Brian Lenihan Jnr (Dublin West, Fianna Fail)

I move: "That the Bill be now read a Second Time."

The draft legislation before the House will enable Ireland to join with the other euro area member states in the implementation of the European financial stability facility. The facility is a contingent €440 billion financial support instrument that will be able to provide loans to euro area member states that are unable to access capital markets due to exceptional circumstances beyond their control. Ireland's key obligation under the facility will be to provide guarantees up to a ceiling of just over €7 billion, if needed, for any funds raised by the facility to provide loans to such euro area member states.

The Bill is a logical consequence of the steps that the European Union and the IMF took in response to the recent Greek funding difficulties. In that case, the euro area loan facility was established to provide loans of up to €80 billion to Greece over a three-year period. In conjunction with this, the IMF agreed to provide a maximum of a further €30 billion, making a total of €110 billion available for lending to Greece. I remind the House that Ireland's share is of the order of €1.5 billion and legislation was enacted last month giving effect to our participation. The measures put in place ensure that Greece will not need to rely on the sovereign debt markets for the next three years, thus giving it the necessary breathing space to rectify its public finances, while at the same time meeting the policy conditionality attached to the loan facility. However, at the time it also was recognised that developing and implementing bespoke instruments each time a member state faced difficulties is not a sustainable or prudent approach. In light of this, it was decided that the EU needed to develop and adopt a comprehensive package of measures that would be of sufficient magnitude to address future potential needs. On 9 May last, ECOFIN adopted a package of measures, including an IMF contribution, that will provide up to €750 billion in financial support to euro area member states, if required.

There are three distinct elements in this package. The first is the establishment of the European financial stabilisation mechanism, under which up to €60 billion may be borrowed by the European Commission and loaned to member states, subject to strict conditions on budgetary consolidation. The Council regulation establishing the stabilisation mechanism was adopted by the Council on 10 May 2010. The stabilisation will be the instrument of first resort should a euro area member state seek assistance. The second element is the €440 billion European financial stability facility, which is the subject of the Bill before the House. It will be governed by the intergovernmental framework agreement agreed between the euro area member states and the special purpose vehicle company that will be used to implement the facility. While the facility is independent of the EU budget, the European Commission will play a key role in its operation. There is also provision for important functions to be carried out by the EIB and the ECB. The framework agreement, which I signed on behalf of Ireland on 10 June, subject to the enactment of the Bill before the House, is included in the Schedule to the Bill.

The third element is the assistance that the IMF can provide to member states under its existing stand-by arrangements. It is estimated that this amounts to an aggregate of €250 billion. The IMF has stated that upon request in individual country cases, it is ready to provide financial assistance to its European members in conjunction with the new European financial stabilisation mechanism and the European financial stability facility. This would be on a similar basis to the assistance that the IMF has agreed to provide to Greece in conjunction with the euro area loan facility. Consequently, in overall terms, an aggregate amount to the value of approximately €750 billion is now being put in place to provide support for euro area member states, if needed.

The direct financial implications of the Bill relate to the subscription of capital for the European financial stability facility company that will operate the facility. The State has already committed to contribute its 1.59% share of the currently issued share capital of €31,000, that is, approximately €490. In addition to the issued share capital, there is an unissued but authorised share capital of €30 million. Calling up further capital from the authorised share capital requires a unanimous decision by the board of directors and each shareholder is represented by a director. The provisions relating to this and other matters are all set out in the company's articles of association, which have been laid before the Oireachtas. If the entire authorised share capital is called up, then Ireland's share would be just under €478,000. However, this will be reduced slightly following the accession of Estonia to the euro next January.

The key obligation of the State under the framework agreement is to provide guarantees to the European financial stability facility company to enable it to raise money to provide loans to euro area member states. It is only if a guarantee is called that the State will be obliged to fund its share of the guarantee in question. Therefore, apart from a small amount of paid-up capital, no money is being called upon. The contribution key, which dictates how much of each funding instrument the State will guarantee, will vary in each case and I will outline the reasons for this when I run through the articles of the framework agreement. Under the agreement, Ireland's guarantee ceiling is just over €7 billion. In the highly unlikely event that a guarantee is called, this will not mean that Ireland will never see its money again. The European financial stability facility company remains liable for funds paid under any guarantee and it will endeavour to secure repayment of any underlying loan in default with a view to returning such funds to guarantors as soon as possible. In such an event, it is likely that a lengthy period would elapse before losses, if any, could be quantified.

