Opinion of the European Central Bank of 5 January 2022 on Ireland’s adherence to the New Arrangements to Borrow with the International Monetary Fund (CON/2022/1)

OPINION OF THE EUROPEAN CENTRAL BANK of 5 January 2022 on Ireland’s adherence to the New Arrangements to Borrow with the International Monetary Fund (CON/2022/1) Introduction and legal basis

On 9 December 2021 the European Central Bank (ECB) received a request from the Irish Minister for Finance for an opinion on the Bretton Woods Agreements (Amendment) Bill 2021 (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 1, Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC as the draft law relates to the Central Bank of Ireland (CBI). In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The draft law provides a legal basis for Ireland to formally adhere to the International Monetary Fund (IMF)’s Decision on the New Arrangements to Borrow (NAB), and approve its terms , and makes provision for the Minister for Finance to make payments out of the Irish State’s Central Fund, to the Catastrophe Containment and Relief Trust operated by the IMF and other such trusts established by the IMF. 1.2 Under the draft law the CBI, on behalf of the Irish State, and in its capacity as Ireland's fiscal agent to the IMF, is authorised to make payments to the IMF arising from a ‘call’ by the IMF, within the meaning of the NAB Decision. According to the explanatory memorandum accompanying the draft law, the CBI’s financing of a call will be made out of the CBI’s investment funds, resulting in claims in the form of a loan or promissory note per paragraph 8(a) of the NAB Decision. Under the draft law any moneys received by or on behalf of the Irish State in accordance with the NAB Decision shall be paid to the CBI.

1.3 According to the explanatory memorandum accompanying the draft law, the CBI would provide the necessary finance to fulfil Ireland’s obligations under the NAB Decision on the proviso that the Minister guarantees the CBI’s participation in the NAB credit arrangement. Under the draft law the Minister for Finance has the discretion to guarantee either or both the payment to the CBI of the principal of, and any interest on, any moneys advanced by the CBI arising from a call by the IMF, limited to the total amount due to the CBI by the IMF under the NAB Decision. The draft law requires the CBI to repay moneys paid by the Minister for Finance under a guarantee as and when such moneys are recovered by the CBI. 1.4 Under the draft law the Minister for Finance may make payments out of the Irish State’s Central Fund not in excess of (a) EUR 50 million in respect of the IMF’s Catastrophe Containment and Relief Trust (CCRT), (b) EUR 50 million in respect of each individual IMF trust fund established under Article V Section 2(b) of the IMF Articles of Agreement, (c) EUR 75 million in respect of the Poverty Reduction and Growth Trust (PRGT) and (d) EUR 325 million in respect of all IMF trust funds, the PRGT and the CCRT.

2. Monetary financing prohibition

2.1 Article 123(1) of the Treaty prohibits national central banks (NCBs) from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Member States. The monetary financing prohibition is, however, subject to certain exemptions laid down in Council Regulation (EC) No 3603/93 . In particular, Article 7 of Regulation (EC) No 3603/93 provides that the financing by NCBs of obligations falling upon the public sector vis-à-vis the IMF is not regarded as a ‘credit facility’ within the meaning of Article 123(1) of the Treaty. Recital 14 of Regulation (EC) No 3603/93 clarifies the rationale behind this exemption, stating that it is appropriate to authorise the financing by the NCBs of obligations falling upon the public sector vis-à-vis the IMF because such financing “results in foreign claims which have all the characteristics of reserve assets” Therefore, the exemption in Article 7 of Regulation (EC) No 3603/93 must be interpreted in line with this rationale . 2.2 Reserve assets are defined as those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for interventions in exchange markets to affect the currency exchange rate, and for other related purposes, such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing . Under this definition, reserve assets must be foreign currency assets and, except in the case of gold bullion, must be claims on non-residents. 2.3 The draft law empowers the CBI to make payments on behalf of the Irish State to the IMF, arising from a call by the IMF for the Irish State to provide the resources pursuant to the NAB. The payments

will result in an SDR-denominated claim of the CBI against the IMF in the form of a loan or promissory note. Consequently, the advancing of monies by the CBI to the IMF on behalf of the Irish State under the NAB, as set out in the draft law, falls within the exemption of Article 7 of Regulation (EC) No 3603/93 because this financing results in foreign claims that have all the characteristics of reserve assets.

3. Financial independence

3.1 From the perspective of the financial independence required of an NCB in the European System of Central Banks (ESCB) under Article 130 of the Treaty, pursuant to which Member States may not put their NCBs in a position where they have insufficient financial resources to carry out their ESCB or Eurosystem-related tasks , the ECB welcomes the guarantee that could be provided by the Minister for Finance under the draft law with respect to the repayment of either or both of the principal and any interest on moneys advanced by the CBI arising from a call by the IMF . However, the ECB notes that the draft law does not currently explicitly cover exchange rate risk on moneys advanced by the CBI.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 5 January 2022.

[signed]

The President of the ECB

Christine LAGARDE