European Financial Stability Facility and Financial Stability Mechanism: Motion

The next item on the agenda is a motion concerning the recent loans made available to Ireland from the European financial stability facility and the European financial stability mechanism. The wording of the motion which has been submitted by Deputy Mulcahy was circulated to members last week, following which no amendments were received. Before I ask the Deputy to move the motion, it needs to be mentioned that we can choose to proceed with this debate at this time, independent of the debate due to take place in the Dáil tomorrow, or defer it for a week in order that it takes place after the Dáil has made its decision. It is a matter for the committee.

I move:

That the Joint Committee on European Affairs undertakes an examination of the terms of the recent loans made available to Ireland from:

(a) the European Financial Stability Facility and

(b) the European Financial Stability Mechanism

to ascertain whether or not Ireland has got the best possible interest rate on these loans and requests the attendance of the President of the European Council, Herman Van Rompuy, to explain whether or not these loans are consistent with the spirit of European Solidarity.

We do not need to spend very much time discussing this motion. However, I would like to make a few points. I welcome the fact that Ireland and other countries have the ability to draw down loans from the European Union. As we all know, this can be done through the European financial stability facility or the European financial stability mechanism. If the European financial stability facility is used, the loan is provided by a private special purpose vehicle in Luxembourg which was established on 7 June. If the European financial stability mechanism is used, the loan is raised by the European Commission, with the approval of the Council, and given to the member state in question. Many think Ireland is the second country, after Greece, to have obtained such a loan. In fact, it is the first country to avail of this mechanism. The public might be under the impression that we are borrowing money from the European Union. As I understand it, not one European country has put its hand in its pocket, placed a load of money on the table and distributed it as a loan to other member states. The reality is that the European Union, through the mechanism and the facility, is becoming guarantor for loans raised on the international financial markets. That is very different.

We should not be particularly critical. It is not my job to be critical, but perhaps some will be critical of what has happened. The reality, as I see it, is that Ireland needed funding and the price of funding on the international markets was absolutely exorbitant. There was a euro crisis and this is part of the response to that crisis. We have a genuine role in scrutinising these loans which I suggest is within our remit. We are drawing down €45 billion, an enormous amount of money, between these two structures which will be a burden on the people for many years to come. That is common cause and it is a genuine issue to examine. We need to consider whether the mechanism agreed when the European financial stability facility was established is fair. We also need to examine whether funds can be accessed at a decent commercial rate, or the best possible commercial, consistent with European solidarity. It can be argued that the mechanisms fall a little short on these criteria.

The interest rate at which we are borrowing from the European Union is higher than that at which we are borrowing from the IMF. There is confusion in that regard. I have received a note from the National Treasury Management Agency, dated 1 December 2010, which states our interest rate from the IMF is 5.7%. I have seen an IMF press release, dated 28 November 2010, which states near the end that an interest rate of 3.12% will be charged during the first three years and that a rate of just under 4% will be charged thereafter. That is a lot lower than the rate if 5.7% the NTMA mentioned in its note. However, that is a side issue. The reality is that we are being charged a higher interest rate by the European Union than by the IMF. Questions need to be asked about this in the first place. Why are we being charged more by the European Union than by the IMF?

The note I have received from the NTMA states the interest rate from the European financial stability facility will be 6.05% per annum and that the interest rate from the European financial stability mechanism will be 5.7% per annum. I propose formally that we examine the 6.05% rate associated with the European financial stability facility. Clause 8 of the framework agreement sets out that an up-front service fee, calculated as 50 basis points, needs to be paid. That comes to €88 million. I suggest that, as a set-up fee, it is not insubstantial. The agreement continues:

The Service Fee and the net present value of the anticipated Margin, together with such other amounts as EFSF decides to retain as an additional cash buffer, will be deducted from the cash amount remitted to Borrower in respect of each Loan (such that on the disbursement date ... the Borrower receives the net amount .... but shall not reduce the principal amount of such Loan that the Borrower is liable to repay and on which interest accrues under the relevant Loan.

