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Seanad Éireann debate -
Tuesday, 21 Oct 2014

Vol. 235 No. 1

European Stability Mechanism (Amendment) Bill 2014: Second Stage

Question proposed: "That the Bill be now read a Second Time."

I welcome the Minister for Finance, Deputy Michael Noonan.

I thank the Acting Chairman for his welcome and the Seanad for agreeing to take all Stages of the European Stability Mechanism (Amendment) Bill 2014 this afternoon and on Thursday next.

On a point of order, I do not believe we are taking all Stages today. We are only dealing with Second Stage.

I did not say the House was taking all Stages today. If the Senator had waited to hear the end of the sentence before intervening, he would have been aware of that.

I am terribly sorry. I will sit down.

The Senator should resume his seat.

Perhaps I should leave now.

I will start again.

I thank the Seanad for agreeing to take all Stages of the European Stability Mechanism (Amendment) Bill 2014 this afternoon and on Thursday next. The purpose of this legislation is to make provision for the inclusion by the board of governors of the European Stability Mechanism, or ESM, in accordance with Article 19 of the ESM treaty, of the ESM's direct recapitalisation instrument, DRI, as one of the financial instruments envisaged under Articles 14 to 18, inclusive, of the treaty. This includes provision for the creation of subsidiary bodies which will implement the direct recapitalisation instrument. It also incorporates the ESM treaty, as adapted following the accession of Latvia to the ESM on 13 March 2014, into the European Stability Mechanism Act 2012, No. 20 of 2012. The urgency of this Bill arises from the aim to have the approval of the ESM board of governors for the direct recapitalisation instrument in November. This legislation must, therefore, be in place by the end of this month and it has been scheduled to be taken in both Houses accordingly.

I will begin by outlining the contents of the Bill as initiated before providing more detail on it and the reason for it. The Bill contains six sections and a Schedule composed of two parts. Section 1 clarifies the references in the Bill to the board of governors, the ESM, an ESM member, the principal Act and the treaty. Section 2 provides that references to "Treaty" in the ESM Act 2012 are to be to the text as amended following the accession of Latvia on 13 March 2014. The treaty as amended following Latvia's accession is annexed to the Bill as the Schedule in both the Irish and English languages.

Section 3 allows for the powers contained in the ESM Act 2012 and the treaty to include those arising from the granting of a direct recapitalisation instrument, as well as those arising from the establishment by the ESM of subsidiary bodies or sub-entities. Such bodies may be used by the ESM to effect a direct recapitalisation. Section 4 provides that the instrument referred to in section 3 is an instrument for the direct recapitalisation of a financial institution of an ESM state. Section 5 provides that these sections of the ESM Act 2012 that deal with legal status, privileges and immunities and exemptions from tax, as well as from authorisation and regulation by the Central Bank, to be enjoyed by the ESM shall apply also to the ESM acting through a subsidiary body or sub-entity.

Section 6, "Short title, collective citation and construction", is a standard section defining the Short Title to the Bill. It also provides for the collective citation of the European Stability Mechanism Act 2012 and the Bill, when enacted, as the European Stability Mechanism Acts 2012 and 2014.

The Schedule, as I have noted, comprises the texts of the ESM treaty, as amended following Latvia's accession as the 18th member of the ESM, in the Irish and English languages, being Parts 1 and 2, respectively.

The euro area Heads of State or Government agreed in June 2012 that it was imperative to break the vicious circle between banks and sovereigns and that when a single supervisory mechanism, involving the ECB, was in place and operational, the European stability mechanism should recapitalise banks directly. The single supervisory mechanism will come into operation on 4 November this year.

The eurogroup meeting on 20 June 2013 agreed to the main features of the European stability mechanism's direct recapitalisation instrument, DRI. The instrument is available for institutions the viability of which can be secured by a capital injection. In this context, the guideline provides that the instrument shall not be used for the winding up of institutions. The euro area member states reached a preliminary agreement on the operational framework of the ESM DRI on 10 June this year. This includes the draft guideline on financial assistance for the direct recapitalisation of institutions which sets out how the DRI will operate.

The draft guideline agreed on 10 June 2014 includes a specific provision on the retroactive application of the instrument. Therefore, the agreement that we were active in negotiating keeps open the possibility of applying to the European stability mechanism for a retrospective or retroactive direct recapitalisation. The draft guideline states the potential retroactive application of the instrument should be decided by the ESM board of governors on a case-by-case basis and by mutual agreement. It also states the detailed modalities for retroactive recapitalisation shall be established in the relevant decision of the ESM board of governors, namely, the euro area Finance Ministers. Establishing the DRI requires a decision by mutual agreement of the ESM board of governors, subject to completion of national approval processes, to create a new ESM instrument in accordance with Article 19 of the ESM treaty. The aim is to have the process completed by November of this year.

An amendment to the ESM Act 2012 will be required to allow the Minister for Finance, as a member of the ESM board of governors, to pass the necessary resolutions. In short, there are three reasons for amending the ESM Act 2012 to allow for the DRI. First, the ESM was established to provide loans for member states. The DRI provides for loans for financial institutions, on the basis of an application by a member state. Second, the DRI provides that subsidiary bodies and sub-entities may be used to facilitate such investments. Third, while the ESM treaty provides for limited self-amendment, for example, in Article 19, to add to the range of financial instruments that can be used, these changes for the DRI go beyond what the Dáil approved in the ESM Act 2012.

