I would like to ask the Minister about the definitions of the treaty. What will happen in terms of the ratification process - I will allow the Chairman to guide me if this should be under a different section - if there are changes to the ESM at the next Council summit or a subsequent summit? There has been a lot of discussion about the ESM facilitating direct lending to banks. If that were to happen, it would require a treaty change. What impact would that have on the ratification of the Bill that is before us?
European Stability Mechanism Bill 2012: Committee Stage
SECTION 1
Question proposed: "That section 1 stand part of the Bill."
The negotiation stage of the treaty is completed, and a text has been agreed among the member states. The treaty will not be amended because we are now in the middle of the ratification stage, which will continue. One of the purposes of this Bill is to enable us to ratify it. If people subsequently decide to amend the treaty, those amendments will have to be renegotiated and an amended treaty will have to be ratified.
If amendments were agreed at the next Council summit, Ireland would not yet have ratified the treaty at that stage. I know it is difficult to say, as we are talking hypothetically, but would we have to halt the ratification and consider a new Bill?
Some countries have ratified already, so I do not think that is feasible, although I will consult about it in a minute. I do not think it is feasible, once the ratification process is under way and some countries have ratified, to stop the process. It would be unfair to the countries that have ratified. What would happen is that ratification would proceed and then, if people had a different view of what the powers of the treaty should be, they would have to come back with an amended version. It would be rather like amending legislation here - an ESM No. 2 treaty.
To be clear, what the Minister is saying is that regardless of the conclusions of the summit, the ratification process will take place across the member states that have agreed to ratify the treaty, and if there is a need to ratify an amending treaty, that would involve a separate piece of legislation.
That is how I see it. At least, that would be the legal position. If there was a strong view that the provisions were inadequate and a clear signal that amendments would be introduced, it would be up to the countries that were in the process of ratification to decide whether to proceed.
With regard to the Spanish bailout of up to €100 million, which is to be channelled through the sovereign and invested in the Spanish banks, is there clarity yet on whether that funding will come from the European Financial Stability Facility or the ESM? Given the scale of the recapitalisation required, it would put a substantial dent in the ESM, which has a potential lending capacity of up to €500 billion; one fifth of it would be gone immediately. Perhaps the Minister can clarify that matter for us.
Picking up on Deputy Doherty's point about the banking licence, I understand we are dealing with the treaty as it is presented, but is it even on the agenda at this stage that the ESM could be given a banking licence to enable it to borrow directly from the European Central Bank? Is the issue of direct recapitalisation of banks by the ESM throughout the eurozone under active consideration? Clearly, that would have been the preference of the Spanish authorities, but they failed to achieve it. In the conference call, was there an open discussion of the possibility of direct recapitalisation which would be kept out of the sovereign balance sheet? That is the fundamental question to which people want an answer.
When it comes to European affairs, I have learned never to say never. For example, the power the EFSF now has, which will be exercised in the case of Spain to provide money for the recapitalisation of banks, was conferred by way of amendment last July. There is an analogous precedent that one can point to in terms of subsequent amendment of treaties.
In the teleconference, I was the only one, speaking on behalf of Ireland, who expressed the view that it would be better if funding of the sovereign was separate from funding of the banks, and that a mechanism should be found for direct bank recapitalisation. I said I would not seek a discussion on it in the teleconference, because others were not expressing an interest, but that I would raise it again in the context of euro group and ECOFIN meetings.
While the methodology and the amount that Spain can apply to recapitalise its banks have how been agreed, Spain has not yet applied for funds. It says the reason is that it needs to complete stress-testing domestically to know exactly what the amounts will be. Spain is arguing that the amounts are much smaller than the figures given by various consultants internationally. The communication after the teleconference not only speaks of providing funds for the recapitalisation of the Spanish banks, but also states - this is not a direct quote, but words to that effect - that €100 billion is more than the expected requirement and that a significant safety margin was built into the figures. There is a problem at the moment. Before we came in here, some of my advisers checked the position of Spain on the bond markets, and bond yields are moving close to 7% this morning. It seems there is a lot of uncertainty. As Spain has not actually applied, there are various estimates of what would be required, and of course there is the overhang from the Greek election. We are in a difficult period in European affairs, especially in the eurozone, but from our point of view, we will continue to fulfil the terms of the programme, proceed with the ratification of the treaty and pay close attention to what is happening outside. It is the policy of the Irish Government that recapitalisation of sovereigns should be separated from recapitalisation of banks and that a mechanism should be found to recapitalise banks in such a way that the recapitalisation would not form part of the general government debt and, in normal parlance, would be off the sovereign balance sheet. That view is shared by other countries also, and we will continue to pursue it.
We are on the definitions section of the Bill, but I will allow some latitude, as these issues are obviously important.
The reason the Spanish bond yields are approaching 7% is the folly of potentially adding €100 billion to Spain's national debt, expecting that that will enhance Spain's attractiveness in the markets as a country to lend to. Of course, it has the opposite effect, and that is why the bond yields are going up. I am glad the Minister directly raised the question of the ESM recapitalising banks so that the recapitalisation is kept away from the sovereign. Is there much support for that position? One would assume the Spanish authorities pushed strongly for that option but failed to get it over the line. It could have a beneficial impact for Ireland if such a decision was made. Is there much support for that, and is the Minister confident that the thinking in the eurozone will move in that direction over time?
Can the Minister clarify whether the EFSF or the ESM will be funding the Spanish bailout? Will there be enough money in the ESM if €100 billion is going to go to Spain and its banks? With bond yields approaching 7%, Spain is on the brink of being out of the markets and being declared unsustainable in terms of the rates that are being charged. What impact would that have for the lending capacity of the ESM to meet the needs that will, inevitably, come before it?
There is significant support for the idea of funding the banks directly in a manner that would not go on the sovereign balance sheet, but it would not be very strong among the triple A countries. Europe is a democracy of democracies. The people who pay the piper have a stronger say in matters like this. I do not know what happened in the background to the Spanish negotiations before a proposal was put. I assume they could not get agreement from the primary funders to do it in a manner that is off-balance sheet.
As well as that, there is no legal mechanism within the EFSF to do so. While there is now, since last July, mechanism for the EFSF to fund the recapitalisation of banks outside a general programme for sovereign, there is not a mechanism to do it in a manner where the sovereign would not be the guarantor. Spain is doing it through some kind of special purpose vehicle but it is clear, from all the documentation I have seen to date, that the sovereign is responsible for the servicing of the loan and for the its repayment. To put it at its simplest, it is on-balance sheet.
With regard to the Deputy's question on EFSF-ESM, the communiqué put a stroke between the two and said the funding would be done from EFSF/ESM. The understanding was that if the Spanish Government applied pretty quickly for the funds available they would come, in the first instance, through the EFSF. Subsequently, when the ESM is ratified, the source of the funding would be the ESM. There are slightly different rules for the two. All creditors of the EFSF are of equal status. In the ESM the sovereign contributors have preferential status. That would, obviously, have an influence on the bond market. Credit default swaps, CDS, being activated, and so on, would have to be taken into account.
To make it even more complicated, there was no clarification of the legal position if EFSF loans become ESM loans. Would they acquire a new status or would the status at the point of lending, in terms of preference, apply? I cannot answer that question.
Some of these issues will come up as we deal with other sections, but if we can resolve them at the start it will help us as we progress through the Bill.
In terms of the State's position, the Minister said he would like to see a separation of the sovereign and the banks and a direct lending facility to the banks which would be kept off the sovereign's balance sheet. If he was to achieve that objective, would the State then have no responsibility for money given by the ESM to the banks? Would the State give no guarantees and have no liability with regard to that lending? Is it proposed simply that the transaction would be kept off the sovereign balance sheet but would be, in some way, guaranteed by the sovereign? Would it be a mere accounting measure to keep our debt levels down, with the sovereign ultimately responsible for it, or is it the Minister's view, which I would share, that money should be lent directly to the banks and that the banks and the lender should be responsible for the transaction, and not the sovereign? Could the Minister outline that matter?
It is my understanding that it is one or the other. There is not a half-way house.
The question is which one does the-----
I have already replied. It is our position that we would like to see a direct funding mechanism to the banks. In that case, it would not be sovereign debt.
Deputy Doherty is familiar with all the arguments. Europe is an evolving situation. The eurozone is evolving rapidly at present. We will see where we are next week.
I am disappointed that my amendments relating to one of my big concerns have been ruled out of order. That concern is that the ESM which is backed by the taxpayers' money is going into directly lending to banks while the banks take no hits. There are subordinate bondholders in Spain who will be paid in full. There are people who bought bonds in the secondary market. The Minister is familiar with this issue and made these arguments when in opposition. People who bought bonds at 60 cent to the euro are now being paid in full.
Has the Minister put forward any proposals in this regard? Does he believe any direct lending to banks should be subject to write-downs and that losses should be imposed on bondholders before any direct lending from EU funds is given to those banks? We can have a discussion as to categories of bondholders but this should apply, at a minimum, to subordinate bondholders.
I do not know what the precise difficulties are in individual Spanish banks. I am sure the Spanish authorities have a fairly good view of that. If the Spanish authorities decide on a resolution process with some of their banks I assume the same rules will apply, under the guidance of the European Central Bank.
I have not come across any suggestion that they would not be allowed to mark down their subordinate bondholders in the Spanish banking system. We got €5.8 billion of savings, if one would call it that, from resolving subordinate, or junior, bondholders.
There are many banks in Spain. There are different categories and a slightly different licensing system from here. I have no familiarity with the Spanish situation. I have seen nothing that would inhibit the Spanish authorities from moving against subordinate bondholders if that is what they decided to do.
I know there is nothing to prevent the Spanish, Irish or any other authority doing that if they so wished. The Bill will allow for recapitalisation to sovereigns in order to bail out banks, without imposing any requirement that bondholders who took a risk and gambled on those banks take a hit. If the Minister is willing to inject European taxpayers' money into recapitalising banks there should, at least, be a condition that there would be write-downs, in terms of some sections of the bondholders. There is nothing to stop any authority doing that but there is no requirement to do so within the treaty. There is no statement of the principle that those who took the risk within the banks should take the hit. The liability falls on European taxpayers.
All I can do to help the Deputy is refer him to the communiqué issued after the Heads of State and Government meeting which endorsed private sector involvement, PSI, in Greece. On the endorsement of PSI in Greece, the communiqué says Greece was a unique situation and that there would not be private sector involvement in the resolution of banks in any other eurozone country. That is all I can do to help Deputy Doherty. I have no expertise on the Spanish situation.
Chairman, are we dealing with the Title or with the definitions section also?
We are on section 1, which is definitions. Deputies Michael McGrath and Doherty had net questions to ask on the broader context. However, this is Committee Stage. I have allowed some latitude to your two colleagues and I will allow some latitude to you, Deputy Boyd Barrett. Please confine yourself to net issues, rather than reopening broader questions which are not really suited to Committee Stage. We have already debated Second Stage.
I will refer to the Title of the Bill.
We are not on the Title. We will deal with the Title at the end of the process. You may come back to the Title at the end. I will come to the Title later. We are on section 1, which is the definitions section. Deputy Boyd Barrett can have the same measure of latitude given to his two colleagues but I ask him to deal with it within reason.
