June 26, 2012 / 5:49 PM / 6 years ago

ESM top creditor status could be dropped-sources

BERLIN (Reuters) - A top ally of German Chancellor Angela Merkel told a closed-door party meeting on Tuesday that euro zone governments were discussing removing the preferred creditor status of the bloc’s permanent rescue fund, possibly on an ad hoc basis, sources told Reuters.

The move would address concerns of countries like Spain that fear private investors will be scared away from their bonds if an increasing share of overall debt is owed to fellow euro zone members who, as preferred creditors, would have to be paid off first in the event of a restructuring or default.

Volker Kauder, parliamentary leader for Merkel’s Christian Democrats (CDU), did not mention Spain in the meeting with fellow conservative lawmakers.

But he informed them that there was a discussion about allowing countries that received aid from the European Stability Mechanism (ESM) to request that the loans not come with a special creditor status. Euro zone governments could then agree to waive this on a case by case basis.

The sources, who attended the meeting, said that neither Merkel nor Finance Minister Wolfgang Schaeuble spoke out in favor of such a move, leaving it unclear whether the idea had the firm backing of the German government.

Separately, the parties in Merkel’s coalition have proposed allowing the ESM to funnel aid directly to national bank rescue funds, according to a draft seen by Reuters.

Christian Democrat (CDU) lawmaker Norbert Barthle said that if the ESM was changed along these lines, Spain could be the first country to benefit, presumably through its FROB bank fund.

The draft proposal makes clear however that even with such a change, it would be the state receiving the aid for its banks which would have ultimate responsibility for repaying the loans.

“It must be assured that the member state seeking ESM aid provides the guarantee that the financial assistance is paid back,” the draft reads.

“That would ensure that the ESM does not assume any direct bank risks. Granting direct aid to financial institutions is ruled out.”

Spanish Foreign Minister Juan Manuel Garcia-Margallo, speaking at a seminar in Santander, said dropping the preferred creditor status of the ESM could “remove some nervousness from the markets”, but said allowing direct aid to banks would be better.

“What seems more important to me is the discussion over whether the aid is direct (to banks) to break the link between sovereign debt and banks, and the conditions and terms of the loans,” he said.

Merkel has ruled out direct aid to banks, saying euro zone countries providing assistance would then have no control over the institutions they were saving.

Reporting by Andreas Rinke and Carlos Ruano; Writing by Noah Barkin

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