Paschal Donohoe (Dublin Central, Fine Gael)

I will respond to some of the points made by the Opposition in the debate so far. The word "treason" was used earlier. I had hoped that word would be banished from our vocabulary when discussing our future. We should reflect on what "treason" is. "Treason" is committed when an individual consciously and willingly delivers an outcome that leads to the downfall of a State. I believe that those people who made decisions on our banking system or the sovereign welfare of our State, decisions which in retrospect we wish had not been made, did not make them with the objective of ruining our State. The use of the word "treason" in the past was ill-judged and not deserving. I regret the return of its use in today's debate. Whatever mistakes have been made, and there have been many, or the costs incurred, which are huge, nobody who contributes to this discussion or who in government makes decisions does so with the objective of trying to end our State. They do it with the objective of preserving it and delivering the welfare of our citizens.

A prominent Member of the Opposition concluded his contribution with the phrase "I am not afraid of default". I am afraid of default and will tell the House why. In this regard we need to look to the history of what happened to those States which went down that path. There is a long and varied history of default within the global economy. Given that many states have defaulted in the past 200 years, the history of what happens to them subsequently is a rich one. I will focus on three aspects of this issue. Experience shows that states which unilaterally default on private market funding regain partial market access between three and a half and five years following the default. On average, they do not gain full market access until eight and a half years later. History also shows that defaulting states returning to the market following several years' absence pay an average premium on the market interest rate at the time of exit of 4.5% in year one and 2.5% in year two. In addition, defaulting states normally have recourse to the lender of last resort rather than the markets. Ireland is already using the lender of last resort. If we were to unilaterally decide not to deal with the lender of last resort, to whom would we turn to fund our public services and meet the needs of citizens?

One must also consider the likely actions of other states in the event of Ireland opting to default. If we were to take unilateral action, we would impose losses on other states and their banks. Given that they are providing funding to keep our banks open and this State afloat, it is highly likely they would decide to use this funding to cover losses on their sovereign and bank balance sheets.

The history of default relates exclusively to developing and emerging economies. No modern, developed state has unilaterally defaulted since the Great Depression. At best, default is a course of action with vast and dangerous unknown outcomes for the State. At worst, the consequences of default for a modern, western European state which is already using the services of the lender of last resort would be catastrophic.

I remind Deputy Ross of the reason I am afraid of defaulting. This State does not run on pixie dust, nor is it funded by some fairy tale character. It needs money and if we decide we will not take funding from the only body willing to lend to us, albeit under conditions with which we are not satisfied, we will be forced to turn to a market which, as history shows, consistently declares a buyers' strike lasting between three and eight years on defaulting economies. Anyone who advocates default must state from where they will source the funding required to keep open our banks, hospitals and schools.

I will address burden sharing and debt, an issue which has generated considerable interest and heated debate in the House. When discussing banking one should provide figures and address developments in detail. On 1 April, the Financial Regulator issued figures on the level of banking debt in the economy and set out its various components. Total banking debt in the Irish economy is €64 billion, of which €36 billion is unguaranteed. Most of those who advocate unilateral action on the banking debt have focused on unguaranteed debt. The average haircut achieved by states which have applied burden sharing is between 30% and 50%. In the event of the State opting to act unilaterally and apply burden sharing to its €36 billion of unguaranteed debt, the potential gain to the State's balance sheet would be €18 billion. Ireland depends on €155 billion in funding from the Central Bank and European Central Bank to keep our banks afloat. The equation is, therefore, simple. The potential once off saving from opting to unilaterally default would be €18 billion. On the other hand, the European Central Bank, which has ruled out burden sharing, is directly providing €85 billion to Irish banks and allowing the Central Bank to supply a further €70 billion to keep the banks open. This is the equation with which the Government has had to grapple only three weeks into office and following three years of a banking policy that brought us to this point. It has been compelled to find a way to ensure we can keep open our banks while charting a path that will lead to a reduction in the value of our debt.

Let us assume unilateral action on burden sharing generated a saving of €18 billion. The vast majority of unguaranteed bank debt is held by Allied Irish Banks and Bank of Ireland, the two banks which, under Government plans, will form the pillars of future banking strategy. If action were taken to reduce the value of the debt held by these two banks, how could we ask the investors who had taken a hit to lend again to Bank of Ireland and Allied Irish Banks? How would the two pillars of our banking system remain open? These are the choices we face.

I have set out the reasons I fear default and explained why we should remove the word "treason" from this debate. The sustainability of our debt has been correctly raised by the Opposition. Their concern is shared by me and all Deputies on the Government side. The State faces a serious challenge, not only arising from the magnitude of the debt but because of the design of the institutions which may emerge. The assumption is that Ireland will exit the IMF-ECB programme in mid or late 2012. It has been proposed to introduce a European stability mechanism in the summer of 2013. The mechanism has two features, including the capacity to facilitate an orderly sovereign default by eurozone countries. Private investors who will be asked to lend to Ireland in 2012 see a mechanism on the horizon which could impose greater losses on them. We must examine what action we need to take to ensure we are able to secure funding from investors who will be afraid of the solution proposed under the stability mechanism. There is a strong probability that the institutional arrangements envisaged by the European Union will become self-defeating. We should use the time available to us before we must return to the markets to address this matter.

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