The point I am making is that the Title section refers to this Bill being in the public interest and the stability of the European Union. Is that not a farcical suggestion given what we now know, particularly in the aftermath of the unravelling of the Spanish attempt to recapitalise its banks and separate that aspect from its sovereign debt. There will be a consequent liability imposed on ordinary Spanish people and the consequences will almost certainly mean that Spain will be locked out of the international bond markets and that €100 billion will turn into €200 billion, €250 billion or a lot more once it has to borrow to roll over its debts, manage its deficit, which will balloon, etc. The evidence that this approach does not work is definitive. Fianna Fáil have more excuses at this stage than the Minister and European leaders because one could argue that at the outset of this crisis people were bumped along by events and panicked into giving bank guarantees wrongly believing that could stem the crisis. In some ways it was difficult for anybody to get their bearings on what was happening but the jury is out now in terms of the possible consequences of giving blanket guarantees to the banking system and forcing the citizens of this State to pick up the tab for that. It is a disastrous strategy because the direct effect of recapitalising the banks and putting the sovereign on the hook will be to immediately force countries out of the bond markets, make them unable to finance themselves, lock them into a spiral of ballooning debt, ballooning deficits and then force them into further austerity programmes to pay for that, with all the negative consequences in terms of contracting economic growth. The evidence for that is piling up across Europe.
I do not understand the reason the Minister and others who represent states that are the victims of this are not screaming from the rooftops at the madness of this approach. How can it be justified when it is clearly not producing the stability this approach claims it will bring about and when is clearly not in the public interest? It is counter to the public interest.
The Deputy has swiftly strayed into what is essentially a Second Stage contribution.
I do not see the difference between that and what the other speakers did.
There are specifics in regard to how this will be done.
Can I ask a specific question?
Before the Deputy asks the question, essentially what is before the committee and before the Dáil is to ratify or not to ratify. Unpicking the contents of the treaty is not possible, and I am not making any political point. I am speaking purely in terms of the business of the committee and the Dáil. The question is to ratify or not to ratify, and that is what the Bill is about. I want us to be clear on that.
On a point of order, that is a little unfair. The Bill is a lot more than that. It is in terms of procedures and-----
The working out of it and the way it is implemented.
I have a specific question. At the outset the late Minister for Finance, Brian Lenihan, said the bank guarantee would cover only a few billion euro for the banks but it got worse and we ended up paying €70 billion, with all the desperate effects of that in terms of deficit and debt for the State. Initially, Spain was talking about €40 billion. It is up to €100 billion now. If it is locked out of the markets we do not know where it will end. It may involve hundreds of billions of euro. Italy will have to roll over approximately €1 trillion in debt. If it is locked out of the markets as a result of similar action we are talking about an enormous hole, so to speak. Is it not the fact that this cannot work?
We have had six weeks of this on the road, and the contribution the Deputy has made is very similar to the contributions he made during the referendum campaign. The referendum was won, and the Deputy's side lost, and we are now enacting the ESM treaty legislation. We are on section 1, which defines the ESM, the Minister and the treaty. All I can say is that I do not agree with the Deputy's series of allegations. What he has said is very similar to what he said on Second Stage. We had a Second Stage debate. The Deputy had his opportunity.
We did not have the Spain issue then.
Spain was on the horizon, and I think a number of people mentioned Spain. The Deputy has his view. I have my view but we are not going to agree and therefore there is no point in me having a rant back at the Deputy.
Let us proceed.
The picture is becoming clearer.
I wish it was.
Question put and agreed to.
SECTION 2
An amendment in the name of Deputy Doherty has been disallowed under Standing Order 131 as it is in conflict with the principle of the Bill. That is the ruling I make.
Amendment No. 1 not moved.
Question proposed: "That section 2 stand part of the Bill."
On the section, I will not challenge the Chairman's ruling because that would not be in line with protocol but I am disappointed with it. I outlined in my Second Stage contribution - I will not rehearse it as we had that debate - that Sinn Féin supports the idea of an emergency lending facility in Europe. That is the reason we supported the ratification of amendment No. 136 of the European treaties Act. There is a requirement for a number of amendments to this Bill, including that the ECB be allowed to finance the ESM and that there should be creditor write-downs. We will deal with the issues around immunity at a later stage. Also, the point we will deal with when dealing with section 2 is that we do not have a step-out facility from the ESM which we had in the EFSF where programme countries did not contribute to the funding mechanism because they were in a programme.
The out-working of this is that this State will provide €1.27 billion to the ESM which we will have borrowed from the EFSF and the IMF at a blended interest rate of 3.7% and then borrow it back from the ESM at an interest rate of approximately 3%. There is an illogical argument in regard to that point in that we are borrowing money from European sources at an interest rate, giving it back to a European source for free and then borrowing it from them again at another interest rate. I assume the Minister would have been opposed to that because it is a disadvantage to this State that we do not have the step-out facility. He might elaborate on how those negotiations failed and we were unable to keep in place the procedure with the EFSF in terms of the ESM.
On section 2 and the five contributions that are to be made to the ESM if this treaty is ratified, the initial authorised capital stock, two of which are to be made this year - one next month and the other in the autumn - and one the following year totalling €1.27 billion, what procedure will be used to make those payments? Will it be the Cabinet? Will it be the Minister? Will it come to the Oireachtas? Those payments, in line with protocol, should come before the Houses of the Oireachtas to be approved. That ties in with section 3 which we will come to because as we discussed, it may not stop with €1.27 billion. Our liability under this Bill is unknown, and we will deal with that later, but we know there is a potential liability of up to €11 billion. I want to know the procedures the Minister will use to hand over that €0.25 million next month and again in the autumn.
It would be helpful to members if I read the briefing note first and we can then discuss some of the detail, if that is agreed. Section 2 provides that the Minister for Finance may, on behalf of the State, make payments to the ESM to cover Ireland's contribution to our share of the authorised capital stock of the ESM in accordance with the treaty. The authorised capital stock of the ESM is set out in Article 8 of the ESM treaty, which was signed by euro area member states on 2 February 2012.
To obtain the highest possible credit rating, the authorised capital stock of the ESM shall be €700 billion. Of this amount, €80 billion will be in the form of paid-in capital by the euro area member states, paid in five equal instalments from July 2012. The balance, €620 billion, will be callable capital. The contribution key for each member state is set out in Annex 1 to the treaty and is based on the ECB capital contribution key. For Ireland, the key is 1.592% of the total paid and committed capital. Ireland's share of the €80 billion in paid-in capital, based on our contribution key, will be just above €1.27 billion, paid in five equal instalments of €254 million.
Unlike the EFSF, there is no stepping-out facility in the ESM when members enter a programme of support. Therefore, Ireland will have to pay its share of the paid-in capital. Ireland's share of the €620 billion callable capital is based on the same key, that is, 1.592% of €620 billion, making the callable capital €9.87 billion.
The ESM is being established as an intergovernmental organisation under public international law. Ireland's contribution will be treated as a financial transaction. This means that, while it will have an impact on Ireland's Exchequer borrowing requirement, it will not have an impact on its general Government deficit. Ireland's share of the €620 billion in callable capital will be accounted for as a contingent liability on the State.
Following the decision of the euro group on 30 March 2012, the paid-in capital will be made available more quickly than initially foreseen in the original ESM treaty. Two tranches of capital will be paid in 2012, the first one in July and the second by October. Another two tranches will be paid in 2013 and a final tranche in the first half of 2014. In line with the ESM treaty, the payment of the capital will be further accelerated if needed to maintain a 15% ratio between the paid-in capital and the outstanding amount of ESM issuances.
Any decision to change the authorised capital stock of the ESM will require a unanimous decision of the ESM's board of governors. I, as Minister for Finance, will be governor for Ireland at the board and serve to ensure Ireland's interests are represented and protected.
With regard to the step-in, step-out provisions, the arrangement for the EFSF is that we step out. While there are disadvantages to that, the advantage is that we do not contribute. The Deputies' argument is that if one steps out, one will not have to make a contribution. However, if one steps out, one has no negotiating position.
Sinn Féin has often spoken about negotiation. The essential requirement in a negotiation is that one have a position. Let us suppose that an arrangement were made with Spain such that the banks would be capitalised directly. If this were achieved in a manner in which we had no say, it would put us at a disadvantage. Alternatively, if we have a say and there is not a step-out facility, Ireland's agreement to whatever deal would be made for the disbursement of funds from the ESM would be essential before the proposed programme could be implemented. The ESM is the permanent bailout fund and the EFSF was always conceived as temporary. As a full member of the eurozone and the European Union, it is better that Ireland have all the obligations and the rights by not having a step-out facility, in which case every decision requires our agreement. It is a matter of opinion but I am of the view that we are better off not having a step-out facility.
A veto.
In those cases where unanimity is required, the vote of every state is required before a programme can be put in place. A veto sounds like a threat but, in many cases, Europe proceeds by unanimity. However, if one steps out, one is not involved in the unanimous decision because one is apart from it.
The capital structure of the ESM has been put in place to support the borrowing and lending activities. If or when the ESM engages in programme funding, it will borrow money on the international financial markets and lend it to the beneficiary ESM member state. This is how the EFSF operates currently. The capital of the ESM will not be paid out directly to programme countries but will only fall to be called upon in the event that member states borrowing from the ESM default or that the ESM incurs losses in ESM operations.
As I outlined, we will be paying two tranches in 2012 and two in 2013, and a final tranche. It will be accounted for in the normal way. I presume it will be paid out of the Vote of central funds. That is dealt with in section 3. There is a reporting mechanism whereby there must be a report issued every six months. The Committee of Public Accounts has a role and there are general debates on Estimates. There is always accountability to the Dáil in respect of disbursements from the central fund.
I do not agree with the Minister's argument on the step-out facility. The position at present is that the ESM does not exist, as we know. The EFSF does exist and Ireland has stepped out of it. The Minister's logic is that we would have no negotiating power. I am not sure why he participated in the teleconference and was arguing for direct capitalisation of banks if he has stepped out.
I did not say that.
The Minister said that if we step out, we do not have the ability to negotiate. Under the existing mechanism, we have stepped out, yet I am sure the Minister's opinion is valued by his counterparts in Europe. He may tell me we do not have a negotiating position because we have stepped out but his logic is that if we were to step out from the ESM, our argument would not carry weight. The same logic would have to apply as with the EFSF. The reason the provision in included - I can understand why some would argue for its inclusion – is that the EFSF was fundamentally flawed. The ESM is flawed also and the problem is that, with an increase in the number of programme countries, including Greece, Portugal and Ireland and soon to include Spain, Italy and others, the fund will become increasingly weak and its status and credit rating will be diminished. This is why there is a need for the ECB to be the lender of last resort for the fund. That argument is not the main item on the agenda at present.
I asked particular questions on the procedure used to make the payments. I take it from the Minister's answer that no Oireachtas approval will be required to make the payments of €250 million next month and in the autumn, and €500 million next year, etc. We focus continually on the sum of €1.27 billion, the callable authorised capital. This Bill allows for the placing of contingent liability on the State of at least €11 billion. The procedure the Minister will apply regarding the payment in July would be the procedure he would apply if, for example, the contingent liability were called upon. It could be the case that the board of governors of the ESM would say the callable capital of this State needs to be increased to €8 billion, as allowed for in the Bill, and that the Irish Government would make that payment without any reference to the Houses of the Oireachtas. The only reference in this regard in the legislation is that we will not, under section 3, exceed the sum of €11.145 billion. At that point it will need approval of the Oireachtas and, obviously, this legislation would need to be amended. I am concerned not only about the scheduled payments but the contingent liability which could be called upon without the Minister seeking the approval of the Houses of the Oireachtas.
