Micheal Noonan’s Statement on Promissory Notes: March 21, 2012

Dáil Éireann Private Members’ Business

Counter Motion Government Speech

Wednesday 22nd March

Check against Delivery

I move amendment No. 1:

To delete all words after “Dáil Éireann” and substitute the following:

Notes that:

The European Stability Mechanism (ESM) Treaty is an important part of the significant number of initiatives which have been taken at EU level to ensure the economic and financial stability of the Euro Area and the EU as a whole which include 

–          The establishment of a temporary support facility – the European Financial Stability Facility and also the extension of the use of the EU’s European Financial Stabilisation Mechanism facility.

–          Agreement to enhance the effectiveness of the EFSF though increased lending capacity and additional flexibilities

–          Agreement to reduce the interest rates and lengthen the maturities for Programme countries

–        Agreement to establish a permanent support facility – the ESM – by July 2013 to replace the temporary EFSF and EFSM arrangements

–        Agreement to include the new EFSF flexibilities in the ESM

–        The agreement to accelerate the entry into force of the ESM Treaty to July 2012 (subject to ratification by Member States representing 90% of the capital commitments).

–        The agreement at EU level to provide significant  additional resources to the IMF

–        The agreement to reassess in March this year the adequacy of the overall ceiling of the EFSF/ESM of EUR 500 billion.

–        The agreement to provide substantial additional support to Greece and the enhancement of its debt sustainability

–        The enhancement of economic governance with the strengthening of the Stability and Growth Pact through, for example, the six pack of legislative measures and also the agreement on the Stability Treaty

–        the ECB’s significant initiative to provide liquidity of up to €1 trillion in support to the EU banking system

And that the Government has participated actively in the development of these initiatives, as appropriate, which are in Ireland’s and in Europe’s interests

And notes that the Government will decide on the appropriate timing for legislation to ratify the ESM Treaty in due course, with regard to the agreed timetable at European level for ratification”

Firstly, there is an issue that I wish to bring to the attention of the house as the Government has always committed that we would inform the Dáil about any development concerning the payment of the promissory note at the end of this month.

In more recent months, we have been involved in technical discussions on reducing the burden of debt associated with the recapitalization of the banks.   In particular our focus has been on the Promissory note arrangement that was put in place to fund the Irish Bank Resolution Corporation – formerly Anglo Irish Bank and Irish Nationwide. This is an arrangement, which requires the State to make cash payments of €3.06 billion each year to IBRC. There have been some developments on this issue during the day.

The discussions with the European authorities on the general issue continue but we are now negotiating with the EU authorities, and principally with the ECB, on the basis that the €3.06 billion cash installment due from the Minister to IBRC on 31 March 2012 under the terms of the IBRC promissory note could be settled by the delivery of a long term Irish Government Bond.  The details of the arrangement have still to be worked out.

This allows me now to turn to the core of the motion before the House – The Government’s extremely constructive engagement with the EU and whether or not we want to put in place appropriate support mechanisms at European level.  We all know that these are needed.  So I want to recap on how Europe has reached its current position.

Europe, and indeed the broader global economy has been in the throes of an economic and financial crisis for a number of years now.  The approach of providing support mechanisms started with the Greek Loan Facility in early 2010.  That was a specific measure for Greece.  It was followed quickly by action to put in place a more general support facility – the EFSF – which could be used for any Euro Area Member State.  This was a temporary mechanism which will expire in 2013.  It turned out that Ireland was the next country to require assistance – in late 2010.   By that time it was clear also that a permanent mechanism would be needed, and the discussion started on the ESM.   At the same time, there was a clear understanding that these types of support measures for countries in difficulty needed to be complemented by measures to promote more sustainable public finances.  The six pack is the new set of rules on enhanced EU economic governance which entered into force on 13 December 2011. The Six-Pack has four main aims:

  • To strengthen the rules of the Stability and Growth Pact (SGP) which was designed to limit budget deficits and government debts, by introducing a much greater and stronger degree of surveillance at an early stage and to make it easier to initiate the excessive deficit procedure. The new rules will also give a greater importance to debt (and not only deficit) reduction and sustainable growth,
  • To introduce new controls on macro-economic imbalances across the EU, such as housing bubbles and growing divergences in competitiveness between Member States,
  • To set standards to ensure the correct and independent compilation of statistics as this data is crucial to sound budgetary policy-making and monitoring of budgets, and
  • To enhance the transparency of the decision-making processes and the accountability of decision-makers.

So it will be clear that the direction in Europe was always towards providing support to deal with countries in difficulty but also to put in place measures to ensure that this would not happen again.

It is important to recognise that we are in uncharted waters here.  That is why the approach is being adapted as it develops.  I have been pointing out for some time that when the Euro was put in place – the architecture to support it was not adequate.  I stated clearly some of the elements that were required – lower interest rates for the programme countries and a substantial firewall among them.  These, and other proposals I have made, have gained traction in Europe and are now part of mainstream thinking.

This resulted in some amendment to the interest rates for the programmes in March 2011.

At the same time, the discussions on the ESM continued and in early July 2011, Finance Ministers signed the Treaty as it then stood.

However, in parallel with this discussion, it became increasingly clear that the existing mechanisms needed to be greatly enhanced.  This culminated in the decisions of the Euro Area Heads of State and Government on 21 July 2011 which agreed significant changes for the Greek Loan Facility and more importantly for the broader European Agenda to – the EFSF.   Most notable among these was reduction in the interest rates and the other costs associated with the EFSF, and the change in its structure, while the maturities were lengthened.  All of these measures aimed to enhance debt sustainability in Programme countries.  In addition, the EFSF was also granted additional flexibilities allowing it 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.