That states in a gobbledygook way that approximately €4 billion of the €22.5 billion will be taken out up-front as part of the service fee. Therefore, we will only receive approximately €17 billion. As I understand it, the net effect is that the effective interest rate is not 6% but between 7% and 8%. That is a lot higher than the rate the IMF is charging us. I do not want to be small-minded about this. I started my contribution by welcoming the fact that the European Union had set up this fund. In the spirit of European solidarity and best practice, when moneys are being made available to member states that get into difficulty, every effort should be made to provide such funds at the most economic interest rate possible. Perhaps some expert will tell the committee that there is no other way of doing this and that it has to be done in the manner set out. We may be told this is the cheapest possible money the country could ever receive, but I remain to be convinced. This important question should be answered to the satisfaction of the committee.

The issue is relevant to the committee. It is also an issue of national importance. There is aprima facie case to answer given that we are being charged more for the European funds than the IMF is charging us. I hope my colleagues will join me in supporting the motion and examining the issue to see whether we are satisfied that the recent package put in place is consistent with the spirit of the treaties, the Union and European solidarity.

I second the motion. The sums involved are enormous. It is worth debating the motion even if it only serves the purpose of educating us. We should examine the matter in some detail.

I do not have any grave objections to us examining such a proposal. It would be educational. Leaving aside the present difficulties, in the same way as having the Single Market, in a large union there should be great advantages to borrowing money in general.

I have a particular difficulty with some of the rating agencies. Nobody seems to be able to say what particular expertise or qualifications they have to decide on the ratings imposed on countries. We should bear in mind that the same agencies were involved when we were borrowing and engaging in wild and extensive spending. There should be a totally independent European rating agency which would not have any difficulty in rating each member state. Like any business - as Senator Quinn would understand better than most - when one becomes big, one has added value in terms of being able to borrow and the rate at which one can borrow.

Let us suppose that Ireland was in the third division in terms of ratings, our ambition would be to get into the second division and then into the first division. If Europe was borrowing money we would borrow on the back of the overall European borrowing. While one would not expect to get the same rate as a first division country, we would certainly expect only a reasonable added value to be imposed so that we could borrow at a reasonable rate. Such an approach would be far better than leaving a small country such as Ireland floating on its own trying to borrow when it has become practically impossible and prohibitive. That would ensure such emergency funds would not be required to be set up in the first place. We would be part of a borrowing mechanism that would recognise where we stood in terms of ratings within Europe but our borrowing would be done as part of a wider European effort on behalf of us all. That in itself would have considerable advantages. It is like any business. If one goes to a bank manager when one is big and strong one has a better chance of getting a loan than the small businessman with very little influence. The rate charged and the impositions involved would be far less if one is big and powerful than if one is a small individual. The same must apply to countries trying to borrow. A considerable amount could be done by looking at all those areas.

This may be top-of-the-head stuff on my part but at least I am putting forward ideas. If someone can tell me that my bright idea will not work for the following reasons then I am prepared to accept that and to put on my thinking cap again to see whether I can come up with some other bright idea. It is important that we should thrash out all those issues and see whether there are ways in which we can return to normal borrowing rather than having to continuously dip in to special funds. I recognise that for the time being we must pay a slightly higher interest rate than the first division club but our ambition is to get back into the first division.

I am pleased we are supporting the motion as it is an important one that we should explore. The latter part of Deputy Mulcahy's motion contains a proposal to invite the President of the European Council to address us. It is my understanding that Herman Van Rompuy's office was not involved at all in granting the loan or determining the interest rate for Ireland. Those decisions were made by the European Central Bank, the European Commission and the IMF. Even if Herman Van Rompuy were to agree to come over, which is unlikely, the most likely thing he would say is that he had nothing to do with the arrangement. His office was not involved and the people reporting to him were not involved in the negotiations. If Deputy Mulcahy's intention is to bring over those who were involved in making the decisions on this country's debts then perhaps he would consider amending the motion and instead invite representatives from the IMF, the ECB and the European Commission because they were the three bodies that granted the loan to us?