My position about the step-out issue is not that Ireland's voice is not considered to be a valued contribution when matters are being discussed at EU level. When Ireland's Ministers make contributions, they are listened to very carefully and treated very seriously. We are a country in good standing within the eurozone and the European Union. The point I am making is that when it comes to the decision making of whether money will be drawn down from the European financial stability facility, EFSF, Ireland's voice is not necessary in agreeing to disperse moneys whereas if we do not step out, it would be necessary. The only point I am making is that it seems to me that in certain circumstances it will give us a stronger position. I am not making much of it but I am trying to give the Deputy the thinking behind the step-in and step-out argument.
On the accountability for funds dispersed, section 3 states:
There may be paid out of the Central Fund or the growing produce of that Fund sums, aggregating to a sum not exceeding €11,145,400,000 to enable the State to make payments in respect of its contribution to the authorised capital stock of the ESM in accordance with the Treaty.
The legal mandate is given in the Bill. It not only covers the contributions which have to be made over the next three years but also the contingent liability of up to €11 billion. The legal authority will be given by the Houses of the Oireachtas when the Bill is enacted. The procedure will be that the Minister for Finance will bring a memorandum to the Government if any disbursements have to be made which the Government will then authorise. In the same way as any payments to any organisation and authorised by the Government are subject to the scrutiny of the House, the normal rules of scrutiny and accountability will apply in this case, too.
We know what is in this legislation with the contingent liability and the initial drawdown. Many people are of the view that because the payments of the five tranches are scheduled over the next three years amounting to €1.27 billion, if the full €11 billion were to be drawn down, it would be appropriate it would be brought before the Houses of the Oireachtas. I am fully aware that if this legislation is passed, it will give the legal basis to the State to pay these moneys into the fund. The only reason there would be a call on the contingent liability is if losses were accrued and money was lent from the ESM that would not be paid back. For example, what would happen if the Spanish banks were not able to pay half the money they borrowed through the sovereign and, therefore, there was a call on additional capital? With the Government's majority, it is likely it would get approval. However, in the interests of democracy and to continue to put money into the ESM drip by drip until it amounts to €11 billion, I cannot see why the Minister would not insert a provision to ensure that any additional calls above the €1.27 billion already approved would seek the approval of the Houses of the Oireachtas.
We must suspend in a minute or so because there is a division in the Dáil. However, the Deputy could introduce an amendment on Report Stage to introduce such a provision.
I will.
If capital contributions were subject to parliamentary votes on each occasion they were paid, the capital structure of the ESM would be uncertain and undermined. One of the virtues of the ESM is that one knows what it is, its rules and that it gives certainty. It would be undermined completely if it were a fund that could only be exercised through the majority vote of parliaments across Europe.
Question put and agreed to.
Sitting suspended at 11.55 a.m. and resumed at 12.15 p.m.
SECTION 3
Question proposed: "That section 3 stand part of the Bill."
This is where the Bill puts a cap on the amount of money, up to €11.145 billion, the State can pay in to the ESM. The treaty, in Article 10, section 1, allows that the board of governors shall review regularly and at least every five years the maximum lending volume and the adequacy of the authorised capital stock of the ESM. It states that it can amend Article 8 and Annex II, which is where the €11 billion figure is referred to.
The legislation puts a cap on that fund of €11.145 billion. In the case where the governors decide to increase the capital stock and to amend Article 8 and Annex II, basically to make a call on the State for additional funding, would it require an amendment to this legislation in that the Minister would not have the power to increase that? The Minister will be one of the governors of the ESM, although maybe not at that time. Will the Minister comment on that? He mentioned earlier that one needs stability in terms of the funding. It is clear within Article 10 that there is an ability for the governors to call up the authorised capital, but this places restrictions, which is good.
There are serious questions in terms of the capital stock. I mentioned the issue in terms of the ECB being there to provide unlimited resources. The Minister mentioned that Spain has not as of yet applied for a bailout. I assume Spain will be the only country so far that will apply for a second bailout before it has even applied for the first bailout, given that its bond rates are at 7%. Things are happening quickly.
This legislation, if we go back to when it was drafted originally last year, was being presented by the Minister and others who agreed this formula as us needing the firepower to reassure the markets. It has completely and utterly failed in its design. There is a need for an emergency lending facility, but it has not reassured the markets. Indeed, the bigger economies are starting to collapse and will need access to this funding.
Will the Minister outline whether an amendment to this legislation will be required if the board of governors exercises its powers under Article 10 of the treaty? Will he explain how the treaty allows the board of governors to make an additional call, and yet the legislation that has been introduced caps that or creates, in the Minister's words, an uncertainty in making it subject to Oireachtas approval? In response to me earlier, the Minister stated one cannot have the ESM as a funding model and it open to uncertainty in relation to Oireachtas approval, but Article 10 in the treaty is now uncertain because it will require approval of the Oireachtas. It is something I welcome, but I ask the Minister to comment on both those issues.
First, when a bailout fund for Europe was at its concept stage, there were various discussions about providing a firewall for Europe. That was the terminology that was used initially. There were debates about the adequacy of the firewall. Deputy Michael McGrath is probably on the record as stating that the firewall is too low on the ESM treaty. That view, that a bigger firewall is necessary, is widely shared across Europe. The figure of €2 trillion was being touted at one stage as a possible firewall to prevent contagion spreading, as it is now spreading into countries such as Spain.
When the arrangements were made, the IMF was asked to contribute as well, and it did. Taking into account the €500 billion, which grows to €700 billion under the ESM, and the IMF contribution, the firewall is somewhat in excess of $1 trillion. On the face of it, it is a reasonable firewall and should meet quite a lot of need. However, Deputy Pearse Doherty will recall that when the debate on firewalls was running, people were putting a bigger figure on it. In Ireland, we were talking about a firewall one and a half times, or twice, that size.
There is power under the treaty to ask states for additional contributions. The enabling legislation is not the treaty, even though they interact. As I understand it, the procedure would be that the governors are entitled to change the contributions which states would be expected to make under the sections to which Deputy Pearse Doherty draws attention. Each participating state's finance Minister is a governor and decisions are by unanimity. If it is the Minister for Finance about whom the Deputy speaks, the first hurdle would be that he or she would have to agree to the changing of the contribution level. Were the Minister for Finance, on the authorisation of the Government, to agree, that would be a change within the powers of the governors in accordance with the treaty, but my view is that the Oireachtas, on the advice of the Government, would have to align the enabling legislation with the new contributory requirements under the treaty. While no amendment of the treaty would be required, an amendment to section 3 of the Bill would be required to insert new contribution levels. That is the way I would see it playing out in that event.
That is clear. It would require additional legislation or an amendment to this legislation, if it is passed.
But not to the treaty because the treaty is empowered.
I understand that. We are only dealing with the enabling legislation.
It is not a big issue for me but it does not clarify that the treaty explicitly states in Article 10 that the board of governors will review the authorised capital stock at least every five years and can through unanimity change Article 8 and Annex II to increase the liability on this State above the current figure of €11 billion. The Minister indicated that they have the ability to ask the State but their ability is stronger than that. Article 8(4), which is referenced in Article 10 in regard to giving powers to the governors to increase the authorised stocks, states:
ESM Members hereby irrevocably and unconditionally undertake to provide their contribution to the authorised capital stock, in accordance with their contribution key in Annex I. They shall meet all capital calls on a timely basis in accordance with the terms set out in this Treaty.
This allows for more than a request from the governors because we will have irrevocably and unconditionally agreed to provide the increased contributions to which the board of governors unanimously agrees under Article 10. I am concerned about this provision. It is proper that, at a bare minimum, any proposal to increase the capital stock would have to come before the Oireachtas by way of amendment but if we refused to amend section 3 of the enabling legislation we would be in conflict with Articles 8 and 10 of the treaty.
The governors are the finance Ministers of participating states. The Irish Minister for Finance of the day, wearing the hat of governor of the ESM fund, would have to agree to the initial decision to raise the capital requirement. Once that is done, certain other things follow. Article 10 states: "The Board of Governors shall review regularly and at least every five years the maximum lending volume and the adequacy of the authorised capital stock of the ESM." That is a prudent requirement. Given that money values and the needs for which the money is required can change, it is important that we are not stuck with a permanent bailout mechanism set at 2012 values and contributions. The Article also provides that the board of governors:
[..] may decide to change the authorised capital stock and amend Article 8 and Annex II accordingly. Such decision shall enter into force after the ESM Members have notified the Depositary of the completion of their applicable national procedures.
While the board of governors may make the change, it will not come into effect until participating states have completed their applicable national procedures. In my understanding, this would require amendments to section 3 of the Bill. That is how I see the matter working in practice.
This is a fundamental question. We have been debating the initial liability of €1.27 billion and the contingent liability of €11 billion. This section puts a cap of €11.145 billion on our contribution to the ESM. That is the decision which Government is asking us to ratify.
No, it is not. The figure of €11 billion is the guaranteed level. The paid in figure is the smaller sum.
Section 3 is very clear. It states: "There may be paid out of the Central Fund or the growing produce of that Fund sums, aggregating to a sum not exceeding €11,145,400,000 to enable the State to make payments in respect of its contribution to the authorised capital stock of the ESM in accordance with the Treaty." Leaving aside amending the legislation in the future, the Minister is asking us to sign up to a limit of just over €11 billion.
However, the qualifier only arises if the guarantee is called in.
I understand that.
The actual contribution is the previous amount to which we referred.
We went through this in the context of guaranteeing the banks. The bank guarantee was not a problem unless it was called in. That is the big issue.
The Deputy is presenting the section as if it requires the Exchequer to pay €11 billion into the fund.
I am not saying that at all. The Minister is asking us to set a limit of €11 billion on the amount that can be paid from the Central Fund to the ESM.
Under all circumstances.
That is the limit. My point is that under Article 10 we are agreeing to allow the board of governors to increase that capital amount and under Article 8 we are agreeing to pay that increased capital amount. I understand that the Minister will be a member of the board of governors and will be able to exercise a veto but why are we dealing with section 3? I support the idea of setting a cap and requiring future increases to be agreed by the Oireachtas but this section is immaterial given that we have already agreed to the treaty provisions requiring us to pay any increase agreed by the board of governors. If the Oireachtas decided not to pay the additional capital sum we would be in conflict with Articles 8 and 10 of the treaty.
We would not. The Bill is not the treaty. The Deputy is correct to say that €11 billion is the maximum capital the Irish State can be called on to provide. Section 3 enables the Exchequer to meet the call if it is made. Under the treaty, if the funds are deemed to be inadequate or if inflation is rampant and the value of the fund is no longer what it was expected to be the governors can, after a unanimous decision, increase both the contribution and the amount that can be called. However, their decision only takes effect when the individual states complete their applicable national procedures. If a future Minister for Finance reminds us that he or she is the governor of a fund we have forgotten about and that he or she has agreed to increase our contribution by 50%, he or she will need to amend section 3 of the European Stability Mechanism Bill 2012 to do so. If the Minister's amendment is rejected in the Dáil in a tight vote, one member state will not have completed its applicable national procedure and the amounts cannot be raised by the governors.
Is the Minister certain that "applicable national procedures" are contained in section 3 of the Bill?
