Background: who is liable for which loans in the euro rescue?

Before the Bundestag vote on aid to Spain from the EFSF euro rescue package, there is a debate as to who is liable for the billions in risks. The parliamentarians disagree on which rules apply to loans to the EFSF if it becomes the new ESM rescue package. An overview of the central arguments.

Attitude of the federal government

In the debates about the bailouts in the euro zone, the federal government has always taken the position that a certain sequence must remain: first the banks try to help themselves. If this does not succeed, the national state has to step in.

The euro rescue package is only used when this is overwhelmed. Then help must be requested from the respective country, which is also liable for the loans. So the first risk in the event of a loan default lies with the national governments.

The case of Spain

This principle should also apply to the agreed aid for the Spanish banks. For these, up to 100 billion euros are to be made available from the EFSF, which are to flow into the Spanish bank rescue package (FROB). The basis is a "Memorandum of Understanding" (MoU), an agreement with the Spanish government that also assumes liability for the loans.

If the aid loans are later transferred from the EFSF to the ESM, this agreement should remain, according to the German government. Because the basis of the aid is the written agreement with the Spanish government, regardless of whether the loans are disbursed by the EFSF or the ESM.

Liability for direct bank recapitalization

At the summit in Brussels at the end of June, the 17 euro governments also reached a medium-term, general agreement. First of all, strict European banking supervision is to be created that can intervene in national banks and make these regulations. If this exists, it should also be possible to pay financial aid from the ESM directly to individual banks. At the weekend, both Finance Minister Wolfgang Schauble and EFSF boss Klaus Regling caused confusion because they made different statements about who would then be liable.

Schauble said he expected that liability will continue to lie with the nation states in which the banks concerned are based.

Regling, on the other hand, sees the ESM and ultimately taxpayers in the euro countries as having an obligation to provide direct bank assistance.

Chancellor Angela Merkel, on the other hand, pointed out that this question was not resolved at all in Brussels. "We didn’t comment on that at all," she said on ZDF. In fact, liability is not mentioned in the official statement made by the euro heads of government on June 29th. It is only stated there that the aids are to be linked to "appropriate conditions" and to be laid down in a MoU.

Pros and cons of national liability

SPD boss Sigmar Gabriel, Schauble and other Union parliamentarians argue that national liability must remain, because otherwise German taxpayers would have to be directly liable for banking problems in other euro countries via the ESM. They interpret the reference made in the euro zone declaration of a necessary MoU for direct bank aid in such a way that the nation states should initially continue to be liable in the future.

Proponents of liability for the ESM, however, argue that this avoids a negative domino effect. Rating agencies have already downgraded Spain’s creditworthiness because the country has to assume the risks for the EFSF bank aid – paradoxically, the aid leads to an increase in risk premiums for government bonds.