Oireachtas Joint and Select Committees

Wednesday, 1 July 2015

Committee of Inquiry into the Banking Crisis

Nexus Phase

Department of Finance - Ms Ann Nolan

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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As we have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session, and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? We begin today's session 1 of public hearings with Ms Ann Nolan, second secretary general of the Department of Finance. In doing so, we'd like to welcome everyone to the public hearing of the Joint Committee of Inquiry into the Banking Crisis. This morning we will continue our hearings with senior officials from the Department of Finance who had key roles during the crisis period. At this morning's session we will hear from Ms Ann Nolan, second secretary general at the Department. Ann Nolan has worked for the Department of Finance since 1985; she has been second secretary general in the financial services division of the Department since 2010 and prior to this she was assistant secretary in financial services division and in public expenditure division at the Department. Ms Nolan, you're very welcome before the committee this morning.

Ms Ann Nolan:

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Before I hear from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry and therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right and members of the public and journalists are reminded these documents are to be confidential and should not be published ... and should not publish any of the documents so displayed. The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets and core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Ms Nolan please.

The following witness was sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So good morning to you again and welcome, Ms Nolan, and when you're ready if I can invite you to make your opening remarks to the committee, please.

Ms Ann Nolan:

Okay. Thank you, Mr. Chairman, and thank you for having me here today, and I will do my best to help the committee in its difficult task. You have my statement and I won't read it all out but will summarise a few important aspects of crisis management and the new legislative framework.

When I started on the banking side at the beginning of November 2008, the task at hand was the assessment of the size of the problem and the possible tools to handle it. The liquidity aspects were well measured at that time and fairly stable. The Irish economy had been contracting all that year and by the autumn of 2008, following the Lehman Brothers collapse, the property market had collapsed, with activity ceasing and prices falling. The solvency of the Irish financial institutions depended on the performance of the economy overall and the value of the property assets against which the institutions had lent money. Therefore, it was clear, as the property market continued to decline, that future losses on the property would be greater than had been previously expected and future profitability would be less than previously anticipated. This meant that the capital position of the banks had to be addressed. The PwC analysis showed clearly that there was a serious problem with land and development loans, both because of the total volume of such loans across the system and because of the small number of developers who had huge debts across the system. The Department immediately began discussions with the bankers on the need to bolster their capital position. The policy parameters within which the Department approached the recapitalisations throughout the period were as follows: banks should take action, where possible, to reduce the capital need by making changes to their balance sheets; assets should be sold; subordinated debt holders should be bailed in as far as possible; money should be raised on the markets, if available; the risk to the guarantee should always be considered; the systemic risk, that is, the risk of contagion, if capital were not provided, should also be considered; State support should only be considered as a last resort.

The initial recapitalisations of Bank of Ireland and AIB, consisting of €3.5 billion in preference shares, was agreed and implemented between December '08 and May '09, with detailed discussions on the amount and the terms and conditions in these capital injections. AIB also agreed at that time to sell their US and Polish subsidiaries.

The chairman and chief executive of Anglo Irish Bank left in December '08 and Donal O'Connor was appointed executive chairman on a temporary basis until a new CEO could be recruited. In view of what we knew about it and had discovered, once the announcement of our intention to recapitalise the banks was made on 21 December '08, we prioritised legal due diligence of Anglo. Arthur Cox carried out the due diligence and their first report was with us on 15 January '09. The options which we had at that point were to continue with the original recapitalisation, either by preference shares or ordinary shares, to nationalise or to try and disengage. The latter was not realistic in view of the guarantee, the expectation that European governments would stand behind their banks and the extreme likely contagion effect across the Irish system. In the event, it was decided to nationalise and replace the board and management.

The problem of land and development loans was dealt with, following a study by Peter Bacon, by setting up NAMA. An asset management agency was necessary because this loan book was so big and dysfunctional that it would have been very difficult for the banks to deal with these loans while continuing to provide banking services to the rest of the economy. NAMA has proved efficient in dealing with these loans. However, the slow, detailed method of valuing them individually and moving them over in tranches, which was developed to meet the requirements of the European competition ... European Commission, the competition directorate, increased the pressure on Irish banks and on the Irish State throughout 2010. The effect of this should not be exaggerated. The size of the losses was the major issue and overvaluing NAMA loans in 2010 would have resulted in losses materialising for the State later. Nonetheless, the transfer of loans based on discounted ... a discount calculated on a broadly stratified sample of loans for each bank would have been a better methodology and would probably have left ... given us the same result.

Another major issue was the haircuts for loans was significantly higher than we had estimated. This was mainly because of lack of equity in the developments. In addition to this, the continued recession meant that other loans, including both mortgages and loans to SMEs, were registering an increase in arrears. The first PCAR stress test run in March 2010 by the Financial Regulator found that the banks had very significant capital needs. Bank of Ireland met this need through a combination of raising capital on the market and a conversion of €1.7 billion of their Government preference shares. AIB sold their overseas assets, with the balance of capital - €3.7 billion - being provided by the Government.

Following our entry into the EU-IMF programme, the second PCAR stress test in March 2011 resulted in further capital demands for the banks.

Once again, Bank of lreland was able to raise money from the private sector, but the other banks, AlB, PTSB, EBS relied mainly on the State.

Given how much the State had to invest in the banking system, the policy throughout the period was to burden-share where appropriate. All of the original shareholders in the covered institutions saw their share value diluted to nothing, or almost nothing. At peak in 2007, the total share value of the institutions was €53.7 billion. In addition, €15.5 billion capital was raised through burden-sharing with subordinated debt holders. Much of this was done through liability management exercises where debt holders were asked to voluntarily sell their debt back to the banks at a reduced price. We also passed legislation to allow the Minister get a special liability order, SLO, from the courts to change the terms of the bonds. This forced the bondholders to sell into the liability management exercise, or have their bonds extended for a long period and interest suspended. The SLO was only used in AlB, but, undoubtedly, the existence of the legislation contributed to the success in burden-sharing with the sub debt holders in the other institutions.

The question of extending burden sharing to senior bondholders was considered seriously twice that I remember - first, in October and November 2010 when the guarantee had lapsed and the programme of assistance was being put in place. A number of lMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo. This was opposed by the EU and ECB officials. In the event, the matter was considered at a more senior level in the IMF and, as a result of a US Treasury veto, the IMF also came down against any such action. It would not have been possible for the lrish Government to act without troika consent. The question was considered again in March 2011, but it was ruled out this time, as I understand, by the ECB.

The financial crisis ... to look at the regulatory supervision and government issues. The financial crisis lead to a reassessment of the legislative framework for the financial services, both domestically and internationally. I will give a brief summary of the changes made. I will divide my comments into domestic and EU, though obviously the two programmes were developed in tandem and the Department worked to ensure they were consistent to the greatest extent possible.

On the domestic side, the first action was to amalgamate the Central Bank with the lrish Financial Services Regulatory Authority. Separating the supervisory and financial stability functions, albeit with a requirement to cooperate, had undermined the importance of the macro prudential aspects of the role of both organisations. The amalgamation was effected through the Central Bank Reform Act 2010. This was followed by an extensive renewal of the supervision and enforcement powers of the Central Bank through the Central Bank (Supervision and Enforcement) Act 2013. This latter legislation streamlined, enhanced and modernised the powers of the Central Bank. Again, while this was a necessary and welcome improvement in the legislative framework, the Central Bank had significant powers before it was enacted and, indeed, used them extensively in the crisis management period, 2008 to 2013, prior to the new legislation.

The third major strand of legislation was providing for resolution powers. This was done initially through the Credit Institutions (Stabilisation) Act 2010, which gave extensive temporary resolution powers to the Minister for Finance to deal with the six covered institutions, as necessary, during the crisis. Subsequently, the Central Bank and Credit institutions (Resolution) Act 2011 was passed. This provides for the orderly resolution of a financial institution in financial difficulties. The Central Bank is the resolution authority.

A final major piece of domestic legislation in the Credit Reporting Act 2013. This is to enable credit institutions check what loans potential borrowers have from other institutions and organisations. This should prevent a reoccurrence of a situation where a small number of people can have large loans from many different institutions and pose a systemic risk. The credit register is currently being set up by the Central Bank.

On the EU front, the crisis lead to significant changes to the international regulatory framework also. The 2009 de Larosiére report recommended the establishment of a new European systemic risk board and three new supervisory authorities, the European Banking Authority, the European lnsurance and Occupational Pensions Authority, and the European Securities and Markets Authorities. These bodies set technical standards, resolve disputes between supervisors and assist in developing consistent interpretation of European law. Major legislative directives were also put in place for all the financial services areas, including the capital requirements directive, CRD lV dealing with bank capital, solvency ll dealing with insurance, and MIFID ll dealing with markets. This was followed by the banking union proposal which centralised banking supervision and resolution for euro area countries, with a possible opt-in for non-euro countries. The Single Supervisory Mechanism, SSM, was set up as a new branch of the ECB with responsibility for supervising the top 130 banks in Europe. The bank restructuring and resolution directive, BRRD, was also agreed to provide for a single resolution mechanism to resolve financial institutions in difficulties.

All of these changes represent a major reconfiguration of the regulatory and supervisory framework. Many of them have only just been implemented and some are not yet operational. It will be some time before their effectiveness can be assessed.

And I'll stop at that, Chairman, and allow you ask your questions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much for your opening statement, Ms Nolan, and if I can now invite Deputy Joe Higgins to commence questions this morning. Deputy, you've 25 minutes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Morning, Ms Nolan. Ms Nolan, the banking and financial services division at the Department of Finance have, as a principal directive, it's on your website, and I'll just quote: "On the one hand, to contribute to the maintenance of financial and economic stability and identify and manage potential risks to that stability...". And then, on the other hand, a little bit later, "...to continue the development of Ireland as a centre for international financial services". As you well know, in the 2003 Central Bank and Financial Services Authority Act, responsibility was given to the Central Bank and the regulator in the Act "to promote the development within the State of the financial services industry". And that was removed, then, in the Central Bank Reform Act 2010.

Can I ask you if continuing to give this mandate to the Department of Finance to develop the financial services industry on the one hand, and then to have ... identify and manage potential risks, can this impact on making appropriate decisions regarding policy and legislation in regard to the regulation of the financial sector?

Ms Ann Nolan:

It is a function of government to develop the economy and a major priority of the current Government and, I think, of previous Governments is employment development, and there are in the funds industry alone, 35,000 people working in the funds industry in Ireland. So, you know, it is a major source of jobs for Ireland and a major and important area. However, for us to develop that, we need a strong regulatory system. I don't see the two as being in contradiction. I think if our regulatory system isn't robust, then that industry isn't secure, and the jobs in that industry is not secure. So, although I think for the regulator to have a job of promotion is inappropriate, I don't think it's inappropriate for the Department of Finance to have that job, and I don't think it influences our regulatory decisions because I think for us, we would see as a major policy issue to have a robust regulatory system, and that that robust regulatory system is necessary to develop the international financial services industry. I don't think they can develop against a background of light regulation in the modern world.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. With respect, Ms Nolan, the paper, Regulating Better, from the Department of the Taoiseach in January 2004 made exactly those points, that regulation was to develop in a responsible way the sector. But we know what happened in the meantime with the bubble and the disastrous crash. Now, several witnesses in front of this inquiry have suggested that giving the Central Bank and the regulator at that time the mandate to regulate and control at the same time as promoting the industry gave rise to a conflict. And the Governor of the Central Bank listed it as one of the difficulties that arose with tougher regulation and allowing so-called light-touch regulation. What's different now, one would have to ask?

