Michael McGrath (Cork South Central, Fianna Fail)

I thank the Minister for his Second Stage speech in respect of the European Stability Mechanism Bill 2012.

At the outset, I want to state on behalf of the Fianna Fáil Party that we will be supporting this Bill. We believe that the establishment of the ESM is important for Europe and Ireland. While we were not voting in the ESM, issues pertaining to the establishment and the operation of the ESM and its relevance were very well ventilated over the past number of weeks during the fiscal stability referendum campaign.

Three years into the crisis, Europe still does not have a common agreed framework for winding down insolvent banks and avoiding all costs falling on taxpayers. The permanent bailout mechanism envisaged by the ESM will be a help towards stabilising the eurozone in general but it is only one element of what is needed and its current mandate is quite limited. We, in Ireland, simply cannot go through another round of expensive bank recapitalisations. Indeed, we also need mitigation of the costs incurred to date.

As the Minister stated at the outset, this Bill is required to allow Ireland ratify the ESM treaty. Given where we are in terms of the current EU-IMF programme, which we all hope that Ireland will be in a position to exit towards the end of next year, we are living through extraordinarily turbulent times, in particular throughout Europe. Who knows what the prospects are for Ireland to exit the programme successfully? It is essential that we have the backdrop of access to ESM funding in the event that we need it. When one considers the data today from the CSO in the Quarterly National Household Survey, where unemployment has gone up to 14.8% and where the number at work in Ireland is at its lowest levels since 2003, we face enormous economic challenges as a country in our interaction, not only with Europe but with the domestic economy as well. It is fundamental for this country that we would have access to the ESM in the event that we need it.

There are aspects of the ESM treaty that I do not particularly like. For example, the provision in the legislation which is provided for in the treaty which makes the ESM immune from legal proceedings is one that I do not understand. No individual or institution should be immune from legal proceedings. Every person has a right to initiate proceedings against any other person or against an institution. Having said that, overall, my party believes it is correct to ratify the ESM treaty and to ensure that Ireland is an active member of the ESM.

As part of a comprehensive solution, I suggest we need to do much more. Specifically, we need to expand the mandate of the ESM so it can inject funds directly into failing banks. The Minister referred to this in his opening remarks. He did not state whether the Government is supportive of that but I understand, from recent comments by the Taoiseach and others, that the Government supports a change to the mandate of the ESM in order to allow it directly to recapitalise banks. This would allow collective support for regional banking crises. If we are to operate as a true currency union, this is something that is urgently needed. It would also have the advantage that the recapitalisation aid would not add to any individual country's debt levels. This could increase the Government's chances to continue raising money on financial markets to fund normal day-to-day operations.

Spain is only now going through the painstaking process of conducting an in-depth analysis of its banking sector which we did through the establishment of NAMA and the various PCAR exercises that we went through in this country. From reading various media reports of the estimated cost of bailing out Spanish banks, I have seen figures of between €40 billion and €80 billion, and even suggestions that it could be as high as €200 billion. I only hope that they can get to the bottom of the losses in their banking system as quickly as possible. It took Ireland quite some time to get to the bottom of the losses in the banking system, given the dishonesty and the failure to recognise the reality within the institutions themselves. It is essential for Spain and for the wider eurozone that some certainty is brought to the full extend of their banking crisis as quickly as possible. If our experience in Ireland is anything to go by, as they delve ever deeper into the details of the bad loans associated with their property collapse, they may find the position much worse than originally feared. I note that they have engaged the services of some of the largest accountancy firms to assist them in this regard and the IMF is due to table a report in the coming days as well. Spain has indicated that within the next two weeks it will make a decision regarding the recapitalisation of its banks. I wish them well in their endeavours. It will be a mammoth task to get a handle on the scale of the problem but it is in everyone's interest that this would be done as quickly as possible.

Spain is the fourth largest economy in the eurozone. While I am sure the Minister did not intend to be flippant in his comments about feta cheese in Greece, he fully appreciates the importance of the Spanish economy in the eurozone and in terms of its relationship with Ireland, and the potential impact that any further destabilisation in Spain could have on our prospects for economic recovery. It is in all of our interests that some certainty is brought to their situation as quickly as possible.

