I am pleased to be in the Seanad today to introduce the Euro Area Loan Facility Bill. We are introducing this legislation to enable Ireland to play its part, along with all other euro area countries, in providing financial support to Greece. Our assistance, in the form of repayable loans, will be centrally channelled through the European Commission as part of an agreed euro area package in conjunction with the International Monetary Fund. It is important to make it abundantly clear that this assistance comes with strong conditions attached.
The multilateral loan facility represents only part of a package of decisive measures designed to restore financial market confidence and project a resolute signal that governments will take all the necessary measures to protect the integrity of both the euro area economy and the euro currency. As my colleague, the Minister for Finance, Deputy Lenihan, reiterated in the Dáil the other day, this support is designed to safeguard the fundamental financial stability of the single currency area. I feel we will all agree that this is an essential prerequisite to securing our economic recovery. In common with other euro area member states, we in Ireland can be relied upon to show meaningful solidarity with our partners in these turbulent times.
The current situation arises because our Greek partners can no longer access borrowing at sustainable rates on the international bond markets. The authorities there have requested support from other euro area member states and the IMF. In response to the ongoing difficulties of the Greek authorities, the Heads of State and Government of the euro area made commitments in February and March of this year reaffirming their willingness to take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole. On foot of these commitments, the euro area finance ministers agreed on 11 April the terms of financial support to be given to Greece. This was to be implemented through bilateral loans centrally pooled by the European Commission as part of an agreed euro area package, with co-financing to come from the IMF.
On 14 April the Government approved Ireland's participation in the Greek financial support programme and agreed to the preparation of the necessary legislation to permit the provision of assistance. On 23 April 2010, Greece formally applied for the activation of the euro area support mechanism. At their subsequent meeting on 2 May 2010, euro group ministers agreed with the assessment of the European Commission and the European Central Bank that Greece's ability to access funding on bond markets was insufficient and that the provision of a loan to safeguard the financial stability of the euro area was warranted. The euro group ministers unanimously agreed to activate stability support to Greece through bilateral loans to be centrally pooled by the European Commission. This will comprise an overall aid package of €110 billion over a three-year period, of which €30 billion will be funded by the IMF. This financial support will mean Greece will not need to rely upon the sovereign debt markets for a period of time and can securely access funding.
The Government has approved ratification of the agreement, which will enable Ireland's participation along with other euro area states in providing this assistance, and has now introduced the draft enabling legislation we are discussing. On 7 May, the Taoiseach attended a meeting of the Heads of State and Government of the euro area at which the loan facility for Greece was endorsed. The Taoiseach confirmed Ireland's participation in this joint loan facility subject to enactment of our legislation. At the same time the Minister for Finance signed the inter-creditor agreement which will govern our contribution to the euro area response. All these steps are subject to the enactment of our domestic legislation.
On 8 May, the European Commission signed on behalf of euro area member states the loan facility agreement setting out the key terms and conditions of the agreement with Greece. While the first disbursement under this facility is imminent, Ireland will contribute to later tranches once we are in a position to do so. Obviously, that can only happen once all our national procedures are completed. Today is a key part of this process.
The Bill we are discussing will provide a legislative basis for Ireland's contribution to the agreed euro area financial support for Greece. In summary, the main proposals contained in the Euro Area Loan Facility Bill are intended to provide for Ireland's participation in the euro area loan facility to Greece, subject to the terms of the loan documentation, payments to be made from the Central Fund in respect of Ireland's share of the euro area funding, with such payments to be based on our paid ECB capital key of 1.64% and subject to an overall limit of €1.5 billion, the receipt into the Exchequer of interest payments and repayment of principal amounts of the loan funding and any related receipts, and the laying before Dáil Éireann of annual reports on expenditure and receipts to Ireland under the loan facility.
In legislative terms, this is a relatively clear-cut Bill containing six sections. Section 1 provides detail on the definitions of the various technical terms contained within the Bill, section 2 provides for payments from the Central Fund subject to the terms of the inter-creditor and loan facility agreements which are appended in Schedules 1 and 2 to the Bill, section 3 provides for the crediting of the Exchequer with moneys received on behalf of the State in connection with the loan facility, section 4 provides for annual reports on payments made and received to be laid before Dáil Éireann, and sections 5 and 6 cover, respectively, expenses incurred in the administration of the Act and its Short Title.
I will explain the agreements and the related memorandum of understanding, the latter of which, while not part of this Bill, was placed in the Oireachtas Library on 17 May. Schedule 1 is the Inter-Creditor Agreement which the Minister, Deputy Brian Lenihan, signed on behalf of the State on 7 May. It provides that the European Commission will act on behalf of the euro area member states in the management and administration of the pooled bilateral loans for Greece, with the ECB acting as paying agent. It comes into effect once the European Commission receives a commitment confirmation from a critical mass of at least five member states and two thirds of the total commitment amount.
