Dr. Constantin Gurdgiev:

Yes. I will come back to that point in a moment.

The problem with QE is that when it ends there will be a reset back to the average historical interest rates. I have provided a comparison in the table in the presentation, which uses two different ways of treating the margin. One of them is the lower margin, which is based on the lending and deposit margin spread, and the other is the upper margin, which is based on the short-term/long-term lending spread in the EURIBOR and Eonia markets. If one takes the average of that, currently the interest rates for households' house purchases with a fixed rate for one year plus is about 2.86% lower than they will be once the QE is ended. It will be a significant shock to those households when that happens. As to when it will happen, we do not know. We know how long QE will last, but we do not know how fast the rates will revert to historical averages.

With household consumer loans, there is slightly less adjustment - less than 1%. That is because they are currently priced outrageously high. Beyond that, the non-financial corporations will also suffer a 2.59% to 2.86% potential increase in future rates. These are very significant rates and they call into the question two issues. First, what will happen to the restructured mortgages and restructured corporate loans that are currently performing? The second issue is how many of the currently performing and non-restructured loans will go into arrears under this scenario and how fast that will happen. QE does not provide us with an answer to that and it does not help us to address that.

With regard to the Acting Chairman's question, the long-run effect of QE is that it reduces or adversely impacts the future profitably of the banks. This is a very significant issue because that in turn reduces the banks' ability to deal with non-performing loans. In particular, QE eliminates what we call the interest carry trade. In other words, it is a trade whereby the bank can borrow at low ECB rates and carry it into safe or relatively safe assets at high rates of return. Because the high rates of return have been eliminated by QE in the safe assets, the carry trade is no longer available to the banks. If the banks do not benefit from the carry trade, they have to extract their profit margins somewhere else. Effectively, they will have to get blood out of a stone from the currently defaulting or weakly performing loans and, as a result of that, we are facing a problem there. In the long run, what it means for us - this does not apply only to Ireland - is that, traditionally, QE carried out at the zero lower bound rates implies that the banks do not deal with non-performing loans; they have no incentive to do so, but they have an incentive to hold them as much as possible in order to extract a higher rate of return in the future. That is a problem. One eliminates the high-yielding, high-quality assets and one incentivises the banks to hold low-quality assets for longer in the hope of generating a high yield from them. That means that household loans and company loans currently in arrears will not be restructured fast enough and loans not yet in arrears but at risk of being in arrears in both categories will not be addressed very aggressively by the banks.

To summarise, my view is simple. QE has had a pronounced effect so far and, hopefully, it will continue to have a pronounced effect in terms of the monetary variables such as exchange rates, which have some transmission to the real economy, although I believe it was overstated here. In addition to being a very open and exporting economy, we are a very open importing economy and if households are dependent on imports of food, as all of us are, they will suffer from the deterioration of exchange rates on the imports side. In addition to that, it has had a significant impact by reducing, in the medium term, the cost of funding the Exchequer, which is good news for us, but in the long run it transmits that cost, probably through the banking channel, in terms of the cost of funding the economy, and there is the lack of a resolution of the problem of non-performing loans. In real terms, QE has so far not had a significant impact, and most likely it will not have a very significant positive impact.