Ms Ann Nolan:

Well, what's a major difference is the Central Bank no longer has that requirement. I mean, I think you have to differentiate significantly in the role of the Department and the role of the Central Bank. The role of the Central Bank is to regulate, and it is absolutely not the role of the Central Bank to promote the development of the industry. We provide the legislative framework for that regulation, and the legislative framework is separate, even within the Department, to the promotion of the IFSC, which is in a different section of the Department. But all Departments have the economic development of the country as part of their mandate.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. I'm just trying to explore whether this is a conflict that still can have detrimental effects because it was suggested by witnesses that one reason for so-called light-touch regulation was that there was a reluctance to be tough on Irish banks, for example, in relation to the extent of property lending, over-lending, etc., because that would make then the Irish Financial Services Centre and the foreign banks that were there look like an offshore account. Isn't there still that contradiction there then?

Ms Ann Nolan:

Absolutely not, in the sense that first of all, the Central Bank no longer has that requirement but far more importantly, the regulation across Europe for all financial services has become far more strict and far more uniform, so the regulatory system to which the IFSC organisations are now subject is not lighter than the regulatory system in other countries. It is not a light-touch regulatory system and nor should it be. It is subject to the EU directives which are implemented in Ireland by the Irish Central Bank but implemented in other countries by their central banks.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I want to quote from you ... for you, something from the Irish funds industry marketing brochure from March 2015-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can you cite that Deputy, if it is part of the documents?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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No, but it's quite simple to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, fair enough.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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So the Irish funds industry organisation says: "We represent the fund promoters/managers, administrators, custodians, transfer agents and professional advisory firms involved in the international funds industry in Ireland, with more than 13,000 funds and net assets of more that €3.8 trillion." Then it goes on to say, "Through its work with governmental and industry committees and working groups, Irish Funds contributes to and influences the development of Ireland’s regulatory and legislative framework." Is that worrying, that a powerful lobby can say, in effect, on one reading, that they are writing the regulation for their own industry?

Ms Ann Nolan:

Well, they most certainly are not. I mean, I'm not responsible for what they say. They are free ... they're ... if you want to find out what they say you'll have to ask them, I can't answer for that but they most certainly are not writing their own regulation. The regulations for the fund industry are almost entirely EU regulations and are developed by the European Commission in conjunction with the European Parliament. We would consult with the funds industry as we would consult with any other group on those regulations as how they would affect them ... interest group. Most of our consultations nowadays are done on the web in ... by means of public consultations. But they do not write the legislation, it just simply isn't true.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, can I just move on then Ms Nolan, thank you ... and if you could comment please on the decision to nationalise Anglo Irish Bank. Why that was not taken the night of the guarantee rather than a few months later and what advice the Government received at the time in this regard? And if you could comment if, in your opinion, nationalising Anglo earlier would have sped up a resolution of the crisis?

Ms Ann Nolan:

Okay, just on the night of the guarantee, at that time I was not working on the banking side and was not involved and I can't comment on what happened that night at all. I was working on the emergency budget which, if you remember happened on 15 October and was working all that weekend all right but it was on a different topic. So I wouldn't be aware as to what ... why decisions were taken in that. I know Kevin Cardiff has already spoken on this and is in a far better place, and probably William Beausang as well, to give you commentary on that. On whether it would have made any difference, I honestly do not believe it would have made any difference but I can't prove that. You can only run life one way and you only get to see it once but I personally don't believe it would have made any difference on the speeding up of resolution.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I appreciate you weren't there on the night, Ms Nolan, but you are a very senior official in finance-----

Ms Ann Nolan:

Yes, and I did answer the second part of your question as to whether I thought in my opinion it would make any difference, and my opinion is-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, just to ask you if you might think it's curious that ... I refer to core documents Department of Finance Vol. 2, pages 116 and 119, but I'll quote, it's not necessary to follow it.

This is the advice from Merrill Lynch to the National Treasury Management Agency and the Department on 28 September, which is one day before the guarantee. And it is obviously in favour of what it calls "state protective custody" of Anglo Irish Bank and INBS, and it says on paragraph (b) there, page 116, "This could occur over a very short period of time ... within days, but the point at which it occurs it will not be of surprise to debt or equity investors as knowledge of the institution's financial position will be obvious and they should expect such intervention in the absence of a private-sector solution." And then, on page 119, under "Guarantee for six Primary Regulated Banks", it says, "This would almost certainly negatively impact the State's sovereign credit rating, and raise issues as to its credibility." That was the advice of the, one of these groups that the Government retained quite a bit. Does it surprise you, in view of that and in view of the fact that their prognosis about the sovereign being affected came true very strongly, that the comprehensive guarantee was still given - and, again, to reflect on the effect of that - as opposed to nationalising Anglo and INBS on the night?

Ms Ann Nolan:

Well, I suppose the one thing I will say is that nationalising Anglo, when it did happen in the following January, did not stop the outflow of funds in Anglo. So, the suggestion which seems to be in this document, that merely nationalising would stop all the outflow of funds from the system, our experience ... subsequent experience was not that that was the effect of nationalisation. So, you know, apart from that, that's really all I can say-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Just to move on to a different but related area, then, Ms. Nolan, on page 5 of your statement, yes, you said, "There was a great reluctance at European level...". We have moved forward to the October-November period of 2010, and approaching the crunch period and the so-called bailout, and you said, "There was a great reluctance at European level to allow the burning of senior bondholders." And that has featured here, but what is your understanding, why was there such reluctance, where did it come from and how was it conveyed to your Department?

Ms Ann Nolan:

Well, we were in discussions, detailed discussions with the Commission, the ECB, and the IMF, so it would be conveyed to us through the various officials ... to us, at official level, through the various officials of those organisations. It may also have been conveyed to the Minister separately, at Eurogroup meetings and so on. The reluctance was because of the contagion effect. They were very concerned that it would encourage or create difficulties in other states, for example, Portugal, Spain, Italy, where it might be seen that they were likely to burn bondholders less, and that you could create a run across Europe from the peripheral states into the centre ... in bondholders.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Ms Nolan, I'd be curious to see how ... how the information ... how it went back and forth between you yourselves and the European Commission and the ECB or whichever of your organisations. So this would be going on at the same time as Mr. Trichet was writing to the Minister for Finance and, you know, demanding certain courses of action. Would that then have been replicated in frequent phone calls or how ... between senior people in the Department of Finance and the European institutions?

Ms Ann Nolan:

Yes, I think there were ... at that time there were a lot of different meetings, okay. There was the discussions on the imminent bailout, EU-IMF programme, and I think Kevin Cardiff, in his long statement, probably far better than I remember, gives details of the various meetings that occurred, so I would have taken part in some of those meetings. But also, my colleague at the time who was in charge, our EFC member, would have been going to very frequent EFC meetings ... meeting his European counterparts at the European working group and so on. So there would have been a lot of interaction ... in fact, there is always a fair amount of interaction.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes.

Ms Ann Nolan:

And this would have been an issue, not so much a major issue of discussion and the agenda but a side issue that was discussed ... both at ... it was discussed at our meetings but it was very ... like ... you asked a question if we had-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Which of the European institutions was constantly in the ear of your colleagues or, indeed, maybe yourself, in relation to this?

Ms Ann Nolan:

Well, it wasn't constantly in the ear. I mean, we had some discussion on it and they just made their position very clear. It's not a question of that they wanted ... you know, their position was really clear. They didn't want this to happen. The ECB, the European Commission which would have been DG ECOFIN, probably at that time, who would have been very reluctant because they were afraid of the contagion across Europe.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Thank you and then on page 4 ... page 5 in your opening statement again, I'll just quote very briefly. It says:

Firstly in October and November 2010 when the guarantee had lapsed and the programme of assistance was being put in place. A number of [the] IMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo.

What do you know about this? What level at the IMF was this-----

Ms Ann Nolan:

I think the two people in question have actually said it publicly and they were Ajai Chopra and Ashoka Mody.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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So, would this have been seen as a very high level within the IMF? Were you aware of this at the time?

Ms Ann Nolan:

Oh yes, I was talking to both of them.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, and what authority did they carry within the-----

Ms Ann Nolan:

Well, they were negotiating the programme here and they were fairly senior people. I couldn't give you their exact grade or anything. I'm sure the committee could look it up.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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How did your Department react to this suggestion?

Ms Ann Nolan:

Well, certainly burning the senior bondholders in Anglo seemed, at that point, like something that we would be in favour of because it was very clear that Anglo's losses were irreparable and the State was basically on the hook for them. But we couldn't do it without actual backing from the IMF and the Commission and the ECB. I think if we-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What period are we talking specifically about here, Ms Nolan? That this discussion was taking place?

Ms Ann Nolan:

As I understand, we're talking about October 2010 but that's the-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, October-November.

Ms Ann Nolan:

Yes, October-November 2010.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. And can you throw any light then on further on what Mr. Cardiff said in testimony here, Ms Nolan, when he's speaking about pressures from certain quarters that no bondholders would be burned and he said that there was a real damage being done essentially by people operating behind the scenes:

[H]idden 'sources' were using leaks of inaccurate information to bounce Ireland into a bailout [...] then the people concerned were not just undemocratic, but anti-democratic - they ought to be asked to explain their actions, but they would first have to admit them. Who was in Korea, pretending to announce that the Irish Government had decided to seek a bailout? Who, in Korea or elsewhere, [and that's in relation to a G7 meeting, I think, that was happening] was taking these false rumours and putting them into the hands of press and financial commentators?

Can you throw any further light on this?

Ms Ann Nolan:

I have no additional knowledge to add to what Kevin has said about that.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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No.

Ms Ann Nolan:

I don't know what happened in Korea. I've never been to Korea.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, thank you. Now, just then on ... in relation to the veto on burning bondholders, can I ask you, Ms Nolan, it's core document Ann Nolan, Vol. 2 and it's page 19. This is a letter from Mr. John Corrigan, the chief executive of the National Treasury Management Agency, to Brian Lenihan, TD, Minister for Finance, dated 28 November 2010. And in the second paragraph, Mr. Corrigan writes:

I learnt during the course of the discussion [and that was a discussion at a meeting of the Government the night before which he attended] that the external authorities and the European Central Bank (at board or equivalent level) had taken the view that burden sharing with unguaranteed bank senior bondholders was "not on the table". It is unfortunate that, notwithstanding the fast moving pace of recent events, I was not made aware of this outcome.

Ms Nolan, is that an extraordinary revelation that the NTMA was again outside the loop which seemed to have happened the night of the bank guarantee as well?

Ms Ann Nolan:

It is unfortunate. The NTMA weren't outside the loop; they were at many of the meetings we were at. In that period 27-28 November, we had meetings night and day, I mean, literally 'til two, three in the morning. The NTMA were at some meetings. There were at some times five or six. I remember one of the Saturday nights there were five or six different meetings taking place at a technical level throughout the building. It was very unfortunate that John was not made aware of that but I rather think it was entirely accidental that people believed he had been told and that he wasn't told, rather than that anyone decided not to tell him.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, but could this potentially have changed something if the NTMA had been aware that they may have taken a different approach and convinced the Minster of a different course of action?

Ms Ann Nolan:

Absolutely not. I mean, I think the issue ... the NTMA and ourselves were ad idem to what we wanted, which would have been the burning of the bondholders and the question was that the European Central Bank that ... had taken a very strong line. The word came back to us at the last minute before the Government meeting and as far as I remember and it is a long time ago ... but it was unfortunate that John wasn't told but I don't think you can read anything else into it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Ms. Nolan, you deal in your statement with the recapitalisation of the banks and the dealing between the banks and the Department. Now, at one stage Bank of Ireland told you that it needed €2 billion. It finished up getting multiples of that. Allied Irish Bank said it didn't need as much support as both Anglo and Bank of Ireland and it finished up getting €21 billion. Were the banks straight with the Department or were they covering up or were they even lying some of them?

