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

I thank all of the Senators who contributed today. 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, DRI, 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. It is important to recognise that the measures provided for in this Bill represent the outcome of lengthy and complex negotiations over the past two years. Much work went into reconciling the views of those countries, such as Ireland, that were convinced of the need for the measure and those that had to be convinced of such a requirement. Seeking common ground amongst often disparate positions is how much European policy is formed and it applies to this measure also. Once the instrument is in place it can be adapted as required. The addition of this instrument to the ESM treaty, which took effect in 2012, is itself evidence that such adaptation can and does take place.
The draft guideline on financial assistance for the direct recapitalisation of institutions, agreed on 10 June 2014, includes a specific provision on the retroactive application of the instrument. Therefore, the agreement, which we were active in negotiating, keeps open the possibility of application to the European Stability Mechanism for retrospective direct recapitalisation. The draft guideline states that 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 that 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.
I wish to address a number of issues that have been raised by Senators. Comments on the Bill have largely focused on a number of aspects of the direct recapitalisation instrument and, in particular, its retroactive application. Concerns have been expressed about a perceived lack of available detail as to how the DRI would be applied retroactively. The draft guideline clearly establishes the scope of, eligibility criteria for and operational procedures of the DRI. Article 14 of the guideline contains the provision for retroactive recapitalisation and provides for a decision on a case-by-case basis. From our point of view, that provides a broad degree of flexibility of interpretation. Demanding more detail during the intense negotiations that took place to reach agreement on the DRI would most likely have resulted in a much more restrictive retroactive instrument, which would not have been in our interest.
Concerns have also been expressed about the €60 billion capacity of the DRI and whether it will be sufficient, particularly given the size of Ireland's bank bailout. The Eurogroup agreed in June 2013 that an ex antelimit of €60 billion would be set by the ESM's board of governors on the amount of financial assistance available for the DRI. This was done to preserve the ESM's lending capacity for other instruments, provide transparency for investors and help preserve the ESM's high creditworthiness. The limit was established to strike a balance between the necessary containment of risk for the ESM and ensuring sufficient capacity for the instrument. 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.
The figure of €60 billion was agreed upon in the context of the ESM's principal function, which is to lend to sovereigns, not banks. The ESM has a maximum lending capacity of €500 billion. Given the way rating agencies treat these things, if the €60 billion provided for DRI was fully used up, the remaining lending capacity would be less than €440 billion and would, in fact, be closer to around €330 billion. In view of the liability cascade that will be in place, whereby the DRI only steps in as a last resort after a stipulated series of other sources for capital have been tapped, the €60 billion figure should be sufficient. It is open to the governors of the ESM, of whom I am one, to raise this €60 billion limit by mutual consent if they consider it necessary. The €60 billion provided for the DRI represents the agreed amount, taking into account the other banking union measures that are now in place, and also the impact of the DRI on the ESM's overall lending capacity. Only time will tell if it will be enough when the next problem bank rears its head. If it is not enough, a decision can be considered to change it.
Finally, there is a view held by some that Ireland should make an application for retroactive recapitalisation as soon as possible. If all member states have ratified the direct recapitalisation instrument by November this year, it can come into effect following a decision by the ESM board of governors to include it in the ESM's instruments.

We can then consider whether, when and how to go about an application for retroactive recapitalisation.

The decision on an application subsequent to the direct recapitalisation instrument coming into effect in November is a matter of timing. As I indicated on both Committee and Report Stages in the Dáil, any decision to apply should not be rushed. Moreover, as I have stated on a number of occasions recently, the best way to ensure the Irish taxpayer gains the maximum possible return on the money that went towards preventing the collapse of the State's banking system is to be in a position to consider all the options open to us for pursuing such a return. We are now in the position of having a number of options in regard to our investment in the banks. Unlike back in 2012, the European Stability Mechanism is no longer the only option open to us to recover the money provided to recapitalise our banks. Investors are again willing to invest in Irish banks, and the market value of our investments has improved accordingly. The determining factor will be which option can achieve the maximum return for the Irish taxpayer. On Committee Stage in the Dáil I explained that, in Europe, a strategic approach delivers the best results. In this context, it is preferable to keep the option of retroactive recapitalisation on the table, rather than risk refusal with an early application. Keeping the maximum number of options on the table is a strategy we will continue to pursue.