The speculation seems to be drifting ever closer to some kind of a bailout for Spain, even if it is ring-fenced for dealing with their banks as opposed to sovereign funding. I understand that Spain as a country is funded for the remainder of this year for its day-to-day operations but that their banks will need access to funding as soon as they face up to the bad loans they are carrying on their books.

Increasingly, it looks like Spain will get some kind of a bailout from Europe and this brings us to the debate as to whether the recapitalisation of its banks will be channelled through the Spanish Government by way of the ESM lending to the Spanish Government and then the Government recapitalising the banks or whether the European countries will agree to change the terms of the treaty to allow the ESM to recapitalise the banks directly. This opens a window of opportunity for us which I will address presently. The expansion of the ESM should go hand-in-hand with pan-European regulation of the banking system such that countries in Europe could collectively take responsibility for banking failures. The Central Bank Governor, Patrick Honohan, has endorsed this approach in recent statements and I agree with him in this regard. His contention is that a centralised regulatory system would not be affected by national blind spots, such as the Irish property bubble, and could, therefore, do a more effective job of supervising banks. This is an interesting idea. He noted that there would be still a role for individual countries in supervision since, as he put it, often they pick up the vibes and the market talk. Clearly such a system should combine local knowledge and expertise with the more critical eye that a pan-European structure would bring.

To date the European Central Bank has repeatedly insisted that it has no role in banking supervision. This may be because national authorities closely guard their right to regulate their banks under the current system but it may also reflect a narrow view on the part of the ECB in respect of its true role. This issue highlights one of the fundamental flaws in the design of monetary union in the first place. The discussion about the possible emergence of a banking union and proper pan-European regulation of banks is timely and we should move in this direction.

We need to establish a Europe-wide deposit protection scheme. At the moment Greek and Spanish savers are moving money out of local banks for fear that their countries will leave the euro and their savings will be re-denominated into new drachma or pesetas. If there were a common deposit insurance scheme, funded appropriately, then this risk would be eliminated. We should put in place a mechanism by which senior bondholders in bust banks take some of the pain in their rescue.

I welcome the draft proposals published in recent days by the European Commission. They open up an important debate in respect of senior bondholders. The European Union should adopt a policy that sees senior bondholders incur losses if equity and subordinated bonds have been wiped out, if the bank has been nationalised and if the State has incurred losses of a certain percentage of GDP to bring the bank back to solvency. The nature of that percentage could be a matter for policy discussion and it could evolve over time. Given the state of euro area public finances, however, there is simply no room for another round of expensive bank bailouts. Therefore, an approach of this sort may help to reduce the perceived riskiness of much of Europe's sovereign debt.

This policy could subject some of the remaining IBRC senior bondholders in Ireland to severe haircuts without any contagion effect for other institutions, apart from those the markets suspect of being severely insolvent and to which states probably should be reluctant to offer blanket liability guarantees. Given the timing involved for these new proposals to become operational, however, I imagine virtually all of the bondholders would be repaid in these circumstances. If we are to make savings in respect of the bank bailout it should focus on some of the other aspects such as the promissory note, an issue to which I will return.

Irish banks lent approximately €200 billion between 2002 and 2007. It is reasonable to suggest that approximately €100 billion of that sum will never be repaid. We have discussed the distribution of losses in the Irish banking system among junior bondholders and the taxpayer, and the fact that senior bondholders are immune as well as the fact that shareholders lost absolutely everything.

It is interesting that every time the issue of reducing the cost of the bank bailout is raised by the Tánaiste in the House, he traces full culpability for the extent of the bailout in Ireland back to the bank guarantee. I contest this assertion. Certainly, it was not a foolproof policy response. It was taken at the time with incomplete and undoubtedly false information supplied by the banks concerned. However, I would welcome an inquiry into the banking guarantee because the more light shed on decisions of that nature, the better. I believe the role of the European Central Bank since the beginning of this crisis should be considered as well. I also hope we do not have to wait for the 30 year rule before some of the correspondence at the time of the bailout in November and December 2010 between the Government and the European Central Bank is released. It is a matter of public interest that such information should be put into the public domain so that we can establish the demands the bank placed on Ireland at the time.