Ms Ann Nolan:

I think there's a few things you have to think about in this and it's something I've thought about quite a bit over the period since. I ... it's not a question of whether they were lying or not. First of all, the question is whether they knew themselves what their position was at the time. There is a question of what their position was at one point in time and the fact that the things deteriorated. I mean the drop in GDP in Ireland in 2009 was phenomenal. I don't think anyone at the end of 2008, which is the point where this is taking part, had any idea the extent to which the recession would be so deep as it was, particularly in 2009-2010. So, therefore, I think the capital needs grew over that period and so even if they were right in 2008 as to what they needed at that point, that point was not even allowing for what was envisaged as so-called stress tests wasn't sufficient when the actual stress was so much bigger than they were testing for. So I don't think there was a question of they told ... you know, in 2008 if somebody had walked into this committee and said, ''By the way, AIB need €20 billion'', everyone would just simply have said, ''You're mad; you can't possibly think AIB needs €20 billion'", you know, because there was no ... there was no facts on which to base such an idea. So I don't think it's a question that they lied, that they knew they needed the €20 billion and lied to us. I think it's a question that they didn't think they needed and, at that time, they didn't really need it. It was later they needed it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But, on the other hand, Ms. Nolan, from evidence we have here in front of the inquiry, we have shown and put it to witnesses that, on the night of the guarantee, particularly in the case of Irish Nationwide, it was insolvent in view of the figures that both Merrill Lynch and Goldman Sachs had presented.

Ms Ann Nolan:

You - the first question you asked me was about AIB and Bank of Ireland. Irish Nationwide, I think, is a slightly different case. I think, Irish Nationwide, there was greater evidence that they were in difficulty. But ironically, it took longer for it to manifest, partly because their deposit base was more sound and, therefore, they weren't as hit by the market walking away from them as some of the other banks.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Well, as a senior official and looking back at the evidence now, do you think that a different view should have been taken of INBS clearly from the figures we had, but also Anglo in relation to their state of solvency on the night of the guarantee?

Ms Ann Nolan:

I think technically, from an accounting point of view, they were probably solvent on the night of the guarantee, they just simply weren't able for the ... for the property collapse which, certainly by mid-November, was very obvious that year and had started well before that. So technically, being solvent wasn't sufficient.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Right. Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Kieran O'Donnell. Actually just before you ... just to clear up one thing with you, Ms. Nolan. You were saying to Deputy Higgins about the Central Bank and the relationship with regard to promotional services in the IFSC and how that now is separated and that conflict doesn't actually exist. Can I ask you to share an opinion or your own views as to, in the previous manifestation, as to whether that was a good operation or a good way to approach the promotion of the IFSC centre?

Ms Ann Nolan:

I think, in retrospect, it was probably a mistake to have it there but I wouldn't want to suggest that that was the reason that they didn't regulate the banks in the way that might have been appropriate because I don't think that. I think it's very easy to pick something like that and say that's the reason the problem existed, and I don't think that's true.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And how did the mistake manifest itself then? What were you ... what were the day-to-day occurrences that demonstrated that it was a mistake?

Ms Ann Nolan:

I think ... it's not so much ... it's almost a philosophical mistake that the regulator would be promoting the thing it's regulating. It's, kind of, what Deputy Higgins was referring to earlier. I don't think the regulator should be ... have a promotional role as a matter of policy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Kieran O'Donnell.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Welcome, Ms. Nolan. In January 2009 a meeting with the Department of Finance, the Central Bank and Financial Regulator and the NTMA took place to discuss the nationalisation of Anglo. And this is coming from Vol. 1, page 37 to 52, and Vol. 1, page 55 to 57.

Ms Ann Nolan:

Vol. 1 of the Department of Finance or my own?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, your own.

Ms Ann Nolan:

My own, okay. Vol. 1-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Ms. Nolan, yes.

Ms Ann Nolan:

-----page 37.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Fifty-two, and then following on to 55 to ... 37 to 52, about the recapitalisation of Anglo. At 55 to 57, about the nationalisation of Anglo.

Ms Ann Nolan:

Oh yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So please comment on what occurred between 8 January 2009, which is page 37 to 52, when the Government ... Irish Government formally notified the European Commission that they would be recapitalising Anglo to ... on 15 January, just over a week later, when you announced ... when the Government announced they would be nationalising Anglo instead. What led to the change of decision and what other options were considered and what advice was advised the Minister and the Government in this regard? So it's that critical week between 8 January 2009 and 15 January 2009, where you went from recapitalising Anglo to the tune of €1.5 billion to nationalising Anglo.

Ms Ann Nolan:

Okay, I have to be careful what I'm saying on this issue but, just to put in context, the chairman and chief executive of Anglo resigned on, I think it was 18 December the previous year. On the 21st we announced that ... we had previously announced that there was capital available, on the 21st we announced that it would be divvied up by, I think at that time, €2 billion each for Bank of Ireland and AIB and €1.5 billion for Anglo - any that were most in need of the capital ... of the three of them ... most immediate need. We had deep concerns about recapitalising Anglo without nationalising it, simply because of the issues that had led to the chairman's resigning. So we prioritised the due diligence of Anglo. We sent Arthur Cox in to do a legal due diligence to see were there any other issues which might have to be dealt with.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What date was that?

Ms Ann Nolan:

That was, I think, probably 22 December. Because ... and possible even the 21st, the day we announced it. Once we decided, we sent them straight in.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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To do due diligence on Anglo.

Ms Ann Nolan:

To do due diligence on Anglo.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Ms Ann Nolan:

In the meantime, we had to ready to do the recapitalisation if the due diligence came back and said, "Everything's wonderful, you can go ahead." So it was like we had two work streams, one looking at nationalisation, one looking at recapitalising. The recapitalising notion ... this paper that you ... on page 37 was on the work stream that was looking at the recapitalisation because we had to have that ready. Otherwise, you would be presenting the Government, when the due diligence came back, with a false choice.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What date would that have gone to the European Commission, Ms. Nolan?

Ms Ann Nolan:

I think it's dated-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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14 January.

Ms Ann Nolan:

-----14 January, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, therefore, this-----

Ms Ann Nolan:

The decision was taken ... we got the due diligence back on 15 January.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But you had a letter going to the European Commission-----

Ms Ann Nolan:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----on 14 January-----

Ms Ann Nolan:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----so why didn't you hold off until 15 January to write to the European Commission? It's only a day later. Why do we have a situation where you were recapitalising on the 14th and a day later you were nationalising?

Ms Ann Nolan:

As I remember it, and I ... you know, it's ... it's a long time ago, and it's hard to remember the exact details, but, as I remember it-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You would have been in charge at the time, would have been ... you would have been over that section, yes.

Ms Ann Nolan:

It would have been my area, yes, and I would have known it very well at the time, it's just memory can sometimes ... but, as I remember it, there was comeback dates for when the capital had to come in, how long it took the Commission to do their thing, and the 14th was the latest we could send it in. If we didn't send it in then, then the Government didn't have that ... you know, we'd be sending something to a decision ... for a decision for Government, where the Government didn't have the options.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why didn't ye-----?

Ms Ann Nolan:

So, it was a technical issue.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why didn't ye get onto Arthur Cox and say we needed due diligence back before the 14th? It's only a day of a difference.

Ms Ann Nolan:

Well, honestly, I think it wasn't ready and they weren't willing to sign off on it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So a day-----

Ms Ann Nolan:

As far as I remember, I mean, you know, that's the way I remember it, that the ... they were ... we were at them to bring it back and bring it back and bring it back, and the 15th was the earliest they could bring it back.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But ... so you were required to file with the European Commission on the 14th?

Ms Ann Nolan:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And the due diligence from Arthur Cox came back a day later?

Ms Ann Nolan:

Yes, but filing with the European Commission didn't commit us to anything. I mean, the Government didn't make the final decision to put in the money at that point.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes, but the perception was out there that, effectively, you were going to recapitalise Anglo rather than-----

Ms Ann Nolan:

Oh, we had announced it the previous-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----rather than nationalise Anglo.

Ms Ann Nolan:

Yes. We had announced it the previous ... on 21 December.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, would you have had any discussions ... interim discussions with Arthur Cox. Effectively, you're paying the fee to Arthur Cox, correct?

Ms Ann Nolan:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who were they appointed by - the Central Bank, the Financial Regulator, or the Department of Finance?

Ms Ann Nolan:

I honestly can't remember, Deputy. I-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But, ultimately, Government.

Ms Ann Nolan:

It was us, anyway; they were working for us.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Was there no discussions with them ... like, they were appointed on the 22nd. Was there no discussions with them, like ... I suppose-----

Ms Ann Nolan:

No, they had been working for us. They were working for us before that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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For someone looking in, would say that it does seem a bit unusual that you had Arthur Cox doing due diligence on Anglo, you put ... you've decided to recapitalise Anglo on 8 January; you wrote to this European Commission on 14 January; and then, the day later, you nationalised Anglo. So, it does ... why wasn't ... weren't you able to get to a point where, by the 14th, that you would have known from discussions with Arthur Cox that you were going to be nationalising Anglo anyway?

Ms Ann Nolan:

Well, the decision to nationalise Anglo was a decision of the Government, so we couldn't just decide. Even if we had informal discussions from Arthur Cox and were considering nationalising, as, indeed, we were because we were ready to nationalise, we couldn't just decide ... I think it was probably the 19th before they were actually nationalised. I ... we couldn't just decide that, and decide to put aside the other part of the work stream, I mean, if you're giving Government the decision, you have to be able to implement both options.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The decisions you took on the decision to nationalise Anglo on the ... page 55, 15 January, "The advice was given because a number of serious corporate governance concerns at Anglo, and because of Anglo's progressively deteriorating liquidity position." The governance issues-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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----- the page for me there ... please.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Page 55 and 56. The governance issues, Ms Nolan, were there since December, since the former chairman had resigned.

Ms Ann Nolan:

Have you-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm just being mindful of other matters taking place outside now and I'd advise Ms Nolan in that way.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, sorry ... the corporate governance issues clearly were there. Would you agree or not agree that they were there?

Ms Ann Nolan:

Oh, absolutely, I mean, that's what I said ... prioritising due diligence.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, nationalising wasn't around the corporate governance issue; it was to resolve-----

Ms Ann Nolan:

It was.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, it was there already in December.

Ms Ann Nolan:

I suppose our question in December: was this a once-off or was there more than one thing? I mean, an organisation can have a once-off corporate governance issue, and, if people resign, then you have sorted it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, then the final-----

Ms Ann Nolan:

I ... sorry, I really am uncomfortable-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The final question on this. Do you believe that, when Arthur Cox were appointed ... did you believe that, at that point, that Anglo would end up being nationalised?

Ms Ann Nolan:

I thought, on the balance of probabilities, it probably would.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Thank you. Can I go on to ... The evidence presented by NAMA to the inquiry referred to the interest roll-up of €9 billion on acquired loans, lending backed by paper collateral only, no equity, substantial issues relating to varying degrees of due diligence, and debtors' borrowing across the institutions. Can you please comment on the circumstance that resulted in recapitalising the banks without a full analysis of the banks' true loan books? Really, what, I suppose, that I'm saying-----

Ms Ann Nolan:

I'm not sure what you're-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, the question I'm saying ... you wanna let me ... let me put it the way I'd like to put it. The ... when it came around and the ... the PCAR test was done in NAMA in March 2010.

That gave rise ... in the follow-up, that gave rise to significant haircuts.

Ms Ann Nolan:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What due diligence, proper due diligence was done on the loans in the various institutions prior to that date to back up putting in State funding of the order you put it in, prior to the PCAR test in 2010? You put in €3.5 billion-----

Ms Ann Nolan:

The €3.5 million in preference shares?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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----- in the two institutions, money was put into Anglo at various times so why was it literally well over a year after the guarantee, in March 2010, when you got some recognition and, in fact, it was a second PCAR test in March 2011 that showed the true position? How were you able to stand over putting taxpayers' money into banks, based on what type of due diligence was carried out?