There may be other elements. I do not know if other legislation will need to be amended but the appropriate amendments to domestic legislation would have to be made to enable the new decision to be implemented.
It is an important issue. Is it not clear that it constitutes a break on what the governors would do?
No, it is not clear. It is clear that it would not take effect in terms of national procedures.
Article 10 states: "Such decision shall enter into force after the ESM Members have notified the Depositary of the completion of their applicable national procedures." The sequence comes afterwards. I say this for the purpose of clarity because the Deputy raised an important issue. Unless he thinks that sentence can be interpreted differently -----
It is a parliamentary brake on the decision.
Is the Minister clear that the Oireachtas has a veto?
In my view, under Article 10 of the treaty, the Houses of the Oireachtas have the final say on whether the contributions and the guarantees are increased.
Would we be in conflict with an intergovernmental treaty by using our veto?
Article 10 can only be invoked when the national procedures have been completed and notified to the depository. It states: "Such decision shall enter into force after the ESM Members have notified the Depositary of the completion of their applicable national procedures." I believe that is straightforward.
I call Deputy Boyd Barrett on section 3.
I have one other question. I might come in afterwards.
Perhaps Deputy Doherty should finish before I call Deputy Boyd Barrett.
The limitations placed on section 3 relate to moneys paid from the Central Fund. I seek clarification that no other moneys could be injected into the ESM. For example the National Pensions Reserve Fund has been well raided at this stage. Do the conditions in section 3 apply only to the Central Fund and not any other funding at the disposal of the State?
I refer to the amount of money that can be called on by the ESM. Under Article 8, we are required, unconditionally, to pay the money in a timely manner. The Minister is asking us to sign up to a minimum contingent liability of €11 billion. How will the Minister for Finance set aside that funding if it is called upon?
The only legal authority the Government will have is to pay the contributions from the Central Fund. It will not have legal authority to pay it from anywhere else. The Central Fund is in funds and so it is paid from there when the time comes. Normal procedure will apply. The Minister for Finance of the day will bring a memorandum to Government requesting authority from the Government to pay this money to the ESM. It would then be subject to the normal accountability in Oireachtas procedures to committees or otherwise.
The second point is how we deal with our budget and everything else. We are signing up to a minimum liability of €11 billion and that liability must be available to the ESM when the board of governors decides to call on it. How do we ensure that fund is available to it if it is called upon? How do we deal with it in terms of-----
Is the Deputy asking about the accounting of it?
Obviously we do not have that type of money available. How does the Government intend to ensure we comply with the treaty and are able to pay into this in a timely manner?
I will repeat for the Deputy the note I read to him earlier. The capital structure of the ESM has been put in place to support the borrowing and lending activities. If or when the ESM engages in programme funding, it will borrow money on the international financial markets and lend it to the beneficiary ESM member state. This is how it is intended to operate. The capital of the ESM will not be paid out directly to programme countries but will only fall to be called upon in the event that member states borrowing from the ESM default or that the ESM incurs losses in ESM operations.
The money we put in will not be given to Spain but will be used as collateral so that the fund can borrow to lend to Spain. It is not a direct transfer of funds. The call only arises if there is a default. If there is a default I do not believe the Dáil would be kept in the dark about it because it would obviously be a major international event. I do not see a difficulty in our requirements. It is treated like an investment and an investment does not contribute to the deficit because there would be matching funds in the fund. It is not reflected in the Government deficit. It is a contingent liability on Government funding.
I am well aware that the money we put in will be used as collateral. The ESM will borrow on international markets and it will be guaranteed to get its money back. With our money we are taking on the risk if loans go bad between the sovereign states or directly with banks if there is a proposal to lend directly to banks. We are signing up the Irish taxpayer to taking a risk with those banks. Earlier the Minister mentioned he would like to see direct lending to banks. The Irish are fed up with absorbing the losses of Irish banks. However, €100 billion was injected from the ESM directly into Spanish banks and we know Spanish banks will not be able to pay off that €100 billion without writedowns on some of their creditors, their bondholders. The Irish taxpayer is being asked to absorb some of those losses.
The Deputy is turning a hypothesis into a fact. There is no provision within the ESM, as it is being ratified by Ireland and other states, to lend directly to banks. Consequently, there is no possible liability to banks. If the Spanish Government borrows €100 billion from the ESM fund, the Spanish Government carries the liability. The only possible risk is the risk of the Spanish sovereign not being in a position to repay or refusing to repay the fund. In all instances it will be acting for the banks. If the situation changes and the ESM is modified with a new provision in the treaty to allow it to lend directly to banks, obviously it will all come back to us again because that will be a major change in the treaty. Then there would be validity in the Deputy making the argument that we should get additional protection or asking what the consequences of the default of a private bank would be for a fund subscribed to by sovereign states. At present what the Deputy is raising is a paper tiger.
At present what I am raising is what the Minister has told the committee he would like to see happening, which is the ESM being allowed to lend directly to banks. If that case were to exist, what he is asking the Irish taxpayers to take on is the risk that those banks would not be able to pay in full to the ESM and, therefore, the losses would be shared among the contributors to the ESM, including Irish taxpayers.
The Deputy does not know whether that is right or not. There is absolutely no provision at present for the ESM to lend directly to banks.
I know that.
If the situation changes and treaty is modified to allow that, there will obviously be consequential changes as well. The Deputy is making a jump and saying that if this ever happens, the Irish taxpayers would be paying for Spanish banks. That is a leap in logic that the facts do not justify.
The Minister has not answered my question. There is a liability now if the treaty is passed. There is a contingent liability on the State of €11 billion. The Minister said the intention is to borrow this from the international markets. I believe that under the Government's policies we are heading for a second bailout. I hope I am wrong, but-----
The Deputy is right.
----- unless we change direction we are heading for a second bailout. While the Minister can disagree with me over whether that scenario will unfold, it merits discussion and debate. If our contingent liability is called in, we will borrow from the ESM to pay the ESM. Is that how this will work?
First, Deputy Doherty states he is convinced we will go for a second bailout, and then he is so convinced, he is able to state how the State will borrow and fund itself in a second bailout.
The Minister has told us for four weeks the only other place we will get it is the ESM.
There is no basis-----
The Deputy asked a question and I ask him to wait for the answer.
Deputy Doherty is very creative but he is moving well beyond what the facts can justify. He is turning it into a fact that there will be a big liability for Ireland because the banks in Spain will draw money from the fund some time in the future and we will say it is all right, so we will have guaranteed everything. Obviously, if there is a major change in the treaty along the lines we suggest, and which I would like to see happening, there will be consequential changes and we will have to work very carefully through them.
In fairness to the Minister he is dealing with the question I asked previously and we have moved on from it. I will repeat what I asked. Under this legislation the State will have a contingent liability of €11 billion. The Minister's answer to the committee earlier in response to my question of how we fund it if it is called in was that we will borrow from the international markets. It is not beyond our wildest imagination given that we are locked out from the international markets at this point in time that there is the potential at least that we will go for a second bailout. Other Ministers have stated this potential exists. In a scenario in which we go for a second bailout-----
There the Deputy goes again speaking about a scenario in which we go for a second bailout.
Minister-----
He starts with a speculation then a hypothesis and then it becomes a fact-----
No, it is-----
-----all in three sentences.
I have not given the Minister a fact. I am speaking about a scenario in which we go for a second bailout. The problem in the past was that people did not ask questions. People did not look forward to see how events would unfold in a year or two. We are trying to have the most robust legislation that protects us against eventualities in the future. I do not expect the Minister to agree we will go for a second bailout but if the international markets do not lend to us in 2014 and our contingent liability is called upon, where will we get the money? It is a simple question. We are signing up to a liability. There are two sources of money, as the Minister has told us for the past four weeks, namely, the international markets and the ESM. If the international markets lock us out and the contingent liability is called upon, we will borrow from the ESM to pay the ESM. This is my question. I know it is difficult for the Minister to confirm this is the reality because it is absurd that we would borrow at 3% from the ESM and pay the money to it at 0% but this is the reality. The Minister could state other things such as that it is needed and it is a difficulty, but it will be the reality if the international markets do not lend to us, unless the Minister has the view there is another source of funding from which we can borrow to pay the ESM if the contingent liability is called upon.
The Deputy has misinterpreted one of my earlier answers. I never stated Ireland's contribution to the ESM if the guarantee were called in would be sourced by raising money on the international markets. I stated the ESM will fund itself on the international markets. The Irish capital contribution would be paid from cash resources which are managed in the normal way on behalf of the State. There is no way one can envisage the full €11 billion being called in in one go. One will manage it from the cash resources of the State. The Deputy is working on the assumption that something cataclysmic will happen.
In fairness, it is time for the Minister to wake up. We are out of the international markets. Our bond rates are sitting at 7.3%. We will need funding in 2014 and we will need a secure source of funding by this time next year. Spain is collapsing and its bond yields are at 7%. It is calling for a bailout. Italy is on the verge of it. The Minister states I am trying to predict a catastrophe in Europe. It is already happening before our eyes. My question is very simple. The Minister states we will take this from cash resources. Do we have €11 billion in cash resources lying about which is not accounted for?
Where the Deputy is making a mistake is in describing a catastrophe about to happen in Europe in very dramatic terms and then stating it will trigger the guarantees which Ireland will make in the treaty. However, the ESM has not been put in place yet and it has not lent a single euro to anybody. Nobody is guaranteeing anything. The first up will be Spain for €100 billion. If it applies for this and receives it, the liability of the fund will be €100 billion. If all of the catastrophes described by Deputy Doherty occur, the fund's liability to Spain will be €100 billion and of this, even if everything was called in because of a catastrophe along the lines predicted by Deputy Doherty, it would not be the full €11 billion but a small proportion of it. This is all I am saying. Get real. The Deputy is into horror stories.
Deputy Doherty and the Minister have been exchanging views for approximately 20 minutes.
This is my final point.
You have said it was your final point several times.
There are no time restrictions and I would like an answer. This is very simple. The Minister can dismiss it as much as he wants. We are dealing with legislation and not what is happening in Spain. In section 3, the Minister is asking us to agree to pay out a contingent liability of €11.14 billion.
To empower the State to do this in circumstances.
Yes, in circumstances.
And the circumstances are the circumstances I described and not the circumstances described by Deputy Doherty.
So we all agree the Minister is asking the State to sign up to a contingent liability of €11 billion.
Absolutely. We fought a referendum on it-----
It may or may never-----
-----and the people said "Yes".
We did not fight a referendum on this Bill. We fought a referendum on the treaty and not on section 3. My question is very simple. The Minister is asking us to sign up to a contingent liability of €11 billion for the reasons he professes. If the international markets do not lend to us, where will we get the money to pay this liability? It may or may never be called in. This is why it is called a contingent liability. However, it is prudent and right to ask from where we will get the money. Does the Minister seriously believe we will pay it from cash reserves we have lying about and that we will not need to borrow the money from somewhere to pay it if it is called in?
The Deputy has asked the question and I will allow the Minister one further reply.
One must assume one sovereign will not get all the funds in the ESM. This is the first assumption. There will be a spread of risk as funds are allocated across sovereigns. One would hope it will not all be drawn down. It is impossible to imagine a situation where there will be a full contingent liability which would require the full drawdown of €11 billion. In my view it is very unlikely that any European state will default because it is a strong union. The Deputy can paint cataclysmic events for his own entertainment if he likes but I am asking him to be real about this. I remind him that his party's policy position is to support a bailout fund for Europe. If the Deputy supports a bailout fund for Europe, perhaps he will describe to us the architecture of the fund he proposes which would not involve contributions for contingent liabilities for the member states.
