Euro zone mulls caps on direct bank aid from bailout fund

BRUSSELS (REUTERS) - The euro zone is considering capping the amount of direct assistance that banks can get from the bloc's 500 billion euro (S$830 billion) bailout fund, finance ministers said on Monday, in a potential blow to some countries hoping for help for their lenders.

Euro zone leaders agreed last June that the European Stability Mechanism (ESM) bailout fund should be able to directly inject funds into banks to ease the debt burden on already struggling sovereigns.

The decision was mainly meant to help Spain, where the banking sector has been hit by the collapse of the property market and the government was struggling to regain market confidence amid a recession and record high unemployment.

"In order to preserve the ESM capacity for other instruments and the ESM's high credit rating, we agreed to explore the possibility of defining limits for the various ESM instruments," Eurogroup chair Jeroen Dijsselbloem told a news conference.

German Finance Minister Wolfgang Schaeuble said the ESM should ideally not be used at all and stressed that funds for banks were limited already.

"The ESM is primarily there in order not to be used, but to create confidence, and for that it needs a certain level of lending capacity," Mr Schaeuble told reporters after a meeting of euro zone finance ministers.

"Therefore what can be used for banking capitalisation is limited anyway, especially as we know that the funds used for banking recapitalisation must be backed by more capital."

Ireland, Greece and Portugal also have high hopes for the recapitalisation tool because they borrowed billions from the euro zone to recapitalise their banks.