European Financial Stability Facility and Euro Area Loan Facility (Amendment) Bill 2011: Second Stage
Tuesday, 20 September 2011
Dáil Éireann Debate
I thank the House for agreeing to discuss the European Financial Stability Facility and the Euro Area Loan Facility (Amendment) Bill 2011 today at short notice. The Bill is needed urgently to allow Ireland ratify the changes to the European Financial Stability Facility and Greek Loan Facility as agreed by the Heads of State or Government on 21 July 2011. It is essential for ensuring financial stability within the euro area.
As Deputies will be aware, euro area member states agreed in May 2010 to create a European Financial Stability Facility, EFSF, in order to safeguard the financial stability of the euro area and to financially support euro area member states which are in difficulties caused by exceptional circumstances beyond their control. The EFSF was incorporated on 7 June 2010 for the purpose of providing stability support to euro area member states in the form of guaranteed loans of up to €440 billion within a limited period of time.
In order to ensure a triple A rating, which provides access to low cost funds, the EFSF adopted complex structures — involving over guarantee of bonds issued and credit enhancement measures such as cash buffers and prepaid margins on loans. These measures reduced its effective lending capacity to some €250 billion, and increased the effective cost of borrowing for borrowers.
Under the EU-IMF financial support programme agreed on 28 November 2010, Ireland accessed one loan of €4.2 billion from the EFSF maturing in July 2016. The total amount available to Ireland from the EFSF under the programme is €17.7 billion.
On 30 June 2011, euro area Ministers for Finance signed an amendment to the European Financial Stability Facility Framework Agreement, subject to the completion of national parliamentary procedures. The main purpose of the June 2011 amendment agreement is to increase the effective lending capacity of the EFSF back up to its headline volume of €440 billion by increasing the over-guarantee percentage to 165% of the amount raised by the facility. The amendments include specification of the margin applying to loans to future programme countries, changes to the pricing structure including the introduction of a new advance margin, a specific reference to Ireland becoming a stepping out guarantor, which occurred on entering the EU-IMF programme, and the potential transfer of EFSF rights, obligations and-or liabilities to the ESM.
On 21 July 2011, the Heads of State or Government announced further measures to ensure the financial stability of the euro area and to stem risk of contagion. These measures include a new programme of assistance for Greece and increasing the flexibility of the EFSF and the ESM by allowing them to act on the basis of a precautionary programme, to finance recapitalisation of financial institutions through loans to governments and to intervene in primary and secondary sovereign bond markets on the basis of ECB analysis. The Heads of State or Government agreed to reduce the interest rate on EFSF loans to Ireland, Greece and Portugal to lending rates equivalent to those of the balance of payments facility, close to, without going below, the EFSF funding cost as well as lengthening the loan maturities.
We discussed this further in Poland this week. The proposals from the European Commission on the EFSM have yet to be decided by ECOFIN and are likely to be decided on 4 October. Some details of the EFSF also need to be finalised.
It is now calculated that the overall savings from the reductions in the margins applying to the EU related programme funding is about €9 billion over the average life of seven and a half years as originally envisaged for the loans. This saving of about €9 billion represents 5.7% of the current forecasted level of GDP in 2011. In terms of 2012 the NTMA now calculate that the savings on the EU funds will be about €900 million.
Legislation is required to enable Ireland ratify both the June amendments to the EFSF framework agreement and those arising from the decision of 21 July 2011 in the form of amendments to the European Financial Stability Facility Act 2010. As the June amendments had not yet been ratified by most countries, a consolidated set of amendments was agreed and these are set out in Schedule 1 to the Bill before us today.
As Deputies will be aware, the delay in implementing the 21 July Head of State or Government decisions in relation to the EFSF is adding to market uncertainty. Also Ireland, Portugal and Greece cannot benefit from the reduced interest rate and increased flexibility until the revised EFSF is implemented. It is for these reasons that ratification of the EFSF and the revised Greek loan facility agreement are now an urgent priority. At the informal eurogroup meeting in Poland last weekend all euro area countries confirmed they would work to ratify the amendments to the EFSF as quickly as possible. Many countries have already provided confirmation that they have ratified it. Ireland, as a recipient of assistance from the EFSF, should not delay the ratification of the amendments to the EFSF.
