New EU draft for rescue fund rules

The EU has released a new draft of regulations that would force countries to take a greater participation alongside the European Stability Mechanism (ESM) rescue fund, or protect the fund against any losses accrued from rescuing banks. The plan was circulated among eurozone finance ministers at the end of last year but has now been made public.

The plan has not been entirely well-received as critics worry that by encouraging a greater share of the financial burden of rescuing a failing bank, the EU will not achieve its goal of “breaking the vicious circle” between failed banks and struggling governments. Already countries like Ireland, Spain and Cyprus have seen their sovereign debt levels skyrocket by the billions of euros required to bail out their banks, and triggering government bailouts, for Dublin and Nicosia, and the brink of collapse, for Madrid.

The new draft goes against the previous plan, agreed to in June of last year, for direct recapitalisation for troubled banks by the ESM, and would shift the responsibility of bailout funds from national coffers to the ESM, which is funded by all 17 eurozone members. Observers had noted that this model would have broken one of the most vicious cycles of the current crisis by protecting governments from being forced to the brink of insolvency by bank rescues.

The new draft proposal, goes against all of those proposals, to force countries who can afford it to invest their own funds into struggling banks in order for them to be viable for ESM support. Even countries facing insolvency will be forced to “indemnify the ESM for any loss”, or offer guarantees that the fund will recover all of its money.

There has been no comment from eurozone officials on the new draft, but it has been confirmed that countries have been given until June to come up with a final decision. There is the possibility that the draft will still be altered before then.

“Discussions are ongoing, and we have a mandate from the European Council to finalise discussions for June,” one senior official involved in the discussions has told the FT.