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Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: By definition, the non-DRI mechanism, which is the main ESM mechanism, links sovereign and banking risk because the lending is via the sovereign. Will that not still be the case?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: Yes, but I want to ensure that I have not missed anything that has changed in the past two years. Is the main lending for the ESM still via the sovereign?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: They can lend on to the banks.

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: It can be used as a budgetary support.

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: If we move on to the direct recapitalisation instrument, DRI, then, am I correct in thinking that it really is the only mechanism that decouples sovereign risk from banking?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: The technical note with which the committee was provided said that as we go through the cascade the creditor haircut - the first bail-in involving equity bondholders - is 8% of the losses, and that the national resolution fund for the SRM, which I guess that is all moving towards, is another 5% of the losses. Is that the case?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: Am I correct in thinking, if we take Anglo Irish Bank as an example - another Anglo - and its losses were €30 billion, that the first level, which is 8%, would be €240 million and that the next level in the cascade, which is the resolution fund, would be 5%, which would be €150 million? In the case of Anglo Irish Bank, which on a European scale is tiny – it is big...

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: The technical note has a contradiction. It says it is 8% and 5% of the bank’s liabilities or losses. They are very different things. Is it liabilities or losses?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: Let us take Anglo Irish Bank. If a bank comes along and says it has a loss which needs to be filled of €30 billion, is it 8% and 5% of the €30 billion or is it 8% and 5% of the total liabilities?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: It is a much higher figure in that case. Is there a sense that the first two parts of the cascade will provide a 100% buffer in most cases?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: For absolute clarity, let us just stay with the example of Anglo Irish Bank. Let us say Anglo Irish Bank says it needs €30 billion. Fifteen percent of €30 billion would be €4.5 billion. If I understand Mr. Sheridan correctly, it is much more than €4.5 billion. Anglo’s total liabilities would be taken into account, which might be €300 billion, and...

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: It is not just 8% and 5% of the loss.

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: That is critical. Could I ask about the €60 billion? I know we have been through it before. It feels very light. I have got very useful clarity on the 8% and 5%. Let us say they do not stop the problem and we have to move on to the ESM. The note we have says the DRI mechanism can only be used if indirect recapitalisation by the ESM is not possible. Is that correct?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: Once we get to the ESM, is it correct that the ESM starts with sovereign liability lending and only when that is not available does one get into the DRI, which is non-sovereign liability lending?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: Am I correct in saying that would be rare? One would have to put together quite a specific case, because if I understand the system and what Mr. Ó Brolcháin said correctly, if we have been through the 8% and the 5% but more money is still required as that has not fixed the problem, and we are now onto the ESM, if we lend the sovereign money to lend on to the banks it might cause...

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: That is a pretty high burden of use. I cannot think of any case in which lending to a country could cause such a scenario to unfold. Is there any case in the recent crisis in which that condition would have been satisfied?

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: No; it is the opposite case. In our case they said it was not that at all and that they would have to lend to the sovereign. Lending to the sovereign is not what destabilised us. One would have to argue that lending to the sovereign by the ESM would destabilise the sovereign, but in our case it was what stabilised it.

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: Yes we are, but I cannot think of a single scenario in which that could occur. This is a meeting about the DRI.

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: Then one could use the DRI.

Joint Oireachtas Committee on Finance, Public Expenditure and Reform: General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion (24 Sep 2014)

Stephen Donnelly: If one assumes that Ireland’s GDP is about one seventy-fifth of eurozone GDP - scaling it back to Ireland, where we understand the amount of money required - that would be about €650 million pro rata. The sum of €60 billion might sound like a lot of money, but when one brings it back to an economy that we can all understand, namely Ireland's, it would be about...