Ireland’s EFSF loan facility agreement will be revised to give effect to the cost reductions from the reduced interest rate and longer maturities agreed by the Heads of State and Government. This will require the unanimous agreement of the loan guarantors.
The decision of the euro area Heads of State and Government on 21 July also has consequences for the ESM treaty in that the treaty signed by euro area Finance Ministers in July, subject to the necessary parliamentary procedures, will now require amendment. Discussions are continuing at a technical level on the text of the amendments. The revised ESM treaty, incorporating the amendments, will be dealt with in separate legislation later this year or early next year. The ESM is due to come into force and take over from the EFSF during 2013, subject to ratification by all euro area member states.
Arising from the serious budgetary and economic problems affecting Greece and its inability to secure international funding at sustainable rates and in the context of safeguarding the financial stability of the European Union and the euro area, it was agreed on foot of an intergovernmental agreement in May 2010 to provide bilateral loans totalling €80 billion for Greece from the euro area member states in conjunction with IMF assistance of €30 billion over a three year period to mid-2013.
In June Finance Ministers agreed at eurogroup level to revise the Greek loan facility to allow for the extension of the grace period between draw-down and the commencement of repayment from three to 4.5 years, the extension of the maturity period for loans from five to ten years and a change in the calculation of the margin relating to loans to Greece to give it a lower interest rate. The Commission signed the loan facility agreement for Greece on behalf of euro area member states on 14 June, pending ratification by the individual euro area member states. In Ireland’s case, this means the Euro Area Loan Facility Act 2010 requires amendment. The Bill provides for the ratification of these amendments to the Greek loan facility agreement.
In line with the Heads of State and Government decision of 21 July on a new programme of assistance for Greece, a second amendment to the Greek loan facility is being finalised to allow for a longer grace period and a lengthening of the loan maturity to 15 years. Once finalised, the Commission will sign the second amendment on behalf of the euro area member states.
The European Financial Stability Facility and Euro Area Loan Facility (Amendment) Bill 2011, as brought before the House today, does not provide for the second amendment to the Greek loan facility as the second amendment had not been signed in time. As soon as it is signed, we will have to bring forward separate legislation to ratify it. Given the importance of the amendment to the EFSF framework agreement to Ireland in securing an interest rate reduction and the pressure being put on euro area member states to ratify the amendments to the EFSF and the first amendment to the Greek loan facility, we cannot delay the Bill any longer waiting for the second amendment to the Greek loan facility to be agreed and signed.
Turning to the Bill, as I have mentioned, it provides for amendments to the European Financial Stability Facility Act 2010 and the Euro Area Loan Facility Act 2010. The Bill has three sections, with the amendment to the EFSF framework agreement set out in Schedule 1 and the amendment to the Greek loan facility agreement of 14 June set out in Schedule 2.
The first section of the Bill provides that the references to the EFSF framework agreement in the European Financial Stability Facility Act 2010 shall include the amendment to the EFSF framework agreement. It also increases the amount that may be paid from the Central Fund to €12.5 billion from €7.5 billion in line with the increase in the notional guarantee ceiling for Ireland as set out in Annexe 1 to the amendment. It is notional because the amendment agreement specifically notes that Ireland and Portugal have become stepping out guarantors. Despite this point, the figure is being amended for reasons of consistency.
The EFSF amendment agreement is set out in Schedule 1. The main changes to the EFSF framework agreement are set out in the amendments to the preamble in the framework agreement. These are: Article 1.(1) provides for Estonia to become a party to the framework agreement — this was a requirement of it joining the euro at the start of 2011; Article 1.(4) sets out the changes arising from the decision of the Heads of State and Government in July to expand the financial assistance that the EFSF can provide in the future beyond the loan facilities it is limited to by the framework agreement.
The changes include: (1) the provision of loans, precautionary facilities and loans for governments of euro area member states, including non-programme member states, to finance the recapitalisation of banks; (2) the purchase of bonds in the secondary bond markets on the basis of an ECB analysis recognising the existence of exceptional financial circumstances and risks to financial stability; (3) the purchase of euro area bonds in the primary market; (4) increasing the effective capacity of the EFSF to its headline €440 billion figure by increasing the level of over-guarantee from €440 billion, 120%, to €780 billion, 165%; (5) amending the pricing structure to cost of funds plus a margin of 200 basis points for the first three years for each financial assistance and 300 basis points thereafter — however, in line with the 21 July decision, the preamble will also be amended to note that Greece is to receive loans at lending rates equivalent to those of the balance of payments without going below the cost of funds and that these lending rates will also be applied for Ireland and Portugal; (6) providing that the maturities for Greece are to be a minimum of 15 years and up to 30 years and these should also apply for Ireland and Portugal.
