Martin Mansergh (Tipperary South, Fianna Fail)

I welcome the opportunity to contribute to this critical debate on the establishment of the National Asset Management Agency, which has caused the early return of the Dáil. The NAMA initiative must be set against a background of ongoing pressure on the public finances and continued uncertainty in the financial sector. The Government will continue to take decisive and coherent action to resolve the serious budget deficit, address the unprecedented slowdown in the economy and restore stability to the financial system. These issues need to be resolved in parallel with managing the public finances and cleansing and repairing our banking system.

From the outset, the Minister for Finance has made it clear that he is keen to engage in a proper debate on NAMA so that the Government can deal with the issues involved as comprehensively as possible. This is why he published draft legislation at the end of July. Since then he has listened to a range of constructive suggestions from various parties and the Bill as initiated today reflects this process. Just over two weeks ago, as part of his consultative approach, he engaged in detailed discussions with the Joint Committee on Finance and the Public Service. He has also stressed that he will continue to listen to constructive comments and suggestions until the enactment of the Bill. However, action is required sooner rather than later if we are to remove the impediments to the ability of financial institutions to lend to the wider economy. The Government's record since the start of the crisis reveals a series of necessary actions taken to stabilise the financial system, protect depositors and safeguard taxpayers' interests. These measures include the guarantee of certain bank liabilities, the recapitalisation of AIB and Bank of Ireland and the nationalisation of Anglo Irish Bank, thereby allowing banks to raise the funds needed to support their operations and ensuring that citizens and businesses can conduct their daily transactions. In return for this measured support, the taxpayer has received payment from the banks. The eventual payment from the banks on foot of the guarantee scheme will be approximately €1 billion and the preference share investments in AIB and Bank of Ireland will yield approximately €560 million per annum at an 8% coupon. It should not be forgotten that remuneration for senior executives and directors has been reformed and banks have had to sign up to new rules regarding their dealings with business and residential customers.

Much remains to be done, however. Anxiety about the impact of risky land and development loans on our banking system continues to create funding difficulties for the banks. This, in turn, restricts the flow of credit as banks focus their resources on these troubled loans. Each euro that a bank lends to a customer must be drawn from deposits or borrowed by the bank from another source. This, in turn, restricts the flow of credit as banks focus their resources on these troubled loans. Each euro that a bank lends to a customer must be drawn from deposits or borrowed by the bank from another source. Irish banks have relied heavily on foreign financial institutions for funding. However, the uncertainties surrounding the scale of losses on banks' balance sheets have made this liquidity more difficult and costly to attract. Furthermore, as long as the banks remain unsure about the losses that may eventually result from these risky loans and nervous about the adequacy of their capital, they will hesitate to provide the credit which is vital to our economic recovery. Everyone is agreed that a resolution is urgently required because otherwise the economy will remain shackled as it awaits a banking system capable of providing credit to viable businesses and households. The Government view is that the asset management agency approach is the best option for addressing this issue and this view has gradually been gaining public support.

Of course a significant portion of the debate, both today and over the past several weeks, has centred on the risk involved in setting up NAMA and as the Minister for Finance has pointed out, any option for solving the banks' problems involves risk. Around the world it has become clear that the risk is one that the private sector is unwilling to take. It is for that very reason that governments all around the world have been forced to provide various supports to their financial sectors.

Of course there is continually an attempt to make out that this is just a national problem instead of a global problem. Confidence in banks worldwide was shaken by the collapse of Lehman Brothers last autumn and we and other countries are coping as best we can with the fall-out. Obviously, there are particularly national circumstances which, maybe, differentiate the fall-out, but we are dealing with a global problem and it is misleading the public to suggest that this is something that only this country is facing.

More specific to today's debate, Ireland is not the only country working on a policy solution to deal with the uncertainties surrounding certain asset classes. The US, Germany, the UK, France and others have all put forward schemes tailored to the specific problems faced in each country to deal with impaired assets.

The Government's position is that the problems associated with lending for land and development are best addressed by transferring these assets to an asset management agency and it was only after a detailed assessment of the various options for dealing with these risky assets and acting on the recommendations of expert advice that the Government decided that this was the best approach.

In terms of the reaction to the Government's approach, I should like to mention the subject of interest rates. The interest rate that Ireland pays on its debt is significantly determined by relevant Government policies and it is vital to maintain the appropriate fiscal policies and financial market policies if we are to enjoy the confidence and support of the international markets. Since the Minister for Finance announced in April last the intention to establish a national asset management agency bond spreads above the German benchmark for Irish sovereign debt have halved from almost 3% over ten-year German bonds to now just 1.5%, and clearly the proposal has the support of the international markets. I might also add that the NAMA proposal has been widely supported by bodies such as the IMF and the ECB.

