Fergus O'Dowd (Louth, Fine Gael)

On the absence of explanatory memoranda, I have a briefing that was circulated by the Department of Finance to all Opposition spokesmen in the Dáil and Seanad last Friday. This is clearly emergency legislation and it is important for the State that we pass it. I agree, however, that time is of the essence and this should have been circulated as explanatory memoranda but it has the same purpose and format.

To ensure that the EFSF secured a AAA rating and can thereby borrow at the lowest possible interest rates, certain complex structures, known collectively as credit enhancement measures, were adopted. These involved the over-guarantee of bonds, cash buffers and the prepayment of margins on loans. A major effect of these measures was to reduce the effective lending capacity to some €250 billion, and they also increased the effective cost of borrowing for borrowers. I have already read this but I will read it again anyway.

Ireland received one loan from the EFSF on 1 February this year worth €4.2 billion. The term of the loan is five and a half years, which means it will mature in July 2016. The total amount available to be disbursed to Ireland from the EFSF under the EU-IMF programme is €17.7 billion.

At the end of June 2011, euro area Ministers for Finance signed an amendment to the European Financial Stability Facility Framework Agreement, subject as usual to national ratification. The main purpose of the June 2011 amendment agreement is to increase the effective lending capacity of the EFSF back up to its headline volume of €440 billion from its effective capacity of €250 billion. This will by accomplished by increasing the over-guarantee percentage to 165% of the amount raised by the facility. Further amendments include specifying the margin applying to loans, changes to the pricing structure including the introduction of a new advance margin, a specific reference to Ireland becoming a stepping out guarantor, which occurred on entering the EU-IMF programme, and the potential transfer of EFSF rights, obligations and-orliabilities to the ESM.

Subsequently, on 21 July 2011, the Heads of State or Government announced further measures to ensure the financial stability of the euro area and stem the risk of contagion. These measures include a new programme of assistance for Greece and increasing the flexibility of the EFSF and the ESM by allowing them to act on the basis of a precautionary programme, finance recapitalisation of financial institutions through loans to Governments and intervene in primary and secondary sovereign bond markets on the basis of ECB analysis. Of particular interest to the existing programme countries, the Heads of State or Government agreed to reduce the interest rate on EFSF loans to Ireland, Greece and Portugal to lending rates equivalent to those of the balance of payments facility close to, without going below, the EFSF funding cost as well as lengthening the loan maturities. This was discussed further in Poland at the informal meeting of ECOFIN Ministers this week.

Following that discussion, the level of savings available is becoming clear. It is now calculated that overall savings from the reductions in the margins applying to the EU-related programme funding will be a total of approximately €9 billion over the average life of seven and a halfyears, as originally envisaged for the loans. This saving of approximately €9 billion represents 5.7% of the current forecasted level of GDP in 2011. In terms of 2012, the National Treasury Management Agency calculates that the savings on the EU funds to be approximately €900 million.

As already stated, this Bill is required to enable Ireland to ratify the agreed changes to the EFSF framework agreement. As most member states had not had time to ratify the amendments agreed in June before the subsequent amendments arising from the 21 July decision, the June amendments to the EFSF framework agreement and those arising from the decision of 21 July 2011 were consolidated into a single amendment agreement, as set out in Schedule 1to the Bill before the Seanad today.

Urgent ratification of the amendment to the EFSF framework agreement is important for a number of reasons. Delays in implementing the measures announced by the Heads of State or Government on 21 July is adding to market volatility. Also, from a national viewpoint, neither Ireland nor Portugal can benefit from the reduced interest rate announced on 21 July last until the revised EFSF is implemented. It is only then that the necessary changes can be made to the Irish EFSF loan facility agreement with the unanimous agreement of the loan guarantors. All euro area countries confirmed at the informal meeting of Finance Ministers in Poland last weekend that they will work to ratify the amendments to the EFSF as quickly as possible. Several countries have already provided confirmation that they have ratified it. Ireland, as a recipient of assistance from the EFSF and a beneficiary of the changes, should not delay the ratification of the amendments to the EFSF.

The euro area Heads of State or Government also announced on 21 July 2011 that the new flexibilities announced for the EFSF would also apply to the ESM. This means that the ESM treaty signed by euro area Finance Ministers in July will, subject to the necessary parliamentary procedures, now require amendment. Technical discussions are continuing on the text of the required amendments. Legislation to ratify the revised ESM treaty, incorporating these amendments, will be brought before the Oireachtas later this year or early next year. The ESM is due to come into force and take over from the EFSF during 2013, subject to ratification by all euro area member states.

Senators will be aware that Greece entered its first programme of financial support in May 2010 on foot of an intergovernmental agreement to provide bilateral loans totalling €80 billion to it from the euro area member states, together with IMF assistance of €30 billion over a three-year period to mid-2013. Finance Ministers agreed at euro group in June 2011 to revise the Greek loan facility by extending the grace period between drawdown and commencement of repayment from three to four and a half years, increasing the maturity period for loans from five to ten years and to reduce the margin applying to loans to Greece under the Greek loan facility by 100 basis points. The Commission signed the amendment to loan facility agreement with Greece on behalf of euro area member states on 14 June 2011, subject to ratification by all euro area member states. The Bill provides for the amendment of the Euro Area Loan Facility Act 2010 to ratify these amendments to the Greek loan facility agreement.