In regard to what the ESM can and cannot do, I wish to clarify several issues. The ESM is governed by a board of governors comprising euro area Finance Ministers, including myself. All of the decisions of substance are made by the board of governors on the basis of mutual agreement, in accordance with Article 5(6) of the treaty. These include decisions on lending capacity, capital calls and the amount of the capital stock. It is not the case that the ESM can, of its own volition, unilaterally call unlimited amounts from member states. Section 3 of the European Stability Mechanism Act 2012 sets a ceiling on Ireland's capital contribution and any change to the amount specified in that Act would need to be approved by amending legislation. In addition, borrowing capacity and lending capacity are fixed by decision of the board of governors and must similarly be changed by their decision. The ESM cannot do so unilaterally.

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 committed to by the euro area leaders in June 2012. This includes: the establishment of the single supervisory mechanism; bank recovery and resolution directive; single resolution mechanism; and single resolution fund.

I thank Senators for their support for the Bill and for their interesting observations. I thank Senator Barrett, in particular, for his support. I would argue, however, that there is a case to be made for the eurozone. Looking at growth in GDP across Europe since the common currency was established, the figures are quite impressive. In terms of exchange rates against the US dollar, for example, the value of the euro has increased substantially, even at the level it is at today, from where it was when it was instituted. It has done a great deal for cross-border trade among the 18 countries that make up the eurozone.

It is unfair to attribute the failure of the banking system to the existence of a common currency. The banking failures date back to the collapse of Lehman Brothers. It is important to also note that banks failed in the United States and United Kingdom. We all remember the television footage of queues outside Northern Rock branches in Britain, as well as the ensuing panic here in Dublin. That happened before any of the Irish banks were touched. Every bank in the world was affected in some way or another, and we were affected very badly. A great deal of the fault for what happened lay in the policy of very cheap liquidity that was followed in Europe at the time, but there also was a great deal of fault arising out of Irish greed. People wanted to make money by selling property to each other at very low interest rates.

I thank Senator Hayden for her remarks. She asked about policy on the banks. In short, we do not have a long-term interest in having State banks and, at some point, we will sell the banks back into the market. Whether we go down the retroactive route through the ESM or sell on the market is something that will ultimately be decided by price. The ESM was a great facility for buying shares in the Irish banks when there was no other option, but now there is a market option. AIB was independently valued at more than €11 billion last year, but that was before the half-year results were announced showing a profit in the neighbourhood of €460 million. There is real value in that bank. If the primary purpose is to get back the money the taxpayer funded to recapitalise the banks, we may do better in the market. The other consideration is whether we want the fund managers of the ESM running an Irish bank. Their particular skill is raising vast amounts of money on the international markets and administering that money, but they are not really bankers. They do not give out loans, for instance. Essentially, they are very large fund managers. If they bought the shares in AIB, they would be directors of the bank and would control the board.

These factors must be taken into consideration, but it is very useful to have the option the ESM presents. That is how I have pursued the matter and we have made it a matter of law. I said in the other House that the pace of change in Europe when it comes to political personnel is very rapid. I am three and a half years in this role and out of the 18 eurozone countries, there are only two Finance Ministers more senior than me, one by only a month. The most senior person is the German Finance Minister, Wolfgang Schäuble, who has a lot of seniority. When things move that rapidly, one must be absolutely sure one's policies do not depend on personalities. Instead, we must have policies that are grounded and founded in law. I negotiated to ensure there was a legal provision for retroactive recapitalisation of banks enshrined as an instrument of the ESM treaty. Whether or not we use that provision is a different matter, but it is there in law. If the personalities change, that will not matter.

I thank Senators for their contributions. I will come back on Thursday, if I can, to continue our discussion. I acknowledge that it is a very technical Bill and I thank Members for their very sensible and acute observations.