The ESM Act 2012 provided for the payment of Ireland's contributions to the ESM and also made provision for the immunities included in the ESM treaty in Irish law. The ESM treaty, as it stood in 2012, was annexed to the Act. Article 3 of the ESM treaty states the "purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States". The key feature is that it provides for financial assistance for euro area member states.

However, as the direct recapitalisation instrument was not in existence when the ESM was adopted and as it provides for direct assistance to a financial institution, it is considered that this expands the scope of the treaty beyond what was approved by the Oireachtas in the ESM Act 2012, and an amendment to that Act to provide for the new instrument is, therefore, required.

In regard to breaking the link between the sovereign and the banking sector, the direct recapitalisation instrument is just one part of the system. The establishment of the single resolution mechanism, SRM, and the accompanying single resolution fund, SRF, which will be mutualised over an eight-year period, is also an important part of the process. There is also a requirement to provide a backstop to the SRF at the end of the mutualisation period. In the interim, discussions are ongoing to ensure the SRF has sufficient funds available to it in the event of a major call on it in early years, through bridge financing arrangements.

The aim of the instrument is to preserve the financial stability of the euro area as a whole and its member states. It does so by catering for those specific cases in which an ESM member experiences acute difficulties with its financial sector that cannot be remedied without significantly endangering its fiscal sustainability, owing to a severe risk of contagion from the financial sector to the sovereign. The use of the instrument could also be considered if other alternatives would have the effect of endangering the continuous market access of an ESM member.

As I noted, Article 14 of the draft operational guideline on the DRI, approved by the euro area finance Ministers on 10 June 2014, provides for retroactive direct recapitalisation. It states:

This guideline is established without prejudice to existing ESM and EFSF programmes in which financial assistance has been provided to ESM Members who recapitalised their institutions, which could be replaced in part or in full with a retroactive application of direct recapitalisation following a decision by the ESM Board of Governors, on a case-by-case basis, by mutual agreement.

The detailed modalities for such replacement shall be established in the relevant ESM Board of Governors decision.

As I have stated on a number of occasions, including in replies to parliamentary questions, an application for the DRI can only be made once the instrument takes effect and this, in turn, requires that the single supervisory mechanism be in place and operational, which is expected to be by 4 November this year.

I turn now to the annexing of the ESM treaty as adapted following Latvia's accession to the ESM. The ESM treaty as adapted following Latvia's accession to the ESM in March this year is being annexed to the ESM Act 2012, in both the Irish and English languages, through this legislation to ensure that the most recent version of the treaty is associated with the Act. Latvia applied to join the ESM on 21 August 2013, arising from its imminent accession to the euro. The arrangements for its accession to the ESM were decided in accordance with Article 44 of the ESM treaty. In October 2013, the ESM board of governors, which, as I have noted, is composed of the euro area finance Ministers, approved Latvia's application to join the ESM, with the technical terms for Latvia's accession. Latvia joined the euro on 1 January 2014 and became the 18th member of the ESM on 13 March, 20 days after it had deposited its instrument of accession.

A consequence of Latvia's joining the ESM is a requirement to adapt the ESM treaty to reflect this fact. As I have mentioned, the ESM treaty provides for limited self-amendment. This includes the adaptations arising directly from the accession of a new member in accordance with Article 44 of the ESM treaty. Such adaptations are subject to the approval of the board of governors by mutual agreement in accordance with Article 5(6) of the ESM treaty. The adaptations arising from Latvia's accession fall within these provisions. These changes were agreed to by the board of governors on 23 October 2013.

As there were adaptations to the text of the ESM treaty to accommodate Latvia's accession, including to annexes I and II, it is appropriate to take the opportunity presented by the Bill to address this issue. The changes to the ESM treaty arising from Latvia's accession comprise the following: the inclusion of Latvia in the list of member states; the amendment of Articles 8.1 and 8.2 to increase the total authorised capital stock and value of paid-in shares by the amount of Latvia's contribution to each; the inclusion of Latvian as an official language by adding a new paragraph to the final part of the main text of the treaty, which is set out in the ESM treaty as annexed to the Bill; and the amendment of annexes I and II to the treaty to include Latvia's contribution key and share of the capital stock. The changes to the annexes have been made because the technical terms of Latvia's accession to the ESM approved by the board of governors include the calculation of Latvia's capital contribution to the ESM. Latvia's ESM capital contribution key was set at 0.2757%. This means that Latvia's total capital subscription will be €1.93 billion, including €221.2 million in paid-in capital which will be paid in five annual instalments of €44.24 million each. Latvia has paid its initial instalment of paid-in capital and is expected to make the four remaining payments annually up to 2018.

The ESM's direct recapitalisation instrument represents a core element of a much broader EU approach to breaking the banking-sovereign link as committed to by the euro leaders in June 2012. This includes the establishment of the single supervisory mechanism, the bank recovery and resolution directive, the single resolution mechanism and the single resolution fund. The inclusion of the ESM treaty as adapted following Latvia's accession ensures that the most up-to-date text of the ESM treaty is annexed to the associated legislation. I look forward to an informed and constructive debate and commend the Bill to the House.

I thank the Minister. It is always very important to wait until someone finishes what they have to say before there are interruptions.

