Mr. Seamus Coffey:

I will take the issue of the ECB bondholdings first and, maybe, then move on to some subsequent issues.

The Chair has introduced a useful topic. The figures in this regard are unconfirmed, although a set of figures was presented to the Governor of the Central Bank, Professor Patrick Honohan, at the Joint Committee on Finance, Public Expenditure and Reform recently and he did not deny them. I think we can take it that they are in the ball park.

The ECB had what it calls the securities market programme where it bought Government bonds. It started in 2010. The programme ended in March of last year. The programme is now over but its legacy is substantial government bondholdings by the various national central banks in the eurozone which carried out the policy on behalf of the ECB. Most of the activity took place after the July 2011 European Council meeting that finally admitted that a Greek default was necessary but, perhaps, did not go far enough. Because private sector involvement was finally admitted in the case of Greece, to try to cushion some of the consequences for the other countries that were under pressure the ECB stepped in and really stepped up its bond buying over the coming months. Irish bonds formed part of that. It looks like they had somewhere in the region of €18 billion to €22 billion of Irish Government bonds bought in a fairly short period. Most of them focused on what we might call "the short end." These were bonds coming to maturity over a fairly short period - two, three or four years. Since then, there have been two sovereign bond maturities in Ireland. There was a November 2011 bond that matured and also a March 2012 one. Many of the bonds that were bought might have matured and been redeemed, but the figures would still have been quite large.

At a eurogroup meeting in February last it was agreed that the national central banks would recycle some of the profits they were making on these bonds back to Greece. As attempts were made to bring down their debt-to-GDP ratio, one approach taken was that there was this money flowing out of Greece and maybe they could get it to flow back in. In the main, as we now will be aware, when central banks make profits they return them back to their sovereign. In our case, we expect the Central Bank to make substantial profits on Government bonds, but these merely happen to be our own Government's bonds and we hope the Central Bank can hold on to them for as long as possible because the interest we pay on them to the Central Bank is then recycled back to the Exchequer. If there is a profit on any interest that is paid on the Irish bonds now held by the national central banks across Europe, it can be returned to the exchequer in those countries and we hope, perhaps, they will return it to us.

The issue is made up of two elements. The Chair spoke about the profit that the central banks will make. The profit is made up of the annual interest - coupon - they get every year and the capital appreciation. There is not too much we can do about the capital appreciation. The central banks will require a certain return for taking on the risk of buying Irish Government bonds, and this was particularly the case in the autumn of 2011 when sovereign bond markets were quite heated.

We can focus particularly on the annual interest, which might not grab as large a headline as focusing on the capital but which sums can be quite large. Here, the central banks are making a cheap and easy profit. The central banks get access to funds at a very cheap rate. They can get the funds at the ECB rate and they have bought these Irish Government bonds. They might have made a profit by buying them at 70 bps or 75 bps, but they are making that profit off somebody else. They are making that profit off the person who sold the bonds. That really is of little concern to us. We borrowed €100 whenever the bonds were issued, say, in 2006 or 2007, and we will pay back €100. The central banks themselves are not making a profit off us on that basis. What they are making a profit on will be the interest that we will now pay on an annual basis on those bonds. Perhaps we should target and try to get back the interest, which is the substance of the Greek deal where the interest that is paid on bonds is then recycled back to the Greek central bank which can return it to the Greek exchequer.

The sums have potential to be reasonably large. Given some of the redemptions, there could be - I merely pick a figure - €12 billion of these bonds still being held by the national central banks across Europe. At a rough 5% annual coupon, one is talking about €600 million of interest per year. We have a massive interest bill, approaching €8 billion. Some €600 million of that could be going to the national central banks of Europe. The money they are borrowing from the ECB for this facility could be costing them €100 million and, potentially, there is a €500 million per annum profit or income for the national central banks across Europe on their holdings of Irish Government bonds. The central banks will benefit because they got to buy them cheap but as of yet, there has been no benefit for Ireland. We were not in bond markets in July and August 2011 when these bonds were being bought. This was, apparently, done for our benefit. It was to try to stabilise European bond markets but as of yet, we have got no real benefit because it is only subsequently that we got back into markets. This potential €500 million is there and could be recycled back to the Central Bank of Ireland which would give it back to the Exchequer. It would be a welcome boost to the public finances.