On 21 July, the Heads of State or Government agreed to support a new programme of assistance for Greece and to increase the length of the grace period and the term of loans already made under the Greek loan facility agreement. The new programme will be facilitated by the amendment to the EFSF framework agreement but a second amendment to the Greek loan facility is required in respect of the longer grace period and a lengthening of the loan maturity to 15 years. Once finalised, the Commission will sign the second amendment on behalf of the euro area member states. As it has not yet been signed by the Commission, it is not possible to provide for its ratification in the Bill before the Seanad today. When it has been signed, we will have to bring forward separate legislation to ratify it. As the amendment to the EFSF framework agreement is important in terms of the stability of the euro area and to Ireland in securing an interest rate reduction, we cannot delay this Bill waiting for the second amendment to the Greek loan facility agreement to be agreed and signed. However, the Bill includes the first amendment to the Greek loan facility agreement.

The Bill amends the European Financial Stability Facility Act 2010 and the Euro Area Loan Facility Act 2010. It has three sections and two Schedules. The amendment to the EFSF framework agreement is set out in Schedule 1and the amendment to the Greek loan facility agreement of 14 June 2011 is set out in Schedule 2. Section 1 of the Bill provides that the references to the EFSF framework agreement in the European Financial Stability Facility Act 2010 shall include the amendment to the EFSF framework agreement. It also increases the amount that may be paid out of the Central Fund from €7.5 billion to €12.5 billion in line with the increase in the guarantee ceiling for Ireland as set out in Annex 1 to the amendment agreement. While this is notional because the amendment agreement specifically notes that Ireland and Portugal have become stepping-out guarantors, the Central Fund figure is being amended for reasons of consistency. Section 2 provides that the references to the loan facility agreement in the Euro Area Loan Facility Act 2010 shall include the amendment to it of 14 June 2011. Section 3 sets out the Short Title of Act.

I will now explain the main changes to the EFSF framework agreement. Article 1(1) provides for Estonia to become a party to the framework agreement. This was a requirement of it joining the euro at the start of 2011. Article 1(4), which amends paragraph (2) of the preamble to the EFSF framework agreement, sets out the changes arising from the decision of the Heads of State or Government in July to expand the financial assistance that the EFSF can provide in the future, beyond the loan facilities it is currently limited to. The changes include the provision of loans; precautionary facilities and loans to Governments of euro-area member states, including non-programme member states to finance the recapitalisation of banks; the purchase of bonds in the secondary bond markets on the basis of an ECB analysis recognising the existence of exceptional financial circumstances and risks to financial stability; the purchase of euro area bonds in the primary market; increasing the effective capacity of the EFSF to its headline €440 billion figure by increasing the level of over-guarantee from €440 billion, 120%, to €780 billion, 165%; and amending the pricing structure to cost of funds plus a margin of 200 basis points for the first three years for each financial assistance and 300 basis points thereafter. However, in line with the 21 July decision, the preamble will also state that Greece is to receive loans at lending rates equivalent to those of the balance of payments without going below the cost of funds and that these lending rates will also be applied for Ireland and Portugal and providing that the maturities for Greece are to be a minimum of 15 years and up to 30 years, and these should also apply for Ireland and Portugal.

The remaining paragraphs of Article 1, from (9) to (60) amend the Articles of the framework agreement to provide for the changes listed above. Many of the amendments are technical or text changes, such as changing "Loan Facility Agreement" in a number of Articles to read "Financial Assistance Facility Agreement". I do not propose to go through them. Annex 1, containing the guarantee commitments for each euro area member state, has been amended because of the increase in the level of total guarantees to €780 billion. Ireland's figure is increasing from just over €7 billion to just under €12.4 billion. However, the annex has also been amended to make it clear that Ireland, Greece and Portugal have become stepping-out guarantors, thereby bringing the effective level of total guarantees down to €726 billion, which is 165% of €440 billion.

Annex 2, which sets out the contribution key based on the ECB capital subscription, has also been amended because of Estonia joining the euro and the European Financial Stability Facility, EFSF. Ireland's contribution key decreases from 1.5915% to 1.5874%.

Schedule 2 to the Bill sets out the amendment agreement to the Greek loan facility agreement. The changes are that the grace period at the start of each loan during which principal is not payable is increased to four and a half years from three years, the maximum term of a loan is increased to ten years from five years, and the margin applicable to loans from this facility is to be reduced by 100 basis points.

Now is a time for euro area member states to contribute to ensuring financial stability within the euro area. It is in all our interests. The revisions to the EFSF form a key part of the measures being put in place to ensure this stability. Ireland must play its part. Therefore, I urge Senators to agree to ratify the changes to the EFSF and the Greek loan facility agreement. I commend the Bill to the Seanad.