I thank the Acting Chairman for the lesson in how I should conduct myself. I thank the Minister who is very welcome to the House on Second Stage of the Bill, the Remaining Stages of which will be completed during the week.

My party supports fully the legislation which provides the technical basis for the recapitalisation of banks within the eurozone. It is complex but it was announced in the June 2012 summit and, as such, it has been slow in evolving. There are parts of the process which are still required to be completed. A mechanism has now been put in place for future bank resolutions, but while the Minister has clarified certain elements of it, we are still missing a clear pathway for countries like Ireland on retrospective recapitalisation. That is what people are looking for following the seismic shift in EU policy announced over two years ago. The Taoiseach and the Minister for Finance have acknowledged that when the State had to step in to save the banks, there was no mechanism like this in place unfortunately. That is why it is important that it is in place should a banking crisis like the one we had visit any other eurozone state in future. That is important in itself and, fundamentally, why we support the Bill. We need to put those mechanisms in place. This was not there in previous times unfortunately. The Minister will be bored hearing this but it is important to record again that Ireland took the hit for the rest of the European banking system. While some of it was deserved, the hit was disproportionate.

It is important that it is agreed by the board of governors when the time is right that we can access this retrospectively, which leads me to a couple of questions. The Minister has made soundings in public comments in relation to the possible sale of the State's share in AIB.

Should that happen, would that mean we are effectively throwing in the towel on retrospective recapitalisation of the moneys put into Allied Irish Banks? How would that fit into a future retrospective recapitalisation? If the State recoups X amount, would it be then the case that we could go back and look for the difference in whatever we were to raise from the sale of AIB, for example? Would we be able to go back into the market and recoup the rest of the money that the taxpayers have put in? That is a fundamentally important point, and the Minister has stated in his speech that it is still something he is pursuing.

It is not easy to get agreement, but mutual agreement is needed by the ESM board of governors on retrospective recapitalisation. I am wondering how possible that is. At the end of the day it is going to be a political decision, which, in my view, will come from Germany and France. In fairness to this Government and to the previous one, the adjustments that have been made and the sacrifices the public has made to get our house and our banking situation back in order have meant that a contagious effect on the rest of Europe was not seen. This is because we acted on the night of the guarantee and have acted since. I believe, as do most people, that Ireland is entitled - I do not use that word lightly - to fair play from Europe. Fair play from Europe is not simply allowing the early repayment of the IMF loans or a reduction in the interest rate, which was punishing at the time anyway and was forced on us.

It is important that all parties and Independents are seen to be supporting thie Bill. I am assuming all parties support it, although I note that Sinn Féin has been absent most of the day, for obvious reasons I would think, and they usually have a view on European banking policy, our fiscal approach and how they would do things. Who knows what will happen in the future? I am always hopeful that we will learn from the mistakes that have been made in the past across the eurozone and that the banking system will learn from them too. I am not sure this is always the case, and that is why it is important that a mechanism is in place into the future. What I and most people want is progress on the stated policy of a real break between banking debt and sovereign debt, which is brought about in this Bill. However, it is also important to consider retrospective capitalisation and the recouping of some of the moneys that would be due to the taxpayer on the back of us taking the decisions that effectively we had no choice but to take at the time.

The Minister states he hopes the process in relation to the draft guidelines on retrospective direct recapitalisation would be completed by November this year. I hope at that stage, when it is appropriate to bring those guidelines back into the House, he will do so. I hope that the Minister will continue the work he is doing with other Ministers to try to convince our European partners that this is the right thing to do. I know that the rest of Europe and the European economy has its difficulties and challenges, as we also have at domestic level even though growth rates would seem to suggest otherwise. While we are dealing with that it would be a good signal for the Irish people to show that the European Union works, that it does take into account the mistakes that happened in the past, and that it does not penalise the Irish citizen for taking a hit for the rest of Europe.

I very much support the Bill and, on behalf of my party here in the Seanad, we will certainly assist in its early passing in the rest of the week. I ask the Minister to give a commitment to come back and report to the House on his ongoing negotiations after 4 November this year, perhaps on Committee and Report Stages.

I welcome the Minister for Finance back to the Seanad. When I was reviewing my notes on the European Stability Mechanism Bill 2012, much of what the Minister had predicted he could do after the establishment of the European Stability Mechanism, ESM, following the fiscal treaty and agreements at home and abroad, he had done, all to the satisfaction of the taxpayer. He is to be commended for this.

The significant issue of the fiscal treaty and the 2012 legislation was breaking the link between sovereign debt and the banks. Unfortunately, internationally banks operate in a cyclical way. When there is an economic downturn or recession, they tend to operate in an appropriate manner. Then the dogs of war in the banking sector are unleashed and they start to operate inappropriately again. They have done this for hundreds of years. I hope the checks and balances in the systems will hold the dogs of war off for as long as possible.

The DRI, direct recapitalisation instrument, is the important tool of this legislation which was not available when the banking catastrophe occurred, landing a bill of €64 billion on taxpayers’ shoulders. This legislation is a continuation of the 2012 Act. The Single Resolution Mechanism, SRM, and the accompanying Single Resolution Fund, SRF, are the construction blocks of a system for a recapitalisation of banks which may be of strategic importance to a country and ensure it will not fall on the taxpayer to pay for it. It is welcome to see the two mechanisms being mutualised, that Latvia has entered the eurozone and the spreading of the burden. The initial paid-in capital for the ESM is €80 billion, with a call on a further €620 billion.