In the current environment I have a dreadful fear that this country will turn in on itself and not look outwards and engage in the way we have done in the past. The basis of the programme could be a catalyst for bad things to happen in terms of our attitude to the outside world. I hope we can have a reasoned and fact-based investigation into what happened that would be impartial and would allow us to give an objective view on the interest rate to the people in so far as we can have one. It is worth considering the motion for that reason alone.

My final point relates to the practicality of doing all of that. We will all be concerned with other matters in February and March. Is it possible that we could get all that is proposed done by the end of January? We could have one or two all-day meetings to try to get all concerned together. We could take a short, sharp approach and have matters concluded by the start of February. It would be a tall order but I fear we will not get it done otherwise. The motion is a good one and I hope we can do a good bit of work on it.

I support the motion, if only for the reason Deputy Barrett outlined, that it acts as an educational opportunity for us and that we would learn more. Many people do not quite understand how the system works. It is not that much different to any business. The bankers are in the business of charging what they believe is the best rate they can get. It seems to me that if one is to lend money to someone and there is a doubt about credibility, one charges a higher rate of interest, just as any business would do. If one has full confidence that one will be repaid then an individual will pay a much lower rate of interest. We have allowed ourselves to get into a situation where there is no confidence in our economy and therefore we have to pay a higher rate. Deputy Mulcahy's point about the different rates between the IMF and the funds we are getting from Europe is interesting. I am not quite sure why that is so. If nothing else, it would be educational to investigate the issue.

I have a different view on rating agencies. If I was a bank and wanted to know about a potential client I would like an independent rating agency to be able to give its best judgment on whether he or she is dodgy or strong. I do not support the argument that we should control the rating agencies. If I were lending money I would much prefer to have recourse to an agency that was independent and could make up its own mind. Much as we hate it when we get a bad rating from a rating agency, at least it is recognised as being someone's opinion. If the rating agencies do a bad job they will lose business. We should not attempt to interfere with the rating agencies. Let them decide, and if they are good at doing their job, they will earn their keep. If they are not, they will lose it.

The Senator misunderstood what I said. I was talking about an independent European rating agency, with recognised independent experts who would independently rate countries within the European Union. I agree entirely that one cannot have a set-up job that would do what we ask it to do. I am talking about independent experts that Europe would recognise as being independent agents.

I commend the motion and the insight it shows. I am somewhat conflicted because on the one hand the ECB has been our sole source of funding for so long at a low rate, and then there is the deal in which we are definitely being charged a high rate. Whether this indicates a lack of solidarity is an open question. I was on radio this morning, as Senator Donohoe mentioned, and we had a somewhat in-the-dark debate about this. This type of analysis would definitely help all of us as regards what will be a key issue in its aftermath. If we get it done before the end of January, it could be very informative.

The points are all well made. However, Mr. Van Rompuy is not really the relevant person to-----

Perhaps he might be substituted by Mr. Klaus Regling.

The three people we need to talk with would include Commissioner Olli Rehn, who had a leading co-ordinating role in this whole area. The others are Mr. Jean-Claude Juncker and Mr. Jean-Claude Trichet. Those are three very influential people who have a meaningful role to play.

There is one other issue, and it is political. Parliamentarians in other member states throughout Europe do not fully understand or comprehend the situation from our perspective. We do not comprehend it from theirs, either, and this is something that is sadly missing from the whole debate. Most European institutions, apart from the Ministers who get it at Executive level, get their information from commentary. There is commentary in theFinancial Times, which has not always been of a positive nature, and in various print and electronic media, that has been totally corrosive in terms of putting together the best package that suits the Irish situation here and now. We hear of expressions of anger in the European Parliament and Members trying to get a petition together to expel some members from the eurozone, all of which is unhelpful. Approaches have been made to the committee secretariat from ambassadors and members of the diplomatic corps indicating the need for some degree of explanation to be given on our situation to our colleagues in other member state parliaments, and the same applies to the institutions we have talked about now.

If the committee agrees, I propose that the motion be amended.

I move amendment No. 1:

To delete the wording from "Van Rompuy" and insert, "representatives of the European Central Bank, the European Commission and the IMF, including Commissioner Olli Rehn, Mr. Jean-Claude Juncker and Mr. Klaus Regling."

Is that agreed?