The remaining paragraphs of Article 1, from paragraph (9) to paragraph (60), amend the articles of the framework agreement to provide for the changes listed above. Many of the amendments are technical or text changes such as changing “Loan Facility Agreement” in a number of articles to read “Financial Assistance Facility Agreement”.
Annexe 1, containing the guarantee commitments for each euro area member state, has been amended because of the increase in the level of total guarantees to €780 billion. Ireland’s figure is increasing from just over €7 billion to just under €12.4 billion. However, the annexe has also been amended to make it clear that Ireland, Greece and Portugal have become stepping-out guarantors, thereby bringing the effect level of total guarantees down to €726 billion, which is 165% of €440 billion.
Annexe 2 which sets out the contribution key based on the ECB capital subscription has also been amended because of Estonia joining the euro and the EFSF. Ireland’s contribution decreases from 1.5915% to 1.5874%.
Schedule 2 to the Bill sets out the amendment agreement to the Greek loan facility agreement. The changes are: the grace period at the start of each loan during which principal is not payable is increased to 4.5 years from three years; the maximum term of a loan is increased to ten years from five, and the margin applicable to loans from this facility is to be reduced by 100 basis points. The amount available to Greece under this facility is unchanged because future loans will come from the EFSF.
I look forward to a constructive debate on the Bill. Now is a time for unity among euro area countries to ensure financial stability within the euro area. The revised EFSF forms part of the measures to ensure that stability and Ireland must play its part, as it is in the interests of this country and the eurozone to do so. Therefore, I urge Deputies to agree to ratify the changes to the EFSF and the Greek loan facility. I commend the Bill to the House.
Deputy Michael McGrath: I thank the Minister for bringing forward this Bill and his Second Stage contribution. I welcome the publication of the European Financial Stability Facility and Euro Area Loan Facility (Amendment) Bill which, essentially, gives effect to the decisions taken in June at the euro area Ministers for Finance meeting and at the July meeting of the eurozone Heads of State and Government. It is indicative of the extent to which the crisis in the eurozone dominated events over the summer that it was necessary to revisit the decisions taken in June just a few weeks later, with further measures aimed at reassuring markets as to the sustainability of public finances across the eurozone. It underlines the inability of the European Union to get ahead of the ongoing debt crisis. The European institutions and political leadership have singularly failed to get to grips with the crisis which rumbles on before our eyes, with the downgrade today of the rating for Italy by Standard & Poor’s.
The collective failure of the European political leadership was underlined by the decision to go on holidays after the 21 July summit. The effect was to immediately create a vacuum. While the decisions were made in principle by the leaders, there was no definitive date as to when they were to be implemented and the procedure for their implementation was somewhat open to question. The decision not to follow through immediately and recall parliaments across the European Union, especially across the eurozone, created a vacuum which was subsequently filled by market turbulence. The fear and uncertainty led to huge turbulence, with billions of euro being written off stock markets. It has crystallised in a sharp way the incapacity of the institutions and the political leadership in Europe to deal with the crisis in a comprehensive way.
In recent days the European Commission published its proposals on eurobonds, but within days the head of the most powerful member state in the eurozone publicly dismissed the idea. It all creates a sense of a European Union that is not acting as a unit, that is not cohesive and that does not have unity of purpose as to how it will set out to resolve the issues involved.
As I said at the time of the eurozone summit in July, I welcome the decision of our EU partners to reduce the interest rate charged to Ireland in respect of the EFSF assistance programme. This is a clear recognition that an essential precondition for Ireland returning to the bond markets is demonstrating that the public finances are on a sustainable path. The saving from the interest rate reduction helps us to achieve this goal. This has been assisted further by the recent announcement of a reduction in the interest rate charged to Ireland on funds drawn down from the separate EFSM. It is particularly welcome that these rate reductions apply to the funds already drawn down from both funds, despite the initial indications to the contrary.
