Brian Cowen (Laois-Offaly, Fianna Fail)

In particular, his report noted that:

As regards the substance of the guarantee itself, it is hard to argue with the view that an extensive guarantee needed to be put in place, since all participants rightly felt that they faced the likely collapse of the Irish banking system within days in the absence of decisive immediate action. Given the hysterical state of global financial markets in those weeks, failure to avoid this outcome would have resulted in immediate and lasting damage to the economy and society.

An issue, however, raised by the Governor's report relates to the merits or otherwise of including subordinated debt holders in the initial guarantee. The Governor's report indicates his views that the inclusion of existing subordinated debt in the coverage of the guarantee likely increased the potential share of the total losses borne by the State. He, however, acknowledges that subordinated debt holders have suffered losses, given the buy-backs that have occurred at discounted prices.

The Governor notes that in making this decision, considerations by the Government included the fact that:

...since many of the subordinated debt bond holders were also holders of Government Paper, their exclusion could adversely affect Ireland's debt rating. There was also concern that anything short of a comprehensive, simple to understand concept might cause confusion when markets opened and undermine the effectiveness of the Government's action. CBFSAI representatives did not challenge these propositions.

The decision to include Anglo Irish Bank in the Government guarantee has been one which has been a subject of understandable and critical debate.

The Governor's independent report points out:

There can be little doubt that a disorderly failure of Anglo would, in the absence of any other protective action, have had a devastating effect on the remainder of the Irish banks. Given the other banks' reliance from day to day and week to week on the willingness of depositors and other lenders not to withdraw their funds, and the certainty that those lenders would infer from the failure of Anglo that all the other Irish banks might be in a comparable situation, in all likelihood the main banks would have run out of cash within days. So either Anglo's disorderly bankruptcy had to be avoided or protective measures taken for the rest of the system, or - as was decided – both.

The Governor's report also deals with the decision not to proceed with the nationalisation of Anglo Irish Bank on the night of the guarantee. He indicated that two questions are raised. First, should policy makers have had a greater sense that Anglo was facing not only a liquidity but also a potential solvency problem? The answer is probably "Yes". The second was whether nationalisation of Anglo on 30 September – compared with its nationalisation five months later – would have made a significant difference to the overall cost of the bank bailout to the taxpayer. Here the Governor indicates that the answer is "Probably not".

The second element of the Government's plan is to restore order to public finances. Once again, people can have confidence that Ireland is back on track. The good news is stability has been restored to our public finances and we have made a fiscal correction of 5% of GDP in 2009 and 2.5% in 2010. Without these measures, our budget deficit would have ballooned to 20%. Today we are held up as an example and people are talking about the Government's resolve and capacity to deal with problems we have been confronted with. There is no room for complacency and we must persevere with the agreed deficit reduction programme over the coming years.

Confidence in Ireland is rising and the decisive action we took means our economic outlook is better than would otherwise have been the case. The ESRI has predicted that growth will return to the economy in the second half of this year and the European Commission is predicting that Ireland will grow at double the eurozone average next year. The markets too can see this. The Government's decisive action has brought us credibility. This credibility is reflected in our reduced costs of borrowing, which is crucial to keep the country running.

Money markets remain difficult and we must be constantly vigilant in this regard. This recession has changed the financial world. The lesson we need to take from it is that we are in a competitive global market and soft option solutions are not going to provide the basis for sustainable growth and the improvement of living standards we seek for the people.

As a former Minister for Finance, I want to respond to the criticisms of fiscal policy in the banking reports and especially where this relates to the role of property-based tax incentives. I want to emphasise that prior to the crisis, the Government took action to reduce the vulnerabilities of the economy to the property market, although I fully accept that in hindsight, it was not sufficient. The independent reports identify four main areas where actions were taken as follows.

These are the decisions in the budget I presented to Dáil Éireann in December 2005 to abolish a very wide range of property-based tax incentives; the refusal by the Government to abolish or dramatically reduce stamp duty; the decision of the regulator at the start of 2007 to increase the capital requirements on banks for speculative property lending from 100% to 150%; and the decision by the Government to allocate every year 1% of GNP into a National Pensions Reserve Fund. Without these actions the crisis in the Irish economy would have been far worse and I believe this is consistent with the analysis of causes contained in the two independent reports.

It is worth emphasising, in considering the role of various incentives given to the construction sector in contributing to the problem that in presenting the 2006 budget in December 2005, I decided to immediately restrict the use of property-based tax incentives by those on high incomes. I introduced for the first time in that Finance Bill a measure to ensure that such taxpayers were no longer able to use property tax incentives or other measures to reduce their tax bill in any year below a certain level. I subsequently announced the most radical abolition of property-based tax incentives made by any recent Minister for Finance. I did this because I was concerned that these incentives were contributing to an overvaluation of property with resultant vulnerabilities. This decision did not gain favour with many interested parties in the property market and it also represented a decisive policy shift because over a long period, successive Governments of all political persuasions had added more new property incentives rather than engage in a wholesale abolition of existing incentives.

I also abolished the property based incentives for the general rental refurbishment scheme. Similarly, the tax relief which was available for interest on loans taken out to acquire an interest in property rental companies was abolished for all new loans taken out after 7 December 2005.

The Government accepts that there are independent policy lessons to be drawn from our experience and, in particular, we accept those set out in Part IV of the Regling and Watson report. I agree with the assessment in the two reports that a more restrictive fiscal policy would have assisted in slowing the economy. Hindsight is always clear and clearly we would have taken such a course if we had known of the scale of the property collapse which was facing the country. I deeply regret that.

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