Senator Darragh O’Brien pointed to several important aspects of the Bill. The 2012 Act was concluded by the time in June 2012 of the communiqué from eurozone leaders on the possible retrospective recapitalisation of the Irish banks. At the time, the Taoiseach and the Minister for Finance were trying to get the best deal for the country. Bank of Ireland has since repaid all of the moneys it received from the State to preserve its liquidity ratios, but we still own 15% of the bank. I do not see how the ESM can be used to recapitalise retrospectively this bank when we have got the money back. If we sell AIB, are we out of the game? Is there a mechanism by which the ESM can take over the bank?

The bigger question relates to IBRC, Irish Bank Resolution Corporation, formerly Anglo Irish Bank and the Irish Nationwide Building Society.

The Minister and his team secured substantial benefits for the taxpayer in the deal liquidating IBRC. They included agreement on extending the period of Ireland's loans and a reduction in the interest rate applied to the loans. This had a major impact on Exchequer cashflow.

While I am not someone who wants to have his cake and eat it, I query the extent to which we may lose out on recapitalisation by the European Stability Mechanism. Fairness is required because taxpayers took the initial hit and it was a significant blow. While we are now on the road to recovery, we did not know that during the early period which was characterised by incredible uncertainty. I remember receiving a briefing from the Department of Finance shortly after this Seanad was convened. I was shocked to learn where we could end up and that we have not ended up in that position is thanks to the work of the Minister and his Department as well as improvements in relations between the State and international bodies.

I have spoken about the retrospective recapitalisation of the banks. I assume any countries that join the European Union will also participate in the European Stability Mechanism. The ESM was established with a fund of €700 billion. If other countries with large financial sectors join the eurozone, will this €700 billion be adequate? If not, will additional moneys be provided? I note Latvia is adopting the same approach as Ireland in that it will provide a certain amount in equity over a five-year period and give a commitment that will be for a callable amount. I assume if other countries with large financial sectors join the European Stability Mechanism, the funding available to the ESM will have to increase. Would this require the introduction of further legislation? I note the Minister is nodding.

Reading the notes provides a wake-up call in terms of how far we have come. It is amazing how quickly people, including political representatives in both Houses, have forgotten where we have come from, especially in the context of where we are today. Much of this progress is due to the careful handling of matters by the Minister.

I welcome the Minister. He seems to be becoming fond of the Seanad, given his regular visits to the Chamber.

While this is a relatively technical Bill, the overall aim of the European Stability Mechanism is to provide an insurance scheme against future shocks to the financial system. The Minister explained the position very well. Unfortunately, we have still not separated the debt of ordinary customers and the massive and reckless debts of certain banks. A fundamental principle needs to be implemented in mechanisms such as the ESM to prevent another financial crisis in future. We all hope that will not be the case but predictions of another financial crisis have been made on and off during the years. Whether the experts are right or wrong, we should at least pay heed to them. Is it possible that we would pay for an insurance policy through the European Stability Mechanism and find there is no money left in it in a crisis? Will the Minister comment on this possibility, however remote it may seem?

It has been repeatedly stated that the ESM cannot be used as a way to invest in countries to help them out of a crisis. As an alternative, however, the European Investment Bank may be given more funds. Will the Minister comment on whether Ireland may obtain more funds through the EIB? If that is the case, what are the Government's priorities for such funding?

As previous speakers correctly noted, we need to secure a deal on retroactive bank capitalisation, if possible. While I realise negotiations may be ongoing behind closed doors and do not expect the Minister to brief the House on their progress, it seems to be rather quiet in this regard.

Given that we have let go of the "double Irish" arrangement - I congratulate the Minister on his handling of the issue on budget day - could we get anything back in terms of bank debt? I would like to see business-headed negotiations to get us the best deal possible. I would appreciate it if the Minister could update the House on the situation.

The other matter I wish to raise is the question of a credit history amnesty for Irish businesses and individuals. As we are aware, banks are afforded massive protection and leeway but ordinary customers have lost out and had to pay massive amounts of cash to bail out the banks. I draw the Minister's attention to an interesting development in South Africa whereby people there will have negative information removed from their credit histories under a so-called amnesty. Under the law introduced there, credit bureaus have two months to erase adverse credit information from their records. We had a massive problem with too much free credit in Ireland during the boom. Could we work out something to ensure negative credit histories do not affect SMEs that are seeking loans to expand? While consumers hold some responsibility for overspending, the banks clearly have a responsibility as they lent too much. However, the problem now is that there is not enough credit, and individuals and businesses are being hindered by poor credit histories. Could some of the boom time credit history be considered as separate from the normal history of the business in order that they would be less likely to be refused credit? I think there is something to be learned from the South African example.

Can people be allowed more access to their pensions? I am aware that the Minister responded last year and the previous year to a suggestion made in this House - and made, I am sure, by others as well - to do something like this. Given that the banks are getting so much help compared to the regular person on the street, I believe we can do more to allow people actual access to cash. I really welcome the move introduced by the Minister in the past few years to allow people access to 30% of their additional voluntary pension contributions, but the Government should extend the scheme to allow people more access to tax-free cash to get more cash flowing into the economy. The fact is that access to AVCs is releasing cash into the economy. It is helping people and it is helping businesses to survive. What is most needed by these two groups is cash. Has the Government got figures on the number of people who have availed of the scheme so far? Can the Minister tell the House how much cash has been released into the economy through the AVC scheme? The concept is very good and it would be interesting to know how well it has worked.

