I move: "That the Bill be now read a Second Time."
The draft legislation before the House will enable Ireland to join with the other euro area member states in the implementation of the European financial stability facility. The facility is a contingent €440 billion financial support instrument that will be able to provide loans to euro area member states that are unable to access capital markets due to exceptional circumstances beyond their control. Ireland's key obligation under the facility will be to provide guarantees up to a ceiling of just over €7 billion, if needed, for any funds raised by the facility to provide loans to such euro area member states.
The Bill is a logical consequence of the steps that the European Union and the IMF took in response to the recent Greek funding difficulties. In that case, the euro area loan facility was established to provide loans of up to €80 billion to Greece over a three-year period. In conjunction with this, the IMF agreed to provide a maximum of a further €30 billion, making a total of €110 billion available for lending to Greece. I remind the House that Ireland's share is of the order of €1.5 billion and legislation was enacted last month giving effect to our participation. The measures put in place ensure that Greece will not need to rely on the sovereign debt markets for the next three years, thus giving it the necessary breathing space to rectify its public finances, while at the same time meeting the policy conditionality attached to the loan facility. However, at the time it also was recognised that developing and implementing bespoke instruments each time a member state faced difficulties is not a sustainable or prudent approach. In light of this, it was decided that the EU needed to develop and adopt a comprehensive package of measures that would be of sufficient magnitude to address future potential needs. On 9 May last, ECOFIN adopted a package of measures, including an IMF contribution, that will provide up to €750 billion in financial support to euro area member states, if required.
There are three distinct elements in this package. The first is the establishment of the European financial stabilisation mechanism, under which up to €60 billion may be borrowed by the European Commission and loaned to member states, subject to strict conditions on budgetary consolidation. The Council regulation establishing the stabilisation mechanism was adopted by the Council on 10 May 2010. The stabilisation will be the instrument of first resort should a euro area member state seek assistance. The second element is the €440 billion European financial stability facility, which is the subject of the Bill before the House. It will be governed by the intergovernmental framework agreement agreed between the euro area member states and the special purpose vehicle company that will be used to implement the facility. While the facility is independent of the EU budget, the European Commission will play a key role in its operation. There is also provision for important functions to be carried out by the EIB and the ECB. The framework agreement, which I signed on behalf of Ireland on 10 June, subject to the enactment of the Bill before the House, is included in the Schedule to the Bill.
The third element is the assistance that the IMF can provide to member states under its existing stand-by arrangements. It is estimated that this amounts to an aggregate of €250 billion. The IMF has stated that upon request in individual country cases, it is ready to provide financial assistance to its European members in conjunction with the new European financial stabilisation mechanism and the European financial stability facility. This would be on a similar basis to the assistance that the IMF has agreed to provide to Greece in conjunction with the euro area loan facility. Consequently, in overall terms, an aggregate amount to the value of approximately €750 billion is now being put in place to provide support for euro area member states, if needed.
The direct financial implications of the Bill relate to the subscription of capital for the European financial stability facility company that will operate the facility. The State has already committed to contribute its 1.59% share of the currently issued share capital of €31,000, that is, approximately €490. In addition to the issued share capital, there is an unissued but authorised share capital of €30 million. Calling up further capital from the authorised share capital requires a unanimous decision by the board of directors and each shareholder is represented by a director. The provisions relating to this and other matters are all set out in the company's articles of association, which have been laid before the Oireachtas. If the entire authorised share capital is called up, then Ireland's share would be just under €478,000. However, this will be reduced slightly following the accession of Estonia to the euro next January.
The key obligation of the State under the framework agreement is to provide guarantees to the European financial stability facility company to enable it to raise money to provide loans to euro area member states. It is only if a guarantee is called that the State will be obliged to fund its share of the guarantee in question. Therefore, apart from a small amount of paid-up capital, no money is being called upon. The contribution key, which dictates how much of each funding instrument the State will guarantee, will vary in each case and I will outline the reasons for this when I run through the articles of the framework agreement. Under the agreement, Ireland's guarantee ceiling is just over €7 billion. In the highly unlikely event that a guarantee is called, this will not mean that Ireland will never see its money again. The European financial stability facility company remains liable for funds paid under any guarantee and it will endeavour to secure repayment of any underlying loan in default with a view to returning such funds to guarantors as soon as possible. In such an event, it is likely that a lengthy period would elapse before losses, if any, could be quantified.
The purpose of the Bill is to permit Ireland to work together with its fellow euro area member states to ensure the overall financial stability of the euro area. The Bill will allow Ireland to issue guarantees in accordance with the European financial stability facility framework agreement and provide for payments to be made from the Central Fund in respect of any obligations arising under the agreement, subject to a maximum ceiling of €7.5 billion. The Bill is a very straightforward item of legislation because member states' obligations are spelt out in detail in the framework agreement, which is scheduled to the Bill. After I have explained each of the sections of the Bill, I will explain the key articles of the framework agreement.