Unfortunately, my amendment was ruled out of order but the Minister listened to my speech on Second Stage. The reason we are seeing the mess in Europe is because no fund is big enough to deal with the problem. This is why the ECB must be the lender of last resort. This is what I put to the Minister back in September.
It is difficult to know where to start. One feels like one is signing up to the economic death warrant of the country.
That is a great soundbite.
It is what I think it is. The Government has done its very best to downplay the real consequences of this. For the record, we did not discuss this during the referendum campaign. Some of us on the "No" side attempted to discuss it and we got disingenuous responses from the Government about the potential liability for the citizens of the country with regard to ratifying the ESM. When I tried to raise the issue of the potential consequences of ratifying the ESM during the referendum I was told by the Minister, and certainly by the Taoiseach, that we were not discussing the ESM, we were discussing the fiscal treaty and that we would discuss the ESM later.
The record will show that when I was asked during media interviews about what the Irish contribution and the liability would be-----
It was €1.2 billion.
The issue was gone into in detail.
The Minister always referred to the figure of €1.2 billion.
The Minister did.
No. I accepted that the €11 billion was the contingent liability. Everybody knew that. What would be the point of pretending it was not?
The Minister did not. This is cute hoor politics.
Do not be abusive. The Deputy should argue his case.
I ask Deputy Boyd Barrett to be careful. This Bill was published-----
In the middle of the referendum campaign.
It was published some time ago.
In May.
Yes. When I directly tried to quote Article 3 in the Dáil and stated that the European Stability Mechanism, ESM, was putting the people of this country on the hook for €11 billion, the standard response was a denial by the Government and a claim that we would only invest €1.2 billion.
That is not true.
It is. It was disingenuous.
It was not.
It is fair enough for the Deputy to discuss what was stated during the referendum, since the Minister raised it, but we will not go through the entire debate of what was or was not said on television, radio or in the Dáil. It is fine as a rhetorical point, in that the Minister raised it and the Deputy has responded to it, but we must deal with the Bill that is before the committee. I ask the Deputy to try to confine himself to it, if he can.
It is not a rhetorical point. I am stating that this matter was not discussed despite the Minister's claim that it was.
The Deputy made that point.
When the Deputy is making allegations, he should produce his source, particularly if he claims the allegations were made in the Dáil. Why has he not brought a copy of the record with him to read out? We could then agree with him. He is throwing allegations around that are not correct.
On a point of order-----
What is the point of order?
I seek to clear up this matter. The Minister stated the people voted on this-----
That is not a point of order.
Clarification-----
That is not a point of order.
The Minister is confused. We voted on the fiscal treaty, not the ESM treaty.
Excuse me, Deputy Doherty, you are out of order. I call Deputy Boyd Barrett.
Let us clarify the matter. This Bill puts ordinary Irish citizens on the hook for €11 billion. The Minister suggests this amount might not be called in and he cannot say what the circumstances might be in which we would be called upon to make these payments. The Spanish process is only beginning. As a result of Spain's request for €100 billion to recapitalise its banks, it will apparently be locked out of the international markets-----
It has made no such request. The Deputy must be careful about the reputation of a country that has traditionally been very friendly to us.
Come on, this is feta cheese stuff.
I am not casting aspersions on the people of Spain. God help them. Europe is forcing ordinary citizens to bear responsibility for the determination of the European Central Bank, ECB, the Spanish Government and the European authorities to bail out the banks at all costs. By signing up to this Bill, we would be on the hook for it as well because the ECB, Angela Merkel and company are determined that all of this must be routed through the sovereign and guaranteed by ordinary citizens. Otherwise they will not bail out banks. We are paying with massive austerity for the privilege of bailing out the banks. This is the reality. I do not know why the Minister is trying to claim otherwise. The point I am putting to him is that in addressing Article 3 and given that the Bill's passage would put Irish citizens on the hook for up to €11 billion, it is the responsibility of the committee and the Dáil to ask about the likelihood of the €11 billion being called in and from where we would get that money. This does not require catastrophic predictions or speculations. It requires a reasonable assessment of what is occurring in Spain and Italy and what might occur in France. One need not be a prophet to work out the likely sequence of events.
As Spain will almost certainly require €100 billion in the first instance to recapitalise its banks, it is already facing the prospect of being locked out of the markets and may not be able to fund itself, in which case it will need even more money. We do not know the exact figures, but there have been speculations about €200 billion, €250 billion and more. Italy's bond yields are increasing and it may not be able to finance itself. The ESM would be called upon to bail it out as well. During the coming years, Italy must roll over a debt of approximately €1 trillion. We do not know how large the problem in the French banks is, but they are likely to need assistance. Is it not fairly likely that we will need to make the full contribution of €11 billion to the fund?
That is inaccurate.
If that is a possibility and to repeat Deputy Doherty's question, from where might we get that money? We should know the answers to these questions. Is it not the case that, irrespective of whether we get the money from the markets or the ESM, the people will pay?
Could we have a question, please?
If we borrow or take the money from our own funds, which the Minister seems to believe are lying around,-----
There is not much point in the Deputy answering his own questions. If he wants to ask a question of the Minister, he should let the Minister answer.
It would not be appropriate for me to answer questions that are based on assumptions about matters in Spain, Italy and France because those are matters for the authorities in Spain, Italy and France. It is self-evident from the section that we will enter into certain obligations, make contributions to the fund - I have already stated the amounts of the contributions - and take on a contingent liability of just over €11 billion in the event of all moneys lent by the fund being unpaid by a particular time. There is no mystery about this.
We are a country in good standing internationally. We enter into international obligations because some problems can only be solved collectively, not individually, and particularly not by a small country. For this reason, we are in the United Nations, the IMF, the World Bank, the Council of Europe and funds like the ESM. All of these international arrangements carry obligations with them. Many of them are legal and policy driven, but some are financial, given that we make contributions to organisations. It is part of the way that countries are run.
All I can do to help the Deputy is to say that, yes, the contributions I have outlined are the contributions we will make and there is a contingent liability. That there was such a contingent liability was debated several times in the course of the referendum. Everybody knew about it. The ESM Bill was published in the middle of the referendum campaign to ensure the Irish public would not vote in the dark about the ESM treaty's consequences and that they would have the full facts of the treaty available to them for consideration well in advance of polling day. I cannot help the Deputy more. A nut fell on the head of a goose or a duck and he said the sky had fallen down. The Deputy wants to run with the "sky has fallen down" theory. Perhaps it will fall down. In the meantime, however, we will get on with putting a permanent bailout fund into Europe and we will fund it in accordance with our international obligations and the treaty on which the Irish people voted, knowing that one of the consequences of a "Yes" vote was that we would ratify the ESM Bill in June.
I do not want to go around the houses on stuff that-----
We are rather going around the houses.
The Minister just went around the houses.
The question has been asked at great length. The same question was asked by Deputy Doherty at considerable length, following which there were supplementary questions. I will allow Deputy Boyd Barrett a further supplementary question, but this topic must be brought to an end at some stage. The argument has been well ventilated.
I deserve the same latitude as other members.
It is not solely a question of that but rather the sub-committee making progress on legislation. I am being very fair but the question has been asked. There may be other questions-----
There is another question I want to ask.
-----and we may later rely on the Deputy to lead on a question. Deputy Doherty has asked a question at considerable length. I will allow another supplementary question but we must then proceed.
I want to respond briefly to the point just made. I reject completely that the Government was upfront about the fact that the Irish citizens are on the hook for €11 billion. Phrases like "contingent liability" which were muttered by the Minister occasionally in response-----
I do not mutter.
The Taoiseach stated, when I raised this in the Dáil, that we were not discussing the European Stability Mechanism but rather the fiscal treaty. When the €11 billion issue was raised, the response was always to say that only €1.27 billion had to be put-----
Was the Bill not published?
It was not distributed. People did not know of it and the Minister did not talk about it. In reality, the Government did not want a debate. I have made my point.
The Deputy was almost a news announcer during the campaign because he was on RTE so often. Why did the Deputy not explain section 3 to the public?
We did our very best and the Government completely downplayed it. In some cases, it misinformed or misled people about the real consequences of the ESM.
That is an untrue allegation.
In plain language - not accountancy language - the reality is that we are committing to pay up to €11 billion into the ESM if we are asked to do so. There is a very strong likelihood we will be asked to do so. It is not simply a matter for Spain what happens there because in signing up to this, we are taking on the responsibility to bail out Spain, Italy or any other state signing up to the ESM. Therefore, it is our business what goes on, what is likely to happen given the significant hole that has emerged in the Spanish banks, and the likelihood that Spain and Italy will need a massive bailout.
If I understand the Minister correctly, he has said we will not be required to increase the amount of our contribution to the ESM unless we go through national procedures, or that it will come before the Houses of the Oireachtas. That implies we have a national veto but I must take the Minister's word on that. It seems to be the interpretation of Article 10. Will the Minister clarify there is no veto on the €11 billion if the ESM requires us to make the contribution? If a simple majority of the board of governors requests we make the additional contributions up to €11 billion, we will have to do it. There is no veto in that regard and we are seriously on the hook for the €11 billion.
The ESM Bill was published and announced, with attention drawn to it in the course-----
I thought we had gone over this ground.
Deputy, please.
-----of the referendum campaign.
Chairman-----
The Deputy is entitled to make his points and the Minister is entitled to respond. That is the way the system works.
The issue of the contributions Ireland would have to pay and the contingent liability was an integral part of the debate, arising on several occasions when people on the "Yes" side were being scrutinised in the media. That is a fact. The contributions are outlined in the text of the Bill, as referred to by the Deputy, and I have spelled out in detail the arrangements. The contribution from Ireland is €1.27 billion and it must be paid in five equal instalments of €254 million. I have described how that will be accounted for, and I need not go back over that ground. The overall contingent liability is €11.145 billion and for that to be called in, the ESM must have loaned the full €500 billion, and that must have been defaulted on. That seems rather unlikely but it is a contingent liability to be included. There are all sorts of liabilities undertaken by a state when it enters into international agreements, and we have many liabilities under the European Union arising from the treaties.
The Deputy is being alarmist and trying to scare people. He is trying to make a political point by stretching logic to its absolute limits. Sovereign debt - the most senior of debt - is very unlikely to have no recovery value. If everybody defaulted together and the full €500 billion loaned to countries unknown would go down, the sovereign debt would still have some residual value. The idea of a full call to the €11 billion figure is legally possible but it is such a remote possibility, the Deputy should not be trying to frighten people. The campaign style of scaring the electorate did not work the last time so perhaps the tactics should change.
The Minister did not answer my question about the board of governors.
It is a matter for the Minister to deal with the questions.
I asked a direct question.
The Deputy may have another opportunity if the issue arises later. I am moving on. We are dealing with section 3, dealing with the contingent liability limit of €11 billion.
Having read the Minister's contribution on Second Stage, is it not €700 billion that would have to be defaulted on by states before we would be fully liable for the €11 billion? I support the Minister. If European states that form part of this fund default to the tune of €700 billion, we would not have to worry too much about where our €11 billion would come from. It would mean the whole project would be gone up in smoke. When having discussions on Committee Stage we should be more realistic about what is happening outside these Houses. The Deputy is a bit like Chicken Licken saying the sky is falling. He is getting too excited.