Ms Ann Nolan:

Okay. There was due diligence, some due diligence carried out and I suppose the PwC reports was the initial due diligence that we did and it did not go into explicit detail. I think, I suppose when you look at the position we were in, in crisis management in this area, the banking system in October 2008, which was guaranteed, was basically far too big for the Government, for the country. The banks were, you know, credit had grown far too much.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Let me put it another way in the limited time. Why wasn't proper or more detailed due diligence done significantly in advance of the guarantee being put in place?

Ms Ann Nolan:

Well, in advance of the guarantee, I wasn't there so... but in any case, I think Kevin and William have answered those questions.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But say, post the guarantee.

Ms Ann Nolan:

Post the guarantee? The reality is we did look, you know, the crisis was ongoing and we couldn't allow the ... we couldn't give ourselves the luxury of taking six months to look at every single loan because the banks might have collapsed in that time, which would have left every small business in Ireland without a proper banking system. So the first recapitalisation was done on the basis of relatively little due diligence in that sense, relative to whatever happened afterwards. But also, the position kept getting worse so even if we had looked at everything, a lot of the loans were perfectly okay at the beginning of 2009, they were very bad by 2010 or 2011. Things got worse over the period.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In hindsight, Professor Honohan is on record here as saying that he believes that the first real analysis of the state of loans was when BlackRock were appointed, in the PCAR test 2011.

Ms Ann Nolan:

Well, you know, hindsight is a great thing, if you have it but, unfortunately, you usually only have it about the past, not the future. In hindsight, it is easy say things could have been done differently but it wasn't possible at the time. I think, you know, the Central Bank itself had in 2008, the end of 2008, told me all the banks were solvent but, in reality, I don't think they had that much detailed knowledge of what was going on in the banks or, indeed, all the expertise they needed to do that. Throughout 2009, they revamped their system as well. By 2010, they were capable of doing a proper PCAR. I don't think they could have done the same PCAR in 2009. I don't think they had the expertise. So I think there is an element of that in what happened.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So was it a lack of expertise in the Central Bank and the Financial Regulator?

Ms Ann Nolan:

It was a factor but you always have to remember that the situation kept getting worse so had we measured accurately earlier, we wouldn't have got as big a number.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In your comment on page 1 where you say - this was at the time of the guarantee - "However, the liquidity problem was caused by the markets looking at future solvency."

Ms Ann Nolan:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you might just expand on that and can one infer from that statement that you believe on the night of the guarantee the banks were insolvent?

Ms Ann Nolan:

Oh no, they were solvent. I am talking about future. I mean the issue ... to be honest almost better than looking at all the loans, if you wanted to know in November 2008 what the real problem was, you just had to drive around Dublin and look at all the half-built office blocks and housing developments that had just stopped building.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That would not be sufficient now for due diligence, Ms Nolan.

Ms Ann Nolan:

I know it is not sufficient but it was actually a good indicator of where the real problem lay. The due diligence told you what those loans were and what the banks owed in them and so on. Even then, had they had the 25% equity they promised us they had in those loans, things wouldn't have been as bad. If you look at the haircuts for bank-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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This is what the banks were informing ye at the time.

Ms Ann Nolan:

At the time, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And that proved when the-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Deputy, don't make a judgment.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes. When did it arise, where you realised that wasn't the case?

Ms Ann Nolan:

When NAMA did their actual loan-by-loan due ... analysis, and it was a detailed analysis-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And why-----

Ms Ann Nolan:

-----before it got to that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, Ms Nolan, why wasn't that spotted with the various due diligence that were done by PwC and others prior to that date?

Ms Ann Nolan:

Because they didn't have the timeframe. I mean, when NAMA did its loan-by-loan analysis, they got into every single detail of that loan, including the legal documentation, the loan agreements and so on.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But surely ... surely equity-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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... sure.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But surely equity. Sorry, would it not as a normal form of due diligence, would an equity stake in a loan not be a normal question to ask as part of due diligence?

Ms Ann Nolan:

Well, they did ask and the banks were ... said they had equity. I know I spoke to the banks-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So then-----

Ms Ann Nolan:

-----and they told me they had equity in those loans.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, can we take it from that the banks were not telling the truth?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Don't be conclusionary now. Ask the question.

Ms Ann Nolan:

Or they didn't know.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Or they didn't know, okay. Can I ask, the issue in terms of the ... the discussions around, we'll say, with burden-sharing with the ECB and so forth, and I want to draw attention, Chairman, to Vol. 2, page 49, which is effectively a report that was commissioned by ... completed by the National Treasury Management Agency in March 2011, basically on burden-sharing for senior and subordinated. Now, in that report, they stated, "[D]epending on the eventual level of haircut applied to the senior unsecured guaranteed debt (senior debt) and subordinated debt, could give rise to a capital saving to the State of approximately €14.9 billion." So, I suppose the question I want to ask is can you tell me the various ... this was March 2011, the various discussions that would have taken place with the IMF, the European Commission over the period since '08 as to where this issue would have come up? Do you believe that if the US had not issued ... exercised their veto within the IMF in late 2010, do you believe that burden-sharing in terms of senior bondholders and subordinated debt holders would have arisen at that time?

Ms Ann Nolan:

Okay, in terms of burden-sharing, I certainly think, if there had been no veto, burden-sharing in Anglo would have happened. I think this document-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And how much would that have saved the State, the taxpayer?

Ms Ann Nolan:

I honestly cannot remember. That's a good question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But you-----

Ms Ann Nolan:

The Anglo-INBS figure is there actually ... it's there on page 53.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Sorry, it's here, yes, apologies.

Ms Ann Nolan:

Page 53.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes, it's-----

Ms Ann Nolan:

Yes, I think that's €3.6 billion-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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€3.6 billion.

Ms Ann Nolan:

-----would have been-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, in late 2010, if the IMF-----

Ms Ann Nolan:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----had not exercised their veto, you believe burden sharing, tax saving of just short of €4 billion would have arisen in Anglo?

Ms Ann Nolan:

I think that ... well, we mightn't have got it all, because you know the way this burden sharing works, but I think that certainly we might have got €3 billion out of the €3.6 billion.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. And in terms of ... and in that particular case. Just going back to the issue in terms of the loans, do you think in hindsight, and looking back, that you could have got to grips with the level of potential losses in ... or, sorry, the level of losses that were building up in terms of the loan book in the banks, earlier than you did? And how would you have gone about that?

Ms Ann Nolan:

It's very difficult to ... I mean, I suppose the problem with the banking system is that it needed to downsize very significantly and that downsizing, no matter what you do, takes time. If you look at the trajectory, you know, it was €400 million loans outstanding in '08 across the six institutions; and, 2010, there was €280 billion loans outstanding; and now it's down to, oh, about €172 billion and we're now at a loan-to-deposit ratio of about 112%. So we're probably around a sustainable level now across the three banks that are left. But that downsizing, could it have been done quicker? It might have cost the State a lot more if we did it quicker is the real problem because there's always a trade-off. If you sell everything very quickly, you get a less good price, so, you know, it isn't a given that doing it quicker would have things better. It might have made things worse.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And what would be your estimate, Ms Nolan, of what the cost of the guarantee, in terms of the recapitalisation of the banks, will be to the Irish taxpayer eventually?

Ms Ann Nolan:

Well, I think the long-term cost is the Anglo cost and we'll get our money back from everyone else but ... we might even make a small profit here and there, you know, €1 billion on NAMA, €1 billion on maybe AIB ... Bank of Ireland's shares. We might make a bit of profit eventually on AIB, I don't know, it depends on how we sell them and ... and how the timing goes and all kinds of other things in the economy. I think we'll get our money back from the living banks. I don't think we'll get anything back ... we won't get anything back from Anglo. That's just sunk money.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You don't see that arising?

Ms Ann Nolan:

Unfortunately.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And can I ask you, the ... just going back to the ... I suppose the issue in terms of ... are you familiar with IAS 39, the accounting standard in terms of-----

Ms Ann Nolan:

I wouldn't ... I'm not an accountant, I wouldn't have any detailed-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The question really, I suppose, is that, based on that accounting standard, there would be a view that it allowed the delay of losses from 2005 onwards. At the time, when you were looking at due diligence, did you receive any professional advice regarding ... that, from '05 onwards, that there was a change in the way losses were assessed in terms of audits of banks?

Ms Ann Nolan:

Yes, I think we got some advice, accounting advice, on the way audits were done but I wouldn't remember the detail of it now.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You wouldn't remember the detail, no, okay. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Michael McGrath.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. You're very welcome, Ms Nolan. Can I start by asking you, from 1998 to 2003, you were principal officer dealing with the IFSC, as I understand it?

Ms Ann Nolan:

That's correct.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can you outline your responsibilities and duties in that role, please?

Ms Ann Nolan:

Okay. I suppose the two ... the major things that were involved there was I was involved in the assigning of licences to IFSC companies which ... the last number of licences were done by competition, so I ran the competitions for companies that wished to get licences in the last two or three rounds of licences for the IFSC. And the other major piece of work I did in there was to integrate the tax system between the IFSC and the non-IFSC tax system because the IFSC had had a 10% rate, it was moving up to a 12.5% rate, and the rest of the tax system was moving down to a 12.5% rate, but there were a number of other aspects where the IFSC ... of the taxation where the IFSC was treated differently to the parts that were outside, so my role was to develop plans to integrate those two.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure, okay. You said in response to Deputy O'Donnell just a moment ago that the overall net cost of the banking crisis will effectively be the money put into Anglo Irish Bank. Can I just ask you your view on some of the work that was done in Project Atlas by PwC? I mean, for example, in February 2009, they produced a summary report of three previous reports that they had conducted into Anglo Irish Bank and they projected what the capital position of the bank would be on the various loss scenarios and they reached a conclusion, for example: "Under the PwC highest stress scenario, Anglo's core equity and tier 1 ratios are projected to exceed regulatory minima, (Tier 1 - 4%) at [end of] September 2010 after taking account of operating profits and stressed impairments." Now, when it actually came to September 2010, the losses in Anglo were almost €30 billion, so how can you rationalise that conclusion in early 2009 with the outcome of a loss and a bill for the taxpayer of almost €30 billion in September 2010?

Ms Ann Nolan:

I mean, Anglo surprised on the downside every time you looked at it for the entire period I've been dealing with it, I think I could say, and that's just looking at the losses. I think there were two aspects where they were wrong in ... not necessarily that they should have been right but, in retrospect. The first one was the issue we've dealt with earlier, the question of whether there was any equity at all in the loans and I think, if you were to ask me, Bank of Ireland did have equity, AIB had some and Anglo, as far as I could see, just topped up all the loans to 100%, or were lending to the borrowers in a different hat ... with a different hat on, so the loans effectively had almost no equity.

The second aspect, I think, where there's the biggest difference between the original PwC work and what actually happened is the assumption that the bank had a model that would continue to generate income. And the other banks, and the living banks, and the reason they're still living banks, had other business where they were generating income, whereas Anglo, this was all they did. Their model was broken and, therefore, there was no income to compensate, or to make up extra ... and no prospect of income to make up extra capital.

But looking back now, how would you characterise that report which, you know, essentially formed the basis of------

Ms Ann Nolan:

The original.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----decisions that Government were making and it was projecting-----

Ms Ann Nolan:

It was-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----that Anglo would, even in the most stressed scenario, would have achieved the minimum capital requirement by September 2010 and the outturn was a €30 billion bill?

