BERLIN - Cyprus' hopes for a bailout fund for bank recapitalisation are up in the air following deep reservations in some European states according to the head of the fund.
Klaus Regling, the head of the European Stability Mechanism (ESM), told Wirtschafts Woche magazine he was not able to say with certainty that the ESM would be used for this purpose.
Last week, Regling said Cyprus's debt crisis risks spreading to other euro zone countries before urging a rapid decision on aid for the island.
"There are several states where enthusiasm for direct bank recapitalisations is very limited," he said, noting it needed unanimous backing. "I can therefore not say with 100 percent certainty that we will have this instrument."
Euro zone leaders agreed last June to allow the ESM to directly recapitalise banks to stop the rescue of failed banks from piling debt on individual countries.
But Germany and others have deep doubts about using the fund for this purpose because they fear it will leave them on the hook for bad loans made in Spain and elsewhere. Regling also has doubts.
"If money from the ESM goes into saving banks then it reduces the ESM's capacity to make loans to needy states," he said in an interview made available on Saturday, adding recapitalising banks without an upper limit could hurt the ESM's credit rating.
German Finance Minister Wolfgang Schaeuble said last month the ESM should limit any recapitalisation of banks to well below 80 billion euros, if anything at all.
The Eurogroup of euro zone finance ministers will meet in Brussels on Monday where besides discussing a bailout for Cyprus they are also set to discuss the European Central Bank's new supervisory role and the ESM.