I draw the Minister's attention to news from the United Kingdom this month. The plan there is that people will be able to use their pension pots like bank accounts from the age of 55 years and withdraw thousands of pounds to save, invest or spend as they wish on holidays or other purposes. The UK Chancellor, George Osborne, said:

People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan. From next year they'll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free.

Under current rules in the United Kingdom, people from the age of 55 years can take 25% of pension savings as a tax-free lump sum. In future, savers will be able to dip into their pension pots when they want, and each time 25% of what they take out will be tax free. People will be able to use their pension pots like bank accounts from the age of 55 years and withdraw thousands of pounds to save, invest or spend as they wish on holidays or other purchases. I think we could release the tight grip on such pension funds. It would be a sensible move. I would like to hear the Minister comment on these moves in the United Kingdom and whether he would be willing to conduct a study of the feasibility of similar measures to be introduced in Ireland. While I welcome moves to protect financial institutions, we can do much more to help ordinary citizens - people who are starting up businesses who can play a massive part in restoring financial and economic stability to the overall system.

Many of the answers are in our own hands. I think it is time we did a little more to encourage those start-ups.

One part of the budget that did worry me was the reference to self-employed people paying tax. It concerned those earning a considerable sum of money, but self-employed people have to pay a higher rate of tax than those who are not self-employed. I do not quite understand that, at a time when we should be encouraging people to leave their 9 a.m. to 5 p.m. jobs and set up businesses, we then introduce something that seems to distinguish between employees and the self-employed. I would be interested to know the Minister's view.

I welcome the Minister. As a number of colleagues have said, this Bill follows the enactment of the European Stability Mechanism Act in 2012. To some extent it is a technical measure dealing specifically with recapitalisation of banks and the retroactive recapitalisation of financial institutions. That may or may not be something that Ireland can engage with and I fully understand that the Minister is confident of that fact.

I will start with some of the current issues concerning the state of the European economy. In recent times it has been evident, particularly when one looks at the volatility of European stock exchanges, including significant losses in recent weeks, that we are far from being out of the woods in terms of the crisis in Europe. Generally speaking, although our own performance has been significantly better, the reality is that Ireland's own recovery will be under threat if we do not see a wider recovery within the European Union.

The European Central Bank has indicated that it will take further measures to stimulate the European economy, but some economists have said the ECB has gone as far as it is able to go in real terms. The markets have already priced in any further action the ECB could take. I am raising this issue because the measure before us is important. The debate in this House is very much focused on its retroactivity and particularly its application to Ireland, as the Minister has said.

I note that a memo from the European Stability Mechanism confirmed it would be retroactive, although it would require mutual agreement. Some cold water has been poured on the idea that we could achieve mutual agreement on a retroactivation application for Ireland, given that there is a certain pessimism that Germany would agree to such a move.

I have a concern about our current shareholdings in AIB and Bank of Ireland. Perhaps the Minister can answer this question. If we were to engage in the retroactive application of the recapitalisation instrument for Ireland would that mean we would have to dispose of our shareholdings in those financial institutions? I am asking that because there is significant evidence, particularly with Bank of Ireland and, to be fair, with AIB also, that those financial institutions are turning the corner. I wonder to what extent it would be prudent for us to retain our shareholdings in those two financial institutions.

Others may not share my view, but I am particularly aware of the fact that a similar situation arose over 20 years ago when we took a shareholding in AIB under another coalition Government. We then retrospectively discarded those shares, but had we held onto them the country would not have been in the situation it found itself in in subsequent decades.

I have another reason for wanting to maintain our shareholding in both AIB and Bank of Ireland that relates to the situation facing the ordinary people of Ireland in terms of our financial future and their access to financial support.

We have changed a good deal since the 1970s. We no longer have building societies or the level of finance available from local authorities, for example, to people on low incomes who want to secure mortgage finance. A serious debate remains to be had in the country about the future of our banks and the banking sector and how ordinary people on middle and low incomes are going to do business in future. Far better for that debate to be had while we retain our shareholdings in the two banks. I am concerned that a recapitalisation of the moneys invested by the people in these banks could leave us in a position where we had less control over the future of banking in the country.

Another aspect of all of the debate relates to the future of the euro area and the recapitalisation provisions of the European Stability Mechanism generally. I was rather struck by the fact that the Minister clarified that the instrument will not be used for the winding up of institutions. I was reminded of an article I read recently in which a German economist, Professor Sebastian Dullien, warned that banking union would be unable to cope with any systemic crisis in the eurozone area unless the winding up of failing banks could be financed via the European Stability Mechanism bailout fund. Are we going far enough with this mechanism? He also went on to query the amount of funding that would be available through the mechanism which, I understand, is capped at €60 billion, although I could be wrong.

