Stephen Donnelly (Wicklow, Independent)
Link to this: Individually | In context

Question 243: To ask the Minister for Finance the basis on which the interest rate on any lending from the European Stability Mechanism will be calculated pursuant to Article 20 of the ESM Treaty; the reason the Treaty no longer contains explicit figures for the cost of funds, when these had been specified in the July 2011 version of the Treaty; if he sought at any stage to have a specified costs of funds inserted in the Treaty, in order to provide certainty on that matter should Ireland need to avail of the ESM; and if, notwithstanding his stated belief that Ireland will return to the markets for funding at the end of the current programme, his Department has made any estimate of the potential costs of funding under the ESM, by way of contingency planning. [25531/12]

Stephen Donnelly (Wicklow, Independent)
Link to this: Individually | In context

Question 244: To ask the Minister for Finance with regard to the European Stability Mechanism and the interest rate it will charge on any lending, his views that the interest rate will be set in order to be an effective deterrent to members from borrowing from the ESM; if he will provide an outline of the expected financing costs of the ESM, as may have been supplied to him in the course of discussions in Europe on the establishment of the ESM; and if he will provide an outline of the expected operating costs of the ESM. [25532/12]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context

I propose to take Questions Nos. 243 and 244 together.

As the Deputy will be aware, the original ESM Treaty signed on 11 July 2011 provided a predefined pricing structure for loans. Subsequently, the Euro Area Heads of State or Government (HOSG) agreed on 21 July 2011 in the context of the agreement on a new programme of support for Greece, to reduce the cost of the European Financial Stability Facility (EFSF) to lending rates equivalent to those of the Balance of Payments facility close to, without going below, the EFSF funding cost and to lengthen the maturity of future EFSF loans to Greece. The HoSG also agreed that the EFSF lending rates and the maturities agreed upon for Greece would be applied to the EFSF loans for Ireland and Portugal.

On foot of the agreement of the HoSG on 21 July 2012 to lower interest rates and lengthen loan maturities for Greece, Portugal and Ireland and in the context of discussions on the pricing policy to apply to the ESM, it was agreed by Euro Area Member states that the ESM would allow for more flexibility in terms of pricing. In particular, the ESM Treaty, as signed on 2 February 2012, no longer includes an annex with predefined margins on its loans, and only stipulates that when granting stability support, the ESM shall aim to fully cover its financing and operating costs and shall include an appropriate margin.

The capital structure of the ESM was designed to ensure that it would receive the highest possible rating, thus ensuring the lowest possible cost of funding. It is not possible to say what the financing costs might be until the ESM goes to the market in due course and it will depend on market circumstances at that time. Similarly, it is not possible at this stage to say what the operating costs of the ESM will be for the purpose of calculating the pricing of loans to any country that may seek assistance.

In the ESM Treaty, article 5.6(f) provides that the Board of Governors shall decide, by mutual agreement, to the provision of stability support by the ESM, including the economic policy conditionality as stated in the memorandum of understanding referred to in article 13(3), and to establish the choice of instruments and the financial terms and conditions, in accordance with Articles 12 to 18 of the Treaty.

The interest rate to be charged is not intended to act as a deterrent. I do not believe that setting a deterrent interest rate would be in the interest of either a programme country or the broader Euro Area or the EU. Ireland's programme is on track – we are meeting all of our commitments. The question of Ireland accessing the ESM does not arise. Notwithstanding current uncertainty, it remains the case that we aim to return to the financial markets gradually, to ensure our successful emergence from the programme and on that basis the ESM is a helpful backstop.