Chairman, the motion calls for an examination to be undertaken, and I should like and I believe the committee should get an independent financial expert - it should not take that long - to look at these loans and come back to us with the real interest rate. I would specifically not like anyone connected with the Government, Parliament or anything like that to do this. It needs to be an independent financial expert who could be given the relevant documentation and report back to the committee. I do not have confidence in the note I got from the National treasury Management Agency.

I accept that.

I am sure we have some resources available and it should not take a fortune to ask an independent financial expert to do a report and come back to us in early January to tell us exactly the effective interest rate, not the headline rate. The headline rate is hiding all the things under the table. The Irish people deserve to know what the real effective interest rate will be on this money, and that is what I believe should be done.

All right. By the way, I believe there is very little chance of getting the various representatives over here to meet us, in the meantime. If we are interested in doing something quickly, I respectfully suggest that the meeting will have to take place in Brussels. I have no doubt about that, so the Deputy will need to pencil in two or three days for that.

That is fine, Chairman.

At this stage it is enormously important that we give a clear message to all our European colleagues to the effect that whatever it takes to resolve the difficulties we are now in, will be done without reservation. This is aside altogether from the motion and is not in conflict with it. It is crucial that we clearly indicate to all our European colleagues, the ECB, IMF, Commissioner Rehn and everybody else that we are determined to deal with the budgetary situation, that we will do what it takes to resolve the problem, in the context of this motion, to ensure that we get the best value for our money as well. That is of major importance.

On the motion to be amended, I have mentioned the representatives of the European Central Bank, the European Commission, the eurogroup, the ESF, IMF, Mr. Olli Rehn, Mr. Regling and Mr. Juncker. Is there anybody else who might be included in that list? Is the motion, as amended, agreed?

On that point, are we sure we are addressing the political dimension to this, as regards contacting those representatives. Ultimately, we are talking about European solidarity, not just the figures.

It is of benefit to Europe as well.

Amendment agreed to.
Motion, as amended, agreed to.

The report of the motion, as amended, will be laid before the Houses of the Oireachtas. Is that agreed? Agreed.

What about Deputy Mulcahy's suggestion about getting an independent financial report?

There are expert opinions available to beat the band, as one knows anytime one switches on a television, radio or any electronic network at the moment. I believe members of the committee are more than competent-----

This is a mathematical issue.

I am aware of that, too.

It is a treasury issue.

It is a treasury issue, but there are people who have been involved in these negotiations that are very adept at dealing with treasury issues as well.

We do not want to hear from any of them. The Chairman has to get the spirit of this right. I want, and I believe Deputy Barrett wants, somebody independent to look at this and come back to the committee with the real effective interest rate.

I am aware of that.

That is all we are asking, Chairman.

I am not trying to dissuade the Deputy. I am merely saying that independent expert advice is fine, but which is the ultimate independent expert opinion?

It is a mathematical issue.

From what I understand Deputy Mulcahy to say, is that we need to get a treasury view as to where the 5.8% interest rate figure came from and the effective interest rate that it represents. I have seen a number of people write about the maths behind the figures and I saw one analysis by Professor Karl Whelan in UCD, a name that I think should be considered. Other people may have other names. His analysis is in the public domain, as I saw it published and it was all about the figures and where they came from, the effective interest rate and so on.

We should invite somebody from the economics department in UCD to give an expert opinion at our next meeting.

It is the numbers that one must look at.

That is very simple.

That is all right.

Will I come back to the secretariat after I have checked out the name of the person who wrote the article? I will send that information to both Deputy Mulcahy and the secretariat. If that is what the committee is looking for, it could contact the person.

We could write formally to the economics department in UCD and ask it to nominate a professor who would come before the committee to give expert evidence on this topic.

Will we go with that suggestion?

Is it agreed that the secretariat write to the economics department of UCD?

The letter should ask it to send a professor or a senior person from the finance section to give testimony as to the effective interest rate on the two euro loans.

That person not being committed to one side or the other.

Is that agreed? Agreed.

The joint committee went into private session at 3.30 p.m. and adjourned at 3.40 p.m. until Tuesday, 11 January 2011.