Schedule 2 of the loan facility agreement between the euro area member states and Greece sets out all of the key details relating to the terms and conditions of the loan. The European Commission has been entrusted by the member states to co-ordinate and manage the pooled bilateral loans to Greece.
The memorandum of understanding sets out the policy considerations required of Greece. As I have already said, it has been laid before the House.
Briefly, the MoU contains three elements: first, the memorandum of understanding on specific economic policy conditionality specifies detailed economic policy measures that will serve as benchmarks for assessing policy performance in the context of the quarterly reviews under the assistance programme; second, the memorandum of economic and financial policies outlines the economic and financial policies that the Greek Government and the Bank of Greece will implement during the remainder of 2010 and in the period 2011 to 2014 to strengthen market confidence in Greece's fiscal and financial position; and third, the technical memorandum of understanding sets out the definitions surrounding the performance criteria and various target indicators. It also describes the methods to be used in assessing programme performance and the various information requirements to ensure adequate monitoring of the targets.
Ongoing compliance by Greece with the terms of the MoU will be a centrepiece for the draw-down of disbursement of the loan facility.
I turn to the conditions being placed on the Greek authorities as part of this programme. Since the beginning of the year, the Greek Government has shown its determination to address its fiscal challenges. The Greek Prime Minister has reiterated the total commitment of his Government to the full implementation of these vital reforms.
I wish to outline briefly to Senators the measures our Greek partners have to implement. As part of the proposed support package and loan agreements Greece has entered into stringent commitments to undertake fiscal consolidation measures, implement structural reforms and apply financial stability measures. The cornerstone of the Greek authorities' programme will be budget cuts aimed at reducing the deficit to below 3% of GDP by 2014. In cash terms this represents public spending cuts of €30 billion over this budgetary horizon. Moreover, in order to reduce their debt-to-GDP ratio, Greece will have to maintain a primary surplus on their budget of at least 5% for the next decade.
Greece will be the subject of continuous appraisal by the European Commission, the International Monetary Fund, IMF, and the European Central Bank, ECB, to measure its progress towards achieving these obligations and this will form part condition of further loan disbursements. We must be clear that there are no easy shortcuts in the context of restoring sustainability to the exchequer finances, either here or elsewhere among our EU partners.
The Bill will entail a large financial commitment in the form of repayable loans to Greece. It is important to provide reassurance to Senators that our financial support package will be repaid as the economic position in Greece improves. It is also important to note that central to the overall support package is the commitment that member states' funding costs are to be met in full. In summary, we will not be financially disadvantaged by these arrangements. Furthermore, while our debt level will rise as a result of this extra borrowing, the financial assistance we provide will not impact upon our general Government deficit, as it is classified as a financial transaction.
A further safeguard underpinning the entire process is that, if any euro area member state should encounter higher funding costs than those charged to Greece, there are provisions for these additional funding costs to be recouped.
We have reassurance from EU level on these important elements of the financial support programme. Commissioner Rehn has stated that there will be no loss to eurozone taxpayers throughout the process from the provision of this loan facility. In addition, from a budgetary perspective, these arrangements will be taken into account by the Commission in its fiscal surveillance procedures.
Based on the euro area contribution of €80 billion, Ireland's share of the contribution, which is based on the ECB paid capital, will be just less than 1.64%. Payments will be made on a phased basis and, as such, there is a likelihood that there might be some front-loading of our overall contribution. In overall terms our contribution to the euro area loan facility is anticipated to be about €1.3 billion. However, in order to allow scope for internal rebalancing within the loan facility, the text of the Bill provides for a precautionary upper limit of up to €1.5 billion.
The overall financial support agreement allows for a loan facility to Greece for the next three years while the component loans cannot exceed a term of five years. When all the funds have been paid back to the participating member states the mechanism will cease to exist.
I now want to mention the decision of the ECOFIN Ministers to establish a European financial stabilisation mechanism, based on Article 122.2 of the treaty, and ratification of an intergovernmental agreement. This is being set up to support financially member states in difficulties caused by exceptional circumstances beyond their control such as those being experienced by Greece. It is likely that this, too, will also require domestic enabling legislation.
As Senators will be aware, this mechanism was devised in the context of a perceived background risk of contagion from Greece to other member states and can be rapidly mobilised as necessary. The activation of these moneys will be subject to strong conditionality. Already €60 billion has been made available from the EU budget. Supplementing this, members of the euro area have agreed to stand ready to complement these EU resources with an additional €440 billion, in conjunction with further financing by the IMF. The IMF will make available further funding in the region of €220 to €250 billion. This euro area and IMF support will be channelled through a special purpose vehicle to be set up shortly.
