Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

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

The purpose of this legislation is to make provision for the inclusion by the 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, inclusive, of the treaty. This includes provision for the creation of subsidiary bodies which will implement the direct recapitalisation instrument. It 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, No. 20 of 2012.

I will begin by outlining the Bill, as initiated, before giving more detail on the Bill and the reasons for this legislation. The Bill has six sections and a Schedule composed of two parts.

Section 1, "Interpretation", clarifies the references in the Bill to the board of governors, the ESM, an ESM member, the principal Act and the treaty. Section 2, "Amendment of definition of "Treaty" in Principal Act", provides that references to "Treaty" in the ESM Act 2012 are to be to the text, as amended, following the accession of Latvia on 13 March 2014. The treaty, as amended, following Latvia's accession is annexed to the Bill in the Schedule in both the Irish and English languages.

Section 3, "Provisions with respect to particular type of instrument and particular entities", allows for the powers contained in the ESM Act 2012 and the treaty to include those arising from the granting of a direct recapitalisation instrument, as well as those arising from the establishment by the ESM of subsidiary bodies or sub-entities. Such bodies may be used by the ESM to effect a direct recapitalisation.

Section 4, "Type of instrument to which section 3 relates", provides that the instrument referred to in section 3 is an instrument for the direct recapitalisation of a financial institution of an ESM member. Section 5, "Applications of sections 5, 6 and 7 of the Principal Act", provides that these sections of the ESM Act 2012 which deal with the legal status, privileges and immunities, exemptions from tax, as well as from authorisation and regulation by the Central Bank, to be enjoyed by the ESM shall apply also to the ESM acting through a subsidiary body or sub-entity.

Section 6, "Short title, collective citation and construction", is a standard section defining the Short Title of the Bill. It also provides for the collective citation of the European Stability Mechanism Act 2012 and the Bill, when enacted, as the European Stability Mechanism Acts 2012 and 2014.

The Schedule, as I have noted, comprises the texts of the ESM treaty, as amended, following Latvia's accession as the 18th member of the ESM in the Irish and English languages, being Parts 1 and 2, respectively.

The euro area Heads of State or Government agreed in June 2012 that it was imperative to break the vicious circle between banks and sovereigns and that when a single supervisory mechanism, involving the ECB, was in place and operational, the European Stability Mechanism should recapitalise banks directly. The Single Supervisory Mechanism will come into operation on 4 November this year.

The Eurogroup meeting on 20 June 2013 agreed to the main features of the European Stability Mechanism's direct recapitalisation instrument, DRI. The instrument is available for institutions the viability of which can be secured by a capital injection. In this context, the guideline provides that the instrument shall not be used for the winding up of institutions. The euro area member states reached a preliminary agreement on the operational framework of the ESM DRI on 10 June this year. This includes the draft guideline on financial assistance for the direct recapitalisation of institutions which sets out how the DRI will operate.

The draft guideline agreed on 10 June 2014 includes a specific provision on the retroactive application of the instrument. Therefore, the agreement that we were active in negotiating keeps open the possibility of applying to the European Stability Mechanism for a retrospective direct recapitalisation. The draft guideline states the potential retroactive application of the instrument should be decided by the ESM board of governors on a case-by-case basis by mutual agreement. It also states the detailed modalities for retroactive recapitalisation shall be established in the relevant decision of the ESM board of governors, that is, the euro area Finance Ministers. Establishing the DRI requires a decision by mutual agreement of the ESM board of governors, subject to 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 the process completed by November this year.

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, there are three reasons for amending the ESM Act 2012 to allow for the DRI. First, the ESM was established to provide loans for member states. The DRI provides for loans for 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. Third, while the ESM treaty provides for limited self-amendment, for example, in Article 19, to add to the range of financial instrument that can be used, these changes for the DRI go beyond what the Dáil approved in the ESM Act 2012.

The ESM Act 2012 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 ESM treaty states 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 for 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 to it". The direct recapitalisation instrument is being introduced under this article. However, as the direct recapitalisation 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 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 with external investment, to conduct the actual recapitalisation. While the treaty provides for ESM subsidiaries, the amendment provides for their use with the direct recapitalisation instrument. I should also clarify that the position on Ireland's capital contribution to the ESM will not be changed by this measure.