Section 1 defines the company that will implement the instrument on behalf of the euro area member states and the European financial stability facility framework agreement. Section 2 provides that the Minister for Finance may issue guarantees on behalf of the State for the purposes of the framework agreement. Section 3 provides that money may be paid from the Central Fund to meet the obligations of the State arising from the framework agreement, up to a maximum sum of €7.5 billion. There is an obligation to subscribe to the capital and other costs of the company and additional obligations could arise if a guarantee is called. Section 4 provides that any money received by the State is to be paid into the Central Fund.
Section 5 deals with the reporting obligations. The Minister must ensure that a report is laid before Dáil Éireann as soon as is practicable after 31 December 2010 and every six months thereafter. There is provision for more frequent reporting from time to time, if considered necessary. The report must include information on outstanding guarantees, moneys advanced by the State and money that has been repaid to the State under the framework agreement. Section 6 amends the reporting requirements of the Euro Area Loan Facility Act 2010. This amendment to the earlier legislation for the assistance to Greece takes on board the views expressed during the passage of the legislation for more frequent reporting. The amendment also makes the reporting requirements consistent with the reporting requirements of this Bill. Section 7 is a standard section on the expenses incurred in the administration of the Bill and section 8 sets out the Short Title.
The Schedule to the Bill contains the European financial stability facility framework agreement. The agreement begins by stipulating the parties to the agreement. These consist of the euro area member states and the European financial stability facility company. This is followed by a preamble, which outlines the origins of the facility and explains its purpose. As the agreement is a lengthy and detailed document, I wish to highlight some of the key points.
Article 1 of the agreement covers the entry into force provisions for the facility. Essentially, the obligation to issue guarantees becomes operational when member states comprising 90% of the guarantee commitments have submitted their commitment confirmations. Article 2 covers the granting of loans, funding instruments, the issuance of guarantees and generally sets out how the facility will operate. It provides that a euro area member state seeking financial assistance must agree a memorandum of understanding with the European Commission in liaison with the IMF and the European Central Bank that sets out the budgetary and economic policy conditions with which the borrower must comply in order to receive financial assistance. In addition, detailed terms and conditions will be set out in a loan facility agreement between the company and the member state in question, subject to the approval of all guarantors. Article 2 also provides that the company will be responsible for raising the money it requires to advance the loans to borrowers and establishing the terms on which it issues or enters into funding instruments. In addition, the interest rate to be charged to a borrower will cover the company's cost of funding, plus a margin to provide remuneration to the guarantors. Guarantors will be required to issue irrevocable and unconditional guarantees in respect of funding instruments issued or entered into under the agreement. The amount of each member state's guarantee is based on its contribution key to the capital of the ECB, multiplied by 120% of the value of the principal, interest and any other amounts due under a particular funding instrument. Each guarantor's total potential exposure is limited, as set out in Annexe 1, to its share of ECB capital among the existing 16 euro area member states. In Ireland's case, the limit is €7.002 billion. Finally, article 2 provides that the issuing of guarantees is limited to funding instruments related to loan facility agreements entered into on or before 30 June 2013. It is worth noting, however, that individual loan tranches may be issued after that date.
Article 3 covers the preparation and authorisation of loan disbursements. The strong conditionality of any country programme is emphasised by the requirement that the Commission, in liaison with the ECB, must present a report to the euro group on the compliance of the borrower with the terms and conditions of the memorandum of understanding before each disbursement of a loan, apart from the initial disbursement. The guarantors will evaluate the report and unanimously decide whether to permit the disbursement.
Article 4 covers the issuance of or entry into force of funding instruments. In particular, the company is required to fund the loans it makes by the issuance of or entry into funding instruments on a matched-funding basis, if market conditions permit it. It also requires the payment dates for loans to be 14 business days before scheduled payment dates for funding instruments. If matched funding is not possible, then the company may, with the unanimous approval of the guarantors pursue a diversified funding strategy. There is provision in this regard for the company to delegate the management of it to one or more debt management agencies of euro area member states or to other institutions.
Article 5 provides for credit enhancement, liquidity and treasury matters. Credit enhancement is seen as an extremely important matter because such measures are designed to help secure the highest possible ratings from the credit rating agencies with obvious benefits for the rates at which the company can raise funding. The first element of credit enhancement is that each guarantee issued by a member state will be for 120% of its actual share of the amount being guaranteed. That will be of great comfort to holders of funding instruments issued by the company because it builds in redundancy and allows for the extremely difficult to imagine scenario that one of the guarantors fails to honour a call on a guarantee.
The second element is that the money raised by the company from the 50 basis point service fees and from the upfront payment of the NPV of the margin of each loan it issues, will be held in a cash reserve to form a cash buffer. Should the company ever issue any loans, the cash reserve will quickly reach a substantial size thereby boosting the resources of the company. The cash reserve is there to cover shortfalls in payment to holders of funding instruments and it will only be distributed back to guarantors when the company has fulfilled its purpose and been dissolved. The cash reserve must be invested in high quality liquid debt instruments. The company will, in the event of a delay or failure to pay by a borrower, first make a demand on the guarantee from each guarantor. If that does not cover the due payment on the funding instrument, then the cash reserve can be used.