I emphasise in passing what the Minister has already referred to in his speech, the importance of passing the Lisbon treaty referendum from the point of view of maintaining that improvement in confidence. Any uncertainty about Ireland's future position or influence in the EU would be costly. We cannot afford to be in denial, as some are, about the economic importance of the vote on the Lisbon treaty. We in this small country cannot afford the indulgence of aligning ourselves with British opposition eurosceptic attitudes - of course Britain has already ratified the Lisbon treaty. Membership of the European Union and the unprecedented opportunities it has given to us is the most tangible fruit and demonstration of Ireland's independence, and reinforces and enhances it rather than diminishes it.

As mentioned, there is a risk attached to the NAMA proposal as there would be for any other proposal designed to alleviate the problems with the banks' balance sheets but as the Minister for Finance pointed out earlier, there is another significant risk of which we cannot allow ourselves to lose sight. This is the risk of damage to our economy inflicted by a clogged-up banking system which if not addressed sooner rather than later may inflict pain on the taxpayer through the scourge of even more increased unemployment for many years to come. We must act decisively and promptly if we wish to position ourselves to take advantage of the upturn that will emerge in the global economy over the next few years. Indeed, it seems that such a recovery already may be emerging. There are some tentative signs that growth is returning internationally and over the next few months the durability of this will become clearer.

While the openness of the Irish economy means that Ireland has been badly affected by the global downturn there are grounds for optimism that we can take advantage of any upturn. The economy is flexible, evidenced by the fact that prices and wages are adjusting rapidly. On a harmonised basis, consumer prices in August fell by 2.4%, the fastest rate of decrease in the euro area. In the public sector de facto wage cuts averaging approximately 7.5% have been implemented this year while there is survey-based evidence as well as some limited hard data to suggest that private sector wages are also adjusting downwards. These rapid wage and price adjustments are helping to begin the restoration of our competitiveness, which is essential if we are to benefit from the global recovery when it emerges.

Many in this House have spoken of the pain being experienced by people hard hit by the recession but it is also fair to comment on the practical "can do" attitudes of many people faced with this crisis. There is a willingness to adjust and to accept, particularly, that those in jobs and with reasonable incomes need to adjust and make sacrifices, and that the quicker we do so the quicker we will recover. I pay tribute to that constructive public attitude.

Domestically, the Government has moved rapidly to maintain the public finances on a sustainable path. Notwithstanding the pressures on the public finances the Government is maintaining investment in physical and human capital at high levels. Infrastructural investment as a proportion of national income will remain high by international standards helping to improve efficiency and reduce costs. Furthermore, the Government will continue to invest heavily in education at all levels, especially at third and fourth level in recognition of the importance of human capital in the global economy. The NAMA initiative will complement and support these other Government policies in ensuring that we are best placed to take advantage of the upswing.

There has been much public debate around the idea that shareholders and bondholders should bear a greater proportion of the banks' losses. With regard to shareholders, the Minister for Finance has made clear that if after the introduction of NAMA the banks require an injection of capital from the public purse then this capital will be in the form of an equity stake. This will dilute the current ownership of shareholders, who have already lost considerable sums and are likely to lose more if their shares are diluted further. With regard to bondholders, a large amount of subordinated debt has been bought back by the banks in recent months at a significant discount. This has resulted in bondholders taking substantial losses relative to the face value of their bonds.

The idea that all bondholders are natural risk takers aiming at high reward in return for high risk is erroneous. Senior bondholders are not high-risk takers. They are usually long-term providers of debt such as pension funds and insurance companies. They are also the type of investors who buy Government debt and who kept our economy funded.

The Minister has already made clear that the Government does not believe that a culture of default or potential default would serve the best interests of the taxpayer. The ability to roll over funding continuously depends on a fundamental belief on the part of the investor in the viability of the investment and the stability of the institution concerned. The history of the past few centuries in Europe as well as contemporary experience further afield shows the fatal consequences of what might amount to debt repudiation. It is a risk-free suggestion for those not currently in positions of responsibility to advocate such populist solutions. The Government, in contrast, would be responsible for the consequences of such decisions.

The Taoiseach and Minister for Finance have repeatedly made clear the Government's firm belief that as far as possible the banking sector should have a market presence and operate within market disciplines and constrains. Despite this many cling to the illusion being promulgated that nationalisation will address all of the problems facing our banks. This is just not so. The impaired assets still would have to be dealt with and the shareholders in AIB and Bank of Ireland would have to be compensated - all of this before the State puts additional capital in to resolve the capital deficiencies from dealing with impaired assets.

Nationalisation could also impact negatively on financial institutions' own funding. Anglo Irish Bank provides an example of the funding challenges presented by nationalisation where the Government was required to inject almost €4 billion in capital following serious losses. The concentration risk in association with the policy of nationalisation could force investors to withdraw funds from certain nationalised banks on the grounds that they were effectively owned by the same owner. No other major country is currently adopting a policy of wholesale bank nationalisation. Therefore, if Ireland was uniquely to pursue that option it could from an international perspective be very damaging to Ireland's reputation and attractiveness to international investors. This is a social market economy, not a socialist economy. We should not be sending signals that we are shifting to a different economic system. I understand, having been around politically for a long time-----

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