Michael McGrath (Cork South Central, Fianna Fail)

Prior to the adjournment of the debate I spoke about the size of the EFSF. One issue which is causing concern among the markets is credibility. The size of the fund does not have the capacity to deal with the functions that have now been assigned to it.

In recent weeks as the issue of contagion has begun to affect larger economies such as Italy and Spain, the issue of credibility crystallised all the more. It is important, especially in the context of the potential, through the EFSF, of recapitalising Europe's banks. The head of the IMF, Christine Lagarde, speaking at the August annual meeting of central bankers in Wyoming in the US suggested there was a need for the urgent recapitalisation of Europe's weakest lenders and shoring up the banking system was the key to cutting the chain of contagion across the Continent.

In its global economic outlook, the IMF today reiterated the point that many of Europe's banks need additional capital. While the cost of recapitalising the Irish banks has been horrendous, we are further down the road than many of our European counterparts at getting to the bottom of the black hole in our banking system. While the measures agreed give governments the opportunity to borrow from the EFSF to recapitalise their banks, Christine Lagarde was, in essence, suggesting it could be used to recapitalise banks by force.

The results of last July's stress tests revealed that nine of the 91 banks tested failed, with a core tier 1 capital ratio of less than 5%. While national regulators are due to report in October on progress made on forcing recapitalisation of banks that failed or nearly failed the stress tests, the question arises as to how long this process will take. Decisive action by policy makers to accelerate the rollout of the EFSF and cover the write-down of Greek exposures by the banks is urgently needed.

In addition to stabilising Italy and Spain, the euro area should make it clear that it will do whatever it takes to quell what is increasingly becoming a self fulfilling debt crisis. Put simply, the EFSF may not have enough funds to undertake the massive bond purchases that may ultimately be required to stabilise the market.

The Minister and his eurozone colleagues should give consideration to it obtaining a line of credit from the ECB in addition to the funds it can raise to the issuing of bonds. A scheme of this sort could give it at least €2,000 billion euro in firepower, perhaps significantly more. The US Treasury Secretary, Timothy Geithner, is reported as having alluded to this possibility during recent discussions in Poland and it is something that needs to be given serious consideration.

In addition to addressing the size of the fund, the potential for it to be used for imaginative solutions to assist member states needs to be examined. I note the Minister is currently giving consideration to changes in the operation of the promissory notes provided as part of the recapitalisation work done in Anglo Irish Bank. The suggestion from Karl Whelan of involving the EFSF in this regard is worthy of close consideration because we would all welcome a restructuring of the arrangement and whether a reduction in the overall bill could be achieved.

Under that proposal, the EFSF would provide a 30 year loan to Anglo Irish Bank to pay off the emergency funding from the ECB for which it currently uses the promissory note as collateral. The note could then be restructured as a 30 year bond to be repaid in full at the end of the period.

I find it very difficult to understand the attitude of the ECB to the efforts of the Government to secure some burden sharing among the remaining unsecured unguaranteed bond holders at Anglo Irish Bank and the Irish Nationwide Building Society. These institutions are being wound down, their deposits have been transferred and they no longer issue any new loans. They are in a completely different scenario to AIB and Bank of Ireland, the two pillar banks.

In concluding this debate, the Minister should give us the bottom line from the ECB in terms of what it is saying to us, its objection and what it would do if the Government decided to proceed with imposing losses on the bondholders. It is important that we know this. I welcome the Bill, which we will be supporting. I look forward to continuing this debate with the Minister on Committee Stage.

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