The €500 billion is the lending limit and €700 billion refers to capital. There is a cushion for collateral purposes to enable best rates to be borrowed.
Could Deputy Doherty's next point be raised under any other section?
It refers to the €11 billion figure and contingent liability. The Minister stated that all of this liability could only be called on if the full €500 billion loaned was defaulted on. Deputy Twomey repeated that assertion. Is it correct to say that a part of that liability could only be called on if there was a portion of default? Is it correct to say none of the contingent liability would be called on unless there was a default?
That is correct.
I put it to the Minister that the assertion is not true. Article 10 does not deal with maintaining the capital ratio. Article 10 of the treaty states:
The board of governors shall review regularly and at least every five years the maximum lending volume and the adequacy of the authorised capital stock of the of the ESM. It may decide to change the authorised capital stock and amend Article 8 and Annex II accordingly. Such decision shall enter into force after the ESM members have notified the depository of the completion of their applicable national procedures. The new shares shall be allocated to the ESM members according to the contributionkeyprovided for in Article 11 and in Annex I.
I believe I am correct, and if so, I am alarmed that the Minister has made such statements today. Article 10 of this treaty allows the ESM board of governors, through unanimous decision, to increase the firepower of the ESM.
This is not because there are multiple defaults across the board. Rather, it is because it would be prudent for a board of governors to question whether it is big enough. Article 10 gives them the power to say we need additional unauthorised capital stock. Instead of having €80 billion, they can say they want €100 billion. Under Article 10, they have been given the power to change Article 8 and Annex II, which will call on our contingent liabilities.
All of this can happen without a state defaulting. The Minister is correct in saying that if there was a default on all €500 billion, our contingent liability would automatically be called in. That is without dispute. The Minister is claiming the only way our contingent liability would be called in is if states default but that is not the case. Article 10 allows the board of governors, through unanimity, to increase lending volume and deal with the adequacy of it. They are given the power to change Annex II, which deals with the call on each member state. I ask the Minister to clarify and correct his statement to the committee if my point is correct.
That is not my understanding of Article 10. After a five-year review, if the board of governors of the ESM decide the firewall is inadequate and that there should be a bigger firewall, they are empowered to make the decision to raise additional funds. There is a key in the annex that gives the proportions for each state. If they want to build a firewall of €1 billion, everyone's contribution goes up and the contingent liability of every member state increases. If there is no default, there is no call in of liability. We have already gone through the mechanism saying that a decision of the governors can only take effect when the member states have notified the depository of the completion of the applicable national procedures. At the point of the decision to increase the firewall, there is no call on anyone's liability. It is simply a decision to build a bigger firewall. If countries are in agreement, they will make larger contributions in the future and their contingent liability will increase. That is my understanding of it, unless I have missed something.
In order to clarify, is there not a danger of conflating two matters: the increase in the contribution to the authorised capital stock, and having to pay out on contingent liability?
If one increases the lending volume-----
Please Deputy Boyd Barrett, we are trying to get to the core of what Deputy Doherty, very reasonably, is raising. Is Deputy Doherty not in danger of conflating two matters?
No. This article allows the ESM to increase the firewall without defaults across the board and to change the subscription ratio in Annex I, which will have an impact on Annex II. This could then require the additional call on our capital.
It does not change the subscription ratio. They will just say that they are going to put an additional €300 billion in the fund and will allocate contributions and guarantees proportionately, using the same key. That is what is most likely to happen. There is no call on the money but we are building a bigger firewall.
Unfortunately, we are stuck in this. The Minister says that this will not change the key.
It could. The key was a matter of debate but a change will not happen without a total revision of the treaty and people agreeing to have a different way of allocating a proportion of contributions across the community. The most likely thing to happen is that they will undertake a review and comment that, in the new circumstances, the firewall is inadequate and say they want to build a bigger firewall and need an extra €300 billion of lendable funds. They increase the figures from five to eight and, to get that, every country must make a bigger contribution and give an additional guarantee in proportion to what has been already done.
I wish to make a couple of points.
Deputy-----
This is fundamental to the section.
I know it is fundamental but I will give it more time if Deputy Doherty addresses the following issue. I am trying to clarify points for the progress of the committee. As I understand it, the question Deputy Doherty is asking is about his concern about the payout. The Minister responded that money would only be paid out in the event of multiple defaults. After he answered that, Deputy Doherty asked about Article 10 and the power to increase. The power to increase in Article 10 is the power to increase the contribution to the authorised capital stock. Then, the national procedures kick in. It is not my role to argue with Deputy Doherty but I want to see what we are now discussing. It seems we are discussing two separate things, one of which is a new contribution to the authorised capital stock in Article 10 and the other is the concern, which Deputy Doherty pursued with the Minister over the past few minutes, about an eventuality that will arise when we must pay out in the event of multiple defaults. These are linked but separate propositions. We will get tied up in knots if Deputy Doherty cannot clarify for the committee where we are heading.
My reading of it is that the payment of Ireland's contingent liability of up to €11 billion is in no way linked to an increase in the authorised share capital of the fund. That is clear. We will not be called upon to pay the €11 billion because they want to increase the size of the overall lending capacity. We will be called upon to pay up to €11 billion in the event that the countries that borrowed money from the ESM do not repay it.
That seems to be the case. We should move on.
Is Deputy Doherty's objection that the fund can increase in years to come?
We dealt with that earlier.
The Minister made a number of comments, one of which is that the only way a contingent liability will be called in is if countries default. I am arguing that, under Article 10, the board of governors has the ability to increase the capital stock. I understand there is a ratio in terms of the overall amount of the fund. Am I correct in regard to the €18 billion paid in by member states and that the overall size of the fund must be 15%?
No one disputes that Article 10 allows the board of governors, through unanimous agreement, to increase the capital stock of the fund. However, there is a provision in the treaty that the amount paid in directly by member states is 15%. If we increase one, we increase the other. The argument being put forward by the Minister, that the only way the contingent liabilities will be called upon is on the basis of the defaults, is inaccurate.
Under Article 10, there is the potential to alter the contribution key in Annex I: "The new shares shall be allocated to the ESM Members according to the contribution key provided for in Article 11 and in Annex I". The key is included in Annex I. There are reasons for that because member states may decide not to pay in and the key would have to change. The key could change but that is not the issue. The issue is that the board of governors has the potential to increase the overall amount in the fund, which would increase our payment to the fund and it could happen without default.
Paid-in capital must be 15% of the amount lent, not the amount of the fund. It is relevant to the accelerated payment of contributions. While countries were building up their contributions, if the amount lent exceeded 15% of the capital paid in, we would have to accelerate payment of the contribution. It was in that context that I explained the issue. It does not influence the point the Deputy is making.
It certainly does influence it. I ask the Minister to withdraw his statement that the only way we would have to provide more paid in capital would be if the sovereigns defaulted. That is not the case.
I never said that was the case. I stated the only way the guarantee would be invoked would be if the sovereigns fully defaulted. The Deputy is trying to tie that into capital being paid in, which is not what I said. That was a misunderstanding on his part which he should not attribute to me.
There are two ways by which the contingent liability, the capital being paid in, can be called on. The first is if there is a default on money lent to the European Stability Mechanism and the fund no longer has sufficient paid in capital. In that scenario it would be necessary to call on the states' contingent liabilities. The second is if the fund increases as a result of a unanimous decision of the board of governors. As the Minister pointed out, if lending increased to a certain level, the capital would also have to be called on.
As I have pointed out, such a scenario does not require a default by the sovereigns. The reason this is so important is that many others and I believe the fund is not sufficiently large in the first instance given that one has Spain, France and other countries included. At a minimum, there is significant potential for the fund to be increased.
If, under Article 10, the governors decide the fund should be increased and participating countries agree to that proposition, countries will be required to make additional contributions in proportion to their current position and they will incur additional contingent liability because the size of the fund will have increased. If the pace of lending does not match the pace of contribution to the extent that paid in capital must be 15% of the amount lent, it may be necessary to accelerate the contribution payment in order that one adheres to the 15% rule. However, that is the only consequence. It is true that if this scenario is realised five years from now, Ireland's contribution and liability will increase and there would also be a possibility that the pace of the additional contribution might increase as a result of the 15% rule. There are, however, no other consequences and nothing to connect this with the calling in of the full sum of €11 billion or whatever it would be as a result of the fund having been increased in size. That is in a different part of the forest, in other words, it is a scenario that would only arise were everybody to default.
I am completely satisfied that the Minister has clarified that this country's contingent liability could be called in, even without member states defaulting.
That is not the case.
It is.
No, I stated the contingent liability could be increased as opposed to being called in.
There appears to be a genuine misunderstanding.
Deputy Pearse Doherty is using the concepts of paid in capital and what is described as "callable" capital interchangeably, which is creating considerable confusion.
That is correct.
I do not understand the Minister's suggestion that if, as is quite possible, the European Stability Mechanism were required to significantly increase the amount it lends, Ireland would not have to pay in more and increase its contingent liability. Is that not the reality?
That is accepted.
The position is that under the current arrangements, which I have described, and on the current level of Irish contribution and contingent liability, the ESM will be empowered to lend €500 billion. If, in the future, a decision is taken that this sum is insufficient and the fund must be increased, it will be increased. For example, if the figure of €500 billion were to increase to €750 billion, the increase of €250 billion would have to be funded, meaning that each member state in the fund would have to make extra contributions. As a consequence, they would incur a proportionate increase in their contingent liabilities. However, this liability is callable and nothing would happen to it unless it was called. It would only be called in full if everybody were to default. There is some confusion caused by the mixing up of two concepts. I have tried to explain the position.
I will proceed.
I have one question to which I did not receive an answer. Will the Minister confirm that the ESM can require us to increase paid in capital, up to the €11 billion figure, by a simple majority decision of the board of governors and that Ireland would not have the power to prevent such a scenario if the board were to make that call?
Before I allow the Minister to respond, we have dealt with the increase to which the Deputy refers.
We have not dealt with it. The Minister did not confirm that the scenario I had outlined was correct.
I refer the Deputy to Article 10.
I am referring to Article 9.
I ask the Deputy to read Article 10. The issue has been addressed. Whereas the Deputy asked a fair question two hours ago, it has been dealt with. Article 10.1 states:
The Board of Governors shall review regularly and at least every five years the maximum lending volume and the adequacy of the authorised capital stock of the ESM. It may decide to change the authorised capital stock and amend Article 8 and Annex II accordingly. Such decision shall enter into force after the ESM Members have notified the Depositary of the completion of their applicable national procedures. The new shares shall be allocated to the ESM Members according to the contribution key provided for in Article 11 and in Annex I.
With respect, Article 9 states: "The Board of Directors may call in authorised unpaid capital by simple majority decision to restore the level of paid-in capital". I ask the Minister to confirm that the amount Ireland will have to pay in may be increased up to a figure of €11 billion by virtue of a decision by a simple majority of the board of governors and that were such a decision to be taken, the Minister could not do anything about it.
The Deputy is not referring to paid in capital.
There is a difference between authorised unpaid capital and paid in capital.
Calling in authorised unpaid capital means increasing the actual amount we pay over.
The Deputy is referring to callable capital rather than paid in capital.
No, I am not. I am reading from the treaty.
I have made several attempts to explain the issue.
