European Central Bank chief Mario Draghi on Friday hailed as “a good result” a deal to recapitalise troubled eurozone banks via the forthcoming European Stability Mechanism rescue fund.
“The future possibility of using the ESM for direct capitalisation of the banks, which was something that the ECB had advocated for some time, is another good result,” Draghi told reporters after a two-day EU summit.
An agreement reached overnight should allow the eurozone’s 500-billion-euro ($630 billion) bailout fund to recapitalise ailing banks directly, without passing through national budgets and thus adding to struggling countries’ debt mountains.
This, however, would occur only after a eurozone-wide banking supervisory body is set up, which leaders aim to achieve by the end of the year.
“The ECB will take up supervisory tasks,” within that body, strengthening the central bank’s oversight of commercial bank activities further, Draghi noted.
He added that for aid from the ESM and the present, temporary EFSF fund to banks to be credible, it “should be accompanied by strict conditionality,” suggesting tight oversight.
That is something which Italy in particular is believed keen to avoid.
ECB officials have long called for eurozone governments to take on a greater burden in providing emergency aid to troubled banks, after the central bank implemented exceptional measures that pose a growing risk to its own accounts.
In two so-called long-term refinancing operations (LTROs) in December and February, the central bank pumped more than 1.0 trillion euros into the banking system in a bid to avert a dangerous credit squeeze.
The ECB also intervened in sovereign debt markets in 2010 and 2011 under its controversial Securities Market Programme (SMP), buying up more than 200 billion euros of bonds to help bring down borrowing costs for heavily indebted countries.
The programme, seen by some as breaking in spirit rules prohibiting the ECB from underwriting government finances, has been dormant since February, but it still exists.
