Germany rules out direct retroactive recapitalisation of Spanish banks

(BRUSSELS) - German Chancellor Angela Merkel on Friday ruled out a eurozone proposal to directly recapitalise old debts run up by ailing Spanish banks, setting her country on a collision course with France on the issue.

Referring to help for Spanish banks agreed by European Union leaders in June, Merkel told reporters in Brussels at the end of a new EU summit that such aid would not be retroactive.

Recapitalisation, she said, "will only be possible for the future."

France wants Spanish banks to be recapitalised retroactively via the new European Stability Mechanism (ESM) rescue fund, which means that Spanish banks could be rescued without the necessary amounts being added to the country's heavy general debt.

"We have pleaded for retroactivity," French Finance Minister Pierre Moscovici said.

Late Thursday, a French government source in Brussels said that discussions on the subject had not been settled.

"The technical work starts at ministerial level," the source said, expressing the hope that there could be an agreement by European leaders at the start of 2013.

The source also held out the possibility of a compromise deal between the French position and that held by Germany, the Netherlands and Finland, all of which oppose retroactivity.

"One possibility might be that states take on for themselves a part of the banks' losses, so they take responsibility and that under certain conditions to be defined the ESM would intervene directly for certain banks, including for situations in the past."

Since the EU summit began on Thursday the prospects for a speedy direct recapitalisation of Spanish banks by the ESM have receded.

The possibility of a direct recapitalisation "will take place in 2013 but when we do not yet know," Italian Prime Minister Mario Monti said.

A European diplomat was less optimistic, saying that "Spanish banks won't be recapitalised before the end of 2013, probably in 2014.".

Spain seems to have come to terms with events.

"I am very happy," Spanish Prime Minster Mariano Rajoy said late Thursday.

"It isn't necessarily urgent for Spain," he added Friday morning, saying it was alreadypositive that direct recapitalisation was on the table for discussion.

"We have estimated that refloating our banks will represent 4.0 percent of GDP (gross domestic product), which isn't much," one Spanish diplomat said.

"We can manage that without a problem."

Direct bank recapitalisation is meant to prevent banking crises from turning into national debt crises when governments are forced to bail out their financial sectors.

Spain is particularly concerned by the measures as it has been given a $100 billion line of credit by the eurozone for its banks, but is worried that using the funds could cause the excessive national debt to soar even higher.