Ms Ann Nolan:

Yes, extremely disappointing. I suppose there are two aspects to that question, Deputy. Obviously the question is could PwC have known better, and I'm not sure whether they could or not. Obviously it was wrong, and I remember at the time, if you look at the ... the first time I saw those reports, summary report, I think it was a bit earlier than the beginning of 2009, some time in 2008, so it was the banks' own projections and the PwC's projections which were stress 1, stress 2, and I remember looking and thinking, "Wouldn't it be wonderful if what happens is the banks' own projections?" Because you don't know the future at any given time, but thinking not very realistic. And then thinking that actually there was a real chance that things were worse than the PwC stress 2 because the economy, you know, with the other side of our hat we were looking at the economy, looking at having done a budget in October, which I was involved in, October 2008, which was out of date already by January '09. So you, kind of, looked at that and thought, you know, "It might be worse than they're saying."

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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In September 2010 the Government made a decision on the strategic future of Anglo to separate it between a funding bank to hold deposits and an asset recovery bank. What other options were being considered at that time, because we know the management of the bank, for example, were putting forward an alternative model which would have seen a surviving bank emerge, as such, from the carcass of Anglo, so what options were the Government considering in the autumn of 2010 for the future of Anglo?

Ms Ann Nolan:

I think by the autumn of 2010, we realised in 2009 when, as we went through the year as the losses in Anglo accumulated, that there was a very serious long-term problem with the operating model of Anglo. The new management team had tried to get a business plan for an ongoing bank which would work, and we looked at those, I think in August 2010, as best I remember it, in conjunction with the Central Bank. In the meantime, their funding model was, you know, they were just ELA almost entirely, and as every piece of their funding rolled off it was replaced by ELA, so they had a huge funding problem. And the new bank just wasn't to my mind - that they were proposing - wasn't to my mind - and we did look at it seriously, but it wasn't actually fund-able in terms of ... it didn't have a business plan that you could convince the ECB or the markets was a funding model going forward. So, that option was looked at and decided against. The twin-track approach was on the basis that we were under the impression, which turned out to be a misapprehension, that the ECB was willing to fund the funding bank, so-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Ms Ann Nolan:

-----the decision, actually, was never implemented because the ECB didn't ... or say they hadn't agreed that. I think there was a misunderstanding.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And then if I take you to January of 2011, and it's in core booklet Vol. 1 of your own booklet, and this is a note on the sale of Anglo and INBS deposit books.

Ms Ann Nolan:

Sorry, what page? Sorry.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sorry, 123, page 123 of Vol. 1. So it's a note for the Minister on 28 January 2011, and this is when the sale of the deposit book for Anglo and INBS was being examined and there seemed to be an amount of pressure from the troika to press ahead with-----

Ms Ann Nolan:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----the disposal of the deposit books as well. Even though, on the top of page 124, it says, "As yet we do not know how to remain in combined entity is to be funded", and yet there seemed to be pressure to proceed on that basis. But, subsequently, on page 126, it says, "Anglo has requested us to consider an "orderly" sale process rather than the more immediate sale process currently envisaged." Is that a reference to the deposit book or to the overall wind-up of the bank?

Ms Ann Nolan:

That's just the deposit book.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. So they were disagreeing with the approach of-----

Ms Ann Nolan:

They took-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----the Government to sell the deposit book, which actually happened subsequently in February 2011.

Ms Ann Nolan:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The deposit book of Anglo and INBS was transferred-----

Ms Ann Nolan:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----to AIB and Irish Life and Permanent.

Ms Ann Nolan:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And what was their logic in opposing that strategy?

Ms Ann Nolan:

It's hard to tell and maybe you can ask them when you have them in.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, we will.

Ms Ann Nolan:

My own view would be that they felt, once the deposits were gone, there was no possibility of resurrecting the bank.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Right. So even at that stage they were still holding out the hope of resurrecting a surviving bank from Anglo?

Ms Ann Nolan:

That would ... I mean ... that's what I would have thought, but I mean I'm ... I'm only supposing.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. We heard from Governor Honohan last week that by November 2010 the total amount of ECB support for the Irish banks normal liquidity and ELA was €131 billion, of which ELA was €45 billion. He said that the ELA was effectively State guaranteed, that it was underpinned by some form of a letter of assurance-----

Ms Ann Nolan:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----from the Minister. Is that the case?

Ms Ann Nolan:

That's true, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So, there was an effective State guarantee in place of €45 billion of ELA to the ECB-----

Ms Ann Nolan:

In effect, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----in the autumn of 2010.

Ms Ann Nolan:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And what was your view of the first letter received from Mr. Trichet then in the middle of October 2010 where, effectively, he's saying, "Look, you can take this extraordinary level of ELA support for granted." And he's quite explicit, and of course we know where all of that let to eventually. But what was the view within the Department of the ELA being highlighted in that manner and the way in which it was put by the ECB?

Ms Ann Nolan:

The letter was unhelpful. I mean ... and probably unnecessary. I mean I think, it was designed to push towards getting into a programme, which probably was necessary at that point anyway, and I don't think we needed to be pushed. I think it was more to do with negotiating tactics than anything else.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can I stay with that for a moment, if you don't mind, Ms Nolan, and put the question to you because from our understanding you would have been very much involved with the kind of day-to-day financial situation as we move from the guarantee towards the bailout, and you would have very intimate knowledge as to what was happening in Government and Finance at that time. So could I put the question to you, and it follows up with what Deputy McGrath was saying, is that the structure, or design of the bank guarantee along with its period of duration, have any bearing on the Irish State entering a bailout programme two years and two months after the guarantee?

Ms Ann Nolan:

It was one of the factors, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In what way?

Ms Ann Nolan:

There was a funding cliff because the structure of the guarantee was for two years, there was a funding cliff, and on top of that when we looked for extension of the guarantee - I think it was that June from the Commission - they were late in giving it to us, and that in itself reinforced the funding cliff. So there were ... it wasn't just the guarantee itself, there was other things which contributed to that, but certainly that was a factor. It was a factor in the ELA being as big as the Deputy just pointed out.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And in regard to Mr. Trichet's letter that Deputy McGrath referred to, prior to that - or in or around the same period as Minister Lenihan's letter of 21 November 2010 - when that letter was written, were Irish banks that were covered by the guarantee still solvent and, therefore, qualifying for ELA funding at the time of that letter, in your opinion?

Ms Ann Nolan:

Oh, they were solvent, but they were solvent ... like, Anglo was solvent because the Department ... because the Irish State was standing behind it, so they were solvent, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And if the Irish State was not solvent were the banks still solvent?

Ms Ann Nolan:

I think the Irish State was solvent.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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At that time?

Ms Ann Nolan:

At that time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. So, just coming back then finally to Mr. Trichet's engagement with the inquiry where he talks about this period, and Mr. Cardiff in his witness statement referring to the Jean-Claude Trichet letter, says in many ways the letter the entirely superfluous since it was already clear by the time of the letter that the Government was going to opt into a bailout programme. Would you be of the same view that the Government was preparing to opt into a bailout programme at that time?

Ms Ann Nolan:

Sorry, which ... which of the letters are you talking about now? The second letter?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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This is Mr. Trichet's letter. Mr. Cardiff in his testimony to this inquiry-----

Ms Ann Nolan:

Yes, no, there were two letters from Mr. Trichet, certainly-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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19 November.

Ms Ann Nolan:

Oh yes. At that point I think it was inevitable; we were in the middle of negotiations, and I think the letter was superfluous, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Ms Ann Nolan:

But annoying at the time for the Government.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. When Mr. Trichet was, as I say, at the IIEA event in which the inquiry engaged with him, speaking on the same issue, he says:

[As] you know, we could [have almost] continued on our side ... having gone up to 100% of ... GDP ... to 200% of ... GDP [this was with regard to the ELA funding that was coming into the country], and why not 300% of ... GDP? [That would] Then what would ... the commission [of] inquiry [be] asking for? [Talking about this inquiry, as to what would be our purpose] You would say, "Were you totally crazy at the ECB to continue, when you were going to the wall at 100 mph, to continue to provide liquidity and liquidity and liquidity?"

So could I ask you, Ms Nolan, was Mr. Trichet right? If this action hadn't happened and entry into the programme had been delayed, would the cost of the bailout have even been bigger for Ireland?

Ms Ann Nolan:

Well, of course, you know, you can't do things ... you only get to do things once. You don't get to try them out for several days.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, and we learn from what we do wrong.

Ms Ann Nolan:

But just ... just to answer the question, I think ... I mean, to an extent, I thought some of what Mr. Trichet said in his evidence or non-evidence, to the inquiry was a little disingenuous. I mean-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Ms Ann Nolan:

-----I think, when you look at monetary policy by the ECB-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I can get into all of that with you later on and-----

Ms Ann Nolan:

Yes, okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----you'll have plenty of time in the wrap-up-----

Ms Ann Nolan:

But do I think it would have cost more? I've no idea whether ... you know, I mean, the reality is we were moving towards a bailout before he wrote that letter.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Can I just come back to an earlier ... it was relating to Deputy O'Donnell, and that is on the issue of Anglo, and Deputy O'Donnell was taking a line of questioning with regard to the whole due diligence issue. Kevin Cardiff, when he was here, suggested that nationalising Anglo would be difficult due to the legality of the bondholders. So how, all of a sudden then, was this not a problem once the due diligence was actually completed, by your own engagement this morning?

Ms Ann Nolan:

Sorry, Kevin said what?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Cardiff was saying that the nationalising of Anglo was difficult due to the legality of the bondholders, that there was constitutional issues and so forth, but taking your own testimony this morning, you were saying once the due diligence was completed, this didn't seem to be a problem anymore. How did due diligence take this off the agenda?

Ms Ann Nolan:

Well, there were ... there two aspects ... legal aspects. I mean, the legislation was ready, I think, and could be made ready very quickly in terms of ... that was ready, I think, at the time of the guarantee, in that nationalisation, and that legislation was ready to go. Part of the due diligence we did in Anglo before we nationalised it was looking at all the bond agreements to make sure there were no clauses ... there were some of the clauses that had to be bought out just before the nationalisation, you know, in terms of swaps and these kind of things, technical stuff, and that ... you know, you need to do that stuff before you nationalise, and we did do it before we nationalised.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right. I just want to just pursue a different line of questioning with you for a moment, Ms Nolan, and then we'll return to the question list. It's the ... and I'm bringing it up on the screen here. It's an economic management paper, 10 October 2012, which would, I'd imagine, have been a very top drawer, top secret document at the time in the-----

Ms Ann Nolan:

It was, yes. What book is it, do you know?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's coming up on your screen in front of you. It's from ... it's witness book Ann Nolan, Vol. 2, pages 85-87. Okay. Now, if I can just scroll down this a moment, and while it's being done, maybe to a page ... it's the third page of it, it's the last footnotes of it here. But in doing so, as I'm pulling that up, by March 2012, it was becoming clear within the Department of Finance that a longer term restructuring solution was needed to the promissory notes which had been provided to IBRC. The paper was produced in October 2012 for the EMC. This proposed replacement of promissory notes with longer terms bonds over maybe a 30 to 40-year spread, however the view was that this would require liquidation of IBRC to allow this to be acceptable to the ECB. Now, what I'm trying to do here is to get an understanding as to who was responsible for the strategic planning of the balance sheet impact of the banking crisis and also to establish with you the level of assistance and co-operation the Department of Finance received from the European Central Bank and Central Bank of Ireland during the crisis plan and implementation of putting in a solution. So, in this regard, who originated this idea and what level of co-operation was evident from the Central Bank of Ireland and the ECB to investigate, discuss and cost alternatives and can you also describe the interaction and level of co-operation between the Central Bank of Ireland, the EMC and the European Central Bank and your Department to work through this proposal?