I remind the Tánaiste and his colleagues in the Labour Party of some comments made by the Minister for Finance at the finance committee last September. The Minister was challenged by Deputy Broughan about supporting the bank guarantee, the position taken by the Minister and his party in September 2008. The Minister correctly pointed out that the proposal put forward by the Labour Party at the time would have been worse because the Labour Party sought to nationalise the entire banking system. This would have taken on all the liabilities in full under the remit of the Sovereign on a permanent basis. The Minister correctly pointed out to the Labour Party at the time that its proposal would have been worse.

Ireland has a strong case for seeking a reduction in the burden of its bank-related debt. The situation has changed completely since the promissory note was first signed. That was before the EU-IMF programme, the Greek write-down, the establishment of the ESM and the decision in July last year of the euro area Heads of State and Governments to empower the EFSF to provide lending to countries for the recapitalisation of banks. The draft European Commission paper has proposed that senior bondholders take losses. Clearly, the sands are shifting in the debate in Europe about where banking losses should fall. Ireland has faced up to its losses through the establishment of NAMA. This crystallised the entirety of the banking losses immediately. I have always taken the view that if there are losses, one is better off facing up to them and dealing with them. Ireland may well be punished for going down that road because this course of action forced us to recapitalise the banks and to produce the funding to do so at a time when the European architecture simply was not in place to deal with bank bailouts. Europe is now beginning to put such an architecture in place and the Minister and his colleagues have the job of trying to retrofit it for Ireland. That is not an easy job and I wish them well, but we need to have clarity about where the negotiations on the promissory note are going. Perhaps they simply became caught up in the crisis, which has intensified in recent weeks and which has stalled progress.

I need not remind the Minister of his comments, one year ago this month in the United States, about seeking to impose losses on the remaining Anglo Irish Bank and Irish Nationwide Building Society bondholders, subject to European Central Bank approval. The ECB approval was not forthcoming and the agenda moved on last September to the issue of the promissory note. Negotiations on that issue began last November. In October or November it emerged that there were discussions of a technical paper and technical negotiations. It is now June 2012 but there is no sign of such a paper and we do not know what stage the negotiations have reached. Perhaps it is all taking place in the background or perhaps it has been delayed because of the Spanish situation and the need for certainty on the question of from where Spain will get the money to recapitalise it banks.

My interest in all of this is the outcome. I hope Ireland will get the right outcome and that the burden will be relieved. There is still €28 billion at play in respect of the promissory note. The first €3.06 billion was paid in one of the Government's first acts on coming to office in March last year. The bond replaced the €3.06 billion due last March and the matter has been kicked into touch for 12 months, subject to the Bank of Ireland shareholder approval. There is still €28 billion at play and the promissory note represents the best prospect of getting a deal on bank debt. Nevertheless, I hope the promissory note is not the limit of the Minister's ambition in seeking to get some fairness and equity for Ireland. The promissory notes amount to more than €30 billion but a further €30 billion, approximately, has been invested in the other banks from the National Pensions Reserve Fund, cash reserves and borrowings. I am sure the Minister is placing these issues on the table as it would make a significant difference to the sustainability of the national debt if they were addressed. Our debt sustainability appears increasingly fragile and our prospects of successfully emerging from the current programme and raising money again on the bond markets at competitive interest rates are very much open to question. While I hope we can achieve this objective, a game-changing initiative such as a comprehensive deal on the banking debt would help in no small way to ensure we exit the programme and return to the bond markets.

The Fianna Fáil Party welcomes the Bill and supports the ratification of the European Stability Mechanism treaty. I hope Ireland will not need to avail of ESM funding. The fund which is expected to be established next month will provide an important firewall across Europe and its lending capacity will have to be increased over time. Having made a start, however, it is important to make funding available without further delay.

Certainty is required regarding Spain and Ireland needs to secure an outcome to its ongoing negotiations on the banking debt. It is in the national interest to secure a deal to reduce the burden on Irish taxpayers. This country took a major hit for the European team and it is time to bring some fair play and equity to the issue. I wish the Minister well in his ongoing efforts in that regard.

See this speech in context