Michael McGrath (Cork South Central, Fianna Fail)

I will share time with Deputy Billy Kelleher.

Deputy Donohoe made a comprehensive and balanced contribution on this important issue. While I concur with his articulate critique of the policy of unilateral default, it begs the question as to how such a policy made its way into the Fine Gael Party's banking policy, the centrepiece of its economic strategy during the general election campaign. I will revert to this issue presently.

All Deputies are anxious to stop talking about banks and start talking in a meaningful way about the needs of the real economy, namely, retailers, hotels, restaurants and the manufacturing, tourism and hospitality sectors. We all know the banks will not drive economic recovery. At best, they can facilitate and support recovery and the measures announced by the Government last Thursday are part of a process of ensuring they play their role in this respect.

We all accept the need to stimulate economic growth, create employment and bring the budget and Exchequer receipts in on target. The stress tests announced last Thursday appear to be robust and rigorous, and we all hope they have finally identified the bottom of the black hole that has characterised the Irish banking system in recent years. Nobody knows for sure that is the case, however, although reassurances were given in the past by the relevant authorities as well as by politicians. That is why last November, when the deal was reached between the Government, the EU and the IMF, a comprehensive strategy was adopted to put in place a detailed and rigorous series of stress tests. That initiative commenced in January with the appointment of Black Rock Consulting by the Central Bank.

Last Thursday, we saw the culmination of this process with the announcement of final figures. In his earlier contribution to this debate, the Minister for Finance, Deputy Noonan, was correct in saying that there has been an initial welcome for those results, which appear to have credibility. Many market analysts have spoken positively about them and the markets themselves appear to have reacted positively to last Thursday's announcement, which is to be welcomed. In his contribution, the Minister said we need confidence not just in the economy but also that the country's banks are being dealt with comprehensively. All the work that was done by the previous Government is now being brought to a conclusion and that strategy was clearly set out in the EU-IMF programme last November.

We must be honest with people in saying that the strategy announced last Thursday is a continuation of what was set out in that programme. The programme clearly provided for stress tests, de-leveraging measures and a reorganisation of the banking sector. As Deputy Lenihan said earlier, all those policies were in place and are now being presented by the new Government in a manner which we all hope will work and which will bring credibility and finality to the issue. We want to see a line drawn under the banking system so that we can start to focus our attention on the needs of the real economy.

The plan has been incorrectly presented as a radically new departure, rather than a process which was in train all along. Of the six banks under examination, it had already been decided to wind down two of them, Anglo Irish Bank and Irish Nationwide. The downsizing and de-leveraging of the other banks was clearly provided for in last November's agreement. The EBS will now be assimilated into AIB, instead of being sold off. In addition, Irish Life & Permanent's life pensions and investment management divisions will be sold. All of that had been provided for in the agreement and is now being implemented. Last Thursday's announcement represents confirmation of the new Government's commitment - which the Minister, Deputy Noonan, reiterated last week - to implement the programme agreed by the last Government, the EU and the IMF.

Burden sharing probably occupies a disproportionate amount of time when people debate the banking crisis. Deputy Donohoe outlined some of the statistics to put the debate in context. Nonetheless, the issue is being debated constantly and it is important for us to deal with it. The new Government has been confronted with the ECB's unwillingness to entertain burden sharing among senior bondholders. The Government has acknowledged that is the stark truth despite the clear promises and commitments that were made during the election campaign by the parties currently in Government. Those can now been seen for what they were - election promises. People were given the impression that there would be a radically new banking policy and that burden sharing would be insisted upon, unilaterally if necessary. That is not what transpired, however, when the new Government was confronted with the ECB's position.

In an interview last Sunday, the Tánaiste seemed to present burden sharing among subordinated bondholders as something new. Last Thursday, however, the Minister, Deputy Noonan, clearly told this House that subordinated bondholders have already contributed €10 billion to the cost of the banking bailout. There will be further discounts to be achieved, which is to be welcomed, but it is not a new initiative. It had already been put in place by the previous Government and was being successfully implemented. The last Government transferred the deposits out of Anglo Irish Bank and Irish Nationwide to facilitate possible burden-sharing with senior bondholders.

The Financial Regulator, Mr. Elderfield, confirmed today in London that it is Government policy that there will not be burden sharing with senior bondholders at AIB, Bank of Ireland, the EBS, and Irish Life & Permanent. However, the possibility of burden-sharing still remains with senior bondholders at Anglo-Irish Bank and Irish Nationwide. I understand the figure at issue is approximately €4 billion of such debt. The new Government should continue to pursue that matter because burden sharing is facilitated by the transfer of the deposit base out of Anglo Irish Bank and Irish Nationwide. That is now a distinct possibility for them.

I accept the analysis that we are with the lender of last resort. If the ECB was to threaten to turn off the funding tap for the Irish banking system we could be facing an economic collapse of cataclysmic proportions. We must therefore work with our European partners, while continuing to emphasise the need for burden-sharing where it can be achieved. It must be done by agreement, however. That is the point the last Government consistently made, yet it was pilloried for doing so. Nonetheless, we should respect alternative views. Many academics and economists practising in the commercial world advocate that Ireland should restructure its debts and impose burden-sharing. We should analyse what those people are saying.

Some weeks ago, Professor Karl Whelan wrote an interesting article in The Irish Times arguing for a debt-for-equity conversion. While I am sure the ECB is not willing to entertain that idea, we should respect such viewpoints and listen to them. If any aspects of such arguments can be adopted to improve the country's situation we should be open-minded to them.

The new Government's objective, which is consistent with that of the previous Government, is to bring our banks to a situation where they will no longer rely on the life support machine of ECB liquidity funding, as well as our own Central Bank. We agree with that objective, although one aspect of the programme for Government seems both bizarre and incompatible. That is the new Government's commitment which requires banks to put forward plans on how they intend to cut costs over and above existing plans in a fair manner and by a sufficient amount to forego a 25-basis point increase on their variable rate mortgage. Effectively, the new Government is saying that if the ECB increases the interest rate by 0.25%, the banks will be forced to absorb that and not pass it on to consumers. I seriously question how the Government will deliver on that commitment. I also question how international markets would view such interference by the Government in the capacity of a bank to determine its own interest rate policy.

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