Deputy Paschal Donohoe asked about the balance of payments and, to a large extent, answered his own question. When it comes to an individual country with its own currency, there will be a focus on the balance of payments because it is interested in the supply of its currency on international markets and how it influences the exchange rate. However, for countries in the eurozone, the balance of payments is less important as a mechanism for influencing the exchange rate because trade in the euro is not particularly influenced by what we do. We may be interested in the direction of the euro exchange rate, but we have little control over it. When we had the punt, a large balance of payments deficit, that is, punts flowing into the international market, it gave raise to concerns about whether people would try to sell or hold our currency. We have realised in recent years that while the balance of payments provides an indication of the health of an economy, it might not be the policy objective it previously was. If more money is flowing out than coming in, problems will arise eventually.

A number of countries are facing difficulties because of balance of payment deficits. It is a question of running a collective rather than an individual currency. The United States runs a huge balance of payments deficit but does not regard this as a significant problem because it controls its own currency and is interested in seeing its value fall. It is not concerned about hundreds of billions of dollars flowing into international markets if the value of the dollar is dragged down as a result because that will help the drive to increase exports. For several years there has been a closer focus on balance of payments and most of the struggling countries are improving in this regard. Our balance of payments has moved from a slight deficit to a surplus and while countries such as Spain and Greece remain in deficit, they are moving towards surpluses. This is something that does not receive much attention, but it is a sign of health and stability in an economy.

On the future of the ESM and the possibility of bailing out banks, I hope we will never have to bail out banks again. Some of the rules being put in place will ensure the call on the taxpayer will be reduced in the future. We know that the capital ratios for banks are going to be increased because they will need more money to absorb losses before somebody else is called on. The mechanism being put in place for bank resolution on an EU-wide basis will require bondholder bail-ins and, perhaps, large depositor bail-ins, depending on the nature of the losses for the banks concerned. The lack of a bank resolution mechanism on an EU-wide basis was a failure in the design of the euro. Most of the countries involved tended to ignore the issue, rather than put in place their own mechanisms for bank resolutions. This was something that could have been done in the run-up to the crisis and was done overnight in Ireland recently. The aim is to avoid taxpayer bailouts of banks. As the bondholders and depositors will only be bailed in to failed banks, it is unlikely that they will be bailed in if viable or functioning banks run into trouble . They will still get their money back, but as long as the bank remains alive, the possibility remains for the State to get its money back. We must avoid the bailouts for Anglo Irish Bank and Irish Nationwide Building Society, in respect of which the State invested money which it had no chance of recouping. In those instances a mechanism will be put in place to ensure there will be no call in the future. The ESM will not be called in for failing banks which will be allowed to fail. It may be called in for viable banks, but countries may also decide to act without the ESM to maintain control within their own jurisdiction if they decide there is value in doing so. The aim at all times is to reduce taxpayer involvement, although it is difficult to decide if that is achievable because they are still only at the design phase. It is badly wanted and I hope it will have an impact in the future.

Senator Kathryn Reilly asked about monetary policy. I slightly disagree that interest rates were set with larger countries in mind. Interest rates were set with inflation in mind. If inflation was low, interest rates were going to be low. The ECB takes note of policy conditions, but it is not going to respond with interest rate changes if they impact on its inflation rate target. Its prime objective is to control inflation. When inflation was low in the eurozone, interest rates tended to be low. They were unsuitable for Ireland at a time when the economic growth rate was high and inflation was higher. The question arises of what countries can do once their interest rates are set at a supranational level. We are seeing difficulties in terms of the ECB trying to reduce interest rates beyond already very low levels. Apart from Ireland, this does not have much of an impact on the ground. The reason ECB interest rates have such a large impact on Ireland is tracker mortgages. The ECB's low rate has not fostered cheaper lending in other countries or on bond markets. While the ECB rate and German bond yields are low, there has been little impact on Italy, Spain, etc.

Closer fiscal union would benefit small countries. Fiscal union should allow countries to deal with macro shocks without putting public finances under pressure. We find ourselves in the midst of a large macroecnomic shock which, in theory, should be dealt with by easing back on the fiscal side, that is, spending more or cutting taxes. However, because we are also faced with a solvency problem in keeping the country afloat, we responded in exactly the opposite way, by cutting expenditure and increasing taxes. If there was fiscal union, perhaps unemployment benefit and other social welfare payments would have been ring-fenced at European level. The public finances might be in a mess, but social welfare levels would be maintained from a central fund and once we were back on track to growth, we would become a net contributor to the fund, rather than a beneficiary. We could thereby sort out the rest of the public finances while protecting social welfare expenditure. That approach would bring net benefits for small countries.