Mr. Feargal Ó Brolcháin:

The purpose of this legislation is to make provision for the inclusion by the European Security Mechanism, ESM, board of governors, in accordance with Article 19 of the ESM treaty, of the ESM's direct recapitalisation instrument as one of the financial instruments envisaged under Articles 14 to 18 of the treaty. This includes provision for the creation of subsidiary bodies which could be used to implement the direct recapitalisation instrument. The legislation also incorporates the ESM treaty, as adapted following the accession of Latvia to the ESM on 13 March 2014, into the European Stability Mechanism Act 2012.

The euro area member states reached a preliminary agreement on the operational framework of the ESM direct recapitalisation instrument, DRI, on 10 June 2014. This includes the draft guideline on financial assistance for the direct recapitalisation of institutions, which set out how the DRI will operate. This has been provided to members. Establishing the DRI requires a decision by mutual agreement of the ESM board of governors, subject to the completion of national approval processes, to create a new ESM instrument in accordance with Article 19 of the ESM treaty. The aim is to have this process completed by November this year.

The Attorney General has been consulted and has advised that an amendment to the ESM Act 2012 will be required to allow the Minister for Finance, as a member of the ESM board of governors, to pass the necessary resolutions. In short, the reason we need to amend the ESM Act 2012 is twofold. First, the ESM was established to provide loans to member states. The DRI provides for loans to financial institutions on the basis of an application by a member state. Second, the DRI provides that subsidiary bodies and sub-entities may be used to facilitate such investments, so we must also cover that eventuality. While the ESM provides for limited self-amendment, for example, in Article 19 of the ESM treaty, to add to the range of financial instruments that can be used, these changes go beyond what the Dáil approved in the ESM Act 2012. That Act provided for the payment of Ireland's contributions to the ESM, and also made provision for the immunities included in the ESM treaty in Irish law. The ESM treaty, as it stood in 2012, was annexed to the Act.

Article 3 of the treaty states that the purpose of the ESM shall be "to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its member states". The key feature is that it provides for financial assistance to euro area member states.

Article 19 of the ESM treaty provides that the board of governors may review the list of financial assistance instruments provided for in Articles 14 to 18 and decide to make changes. The directory capitalisation instrument is being introduced under this article. However, as the direct capitalisation instrument was not in existence when the ESM was adopted and as it provides for direct assistance to a financial institution, it is considered that this expands the scope of the treaty beyond what was approved by the Oireachtas in the ESM Act of 2012, and an amendment to that Act to provide for the new instrument is therefore required. In addition, the draft guideline provides for the use of subsidiary bodies and entities of the ESM, including external investment, to conduct the actual recapitalisation. Although the treaty provides for ESM subsidiaries, the amendment provides for their use with a direct recapitalisation instrument.
The aim of the instrument is to preserve the financial stability of the euro area as a whole and of the member states by catering for specific cases in which an ESM member experiences acute difficulties with a financial sector that cannot be remedied without significantly endangering fiscal sustainability due to a severe risk of contagion from the financial sector to the sovereign. The use of the instrument could also be considered if other alternatives would have the effect of endangering the continuous market access of an ESM member.
The treaty as adapted following Latvia's accession to the ESM in March this year is being annexed to the ESM Act 2012 in both the Irish and English languages through this legislation to ensure the most recent version of the treaty is associated with the Act. Latvia applied to join the ESM on 21 August 2013, arising from its imminent accession to the euro. The arrangements for its accession to the ESM were dealt with in accordance with Article 44 of the ESM treaty. In October 2013, the ESM board of governors - the euro area finance Ministers - approved Latvia's application to join the ESM, along with the technical terms for Latvia's accession. Latvia joined the euro on 1 January 2014 and became the 18th member of the ESM on 13 March 2014, having deposited its instrument of accession 20 days beforehand.
As a consequence of Latvia joining the ESM, there is a need to adapt the ESM treaty to reflect this fact. The ESM treaty provides for limited self-amendment, as I mentioned. This includes adaptations arising directly from the accession of a new member under Article 44. Such adaptations are subject to the approval of the board of governors by mutual agreement, as indicated by Article 5.6.(l) of the treaty. The adaptations arising from Latvia's accession fall within these provisions. These changes were agreed by the board of governors on 23 October 2013, and as there were adaptations to the text of the ESM treaty to accommodate Latvia's accession in annexes I and II, it is considered appropriate to take the opportunity of this Bill to address this.
Latvia's accession led to a number of necessary technical adaptations to the ESM treaty, including the addition of Latvia to the list of member states; the amendment of Articles 8.1 and 8.2 to increase the total authorised capital stock and value of paid-in shares by the amount of Latvia's contribution to each; the inclusion of Latvian as an official language through the addition of a new paragraph to the final part of the main text of the treaty;and the amendment of Annexes I and II to the treaty to include Latvia's contribution key and share of the capital stock. These changes come about because the technical terms of Latvia's accession to the ESM approved by the board of governors include the calculation of Latvia's capital contribution to the ESM, with the capital contribution key set at 0.2757%. This means that Latvia's total capital subscription will be €1.93 billion, including €221.2 million in paid-in capital, which will be paid in five annual instalments of €44.24 million. Latvia has paid its initial instalment of paid-in capital and will make the four remaining payments annually up to 2018.
I will run through the heads of the Bill and I will then be happy to take any questions. The heads were provided to the committee in July and the drafting process has taken place since then. As is usual in such circumstances, the Bill when it appears will have the same content but will look more detailed and fleshed out. Head 1 states the aim of amending the ESM Act to allow for the inclusion of an instrument for direct recapitalisation of financial institutions in beneficiary member states as part of the amendment envisaged under Article 19 of the ESM treaty. Head 2 is to provide for amendment of the ESM to allow for the creation of the ESM subsidiary bodies, sub-entities and funds to implement direct recapitalisation. This can include provision for participation by the private sector in such direct recapitalisation. The purpose of this Bill is to extend the immunities of the ESM to such subsidiary bodies when they are involved with direct recapitalisation. Head 3 indicates that the ESM treaty, as amended following Latvia's accession, is annexed to this amendment Bill.