Article 9.1 of the treaty makes it clear that the board of governors may call in authorised unpaid capital, which is our contingent liability, at any time and set an appropriate period of time for its payment by the ESM members.
Has the Deputy read the rest of the article?
Article 9.2 allows the board of governors to make the same demand for the covering of losses. Article 9.1 gives the board broad scope to call in unpaid capital at any time. It is fundamental to the question that the-----
It should be authorised initial capital.
I will proceed as the Minister has indicated he has dealt with the issue.
He did not deal with it. He referred to Article 10, whereas I referred to Article 9.
Does the Minister wish to add anything at this point?
Question put and agreed to.
Section 4 agreed to.
SECTION 5
Question proposed: "That section 5 stand part of the Bill."
This section gives the Minister legal immunity as a governor of the European Stability Mechanism once the mechanism is established following ratification of the treaty, should such ratification take place. Will he outline the reason he desires legal immunity for the actions he may undertake as a member of the board of governors? Why does the ESM require legal immunity? Is the Minister disposed to waiving his legal immunity if he were required to do so? Where is the precedent for a body such as the European Stability Mechanism and its governors, papers and premises being granted inviolability and immunity?
Section 5 provides that the ESM shall have within the State the legal status, privileges and immunity set out in Article 32 of the treaty and that the chairperson of the ESM board of governors, its governors, alternate governors, directors, alternate directors, managing director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents. Article 2 of the treaty sets out that the ESM shall have full legal personality and full legal capacity to acquire and dispose of movable and immovable property, contract, be a party to legal proceedings and enter into a headquarter agreement and-or protocols, as necessary, for ensuring its legal status and privilege and immunities are recognised and enforced.
Article 32 of the Treaty sets out that the ESM shall have full legal personality; full legal capacity to acquire and dispose of movable and immovable property; contract; be a party to legal proceedings; and enter into a headquarter agreement or protocols as necessary for ensuring that its legal status and its privileges and immunities are recognised and enforced. Article 32 further sets out that the ESM, its property, funding and assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that the ESM expressly waives its immunity for the purpose of any proceedings or by the terms of any contract, including the documentation of the funding instruments. It also provides that the property, funding and assets of the ESM shall, wherever located and by whomsoever held, be immune from search, requisition, confiscation, expropriation or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action. The archives of the ESM and all documents belonging to the ESM or held by it, shall be inviolable. The premises of the ESM shall be inviolable.
The official communications of the ESM shall be accorded, by each ESM Member and by each state which has recognised the legal status and the privileges and immunities of the ESM, the same treatment as it accords to the official communications of an ESM member. To the extent necessary to carry out the activities provided for in this treaty, all property, funding and assets of the ESM shall be free from restrictions, regulations, controls and moratoria of any nature. The ESM shall be exempted from any requirement to be authorized or licensed as a credit institution, investment services provider or other authorised licensed or regulated entity under the laws of each ESM member.
As the ESM is an international financial institution, the euro area member states agreed to give the ESM and those working for the ESM, such as governors, directors and so on, diplomatic privileges and immunities in line with other international financial institutions set up by an international treaty. The privileges and immunities are mainly in respect of diplomatic immunity, taxation and exemption from any requirement to be authorised or licensed as a credit institution investment services provider or other authorised licensed or regulated entity under the laws of each ESM member.
A Government order under the Diplomatic Relations and Immunities Act 1967 could not address in full the privileges and immunities provided in the treaty. Therefore, they are provided for in this Bill.
I thank the Minister for his speaking note. As one of the governors of the ESM, he will be above the law. What are the circumstances in which he would want to be above the law?
The speaking note states that immunity from legal proceedings is in respect of acts performed by them in their official capacity. We are talking about actions by governors qua governors of the ESM, so it is important to state that it does not extend beyond that. I presume it is to avoid the ESM being inhibited from acting in the manner envisaged by legal proceedings of one kind or another, whether mischievous or otherwise. This is not unusual. The privileges and immunities contained in the ESM treaty are similar to those in the treaties underlying the UN and the IMF. The purpose of diplomatic privilege and immunities is not to benefit individuals or the ESM, but to ensure the effective performance of functions of the ESM. In the case of the ESM, we believe the immunities are justified.
The Minister may correct me if I am wrong. He was involved in negotiating this treaty. I presume there was discussion about why the Minister, as a governor, may require legal immunity and why he might want to be above the law in the member states. I understand some of the logic in his answer but why should an elected politician be above the law in any parliament? The Minister will be above the law in this State for his duties with the ESM. I do not think anybody should be above the law in any member state. What kind of discussion took place around the table? What worries did the finance ministers have that they decided to grant themselves immunity from prosecution for functions that they carry out? We have seen in other cases involving immunity that it extends to quite frivolous activities. Some people with diplomatic immunity are refusing to pay parking fines, speeding tickets and so on because they were attending meetings or whatever. Therefore, I presume that the Minister's immunity can be used by claiming to be carrying out his duties as a member of the ESM board.
When we talk about the EU, we often talk about restoring democracy and trying to go back to the people, yet this institution is being created that is above the law in every single member state.
I would like to let Deputy Boyd Barrett in on this issue as well, and then I will go back to the Minister.
The ESM is potentially going to be one of the most powerful bodies in Europe that might literally hold the fate of states and the eurozone in its hands. It seems absolutely extraordinary that it would seek immunity from any sort of legal oversight by the governors or its staff as to its activities, its decisions and how it came to make those decisions, and that its archives should not be subject to scrutiny. Essentially, it would be a law unto itself. Why on earth would the people who are involved in negotiating the establishment of the ESM want to create this enormously powerful financial institution and ensure that it is above the law and subject to no scrutiny whatsoever at any point now or in the future?
I presume that this is something similar to the way Cabinet confidentiality and government papers are protected by law. I do not see what the Deputies' concerns are. Do they think that the Minister and his board of governors are going to run away with something? What are their real concerns about this organisation? It is like an arm of government, protecting itself and the confidentiality of its papers------
No member of the Cabinet is above the law in this State.
No governor will be above the law in the way-----
Yes they will. They will be above the law when carrying out their functions in the ESM.
They cannot kill anybody. They are doing their job. Some of the nonsensical questions on this committee are getting a bit ridiculous.
They can make decisions that will have very far-reaching, fundamental and potentially devastating impacts on millions of citizens in Europe, and yet they will not be subject to any legal scrutiny.
What will they be doing that is so urgent that we have to go down this line of questioning?
They might do to us what they did to Greece.
Order please.
The paranoia is starting to get ridiculous.
Why give them immunity?
What is the Deputy so concerned about? He throws out all this rubbish about every organisation that is set up, yet we are still waiting for some-----
Why would it want legal immunity?
The net point is that the ESM is going to be the lender of last resort to sovereign states in certain circumstances in Europe. It wants to make sure that it is not inhibited from carrying out its functions. Sometimes it may have to carry out functions very quickly and it does not want to be inhibited by people taking legal proceedings to stop it. We do not have to go back very far to see politicians taking legal action to prevent things occurring in this State. As Deputy Boyd Barrett said, these are very important things in Europe and the future of millions of citizens may hinge on them. If a minority party holding the Deputy's views goes to court and succeeds in stopping the ESM intervening to fund a state, and a state defaults as a result, then that is a very serious issue. I do not think it is an exaggeration to say that we can envisage in modern Europe these kinds of proceedings being initiated. It is put in specifically so that the ESM can do what it says on the tin and is not inhibited by legal actions from carrying out its functions.
That is an extraordinary statement. To throw out the red herring that the People Before Profit Alliance could be the real threat to the future of Europe-----
It is growing and growing.
-----and millions of its citizens is pretty extraordinary. The likelihood of legal action preventing the ESM from doing anything is minimal.
I do not think so.
It is minimal. Can the Deputy give me an instance in which that is likely to happen?
These lads are running down to the High Court at the drop of a hat.
Is he seriously suggesting that if an institution holds the key to the future of millions of citizens, making decisions that could devastate their lives or fundamentally affect them in one way or another, those citizens should not have some right to legal recourse against that institution? What possible reason could there be for inviolability of the offices, documents and archives of the ESM? They can never be looked at, so we will never know how decisions were made, the reasons or motives behind them or the arguments for making one decision rather then another. It is like something out of a James Bond movie.
It is hard to reply to rhetoric but if we look at what is emerging in Europe at present-----
What about the Minister's rhetoric about small parties threatening the fate of Europe?
-----in terms of movements on the extreme right and extreme left, it is totally foreseeable that as soon as the ESM moves to do anything, some group will have it in some court. If that happens, there is a good chance the ESM will be prevented from doing what it was set up to do.
We are marching towards 1984.
Please, Deputy.
Marching towards 1933 is a much bigger risk.
Yes, indeed, and the Minister is dragging us there.
May I ask a question out of interest? The Minister named a list of organisations that are above the law and immune from prosecution, including their governors. Is the ECB included in that?
Not to my knowledge.
I am asking this for a reason. The Minister's argument was bizarre. There could have been another form of words that would not prevent the ESM-----
I will check the position of the ECB.
The ECB must carry out the same types of operation with the same sharpness. We are not happy with what it is doing, but it is still functioning.
We will check that for the Deputy.
I think the minutes are secret. In fact, minutes are not taken.
Yes, but is it above the law?
Question put and agreed to.
SECTION 6
Question proposed: "That section 6 stand part of the Bill."
This is to do with regulatory issues. The ESM will be outside the regulatory provision of any member state, including Ireland. Can the Minister talk to me about that? What is the background behind section 6?
The ESM is not required to be licensed by individual member states or by the Central Bank of Ireland. Given that it is in an international organisation, it would be inappropriate for it to be regulated by the central bank of one particular sovereign.
Will this institution, which will have all of our sovereign money, be regulated by anybody?
Well, it will be-----
The treaty.
There is a treaty with which it must comply and there is a board of governors. The accountability is really political in these organisations. In the final analysis, they are accountable to the Heads of State or Government of the participating sovereigns.
We will not know what they are doing, so how could we make them accountable?
What the section provides is that the ESM will not be taken to be providing a service or carrying on an activity in the State which would be regulated by the Central Bank.
We talk about lack of regulation. People are appointed to different things and there is no scrutiny or oversight. It ties in with the last section; there is immunity, so we cannot see the papers and so on, and now there is no regulation.
We have to act in accordance with the treaty. The Deputy has read the treaty, which is quite detailed in the way in which it constrains the actions of the ESM.
Can the Minister clarify that the staff of the ESM will pay no tax whatsoever?
That is not dealt with in section 6.
Apologies.
Question put and agreed to.
SECTION 7
Question proposed: "That section 7 stand part of the Bill."
I ask the Minister to clarify why the staff of the ESM should not have to pay tax.
My understanding is that exemptions apply to the institutions. There are various tax arrangements for people who are employed in different European institutions. I do not have a note on the tax arrangements for employees of the ESM, but as I understand the section, the ESM is an agency.
It does mention staff. The word "staff" is there.