The aim of the instrument is to preserve the financial stability of the euro area as a whole and its member states. It does so by catering for those specific cases in which an ESM member experiences acute difficulties with its financial sector that cannot be remedied without significantly endangering its fiscal sustainability owing 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 Eurogroup agreed in June 2013 that an ex antelimit or cap of €60 billion would be set by the ESM's board of governors for the amount of financial assistance available for the DRI. It was also approved at the time that the €60 billion cap could be reviewed by the board of governors, if deemed necessary. This amount is provided within the ESM's overall lending capacity of €500 billion.

The reasons for the cap are as follows: to preserve the ESM's lending capacity for other instruments; to provide transparency for investors; and to help to preserve the ESM's high creditworthiness. This limit strikes a balance between the necessary containment of risks for the ESM, while at the same time ensuring sufficient capacity for the instrument. In this context, it is important to recognise that the ESM's DRI is part of a broader EU response to breaking the link between banks and sovereigns. It must be viewed in conjunction with the banking union measures, particularly the bank recovery and resolution directive, the single supervisory mechanism, the single resolution mechanism and the single resolution fund. Article 14 of the draft operational guideline on the DRI, approved by euro area Finance Ministers on 10 June this year, provides for retroactive direct recapitalisation. It states:

This guideline is established without prejudice to existing ESM and EFSF programmes in which financial assistance has been provided to ESM Members who recapitalised their institutions, which could be replaced in part or in full with a retroactive application of direct recapitalisation following a decision by the ESM Board of Governors, on a case-by-case basis, by mutual agreement.

The detailed modalities for such replacement shall be established in the relevant ESM Board of Governors decision.

As I have stated on a number of occasions, including in replies to parliamentary questions, an application for the DRI can only be made once the instrument takes effect and this, in turn, requires that the single supervisory mechanism be in place and operational, which is expected to be 4 November this year.

I turn to the annexing of the ESM treaty as adapted, following Latvia's accession to the ESM. The ESM 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 decided in accordance with Article 44 of the ESM treaty. In October 2013 the ESM board of governors which, as I have noted, is composed of the euro area Finance Ministers, approved Latvia's application to join the ESM, 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, 20 days after it had deposited its instrument of accession.

A consequence of Latvia joining the ESM is a requirement to adapt the ESM treaty to reflect this fact. As I have mentioned, the ESM treaty provides for limited self-amendment. This includes the adaptations arising directly from the accession of a new member in accordance with Article 44 of the ESM treaty. Such adaptations are subject to the approval of the board of governors by mutual agreement in accordance with Article 5(6) of the ESM treaty. The adaptations arising from Latvia's accession fall within these provisions. These changes were agreed to by the board of governors on 23 October 2013. Since there were adaptations to the text of the ESM treaty to accommodate Latvia's accession, including to Annexes I and II of the treaty, it is considered appropriate to take the opportunity presented by the Bill to address this issue. The changes to the ESM treaty arising from Latvia's accession are as follows: the inclusion of Latvia in 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 a new paragraph being added to the final part of the main text of the treaty, which is set out in the ESM treaty as annexed to the Bill; 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 to the annexes have been made 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. Latvia's ESM capital contribution key was 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 each. Latvia has paid its initial instalment of paid-in capital and is expected to make the four remaining payments annually up to 2018.

The ESM direct recapitalisation instrument represents a core element of a much broader EU approach to the issue of breaking the bank-sovereign link, as was committed to by the euro area leaders in June 2012. This includes the establishment of the single supervisory mechanism, the bank recovery and resolution directive, the single resolution mechanism and the single resolution fund. The inclusion of the ESM treaty, as adapted, following Latvia's accession ensures the most up-to-date text of the ESM treaty is annexed to the associated legislation. As the ESM intends to seek the approval of the board of governors for the DRI in November, this legislation needs to be in place by the end of this month and it has been scheduled accordingly.

I look forward to an informed and constructive debate and commend the Bill to the House.

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