lending only raises more questions.
- For investors in Ireland the Council deal may prove something of a red herring. Ireland’s improving standing with investors has – or should have - as much to do with the nature of its crisis and its improving fundamentals.
The views expressed in this report can be attributed to the named author(s) only.