Of more concern to Ireland, perhaps, was that he raised the questions of whether this measure would be levelling the playing field for countries such as Ireland. He took the view that if problems were to loom in the Irish banks we would have to reckon with what he termed a bail-in of creditors and investors. He argued that we might not be considered a threat to the European banking system generally speaking. His comments were rather pessimistic. He argued that we would not be in a position to bail in our banks given our current financial situation and that investors in the European banking system generally speaking would know that. He also argued that, for example, Deutsche Bank would have an advantage over Irish banks. I am unsure whether that is realistic and something we should be taking seriously or whether the Minister is confident that the recapitalisation measures are sufficient to cover Ireland in the event that any of our banks were to suffer from a crisis because of the fragile position of the European economic area generally.

It is a great credit to the Minister - we have not seen him in the House since the budget - that as a country we are in a position to go forward. Part of my concern about the country holding shares in the principal banks is that it is the ordinary people of Ireland who have paid the price for the financial crisis. It is wonderful that we have turned a corner but I would hate to be in a position in ten years time to have to say that we did not take the right actions or do the right thing to ensure any potential benefit to the peopl, such as by retaining these shareholdings.

I welcome the Minister and apologise for missing his speech which I have just read. I had a previous engagement.

As has been mentioned, the Bill sets up a direct recapitalisation instrument or rather it permits some guidelines to be added to the ESM treaty. Some people have raised the question, although not necessarily in the House this afternoon, about the legal status of these guidelines. Some commentators have questioned the usefulness of the instrument and the ESM. Some people, although not many, claim that it will live up to the grand ambition of separating banking and sovereign debt, as had been anticipated. The total funds available are rather small while the rules mean that the sovereign, namely, the people, would still end up taking some part of a hit. These are legitimate criticisms.

In an Irish context the debate on the ESM has focused on the issue of retroactive recapitalisation and that has been reflected this afternoon in the Chamber. This is where the focus definitely should be, given what has happened in recent years. My colleague, Deputy Pearse Doherty, has kept the issue firmly on the agenda but any time he has questioned it he has been told that he will have to wait until the instrument has been established. The Minister has said this will happen in some weeks. I understand 4 November is the relevant date. I am unsure whether there is a firm commitment to make the application for retroactive recapitalisation. There are questions about the exact process to be followed. Even if an application was made, simple questions remain, like whether the application would be treated in the same way as future recapitalisation, and these need to be answered.

Ratifying the Bill without holding the Government to account on the plan to secure recapitalisation could be seen as letting the issue go somewhat or letting the Government off the hook. In June 2012 there was talk of a game changer and a seismic shift. People want to see action being taken. This is why it is important to get confirmation that an application will be made, that the Government will apply and how the application will be treated. The Minister stated in the Dáil that some of the original opponents of recapitalisation have left their posts but some of the Governments have not changed. There has been a good deal of silence and a lack of support has been shown, despite letters sent by the Taoiseach to European Union leaders. Commitments have been made that the matter is being raised at all appropriate levels at ministerial meetings, etc.

My colleagues in the European Parliament sought the support of the Parliament, stating the European Parliament supported retroactive recapitalisation, but the proposal was voted down on a particular amendment. The Minister will know from contributions made in the Dáil in the past week or two that an amendment was tabled on Committee Stage. We will table a similar amendment in the Seanad. We do not believe that the Bill should be allowed to pass without toughening it up somewhat and toughening up on plans to pursue retroactive recapitalisation.

Having listened to the contributions it is clear we all want the same. We want a substantial amount of debt to be lifted off the shoulders of the sovereign. As Senators, we have a role to continue to question the Government and hold it to its commitments. That is why we will be tabling amendments on Committee Stage on Thursday. I look forward to listening to the Minister and to having further dialogue with him on the matter.

The Minister is welcome as always. Having read through the documentation on the matter one of the thoughts I had - I am not being too mischievous - was what did Latvia do to deserve to be included in the euro. The more serious theme is Alan Ahearne's comment in a section of the Brian Lenihan book to the effect that an additional dimension to Ireland's crisis was the country's membership of a poorly-constructed and at times dysfunctional currency union. It was extremely badly designed. The wisdom of the United Kingdom, Sweden and Denmark in not joining has been justified by events. People like the Minister are doing their best, I imagine, to establish whether we can get back any retrospection following what happened and having taken the hit for the dysfunctionality of the eurozone. If I was a Latvian I would be voting against this Bill, but we will leave that aside.

One of the problems is that we get interest rates inappropriate to a country's stage of development. We lose the exchange rate as an instrument of economic policy. We have tsunamis also. One of the banks that was advising the Minister on how to run the mortgage market in the Sunday Independent had 275% wholesale funding but hardly any deposit. That is a recipe for instability. There was no bank regulation and we took the hit for it.

There was inadequate fiscal federalism for the system it was supposed to serve and there was no exit mechanism. I fear that this system will guarantee mass unemployment forever in places such as Spain, Greece, Italy, Belgium and Portugal. Ireland has struggled manfully with the system. This was designed to be a hard currency zone but, as far as I can see, only two eurozone countries, Germany and Austria, actually qualify. The other countries in the hard currency zone are Sweden, Norway, Denmark and Switzerland.

The fact that Ireland did not have mechanisms to deal with huge movements of capital into the banking system created the property bubble. Such movements were treated as manna from heaven. The Minister has worked against this, with our support, in the years since his appointment and he said in the Dáil that he keeps open the prospect of retrospective action, but this would require the unanimous agreement of the 17 other eurozone countries. Such agreement seems unlikely but, as the Minister said, it keeps open the possibility of applying the European Stability Mechanism, ESM, for retrospective direct recapitalisation. The single supervisory mechanism comes into operation in November and it is a step towards this, but it is a long road.