It was agreed at the same time that these flexibilities would also be included in the ESM.

In order to do that, there was a need to reconsider the draft ESM Treaty.  These additional flexibilities, and the establishment of a permanent support mechanism, are clearly in our interest, and the reopening of the ESM discussions clearly brought potential benefits for us.

While that was taking place, discussions continued on the 2nd Greek Programme involving substantial additional funding and also private sector involvement which is strictly limited to Greece.  We have discussed those measures recently when we considered the legislation on the 2nd amendment to the Greek loan facility.

Of course, thinking was developing as to how to further underpin the EU’s support programmes.   The outcome was that, as part of the agreement to these broader measures, discussion started on a broader fiscal compact, with the aim of ensuring that the level of fiscal irresponsibility which brought about the current crisis could not be repeated.  This represents a development of the approach underlying the six pack, in the same way that the enhancement to the EFSF and the ESM represented a significant and important development in the approach to support mechanisms.

I should also point out that the measures in the fiscal arena have been complemented by the actions of the ECB.  The low interest rates currently in place will help to offset the economic slowdown which is affecting not just Europe but also the world economy.  In addition, the ECB’s longer term refinancing operation or LTRO, has provided some €1 trillion in liquidity to the European Banking system.

Looking now to our own position. We are in receipt of substantial support from the EU mechanisms under our EU-IMF programme of financial support.  This provides funding at rates well below those which would be available if we had to fund ourselves in the financial markets.  In addition, the ECB continues to provide substantial liquidity support to the Irish banking system.  It should therefore be clear that European solidarity is in our interests and to our benefit.

Our Programme is working;  we have met all our targets to date – over 90 in all.  We have met the quantitative fiscal targets.  We have implemented financial sector restructuring.  We achieved banking recapitalisation at a significantly lower cost than initially envisaged.  We imposed burden sharing on junior debt holders.  We are implementing structural reforms with a view to enhancing the growth potential of the economy.  We are introducing fiscal reforms to improve the management and control of our public finances.

The success of our programme implementation has been recognised by the financial markets.  Our 10 year bond yields have remained below 7% for a number of weeks now.  In addition, the NTMA has successfully re-engaged with the markets through the recent bond swap.  These are all positive indications.  They reflect our resolve to emerge successfully from our programme at the end of 2013, and to resume financing ourselves in the financial markets.

It is in Ireland’s, and in Europe’s interest, that there should be a strong firewall, or safety net available to all Euro Area Member states.  I have argued for this consistently.  The ESM provides this firewall.  It provides reassurance to the financial markets, and to all of us, thereby underpinning the confidence that is essential to healthy economic activity. It will also help to protect Euro Area Member States who are in economic difficulty from market speculation.

Now turning to the content of the ESM Treaty, there is no basis for the assertions made in the private members motion in relation to the inclusion of the cross reference to each other in the ESM and Stability Treaties.

The linkage between the ESM and the ratification of the Stability Treaty was accepted in the context of the acceleration into force of the ESM by July 2012. It was of particular importance to a number of countries. It is entirely logical and reasonable that a country receiving the support of its partners under the ESM should be prepared to run sensible budgetary policies as required under the new Treaty. That is the position, and the attempt to put any other gloss on it is both inaccurate and misleading.

Further I have clarified that the linkage of both the ESM Treaty and the Stability Treaty refers to new applications for assistance under the ESM and will not affect the transfer to the ESM of undisbursed amounts under the European Financial Stability Facility (EFSF) for Ireland and other programme countries. The funding approved under the existing Programme of Financial Support for Ireland is not therefore conditional on Ireland ratifying the fiscal compact but, as is currently the case, on Ireland successfully implementing our programme.

The ESM treaty will have to be ratified by the 17 Euro Area member states; it will enter into force and the ESM will become operational as soon as possible. The target date is July 2012, a year earlier than originally planned. As a permanent mechanism, the ESM will take over the tasks currently fulfilled by the European Financial Stability Facility and the European Financial Stabilisation Mechanism.  The ESM’s lending capacity is currently set at €500 billion, and this will be subject to reassessment later this month. This again reflects the continuing development of EU policy to which I referred earlier.

Sinn Fein tabled a motion to try to cast the Government’s actions in a bad light. The Government has consistently acted to support the financial stability of both Ireland and the Euro Area. We have contributed constructively to efforts at European level to ensure the economic stability of the Euro Area, the financial stability of the European Union and the safeguarding of the financial stability of the Euro Area as a whole. While the underlying economic and fiscal situations differ across Europe, it is imperative that countries restore their respective economies to health and their public finances to a sustainable position.

In relation to the legislation, as our amendment to tonight’s motion makes clear, the decision on the timing of legislation for the ESM Treaty, and also for the Article 136 amendment has yet to be taken.  However, it is clear that we will bring forward this legislation at the appropriate time.  This will have regard to the target date for entry into force of the ESM Treaty on 1 July.

The motion before the house tonight seeks to sow confusion and doubt where none should exist.  The Government’s amendment places the ESM in its proper positive context of a series of developing EU measures to address the current crisis, and to seek to avoid a future repetition.  The Government has played a constructive role in these discussions.

I commend the Government’s amendment to the House.