Direct bank recapitalisation is not possible, says Eurogroup

CATEGORY: INTERNATIONAL ECONOMIC

Tue 19 Jun 2012
Direct bank recapitalisation is not possible, says EurogroupLONDON (SHARECAST) – European legislation does not permit the European rescue fund to directly recapitalise banks, according to one Eurogroup official.

The statement, seen in Spanish daily Expansion, comes after Spanish President Mariano Rajoy and European Commission President Jose Manuel Barroso told the Group of 20 that the risks of a banking sector bailout should not spill over to sovereign debt.

Although the final details of the Spanish bank bailout have not been ironed out, Spain’s Fund for Orderly Bank Restructuring (FROB) may receive up to €100bn to then inject into troubled banks. The European Union (EU) insists that the financial aid will include strict conditions, including the possibility of liquidating some banks.

Last week, European Commissioner for Competition Joaquin Almunia speculated that the Bank of Spain may be forced to liquidate some banks. The Bank of Spain would later rule out that option.

The EU must still determine whether the funds will come from the temporary European Financial Stability Facility (EFSF) or the permanent rescue fund, the European Stability Mechanism (ESM). If funds from the ESM are used, they would have seniority over other debt obligations in the case of a credit event.

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