The treaty provides that within the scope of its official activities, the ESM and its assets, income, property, operations and taxation authorised by the treaty shall be exempt from all direct taxes. ESM members shall wherever possible take the appropriate measures to remit or refund the amount of indirect tax or sales tax included in the price of movable or immovable property where the ESM makes a substantial purchase for its official use, the price of which includes taxes of this kind. No exemption shall be granted in respect of taxes and duties on public utility services. Goods imported by the ESM and necessary for the exercise of its official activities shall be exempt from all import duties and taxes and from all import prohibitions and restrictions. Staff of the ESM shall be subject to an internal tax for the benefit of the ESM on salaries and emoluments paid by the ESM, subject to rules to be adopted by the board of governors. From the date on which this tax is applied, such salaries and emoluments shall be exempt from national income tax. No taxation of any kind shall be levied on any obligations or securities issued by the ESM, including any interest or dividend thereon by whomsoever held, which discriminates against such obligations or securities solely because of its origin, or if the sole jurisdictional basis for such taxation is the place or currency in which it is issued, made payable or paid, or the location of any office or place of business maintained by the ESM.
For clarification, is it likely that there will be any staff members of the ESM in this jurisdiction?
I do not think they will be in this jurisdiction, but they may be recruited from this jurisdiction. The headquarters will be in Luxembourg, and I do not see why it should have other locations.
Is it the case that the board of governors will decide what tax these people pay?
That is what the section says, yes.
There is no determination at this point in time. What is the position for staff of the EFSF? Do they pay taxes?
I do not know.
Is this the standard for such organisations?
I know that personal tax arrangements are made by people in the European bureaucracy in Brussels, and they are not aligned with practice in the sovereign states. There is also the issue of avoiding double taxation. There are different rules of taxation applying to residency, domicile and place of work, and there must be provisions to avoid double taxation.
Has the identity of the alternate governor been announced?
No. The practice is that ratification takes place first, and then the pieces are put in place.
There is no salary or payment for the Governor and alternate governor. It is purely a matter of status. Is that correct?
It is just part of the European job. When, at some stage, I print my CV, it will say I am a governor of the World Bank and of the IMF. It sounds very important. In practice, one attends one meeting a year.
The Minister may have to attend more of the ESM meetings.
Please God, no.
Question put and agreed to.
Section 8 agreed to.
SECTION 9
Question proposed: "That section 9 stand part of the Bill."
On section 8-----
Section 8 is agreed to, Deputy.
You are going very quickly, Chairman.
We are not going that quickly. I am advised that I am not empowered to go back to section 8. The decision has been made. We are discussing section 9. Is section 9 agreed to?
It is not.
This is how the ESM is going to work.
It might get its business done, so.
This ties in with the previous question. There will be no payment to the governors but the expenses incurred by the administration of the Act shall be paid out of moneys provided by the Oireachtas. Is there an estimate of the likely cost of that administration? Will it be put before the Dáil?
This is an enabling provision.
I understand that. Will those costs be furnished? Section 8 referred to a report to the Dáil on contributions made by the ESM. How often will that report be produced and will the Government facilitate debate on each report, as a matter of course, given the importance of the institution and the magnitude of the contributions?
There will be reports at six-monthly intervals, or twice a year. When a report is presented to the Dáil it is normally presented to a select committee. They will probably be presented to this committee.
They are the ESM secrets.
I will meet the Deputy for a cup of coffee some time and tell him everything.
Question put and agreed to.
SECTION 10
Question proposed: "That section 10 stand part of the Bill."
I wish to raise a broader issue, if you will allow me, Chairman. Is there any suggestion that the ESM can be used as a vehicle for the Government's efforts to renegotiate the bank debt attached to the promissory note? Is there a potential for the ESM to be the vehicle for dealing with that? Would the Minister like to take this opportunity to update the committee on the negotiations on the promissory note? Is there a timeline for the completion of the technical paper? Could the Minister give us a sense of the process? Where will the paper be tabled once it is finally agreed by the Minister and the members of the troika? Does the Minister view the Spanish deal as a setback for our efforts to renegotiate, given that bank debt is, regrettably, being once again heaped on the sovereign? Can the Minister give us a sense of where that is going?
The Minister has said on a number of occasions that he views the renegotiation as a medium-term project, but next March will creep up again very quickly.
We share the idea that Ireland's debt position would be more sustainable if different arrangements were made for outstanding bank debt. The kind of arrangement we have in mind is to increase the term of various loans, principally the promissory note, to maintain a low interest rate on it and to have it for a longer period of time. We are not talking about write-offs or restructuring in that sense. The terms are imprecise but we are talking about a piece of financial engineering to replace short-term expensive paper with long-term inexpensive paper. The length of time is not agreed but these are the elements of the negotiation.
There are various difficulties. The European Central Bank is inhibited from lending long. At least, it is of the view that it may not have the legal authority to lend long because that might be regarded as monetary financing.
It is within that scheme of things that we are exploring matters. The Deputy can take it that all hands are on deck in Europe looking at Greece and Spain. I would hope to commence conversations again when I get to Luxembourg next week. The meetings are held in Luxembourg in April, June and October. The June meetings will be in Luxembourg, in the middle of next week.
An opportunity would have presented itself for Ireland if the assistance to Spain had not been tied to the sovereign but had gone directly to the banks. There is a protocol in Europe, which is not a matter of law, that what applies to one country will apply to another, even if policy is changed at a later date. There is an obligation, which is accepted, that if a country was treated more adversely, it should be brought retrospectively under a new protocol if a change takes place. However, nothing happened in Spain to set us back. It was just that there was a possibility of a new opportunity arising, and that did not occur. There is nothing in either of the treaties, or in either of the funds, to allow direct funding to the sovereign.
We have some time. The IMF has come out publicly in support of us.
We have invited the Minister to come before the committee next week, in accordance with our decision. We are hoping to finalise that arrangement and hold the meeting on Tuesday or Wednesday of next week. We will have an opportunity to have this discussion then.
I will allow a brief supplementary, Deputy McGrath.
I know the talks between the Government and the troika have been ongoing for some months. However, once a paper is agreed by the troika will it be tabled at ECOFIN? What is the process for having a deal approved and put in place?
The process started as an Irish request. The troika has now accepted the task of turning that into a policy paper which it will present to the Commission. If the Commission, and all the rest of us, are happy with it, the Commission will table it as a Commission policy paper. That is when it gets difficult. The consent of 27 sovereigns is required. That is where the political approaches have to be made. I cannot predict what an outcome might be.
Is the Minister confident?
One always travels in hope. I see Europe as a process. It is evolving all the time and there is change all the time. People told me I was wasting my time looking for a reduction in interest rates, but that was negotiated. People said there was no point in looking for the restoration of the minimum wage to its original level, yet it was conceded.
I did not say either of those two things.
Deputy Boyd Barrett is not speaking for 166 people, yet.
No one actually said that.
Deputy, we will have to consult the record.
If the Minister makes claims he should provide the record.
We will have to consult the record. People are allowed make these points.
Did someone give Deputy Boyd Barrett a hard time in school? He always acts as if he has been accused of something. He is not. I was not even thinking of him.
For the record, I think the whole country wishes the Minister well in renegotiating the promissory note. We may not be happy with the outcome of those negotiations and we may want to go further, but we want a success.
I appreciate that.
Any success will be of benefit. Some of us would prefer a different approach and that we would get a bigger chunk, and so on. I have two questions. First, what is the maximum term limit on loans under the ESM? Does it have the ability to lend over 30 years? Is that agreed or-----
There is no maximum stated.
My two questions tie together. In terms of the renegotiation of the promissory note and the difficulty the European Central Bank has regarding long-term financing, there was talk, although I do not think it was specified, of 30-year loans in the ESM and potentially longer loans. Could we not apply to the ESM for a loan to pay off the promissory note on a longer term? Why could that not be secured? It is not my preferred approach but it exists. Spain is about to apply for a loan to pay off its banks. We have engineered a promissory note that was wrong in its design. Why does that option not exist? Talks have been going on since last September. From what I hear from the Minister there is one option on the table to which the answer is "Yes" or "No". I do not understand why it is taking so long.
Second, the cost of the loans that will be provided by the ESM to member states is not clear but I understand they will be at cost with a small margin. They are now below the IMF rate. The IMF is lending to this State at about 4.7%; it lends to other states at different rates. The ESM is lending at 3%. Has the Minister entertained the thought of refinancing the €22 billion of IMF funding that has been given to this State through the ESM and the savings that would accrue of approximately €400 million per year? Instead of the average maturity of 7.5 years we have the possibility of taking a longer-term loan out as well.
We are gone off the Short Title.
The arrangement for the bailouts is that the European authorities, together with the IMF, will provide the financial assistance and will be involved in the monitoring of the conditionality within the programmes. To share the burden the European authorities want the IMF involved, and therefore it is part of the structure of bailout programmes in which the IMF is involved. For its part, the IMF will not take a lead role or act unilaterally to assist the European countries. It will only do so if Europe takes the lead and it will come in and assist. It is very careful about the amounts it will contribute. As the Deputy rightly said, in the amounts of money given the IMF has its own set of rules and interest rates but it is not possible to get the Commission and the ECB to take up that portion of the programme. That is the portion of the programme to which the IMF is committed, and the IMF provides the money on its set of conditions at its interest rate level. When interest rates change, therefore, it is not possible to get that money elsewhere. That is not an available option.
On the Deputy's original question about action on the promissory note, we are not ruling out any approach. If we could get a solution which involved the ESM, well and good. We are prepared to examine all options but we must be very sure that the new arrangement is less onerous on the Irish taxpayer than the old arrangement. On the primary presentation, sometimes it does not jump off the page until the numbers are worked out over a very long period of time but we are not ruling anything out.
I call Deputy Boyd Barrett to speak to section 10 as best he can.
On a lighter note, we wish the Minister well in trying to get a better deal for Ireland in terms of the banking debt but we are somewhat gloomy about whether the approach and tactics he is employing can deliver that result. To make a topical analogy, we are all hoping that Ireland will beat Spain tonight but we are not sure if the strength of the team or the tactics of the manager are likely to deliver that result.
The bitter word.
Question put and agreed to.
SCHEDULE
Question proposed: "That the Schedule be the Schedule to the Bill."
The Irish and English versions of the ESM treaty are attached to the Bill in the Schedule. As Deputies will be aware, the treaty includes provisions on membership, the purpose of the ESM, governance authorised capital stock, operations and financial management, general provisions and traditional arrangements to apply on the move from the EFSF to the ESM.
I wish to inform the committee that I plan to bring forward on Report Stage amendments to the Irish language version of the treaty as held by the European Commission which are necessary to ensure consistency of the Irish translation of the treaty with other language translations and also to correct grammatical and typographical errors in the Irish version of the treaty.
In the course of preparing the European Stability Mechanism Bill 2012 it has emerged that some corrections are required to the Irish language version of the treaty as held by the European Commission. Before correcting the Irish version of the ESM treaty attached to this Bill, the Irish version of the treaty held by the European Commission had to be amended. The method of correction is known as process verbal derectification, known to its friends as PV.
What is that in Irish?
The PV procedure is a simplified process of rectification of the text of treaties where the error being corrected is not a substantive change to the treaties and where the contracting states are agreed that there is an error which can be corrected as proposed. It is not a procedure for amending the treaty. In the case of EU treaties, the PV is conducted by way of written procedures where the rectification will be made once member states indicate that they have no issue with the proposed amendment.
The procedure has been completed and the Irish version of the ESM treaty has been corrected. The amendments I propose to bring forward on Report Stage will carry through those corrections into the copy of the treaty set out in Part 1 of the Schedule. I am obliged, for procedural reasons, to notify members that these amendments will be coming forward on Report Stage.
Question put and agreed to.
Title agreed to.
Bill reported without amendment.