I asked fellow economists about the €60 billion in the fund and they said that around €2 trillion would be required to rescue all the dud zombie banks in Europe - €60 billion is only a drop in the ocean. Perhaps the Members of this House and others should read the small print more closely when documents from Europe come before us, as this matter has been a disaster for people throughout the continent. I do not believe some countries will reach a resolution for a very long time. The matter was badly thought out and has done huge damage to many people in our constituencies and in countries throughout Europe.

I wish the Minister well as he must grapple with the problem. The last time I met the Minister he was being condemned by people in the tourist industry for a measure that in fact promoted that industry. Similarly, a measure that promoted the newspaper industry was condemned in a newspaper editorial. Two banks, one rescued by the British Government and the other rescued by the Irish Government, give the Minister advice on how to run the mortgage market. Many tax lawyers and accountants who designed the "double Irish" arrangement now try to advise the Minister on how to replace base erosion and profit shifting, BEPS. This illustrates the problems faced by the Minister for Finance, but he copes with them remarkably well and I commend him on this. I wish the Minister well, because much of the success we seek depends on his success in his onerous post. He has our support.

I thank all of the Senators who contributed to the debate. The purpose of this legislation is to make provision for the inclusion by the ESM board of governors, in accordance with Article 19 of the ESM treaty, of the ESM's direct recapitalisation instrument, DRI, as one of the financial instruments envisaged under Articles 14 to 18, inclusive, of the treaty. This includes provision for the creation of subsidiary bodies which will implement the direct recapitalisation instrument. It also incorporates the ESM treaty as adapted following the accession of Latvia to the ESM on 13 March 2014. It is important to recognise that the measures provided for in this Bill represent the outcome of lengthy and complex negotiations over the past two years. Much work went into reconciling the views of those countries, such as Ireland, that were convinced of the need for the measure and those that had to be convinced of such a requirement. Seeking common ground amongst often disparate positions is how much European policy is formed and it applies to this measure also. Once the instrument is in place it can be adapted as required. The addition of this instrument to the ESM treaty, which took effect in 2012, is itself evidence that such adaptation can and does take place.

The draft guideline on financial assistance for the direct recapitalisation of institutions, agreed on 10 June 2014, includes a specific provision on the retroactive application of the instrument. Therefore, the agreement, which we were active in negotiating, keeps open the possibility of application to the European Stability Mechanism for retrospective direct recapitalisation. The draft guideline states that the potential retroactive application of the instrument should be decided by the ESM board of governors on a case-by-case basis by mutual agreement. It also states that the detailed modalities for retroactive recapitalisation shall be established in the relevant decision of the ESM board of governors - that is, the euro area finance Ministers.

I wish to address a number of issues that have been raised by Senators. Comments on the Bill have largely focused on a number of aspects of the direct recapitalisation instrument and, in particular, its retroactive application. Concerns have been expressed about a perceived lack of available detail as to how the DRI would be applied retroactively. The draft guideline clearly establishes the scope of, eligibility criteria for and operational procedures of the DRI. Article 14 of the guideline contains the provision for retroactive recapitalisation and provides for a decision on a case-by-case basis. From our point of view, that provides a broad degree of flexibility of interpretation. Demanding more detail during the intense negotiations that took place to reach agreement on the DRI would most likely have resulted in a much more restrictive retroactive instrument, which would not have been in our interest.

Concerns have also been expressed about the €60 billion capacity of the DRI and whether it will be sufficient, particularly given the size of Ireland's bank bailout. The Eurogroup agreed in June 2013 that an ex ante limit of €60 billion would be set by the ESM's board of governors on the amount of financial assistance available for the DRI. This was done to preserve the ESM's lending capacity for other instruments, provide transparency for investors and help preserve the ESM's high creditworthiness. The limit was established to strike a balance between the necessary containment of risk for the ESM and ensuring sufficient capacity for the instrument. It is important to recognise that the ESM's DRI is part of a broader EU response to breaking the link between banks and sovereigns. It must be viewed in conjunction with the banking union measures, particularly the bank recovery and resolution directive, the single supervisory mechanism, the single resolution mechanism and the single resolution fund.

The figure of €60 billion was agreed upon in the context of the ESM's principal function, which is to lend to sovereigns, not banks. The ESM has a maximum lending capacity of €500 billion. Given the way rating agencies treat these things, if the €60 billion provided for DRI was fully used up, the remaining lending capacity would be less than €440 billion and would, in fact, be closer to around €330 billion. In view of the liability cascade that will be in place, whereby the DRI only steps in as a last resort after a stipulated series of other sources for capital have been tapped, the €60 billion figure should be sufficient. It is open to the governors of the ESM, of whom I am one, to raise this €60 billion limit by mutual consent if they consider it necessary. The €60 billion provided for the DRI represents the agreed amount, taking into account the other banking union measures that are now in place, and also the impact of the DRI on the ESM's overall lending capacity. Only time will tell if it will be enough when the next problem bank rears its head. If it is not enough, a decision can be considered to change it.

There is a view held by some that Ireland should make an application for retroactive recapitalisation as soon as possible. If all member states have ratified the direct recapitalisation instrument by November this year, it can come into effect following a decision by the ESM board of governors to include it in the ESM's instruments.