Ms Ann Nolan:

Okay. This proposal ... I suppose, it goes back to what we were talking about earlier about moving all the deposits out of Anglo and INBS and then the following summer we amalgamated the two of them. Now, we then had, effectively, a run-off vehicle with very big European funding which was rolling on a two-week basis, which was very unsatisfactory. At the time of the guarantee ... at the time of the bailout, which would have been November 2010, there was some discussion about how the long-term funding of Anglo ... but no conclusion was reached at that time. So we had various options after we had amalgamated the two of them in summer of 2011. Various options were discussed, many of which didn't make very much sense but, from our own point of view, those discussions with the troika were very important because we knew we needed to get some resolution which would give long-term, not two-week funding, that we couldn't have a vehicle there ... you know, effectively for us, a priority was fixing it up or having a long-term solution before we left the programme. While you were in the programme, you had a kind of certain protection from the markets but you wouldn't have that when you left the programme so it was quite important to look at that. So it was, I think ... I genuinely do not remember who first suggested it, but I think it was at some meetings at the very beginning of September 2011, no, 2012, when the liquidation of Anglo was first discussed and suddenly it became possible because, because it's kind of almost legal theology that the ECB had, this was a more attractive solution to them than the other solutions we'd been putting forward. And it was ... had huge attractions to us as well, in that it would, effectively, remove Anglo or IBRC from the landscape, which was causing so much trouble for everyone. So we entered into discussions fairly intensively starting at the very beginning of September 2012, ourselves, the Central Bank and the ECB.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And maybe you could just paint a picture as to what the difficulties were, if I can maybe draw your attention there to the very bottom of the page, where it says:

[The] Net book value of customer loan book per IBRC 30 June 2012 accounts [one, they had] €15.6 billion. Total ELA funding at the end of September ... (as advised by [the Central Bank]: €40.6 billion. The Promissory Notes and NAMA Bonds are pledged against €24.4 billion of this €40.6 billion of funding. Additionally, €3.7 billion of funding has been provided [in] certain loans (nominal value [of] €5.4 billion). The balance of ELA funding (€12.5 billion) is made up by the Ministerial Guarantee.

Ms Ann Nolan:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Is that a summary of the type of sums that you were dealing with and what you were trying to unravel?

Ms Ann Nolan:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Ms Ann Nolan:

We were trying to get this ... all these various elements. We needed to make sure the Central Bank was whole, because you couldn't leave the Central Bank with a deficit in it. We'd only have to make that up ourselves. We needed to make sure that the ELA was gone out of the system because that was the objective of the ECB in getting involved in this. We needed to make sure that the promissory note payments were put on a much better position ... a better schedule for the Irish Government so that when we were going back into the market, we wouldn't have this huge borrowing requirement for the promissory note, which would damage our capacity to do business in the market. So they were our ... you know, the solution we got met most of those objectives.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And if I can just go back to the very first page of that document there, Ms Nolan. It's point B at the end of the page and it says, "However, replacement of the Promissory Note with shorter-dated Government bonds would negate the benefit [of] the State and create a 'funding cliff'"-----

Ms Ann Nolan:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----"in the near term, thereby severely hampering the State's ability to re-access debt markets, as the Irish market lacks capacity to absorb additional shorter[-term] dated issues."

Ms Ann Nolan:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What was the thinking in terms of the co-operation that was going to come from the ECB and other agencies in getting over what was probably this ... summarised as the hurdle that had to be cleared?

Ms Ann Nolan:

Well, I suppose, you know, you had ... we were ... you see it in the next paragraph, we were looking for a single 40-year bond which would be perfect, but, obviously, it wasn't a realistic ... it was our negotiating position. Their negotiating position was shorter dated ... very short-dated Government bonds. The negotiation went on for a period. We ended up with, I think, a reasonably ... one that was certainly a lot closer to what we were looking for than what they were looking for. We ended up with a position which we were all happy with.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And just moving onto the next page-----

Ms Ann Nolan:

Or maybe, in fairness-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry.

Ms Ann Nolan:

-----was unanimously noted by the ECB.

I think that they would never say that they're happy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, but what level of entertainment were they giving the 40-year proposal?

Ms Ann Nolan:

Well we did get some 40-year bonds, so, that's how ... yes it was a good deal.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And just moving on to point 9, and this will be my final question on this issue, it says, "If [the fair value of NAMA pays for the assets sorry, if] the fair value that NAMA pays for the assets is at a significant discount to the net value of to the assets at IBRC [this is the relationship now of NAMA and the loan book of what was formerly the Anglo Irish Bank], this may create a capital shortfall for the [Central Bank of Ireland] arising from the sale, [from] which the State would ultimately be liable as a result of the Ministerial guarantee." Can you explain to us what that actually means there?

Ms Ann Nolan:

Okay ... well, when we liquidated we didn't know we could sell all the assets. So, if the assets sold or ... the assets would be transferred to NAMA ... What happened was, the flow ... the Central Bank had a floating charge on the assets; the floating charge was sold to NAMA in return for NAMA bonds, so then the Central Bank had NAMA bonds. So the Central Bank was okay from day one, it had NAMA bonds and they were Government-guaranteed NAMA bonds. The floating charge then went to NAMA. All the assets were then valued, the valuation, the NAMA valuation set a floor. They couldn't be sold for less than that. If the sales process had bids for less than that, they go to NAMA at the NAMA valuation. In the event they were all sold for more than the NAMA valuation so it never arose. But in the ... had it been that the NAMA valuation added together for all the assets and none of them had sold to the private sector and the NAMA valuation was less than the floating note charge, we could have been left with a ... with a bill, and that's what that is referring to. But that did not happen.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. So just to come back to maybe to summarise my very, very first question to you, all of these details very, very big numbers, very big sums, very difficult detailed, complexed issues to be unravelled to try and create another type of solution or another type of approach. Who originated the idea, and if you could maybe summarise again as to what level of co-operation was evident coming from the Central Bank and the European Central Bank to discuss and cost these alternatives?

Ms Ann Nolan:

Okay, well, as I say, I can't quite remember who suggested the idea but most of the work for it was done in the Department. We seconded ... corporate bankers from AIB, who weren't very busy at the time ... a team of corporate bankers into the Department, and had them working directly on my team there, to look at all of these very complex details. And they did the planning for us in co-operation with the Central Bank of Ireland who co-operated very strongly and in negotiation ... technically, the ECB weren't negotiating with us; technically, this was a deal between us and the Central Bank of Ireland, but, of course, there were technical discussions between my team and the ECB on several occasions. The ECB, I think, blew hot and cold on it. There were people within the ECB who felt it was a good deal and should be done; there were people within the ECB who felt it was, you know, not such a good deal and maybe shouldn't be done. But the ones who wanted to do it were the ones whose view prevailed in the end, thank God.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, thank you. Senator Susan O'Keeffe.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Thank you, Chair ... sorry, Ms Nolan. From 2009 to May 2010, what was the Department of Finance doing to ascertain the true state of the banks?

Ms Ann Nolan:

From 2009 to May 2010?

Ms Ann Nolan:

Okay ... first of all we were dealing with the various issues which arose around setting up NAMA. We were dealing with the aftermath of the PwC report, which was putting in the preference shares into Bank of Ireland and AIB. We were not doing due diligence on the banks themselves, we felt that was for the ... Financial Regulator's job to do-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Even, even though, even though, arguably, the Financial Regulator's due diligence had not been, if you like, as complete as it might have been, that was clear already in 2008, so why would you still have taken that position in 2009?

Ms Ann Nolan:

Well, the ... to be fair to the Financial Regulator, they were, they were gearing up their system to do the PCAR. Like the PCAR 2010, they were recruiting people and so on and ... you know, for us to do a parallel recruiting system, because, you know, we are not the regulator, we wouldn't have the expertise to go in and actually look ourselves at the regulation-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But does due diligence in that sense in the state that we were then in ... does due diligence fall under regulation at that point when in fact what you want is information and knowledge so that you can make further decisions?

Ms Ann Nolan:

Well, establishing the capital needs of the banks falls under regulation, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. So, so the regulator was doing that, so what else were you then doing in the Department?

Ms Ann Nolan:

Well, the biggest single job was the legislation on NAMA in 2009, which was a huge piece of work, and the parallel agreement with the European Commission on how the NAMA loans would be valued and the setting up of NAMA as an organisation. So it was ready to go and had it's first piece done by the beginning of 2010, that was a huge piece of work which the Department did in the period and which I was ... spent a lot of my time on.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Would you agree with Professor Honohan's evidence when he was here last week, its on page 29 of his evidence. He says:

when I came in 2009, I realised that nobody was particularly concerned about Ireland [and I'm editing slightly] there was a sense that we were okay. ... But it was really the change in attitude in August of 2010 ... and, in September [that] we were absolutely in the centre of attention.

Do you think that that's how you recall it or is that just his view?

Ms Ann Nolan:

Well, obviously, it's his view.

Ms Ann Nolan:

I'm not sure who he means by nobody.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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He's talking here in the European context-----

Ms Ann Nolan:

Well, in the European context, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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-----that, if you like, in Europe, that nobody was really looking at Ireland. They weren't worried.

Ms Ann Nolan:

I think that's possibly true. I mean, I think, in 2009, if you look across Europe, there was a fall in the growth level in every single country and people were looking at themselves and trying to deal with their own problems, the fallout from the crash in autumn '08 was being dealt with throughout the system, and it probably is a fair comment that it was 2010 that pressures built up again across the system. I think the Greek problems ... probably not best ... in early 2010 started people looking at other countries in the periphery.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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In Vol. 1 of your book, its on page 28, "The PwC report ...look[s] at the trends in these capital ratios for the next two years, starting with forecasts provided by the institutions, and show that the institutions are currently forecasting operating profits well in excess of loan impairment levels."

Ms Ann Nolan:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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That was dated November 2008. So, was that a valid observation there? Operating profits well in excess?

Ms Ann Nolan:

Well, that's what they were forecasting. I mean, it's not what happened but it's what they were forecasting, I'm sure that's true.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So what does that tell us, about, I mean this is in-----

Ms Ann Nolan:

It tells us like ... it tells us that in the autumn of 2008, nobody knew how bad it was going to be. I mean, the fall in the GDP throughout Europe in 2009 was one of the most deepest recessions that ever happened, you know, I mean, once you have a deep recession, banks do not make profits.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But, but if you looked at the, at the forecasts for ... even for tax revenues in Ireland between June 2008 and October 2008, that was just going one way, it was going from €3 billion to €5 billion to €6 billion. That's true isn't it, I mean we have the documentation that shows that?

Ms Ann Nolan:

I think you mean the deficit in tax revenues, if tax revenues were going that way we'd have been fine ... but, yes, I agree they were.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes, so that was going one way and unlikely to suddenly start recovering-----

Ms Ann Nolan:

Well, it might have stayed like that, rather than kept going down-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Did anybody really think it would? Given the state of the banks, given the state of the world economy-----

Ms Ann Nolan:

I mean, I think the ... if you look at the forecasts done in the autumn of 2008, I don't necessarily have them with me, from the various people, they all were predicting 2009 to be bad, I don't think any of them to were predicting it to be as bad as it was. I mean, you know, I'm not trying to justify what the banks were forecasting for themselves in autumn 2008. Obviously, it turned out to be wrong. I'm merely saying that it was their forecast at the time.