The question that people at home will want to have answered is how will they feel the difference and how will Ireland make the best possible use of the very significant saving achieved. The Minister has confirmed that the saving in 2012 will be €900 million, which provides significant scope in the preparation of budget 2012. The bottom line is that we must achieve a deficit figure of 8.6%. This additional €900 million saving which was not expected a few months ago gives the Government scope to make political choices. Perhaps the Minister might refer to the particular primary balance targets we must achieve, excluding the interest payments we must make next year. While we are committed to achieving the 8.6% target, are we committed to achieving a particular primary balance also, which does not take account of the saving on the interest rate? The Minister has gone on record recently as saying the budget will be about two thirds as difficult as last year’s. With the €900 million saving, it need only be less than half as difficult as last year’s.
Deputy Michael McGrath: I am sure there are. I fully acknowledge that the major risk the economy faces is related to the issue of growth and the global economic picture. We received the updated outlook from the IMF today which was quite pessimistic, and that certainly is a downside that will feed into the Government’s pre-budget outlook and new multi-year plan which we look forward to seeing next month.
We would like to receive further information on other issues related to the 21 July eurozone summit decisions such as the purchase of debt on secondary markets by the EFSF, following the imprimatur of the ECB. Will Ireland be in a position to avail of this? Will it be availing of the extension of the maturities? There was a reference in the communique to a commitment to provide ongoing funding for programme countries that continued to meet the commitments into which they had entered. When Mr. John Corrigan appeared before the Oireachtas finance committee recently, he was of the view that if Ireland was not in a position to get back into the markets in the second half of 2013, we would be looking at drawing down funds from the new ESM fund which comes into being in the middle of that year. We would welcome the Minister’s comments in that regard.
Given the seriousness of the situation, it is somewhat frustrating that the Bill at this stage is only able to deal with the first of the two amendments agreed to on the Greek loan facility. I note the Minister’s comment that this issue may have to be revisited in separate legislation.  The uncertainty over a second bailout for Greece needs to be brought to an end as soon as possible, as it is giving rise to fears of a domino effect across the European banking system.
The high profile pan-European stress test of bank balance sheets notably failed to allay investor fears about their ability to withstand a Greek default, the reasons for which are all too apparent. Many eurozone banks, particularly French banks, hold large amounts of Greek Government debt and are significantly exposed as a result. The fear of an imminent Greek default is causing investors to sell shares in such banks. The leading French banks, BNP Paribas and Société Générale, have seen their share prices tumble in recent times. In turn, this increases the cost of capital for such banks, making them more vulnerable. The contagion effect is clearly seen when other banks, which see falling bank share prices and widening credit-default spreads, react by refusing to provide the vulnerable banks with interbank liquidity. There is a sense of déjà vu from 2008 when the liquidity markets seized up. This breakdown in the interbank market leads to a breakdown of the credit circuit which can have very damaging implications for the eurozone economy, including the Irish economy.
The economist Daniel Gros recently warned that a failure to avert a breakdown of the normal functioning of the credit markets would lead to a repeat of the “immediate recession” experienced after the Lehman Brothers bankruptcy. The consequences for Ireland of such a scenario would be to choke off recovery in the economy. The central point is that our interest in the negotiations at European level to deal with the crisis did not end with the securing of a reduction in our bailout interest rate. We must be active participants in the design and implementation of measures to deal comprehensively with the related problems of sovereign finances and bank liquidity and solvency.
The creation of the EFSF and its successor, the European Stability Mechanism which will be launched in mid-2013 was designed to prevent such a disastrous chain of events from taking place. Unfortunately, the EU authorities have not always acted quickly enough to take measures to stabilise the situation. How often have we heard the phrase that the euro is back from the brink? The decisions taken during the summer certainly brought a temporary improvement to the situation in relaxing the terms of the current bailout arrangements for Greece, Portugal and Ireland and providing for private sector involvement in the proposed second bailout for Greece. This is not being extended to Portugal and Ireland — nor was it sought, as the Minister indicated previously. However, even at this short remove, there are considerable concerns that there will sooner or later be a need to revisit the operation and size of the EFSF. That is a fundamental issue at the heart of the uncertainty in the financial markets. There is a lack of credibility to the fund which clearly is not big enough to bail out large economies such as Italy and Spain.
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