Experts mandated by the Eurogroup working group have started the preparatory work for setting up the facility as a matter of the highest priority and are evaluating the best technical options for the set-up of such facility within a short delay. Member states are in the process of preparing the necessary legal arrangements for their participation to the SPV.
This vehicle will make loans/provide credit lines to cover financing needs of member states in difficulty. It will be funded through bond issuances on the market, under the guarantee of participating euro area member states, in accordance with their ECB capital participation key. Loans will be provided on terms and conditions similar to those of the IMF.
The governance arrangements of the European financial stabilisation mechanism, in particular relating to a possible activation of support, will be similar to those of the Greek case. The Commission will play a co-ordinating role in the set up of the mechanism and in the definition and monitoring of programme conditionality.
I want to also outline other measures being considered at European level. At their meeting on 9 May, ECOFIN Ministers also reiterated their commitment to ensure fiscal sustainability and enhanced economic growth in all member states. It was agreed that, where warranted, plans for fiscal consolidation and structural reforms will be accelerated across the full eurozone.
To advance this objective, last week the European Commission brought forward various reform proposals to reinforce economic co-ordination, including ones to ensure the budgetary policies of member states do not undermine the economic and financial stability of the euro area. These will form the basis for further discussion in conjunction with the task force, which is being chaired by EU President Van Rompuy. The first meeting of this task force will be on Friday, 21 May and the Minister, Deputy Brian Lenihan, has indicated he will attend.
We must be clear, however, that these proposals mark the beginning of discussions on these issues. It does not mean, as some have suggested, any loss of Irish sovereignty but is designed to assist the member states be better prepared for any future economic crises. Like most Commission documents, it is designed to float ideas and stimulate debate. Any policy proposals arising from it will have to be ultimately agreed by the member states.
Other initiatives decided upon by the Council relate to regulatory and supervisory reform of financial markets, including the derivative markets, and examining the role of ratings agencies. Work is continuing on other proposals including the possible introduction of a stability fee which will ensure the financial sector will in future pay its share in the event of another financial sector crisis.
Before concluding I wish to comment on our own economic prospects. It is appropriate to do so in the context of the commitment in this Bill to borrow an additional €1.3 billion having regard to the economic difficulties we are currently facing.
In Ireland we are only too well aware of the enormous challenges a small economy can face during difficult and turbulent economic times. However, there are welcome indications that we are beginning to turn the corner gradually. There is mounting evidence that economic conditions are stabilising. Recent economic data and a range of other indicators support this perspective. Consumer sentiment is strengthening and we see clear evidence of increased activity in the motor trade and retail sales sectors. Government policy measures in the last budget have helped restore confidence. In addition, industrial production data and other leading business indicators are also showing signs of improvement. In summary, the official view, as set out in last December's budget, that the economy would bottom out by mid-year and that positive growth would resume in the second half of this year, is being borne out. Most economic commentators now share this perspective. In fact, some are even more optimistic than that.
There are a number of key elements which underpin the Government's approach to addressing our economic challenges, namely, the restoration of stability to the public finances, the repair of the banking system and regaining our economic competitiveness. It goes without saying that all of these are inextricably linked to the return of economic confidence and are essential preconditions for an economic recovery.
Through implementing decisive expenditure control measures since mid-2008 to address the downturn in the public finances we have demonstrated our resolve to restore sustainability to the public finances and shown our ability to manage our budgetary and economic affairs in a prudent, credible manner. We remain committed to implementing our fiscal consolidation plan in order to bring the public spending deficit below 3% of the GDP Stability and Growth Pact threshold by the end of 2014. The evidence is clear. As the Government has already said, there are no easy answers and no quick fixes but we will continue to do the right thing.
The most recent set of Exchequer returns covering the period to the end of April were in line with expectations and show that the action taken by the Irish Government in managing the public finances is working. While challenges do remain in the context of implementing a €3 billion adjustment for next year's budget, our focus is to continue to improve confidence among households, the domestic business sector and the international investment community, through adhering to our consolidation plan. Recent developments such as those we are discussing highlight the importance of continuing to take firm and decisive action in this regard. It is fair to say that the difficult measures we have taken have been clearly vindicated. If we had not implemented these tough measures, we would now be in the unenviable position of having to take even harder measures to stabilise our economy than those now being put in place by our Greek partners.
I have outlined the background to this Bill. The decision we are now considering reflects the principles of solidarity and responsibility which lie at the core of monetary union membership. The support the euro area member states are prepared to give to Greece will benefit us all. I cannot stress enough that this is about the financial stability of the euro area and about European solidarity. In terms of the financial support package we are providing, I believe I have provided strong assurances to the House that the agreement provides that the funding costs will be fully covered. Here in Ireland, we are facing tough challenges and to succeed we must continue to pursue appropriate policies. Equally, the economic and budgetary issues we confront as a member of the euro area are vital to resolve. I look forward to an informed and constructive debate from Senators and commend the Bill to the House.