Ms Ann Nolan:

I mean, that's what the document says.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes, and the question is, how, you know, how can we ... how could those have been relied on to the extent that they appear to have been relied upon, when all around us, you know ... we're losing our heads, so to speak, everything was going one way-----

Ms Ann Nolan:

But, but they weren't relied on-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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-----and yet one could look at these and say-----

Ms Ann Nolan:

If we believed them, we wouldn't have given them any capital and we gave them €3.5 billion in preference shares. I mean the reality is we didn't believe-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Well, this is the letter to the Minister, confidential and commercially sensitive, written by ... the Central Bank. Why on ... I mean, if it's not to be believed, then why were we ... why was Mr. Lenihan receiving it as a confidential document-----

Ms Ann Nolan:

Well, I think, if you look on page 30-----

Ms Ann Nolan:

You'll see in the summary at the end ... what John Hurley and Jim Farrell were actually saying is:

The above scenarios are predicated on a number of capital assumptions outlined in Section 2 above and the caveats set out in the report. While the assumptions used by PwC are challenging, they must be seen in the context of considerable uncertainty about the prospects for the economy; and indeed an even more pessimistic economic outturn cannot be ruled out.

So, I don't think, you know, at that time anyone was suggesting that this was the bottom and the worst-case scenario.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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You referred earlier on to that expression "the living banks". So, when did Anglo die?

Ms Ann Nolan:

I think the decision to wind it down was taken in August 2010.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, but when did it really die?

Ms Ann Nolan:

Well, I suppose, technically, it really died when we liquidated it in February 2012.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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2013.

Ms Ann Nolan:

2013. Sorry ... that's bad. Thank you, Deputy.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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At the night ... during the time of the bailout, when Patrick Honohan went on "Morning Ireland" on the morning of 18 November, what was the reaction among officials like yourself to that interview?

Ms Ann Nolan:

It was very Patrick. I ... you know, in some ways it made no difference because he was pre-empting the Government's decision. I think it probably was unhelpful to the Government but I don't think it really changed anything. It was probably unhelpful to our negotiation position, which was probably our immediate reaction, if I was being really honest about it, because for us at that point, down in the trenches, we were more interested in the small print of what was being agreed. You know, what are we committing to, is it things we don't want to take off it? You didn't want someone coming along pre-empting that. But, even in that, I'm not sure if it really made any difference. It's more an emotional reaction when you're very involved.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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You were obviously involved, as you said, very close up from the beginning ... from 2008 right through. How early on did you believe Ireland would need a bailout? Because Patrick Honohan suggested he had a conversation - albeit a small conversation - with Minister Lenihan in April of that year, suggesting that there might be. Did you have a view yourself?

Ms Ann Nolan:

I think ... I mean, I would've been aware that somebody had mentioned it and ... probably by May anyway, that year. And I don't think I remember having a conversation with Patrick about it particularly. I think we were looking at how it could or couldn't be avoided and whether it should or shouldn't be avoided because there's two aspects to that. At a certain point of stress, you might be better off in a programme, you know, provided you could control what the programme was forcing you to do. In other words ... and certainly by that August we were working in the Department very much on the national recovery plan, the four-year plan, because we wanted to make sure that if we entered into negotiations, that we had a version up front, ourselves, of what we wanted out of them. In other words, that we weren't in a position where the IMF was coming in and making it up ab initio.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And finally, if I may, Chair, when you came into the job in early November 2008, how - if you look back - how would you describe what you found ... if it was, sort of, in between chaos and a lack of information at the very one end and extremely organised and loads of information at the other end? Where was it when you arrived? And what did that mean, then, for you?

Ms Ann Nolan:

It certainly wasn't chaos, okay. There was some information but probably not as much as we needed and it was coming in fairly slowly. So I think that's-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Have you got one more, have you?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Sorry, I thought that Ms Nolan was going to continue speaking there.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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She can if she wishes.

Ms Ann Nolan:

I'm fine.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Deputy John Paul Phelan.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Good morning, Ms Nolan. Firstly, actually, did you see the evidence of Mr. Cardiff on his two-----

Ms Ann Nolan:

I saw bits of it and not all of it. It was quite a long ... several sessions.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It was. Can I ask, were you aware ... he outlined to the committee that a number of people and individuals and institutions had come to him and others making suggestions about the need for either a political guarantee or a guarantee months in advance of the actual night that the guarantee decision was made. Were you aware of that at the time or was-----

Ms Ann Nolan:

No, I wasn't aware of it at the time.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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He also indicated that at a similar time in 2008, far in advance of the actual bailout, which came at the end of 2010, that he and a group within the Department were involved in examining, shall we say, the possibility of a bailout. Again, were you party to it or were you aware-----

Ms Ann Nolan:

Is this the Johnny Logan group?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well, there was two groups. I'm not sure if this was the Johnny Logan group or the other ... there was two groups that he mentioned. But were you aware of it or were you party to it?

Ms Ann Nolan:

Yes. I would have been involved in any groups that existed.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You were in the Johnny Logan group?

Ms Ann Nolan:

Yes. I attended a few meetings, anyway, of the Johnny Logan group. I'm not sure there were ever ... if it was ever formally-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Christened?

Ms Ann Nolan:

Christened. It was informally called that.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And was that group actually active at the time of the ... when did it become active-----

Ms Ann Nolan:

Of the bailout? I think it was ... it was beforehand and I genuinely can't remember when the meetings were. But it was looking at ... you know, one of the things we had going for us at the time - and, in the end, it may not have mattered that much - we had a fair bit of cash in hand with the NTMA, which certainly helped our negotiating position. And we also ... you know, what we were looking at is were there other places where you could get cash. But we were never ... in the event we had the bailout agreed before we were in a position where we were actually looking for cash in any desperate way. And I think, in retrospect, that was right. We should have ... it's much better to negotiate from a position where you're not desperate.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ask you now again ... and I don't want to re-cover ground that's been already covered but there's a question that I must ask you in relation to the analysis and due diligence that was carried out on .... to identify the amount of €3.5 billion in capital for AIB and Bank of Ireland in February 2009. Why did the Government proceed with this amount for AIB given that it was clearly outlined that this amount was insufficient to meet their capital needs, with AIB ultimately requiring in excess of €20 billion?

Ms Ann Nolan:

Well, at the time our assessment was that AIB needed about €5 billion or €5.5 billion ... somewhere between €5 billion and €5.5 billion. And we gave them €3.5 billion on the understanding that they would sell their Polish and US subsidiaries to make up the difference.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Now I want to turn to the issue of capitalisation ... recapitalisation in general. And I've referred already ... you actually said in your opening statement that it became clear that the banks' managements had differing views on the need for capital in their institutions. Can you briefly outline what those differing views-----

Ms Ann Nolan:

This is at the initial position?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.

Ms Ann Nolan:

Yes. I think Bank of Ireland were the most realistic. I mean, I think very early on they told us that even if, technically, they could do a projection that showed they wouldn't need capital, they felt for the markets to really have faith in them, they needed probably €2 billion extra capital. And AIB told us they were the alpha male that didn't need any capital. And ... sorry that's a bad expression ... they were, you know, well able to cope. And Anglo told us that the private sector would give them capital. The first time I met them I was stunned at the amount of capital the private sector was going to put into them. But, of course, it never materialised. I mean, you knew it was-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I was just going to turn to the Bank of Ireland question because we have minutes - and I've referred to them in evidence - from Mr. Cardiff from 13 and 17 October 2008, where they were discussing at board level that ... the need for a taxpayer injection - actually, not just a recapitalisation but a taxpayer funded one - and on 17 October, one of their minutes said "it would be inappropriate to push the Government at [this] time, as the Exchequer budget was due to be announced the following day." Would you have been aware, and when did you become aware - because I think you indicated that you were - that, internally, Bank of Ireland were acknowledging the need for taxpayer capital?

Ms Ann Nolan:

I think it wasn't ... certainly not at that point because in October I was working on that budget, on the spending side, so I was not aware of what Bank of Ireland were or weren't doing internally. But-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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They didn't, like, in their initial discussions with you say that-----

Ms Ann Nolan:

I'm trying to remember-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----or flag it.

Ms Ann Nolan:

-----it's very difficult. I think it was probably the beginning of December that it was flagged by Bank of Ireland to us. And they were looking for preference shares of some sort.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I now want to turn, actually, briefly - because my time is getting brief - to your previous role in relation to the IFSC from 2000 ... or 1998 to 2003, I think, you were involved-----

Ms Ann Nolan:

Yes, that's right.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----in that function.

There's an oft-quoted article by my colleague Deputy Higgins, which he didn't refer to today, from The New York Timesin April 2005 - which admittedly was just after you would have left the role; it would have been referencing the time that you were there - when they described the IFSC as "the Wild West" of finance. Was that a fair description of what you saw in your time when you were with the IFSC?

Ms Ann Nolan:

Absolutely not.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Where do you think that they, I suppose, drew that from exactly?

Ms Ann Nolan:

No, I think it's to do with the 12.5% tax rate. I really don't know; you'd have to ask them. I haven't even ... I probably saw it at the time, I don't remember the article-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was there a reaction in the Department of Finance to that comment from-----

Ms Ann Nolan:

Probably, but I genuinely don't remember. An awful lot has happened since.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, that's fair enough. I now want to turn actually briefly to Mr. Moran. Mr. John Moran, the previous Secretary General we've had in giving evidence already. He in many respects was one of the first outsiders, maybe the first one, to become Secretary General of the Department of Finance. How would you define his period as Secretary General? And did the Department operate in a different manner while he was in the role? Was there a notable change, I suppose, from his predecessors and if there were, can you just briefly outline them?

Ms Ann Nolan:

Okay, well, I think it's fair to say that the Department has implemented a huge change of management programme from, basically, 2009-2010 to date because we could see that there were shortfallings ... shortcomings in the way we were organised. And John, in his unique, inimitable way, contributed very positively to that change but it had started before he arrived - the Wright report, it indicated quite a lot of changes - and has continued after he's left, but he certainly brought some very positive things to that and contributed very positively to that.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Finally, I want to refer to e-mails which were covered in the Irish Independent on 9 June 2015 from Patrick Honohan, where he wrote to you to make sure that subordinated bondholders in IBRC would not receive payment after the liquidation. That was the tenor of what was covered in those reports. You held a different view, it seems, or can you-----

Ms Ann Nolan:

No, I absolutely ... I ... if there's any way I can avoid paying subordinated bondholders in Anglo any money, I will do it.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay-----

Ms Ann Nolan:

But I'm not guaranteeing that there is ... I mean there mightn't be any money to pay them in the first place but-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you believe that there will be sufficient funds from the-----

Ms Ann Nolan:

I think there'll be sufficient funds to pay the ordinary debt holders; the credit unions, the State, the other people who are owed money but whether there'll be any for the subordinated debt holders ... first of all, there mightn't be and, secondly, we will do, if there is, everything in our power to avoid giving it to them. But I don't think a moral argument will get me very far. I think that's the tenor of my-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I have almost a minute left and I'll ask briefly, because I note from your CV, the brief CV that we've gotten, that you were previously a member of the board of ACC.

Ms Ann Nolan:

That's right, a long time ago in the mid-90s.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, I'd just like to ask you, that it's ... do you believe that its corporate governance structure differed in any significant way, I suppose, from the other Irish financial institutions, the principal banks that we're discussing at this inquiry?