We can then consider whether, when and how to go about an application for retroactive recapitalisation.

The decision on an application subsequent to the direct recapitalisation instrument coming into effect in November is a matter of timing. As I indicated on both Committee and Report Stages in the Dáil, any decision to apply should not be rushed. Moreover, as I have stated on a number of occasions recently, the best way to ensure the taxpayer gains the maximum possible return on the money that went towards preventing the collapse of the State's banking system is to be in a position to consider all the options open to us for pursuing such a return. We are now in the position of having a number of options in regard to our investment in the banks. Unlike back in 2012, the European Stability Mechanism is no longer the only option open to us to recover the money provided to recapitalise the banks. Investors are again willing to invest in Irish banks, and the market value of our investments has improved accordingly. The determining factor will be which option can achieve the maximum return for the taxpayer. On Committee Stage in the Dáil I explained that, in Europe, a strategic approach delivers the best results. In this context, it is preferable to keep the option of retroactive recapitalisation on the table, rather than risk refusal with an early application. Keeping the maximum number of options on the table is a strategy we will continue to pursue.

In regard to what the ESM can and cannot do, I wish to clarify several issues. The ESM is governed by a board of governors comprising euro area Finance Ministers, including myself. All of the decisions of substance are made by the board of governors on the basis of mutual agreement, in accordance with Article 5(6) of the treaty. These include decisions on lending capacity, capital calls and the amount of the capital stock. It is not the case that the ESM can, of its own volition, unilaterally call unlimited amounts from member states. Section 3 of the European Stability Mechanism Act 2012 sets a ceiling on Ireland's capital contribution and any change to the amount specified in that Act would need to be approved by amending legislation. In addition, borrowing capacity and lending capacity are fixed by decision of the board of governors and must similarly be changed by their decision. The ESM cannot do so unilaterally.

The ESM direct recapitalisation instrument represents a core element of a much broader EU approach to the issue of breaking the bank-sovereign link, as committed to by the euro area leaders in June 2012. This includes: the establishment of the single supervisory mechanism; bank recovery and resolution directive; single resolution mechanism; and single resolution fund.

I thank Senators for their support for the Bill and for their interesting observations. I thank Senator Barrett, in particular, for his support. I argue, however, that there is a case to be made for the eurozone. Looking at growth in GDP across Europe since the common currency was established, the figures are quite impressive. In terms of exchange rates against the US dollar, for example, the value of the euro has increased substantially, even at the level it is at today, from where it was when it was instituted. It has done a great deal for cross-border trade among the 18 countries that make up the eurozone.

It is unfair to attribute the failure of the banking system to the existence of a common currency. The banking failures date back to the collapse of Lehman Brothers. It is important to also note that banks failed in the United States and United Kingdom. We all remember the television footage of queues outside Northern Rock branches in Britain, as well as the ensuing panic here in Dublin. That happened before any of the Irish banks were touched. Every bank in the world was affected in some way or another, and we were affected very badly. A great deal of the fault for what happened lay in the policy of very cheap liquidity that was followed in Europe at the time, but there also was a great deal of fault arising out of Irish greed. People wanted to make money by selling property to each other at very low interest rates.

I thank Senator Aideen Hayden for her remarks. She asked about policy on the banks. In short, we do not have a long-term interest in having State banks and, at some point, we will sell the banks back into the market. Whether we go down the retroactive route through the ESM or sell on the market is something that will ultimately be decided by price. The ESM was a great facility for buying shares in the Irish banks when there was no other option, but now there is a market option. AIB was independently valued at more than €11 billion last year, but that was before the half-year results were announced showing a profit in the neighbourhood of €460 million. There is real value in that bank. If the primary purpose is to get back the money the taxpayer funded to recapitalise the banks, we may do better in the market. The other consideration is whether we want the fund managers of the ESM running an Irish bank. Their particular skill is raising vast amounts of money on the international markets and administering that money, but they are not really bankers. They do not give out loans, for instance. Essentially, they are very large fund managers. If they bought the shares in AIB, they would be directors of the bank and would control the board.

These factors must be taken into consideration, but it is very useful to have the option the ESM presents. That is how I have pursued the matter and we have made it a matter of law. I said in the other House that the pace of change in Europe when it comes to political personnel is very rapid. I am three and a half years in this role and out of the 18 eurozone countries, there are only two Finance Ministers more senior than me, one by only a month. The most senior person is the German Finance Minister, Wolfgang Schäuble, who has a lot of seniority. When things move that rapidly, one must be absolutely sure one's policies do not depend on personalities. Instead, we must have policies that are grounded and founded in law. I negotiated to ensure there was a legal provision for retroactive recapitalisation of banks enshrined as an instrument of the ESM treaty. Whether we use that provision is a different matter, but it is there in law. If the personalities change, that will not matter.

I thank Senators for their contributions. I will come back on Thursday, if I can, to continue our discussion. I acknowledge that it is a very technical Bill. I thank Members for their very sensible and acute observations.

Question put and agreed to.
Committee Stage ordered for Thursday, 23 October 2014.

When is it proposed to sit again?

At 10.30 a.m. tomorrow.

The Seanad adjourned at 5.30 p.m. until 10.30 a.m. on Wednesday, 22 October 2014.
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