The purpose of the Bill is to permit Ireland to work together with its fellow euro area member states to ensure the overall financial stability of the euro area. The Bill will allow Ireland to issue guarantees in accordance with the European financial stability facility framework agreement and provide for payments to be made from the Central Fund in respect of any obligations arising under the agreement, subject to a maximum ceiling of €7.5 billion. The Bill is a very straightforward item of legislation because member states' obligations are spelt out in detail in the framework agreement, which is scheduled to the Bill. After I have explained each of the sections of the Bill, I will explain the key articles of the framework agreement.

Section 1 defines the company that will implement the instrument on behalf of the euro area member states and the European financial stability facility framework agreement. Section 2 provides that the Minister for Finance may issue guarantees on behalf of the State for the purposes of the framework agreement. Section 3 provides that money may be paid from the Central Fund to meet the obligations of the State arising from the framework agreement, up to a maximum sum of €7.5 billion. There is an obligation to subscribe to the capital and other costs of the company and additional obligations could arise if a guarantee is called. Section 4 provides that any money received by the State is to be paid into the Central Fund.

Section 5 deals with the reporting obligations. The Minister must ensure that a report is laid before Dáil Éireann as soon as is practical after 31 December 2010 and every six months thereafter. There is provision for more frequent reporting from time to time, if considered necessary. The report must include information on outstanding guarantees, moneys advanced by the State and money that has been repaid to the State under the framework agreement. Section 6 amends the reporting requirements of the Euro Area Loan Facility Act 2010. This amendment to the earlier legislation for the assistance to Greece takes on board the views expressed during the passage of the legislation for more frequent reporting. The amendment also makes the reporting requirements consistent with the reporting requirements of this Bill. Section 7 is a standard section on the expenses incurred in the administration of the Bill and section 8 sets out the Short Title.

The Schedule to the Bill contains the European financial stability facility framework agreement. The agreement begins by stipulating the parties to the agreement. These consist of the euro area member states and the European financial stability facility company. This is followed by a preamble, which outlines the origins of the facility and explains its purpose. As the agreement is a lengthy and detailed document, I wish to highlight some of the key points.

Article 1 of the agreement covers the entry into force provisions for the facility. Essentially, the obligation to issue guarantees becomes operational when member states comprising 90% of the guarantee commitments have submitted their commitment confirmations. Article 2 covers the granting of loans, funding instruments, the issuance of guarantees and generally sets out how the facility will operate. It provides that a euro area member state seeking financial assistance must agree a memorandum of understanding with the European Commission in liaison with the IMF and the European Central Bank that sets out the budgetary and economic policy conditions with which the borrower must comply in order to receive financial assistance. In addition, detailed terms and conditions will be set out in a loan facility agreement between the company and the member state in question, subject to the approval of all guarantors. Article 2 also provides that the company will be responsible for raising the money it requires to advance the loans to borrowers and establishing the terms on which it issues or enters into funding instruments. In addition, the interest rate to be charged to a borrower will cover the company's cost of funding, plus a margin to provide remuneration to the guarantors. Guarantors will be required to issue irrevocable and unconditional guarantees in respect of funding instruments issued or entered into under the agreement. The amount of each member state's guarantee is based on its contribution key to the capital of the ECB, multiplied by 120% of the value of the principal, interest and any other amounts due under a particular funding instrument. Each guarantor's total potential exposure is limited, as set out in Annex 1, to its share of ECB capital among the existing 16 euro area member states. In Ireland's case, the limit is €7.002 billion. Finally, article 2 provides that the issuing of guarantees is limited to funding instruments related to loan facility agreements entered into on or before 30 June 2013. It is worth noting, however, that individual loan tranches may be issued after that date.

Article 3 covers the preparation and authorisation of loan disbursements. The strong conditionality of any country programme is emphasised by the requirement that the Commission, in liaison with the ECB, must present a report to the euro group on the compliance of the borrower with the terms and conditions of the memorandum of understanding before each disbursement of a loan, apart from the initial disbursement.

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