Article 6 covers claims under a guarantee. If the company does not receive a scheduled payment under a loan it will call in the guarantees from the relevant guarantors. It will also, if necessary, draw on the cash reserve. Once a guarantee has been paid, the company is liable to reimburse each guarantor subject to the extent of the funds actually received from the underlying borrowers in respect of the relevant loans.
Article 7 covers the contribution between guarantors. If a guarantee is called to meet a scheduled payment and, due to the non-payment by one or more of the other guarantors, a guarantor ends up paying more than its required proportion, that is, its share of the guarantee in question before it is increased to 120%, then, after three business days, that guarantor is entitled to an indemnity from each of the other guarantors for the excess it has paid plus interest at the rate of one month EURIBOR plus 500 basis points.
Article 8 deals with calculations and adjustments of the guarantees. I have already explained that a prospective borrower can make a request to be excused from having to provide further guarantees. If that is accepted unanimously, it becomes a stepping-out guarantor and the contribution key in Annexe 2 for the remaining guarantors will be adjusted accordingly. For example, the article specifically provides that Greece is to be treated as a stepping-out guarantor from the start. As a consequence, Ireland's contribution rate to guarantees of 1.59% in Annexe 2 as it stands will increase to 1.64%. On that basis, under the agreement, Ireland's exposure in respect of its overall guarantees remains at just over €7 billion.
Article 9 outlines the procedures to be followed by the company if it becomes aware of any breaches of conditions by a borrower or the need for any amendments of a loan facility agreement. Article 10 deals with the company, inter-guarantor decisions, directors and governance. It provides that each shareholder, that is each euro area member state, is entitled to be represented by a director, specifically its representative on the eurogroup working group which typically is the relevant economic and financial committee, EFC, member. Each director's voting weight will correspond to the number of shares held by his country. The article identifies what decisions guarantors must take on a unanimous basis. These include decisions on the granting of loan facility agreements, the disbursement of loans, various modifications of loan facility agreements, stepping-out guarantors, significant changes to the credit enhancement structure and the funding strategy of each EFSF programme or any increase in the aggregate amount of guarantees that might be issued under the framework agreement. Corporate matters of the company that require unanimity include the call-up of capital, the employment of the CEO, approving the accounts and any changes to the company's articles of association, a copy of which has been laid before the House.
I draw Deputies' attention to the fact that the definition of the framework agreement includes amendments to it. That has been included for the very good reason that there will be fairly technical amendments to the agreement from time to lime and it would be a gross misuse of resources to have to prepare amending legislation each time. For instance, the definition would accommodate the accession of Estonia to the euro and the consequential amendments that will have to be made to the agreement under Article 13(7). The most significant change that can be made to the agreement would be an increase in the overall ceiling of €440 billion. Under section 3, the maximum amount that the Central Fund can pay out is €7.5 billion. I am asking for some leeway over the current maximum exposure to allow for an emergency increase in the agreement's ceiling of €440 billion, potentially when the House is not sitting. The leeway could permit agreement to an increase of approximately €28 billion on a euro-wide basis over the current €440 billion ceiling without requiring further legislative amendment. That is an appropriate balance. Any increase above that level will require an amendment to our legislation before we could agree to it.
Article 11 deals with the duration and the liquidation of the company. The company will remain in existence until 30 June 2013 as a minimum and it will be liquidated as soon as the loans advanced by it have been repaid and all its liabilities to holders of its funding instruments have been discharged. If no loan facility agreements are in place on or before 30 June 2013, then the company will be dissolved immediately. On its liquidation, any liabilities, if there are any, may be divided among the shareholders and any assets, after the cash reserve has been distributed, will be distributed to shareholders.
Article 12 covers the appointment of the European Central Bank and the European Investment Bank to fulfil various financial functions and Article 13 covers the administrative provisions. These include the use of resources, reporting, the transfer and disposal of shares and amendment of the agreement in the event of the accession of a new member state to theeuro.
Annexe 1 to the agreement sets out the list of guarantor member states and their respective guarantee commitments and Annexe 2 sets out the contribution key for each member state. As I said at the outset, the European financial stability facility is an essential contingency measure. As Deputies are aware, other broad-ranging measures are also being considered at EU level with a view, inter alia, to improving the economic governance of the euro area and the related arrangements for budgetary surveillance. I am participating in these discussions as a member of the task force established by President Van Rompuy. I would like to reassure the House that notwithstanding what has been implied in some media reports, Ireland has nothing to fear and everything to gain from this important process which is likely, if anything, to enhance the role of national parliaments in these matters.
In the difficult times we have been experiencing, our membership of the euro has been and continues to be of critical importance to the economy. It is therefore incumbent upon us to play our part in defending the currency, not only because of the principles of solidarity and responsibility that came with our membership of the euro, but because ensuring the ongoing financial stability of the euro-area is vital to our economic recovery and future success. That is the purpose of the Bill. I have outlined the full implications of the legislation before the House including the possible financial implications. This is an important piece of legislation for us and our European partners. I commend the Bill to the House.