EUROPEAN CENTRAL Bank chief Mario Draghi has expressed guarded optimism that Europe’s bailout fund will be used to directly rescue banks, an initiative with potential to set a precedent for Ireland’s bank bailout.
Mr Draghi also said the current structure of the euro zone was unsustainable and a pan-European deposit guarantee scheme was required to prevent bank runs.
His remarks to MEPs, on the day that Spain revealed a record €66.2 billion capital flight from its banks in March, came as senior European figures issued dire warnings that the euro’s survival was at risk.
EU economics commissioner Olli Rehn said the currency could disintegrate, Italian premier Mario Monti said Rome was exposed to huge contagion risk and chief of the Italian central bank Ignazio Visco said “the entire European edifice” was in danger.
Facing pressure for the ECB to intervene to stabilise markets, Mr Draghi insisted it was primarily the task of governments to tackle the crisis.
He called for a further centralisation of banking supervision and greater protection for depositors, saying the authorities will avoid bank runs from solvent banks.
“Depositors’ money will be protected if we build this European guaranteed deposit fund. This will assure that depositors will be protected,” he said.
Also in the mix is the suggestion, resisted by Germany and its allies, that the ESM fund be deployed to recapitalise banks directly. The money would not go onto the national debt of the country concerned.
Spain is very keen to pursue such a plan as it may enable the country to avoid a full-blown EU-IMF bailout.
France and Italy are strongly supportive, and Taoiseach Enda Kenny has said Ireland would scrutinise any such move with great interest.
Mr Draghi, speaking as chief of the European agency charged with assessing systemic financial risk, said there was a danger that Europe would have a big pot of money that nobody could touch.
“I am a little more optimistic the possibility that the ESM will be used. People are working on finding ways how the ESM could be used to recapitalise banks.
“The issue is not so much if ESM money could be used to recapitalise banks, but whether this could be done directly without having to go through governments,” Mr Draghi said.
Minister for Enterprise Richard Bruton, in Brussels for EU meetings, said he was encouraged by the scope of the debate now under way in Europe. “There is a sufficient level of urgency but we have to wait and see the outcome. The outcome is what we will be judged by,” he said.
Mr Rehn said Europe needed a genuine stability culture and a big upgrade in the power to contain contagion. “This is the case, at least if we want to avoid a disintegration of the euro zone and instead make the euro succeed.”
Mr Monti, who implicitly called on the ECB to resume its bondbuying campaign, blamed systemic problems for contagion rather the weakness of any country.
“It is obviously a difficult place to be in, when you have a country displaying massive and concentrated efforts of consolidation and structural reforms, which are obviously politically and socially costly, and sees its position threatened by huge possibilities of contagion,” he said.
Mr Visco said global investors were increasingly doubtful about governments’ cohesion in guiding the reform of EU governance and even their ability to ensure the euro’s survival.
“Political inertia, disregard of the rules and mistaken economic decisions have favoured the emergence of internal imbalances, long obscured by the euro and unheeded by the markets, which today put the entire European edifice at risk,” Mr Visco said.