Ms Ann Nolan:

I mean, at the time I was on the board of the ACC Bank its structures were very different. It was still largely an agricultural bank, lending to farmers. It was doing a small bit of property lending. I didn't like the structures of the property lending but I was told I was a conservative civil servant. In retrospect, maybe I should have brought my conservatism to all of the other banks as well. I wasn't keen on it but it was a small portion; it wasn't a huge risk at the time because it was a relatively small proportion of their book, so it was different.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, and we'll move to towards wrapping things up so and if I can invite Deputy Joe Higgins to commence the wrap-up and then I'll finish with Deputy O' Donnell.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Ms Nolan, on page 4 of your opening statement, you say:: "The State received shareholdings in the banks in return for its capital and for the continuing banks this investment can be recovered over time by selling the shareholdings." And you go on to say that the long-term losses essentially arise from INBS and Anglo. Can I query and interrogate that somewhat with you for a minute or two? In regard to Allied Irish Banks, the general figure that is put out there is that €21 billion of State funds went in. I would say that has to be added to by the following: NAMA witnesses said to the inquiry that the banks were overpaid for loans transferred to NAMA from them by €10 billion. That was the evidence from NAMA chief executive and chair. If we allocate the Allied Irish Bank proportion of that, it would be €2.8 billion, so I say if you add that to the €21 billion, you get €23.8 billion. the merger with the EBS gives a further €777 million in a, kind of, a hidden recapitalisation to AIB and then there's a further transfer, in February 2011, of €1.6 billion or €1.7 billion of Anglo NAMA bonds and deposits. Now that brings the cost, arguably, to €26 billion. Can I ask you how do you see such costs, between €21 billion and €26 billion, being recovered for the taxpayer, as you suggest?

Ms Ann Nolan:

Okay, first of all there's double counting there because the €20 billion includes the EBS money. You know, the money that we ... the capital we put into EBS is counted as part of the €20 billion, I think.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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No, it's .... I don't think so. Well, let's not query about-----

Ms Ann Nolan:

And similarly the NAMA piece ... I mean, I think NAMA will sell the loans for what they spent so there's no extra loss there; that extra loss doesn't exist. So I couldn't agree with that piece being extra. I can't remember what the third thing you said was added to it. So I mean it's the €20 billion, I think, we'll get back. We've already got fees of about €5 billion and we have our CoCos due back next year of €1.6 billion, which I expect them to pay us back. And I expect that over time we can get the rest back. I mean, it's my expectation and, you know, it's pretty for the future-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But it's a hope rather than-----

Ms Ann Nolan:

No, I think it's based on the position the bank is currently in and the, kind of, profits it's currently making.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And what about the extra €2.8 billion that, according to NAMA-----

Ms Ann Nolan:

That €2.8 billion is coming back to NAMA from the cost of the funds; that isn't an extra €2.8 billion. I just don't agree that there's a loss there. That would imply that there's a loss to the State from NAMA of €2.8 billion, which there is not.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Well, NAMA suggested that they overpaid the banks by €10 billion-----

Ms Ann Nolan:

No, they overpaid-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----by contrast with what the market would pay at the time.

Ms Ann Nolan:

Yes, but NAMA's going to ... they did that with the view to getting that money back over time, which they will. The money is coming back to NAMA. I don't expect NAMA to have a €10 billion loss at the end of the day.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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So what timescale are you working on in relation to Allied Irish Banks? And you're suggesting that it would be re-privatised to make back the-----

Ms Ann Nolan:

Yes, to make back the money, you'd have to sell it, or, I suppose, if you held it long term you could get the money over a very long timeframe by taking the profits but the question of the sale of AIB, it's a political question for the Government of the day.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. And, Ms Nolan, in view of the disaster that befell our people as a result of the banking crisis related to the drive for profit maximisation and competition-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final question now, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----what would your view be of, instead of giving it back to private interests again seeking profit maximisation, of maintaining a publicly owned banking services devoted to social good, social investment, rather than private profit maximisation?

Ms Ann Nolan:

That is an entirely political question and the Government of the day has a choice, and I'll do whatever they say.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Kieran O'Donnell, just to wrap up.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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At the time when Anglo was nationalised on 18 January '09, was Anglo insolvent at the time?

Ms Ann Nolan:

Technically, no, because I think the-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In substance?

Ms Ann Nolan:

I think the real problem with Anglo at the time, okay ... and I'm ... I mean, I'm not an accountant so ... an accountant would have to tell you whether they were solvent or not.

The real problem was that - and I didn't know this at the time but I know it now - their model was broken. They were lending effectively into the building industry. The bulk of their lending, directly or indirectly, was into the building industry. And that method of financing developments can't be done any more, you know, banks will never again give more than 60% into development loaning ... lending - 60% of any given development. So, the problem wasn't so much ... there were several problems but the big thing was that there was no capacity to regenerate profits, which the other banks had.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, on NAMA, in your statement you referenced that ... the transfer of loans based on a discount on a broad stratified sample of loans for each bank, which I'm assuming is linking in to what was the original business plan, which is a 30% discount.

Ms Ann Nolan:

Well, it doesn't ... it would have ... it probably could be the same discount, it probably would have been the same discount. All I'm talking about there is the method of doing it. What we did was we looked at every single loan. So in tranche 1, they went through every single loan in every single bank. Probably if they'd done 20% of the loans for every bank, in the different tranches, and done them all together, you'd have got more or less the same answer.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What would have been the benefit of that?

Ms Ann Nolan:

Quicker.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. Would you have liked to have seen Anglo - or IBRC - liquidated before it was?

Ms Ann Nolan:

I'd like to have seen it liquidated earlier, probably, and to have seen it liquidated while it still had some of its senior bonds in it that we could liquidate but, in practice, that really wasn't an option. There was never a point at which I could do that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And was there a point that you could have done it prior to the first repayment having to be made on the promissory note?

Ms Ann Nolan:

It just simply wasn't an option at that point.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It wasn't an option.

Ms Ann Nolan:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, I suppose, finally, if NAMA hadn't been established ... hadn't been set up or the haircuts were much lower, could we have avoided a bailout?

Ms Ann Nolan:

If NAMA hadn't been established, we would have had a different problem; we would have had zombie banks. And while we may or may not have ... I don't think we would have avoided a bailout but I think we may have had a far worse problem in terms of the SME loans and the capacity of the banks to get back to looking at their SME loan books, which might have had a much worse impact on the real economy. Because, after all, you know, the banking ... and this inquiry is, obviously, looking at banking, but banking is there to service the economy and getting employment growing and unemployment falling was the most important political desire by both of the Governments in the last seven years.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, I suppose, in summary, as you're here, what would be your overall, I suppose, summation of your dealings with the banks from November 2008 onwards to now, both in terms of how it came to pass that €64 billion of taxpayers' money gross went into the banks?

Ms Ann Nolan:

Well, I mean, it's been a very difficult time, I'd say, certainly for the Department and probably for the banks and certainly for the country. In dealings with the banks, the vast bulk of the bankers that I have dealt with have worked as best they could for their organisations and, indirectly, to minimise what the State was giving them. I wouldn't say all, but the vast bulk.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. And, just, I suppose, a final point ... a very final point. When you were doing the due diligence with Arthur Cox and Anglo Irish Bank, would they have looked at the model in terms of the type of interest rates that would have been charged to customers and the cost of funds for the bank itself?

Ms Ann Nolan:

The particular due diligence I referred to earlier was looking at corporate governance issues. In particular, it may have looked at other things and I was looking at the legal ramifications.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So Arthur Cox did not look at the loan book?

Ms Ann Nolan:

At that time in January, no. There wouldn't have been time in the three weeks that were there.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, therefore, are you saying to me that you made your decision on nationalisation of Anglo based on corporate issues as distinct from financial issues?

Ms Ann Nolan:

Yes, financial issues ...we were based ... but the information on financial issues were as per the PwC reports and the ... Anglo's own annual reports.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy. Thank you very much Ms. Nolan. I'm going to bring proceedings to a conclusion. I ... if you want to add anything by means of your own final comments, the inquiry, as you mentioned earlier yourself, is not just for looking at the past, it's also about measurements going into the future, and if you have any particular observations, recommendations, you'd like to make in that regard, we'd be most welcome to actually hear them. So if I can ask you maybe to make your closing remarks now, Ms. Nolan.

Ms Ann Nolan:

Okay. Well, listen, I really would like to thank you very much and wish you well. It's a very difficult thing and I know that ... having to come here has made me think very carefully about everything I've done for the last seven years and it's been quite a challenge. So I really do wish you well in trying to put together everyone's views of it ... into a coherent narrative that will allow us have very positive, hopefully, recommendations for going into the future.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Ms. Nolan. With that said, I'd like to thank you for your participation today and for your engagement with the inquiry, to now formally excuse you and, in doing so, to propose to suspend the meeting until 11.50 a.m. Is that agreed? Agreed. Thank you.

Sitting suspended at 11.36 a.m. and resumed at 11.59 a.m.

Department of Finance - Mr. Donal McNally

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Okay, with that said, I now bring the meeting the meeting back into public session, is that agreed? For session 2 of today ... which is a public hearing and discussion with Mr. Donal McNally, former second secretary general of the Department of Finance. The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in public Gallery to ensure that their mobile devices are switched off? This morning we continue our hearings with the senior officials from Department of Finance who had key roles during and after the crisis period. At our next session we will hear from Mr. Donal McNally, former second secretary general at the Department.

Mr. McNally joined the Civil Service in 1969, and joined the Department of Finance in 1986. He has worked in the Department at various levels in banking policy, health spending, tax policy, budget and economic division, and finally public expenditure division. He was appointed second secretary general in 2000, and headed the budget and economic division until 2008, and the public expenditure division until his retirement in 2012. So, Mr. McNally, you're very welcome before-----

Mr. Donal McNally:

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----the committee today. Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry and, therefore, the utmost caution should be taken not to prejudice those proceedings.

Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and should not publish any of the documents so displayed.

The witness has been directed to attend the meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. McNally please.

The following witness was sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Once again, Mr. McNally, welcome before the committee today, and if I can invite you now to make your opening remarks to the committee please.

Mr. Donal McNally:

Thank you, Mr. Chairman. My opening remarks are quite brief. First of all, I'd like to thank you and the members for the opportunity to make this brief opening statement today. The task of inquiring into the banking crisis and the events surrounding it will, I hope, reveal lessons for the future guidance of policy makers which will help reduce the risks of a recurrence of these events to a remote one. I don't think we could have another such unaffordable crisis.

I would like at the outset to express my regret at how matters turned out for the people of Ireland and for the period of austerity that affected so many, and for the increased burden of debt that we now carry. As set out in my written statement, my connection in this was as a senior civil servant providing economic and fiscal policy advice to Ministers and Government, who then decided on the policy actions to pursue.

I believe that, as confirmed by the Wright report, that the policy advice was appropriate, although not always followed. The advice was to run a fiscal policy close to balance or a surplus, and to avoid adding unnecessarily to demand in the economy, to improve supply and to guard our competitiveness. I did not provide advice on monetary or credit issues, that being the preserve of the Central Bank, or on credit growth, seeing that is a matter for the Central Bank to handle. While giving advice I also took advice, notably that the likely growth scenario was one of a soft landing, i.e. that the housing market would return to more normal levels in a manageable way. This was the view of economic advisers in the Department as well as outside, official and private sector commentators.

I did not foresee events as they happened. Others didn't do so either. I was aware of only limited contrarian advice at the time. It is difficult, as I said in my written statement, for cautionary or contrarian views to be got across when the economic news is so positive and when the country has been widely complimented on its economic performance.

The rise in asset prices was a factor of accommodating monetary policy and fiscal policy, strong domestic demand and certain property tax incentives. These incentives were introduced at various times since the 1980s. The motivation for these reliefs was to develop, restore, renew certain areas, and to stimulate employment and job creation. Some of these were more successful than others, and all were generally supported at political level. A number of these were terminated after 1997, some limited in extent, and some new ones introduced. The case for such reliefs was much diminished in the strong property market, but it took time to eliminate these from the tax system.

I accept that there was a deficiency in economic advice resources, which it also took time to address effectively. The situation was improved, but the problem is not just recruiting but retaining staff. The current Government economic and evaluation service model seeks to address these issues in a constructive way. Fiscal policy decisions take place in a different context to monetary policy action. That context is a democratic one. Government must marshal support for policy actions, and justify and defend these to parliament and the electorate. It is not easy to garner support for restraint when resources appear plentiful. A key challenge for the future, I believe, will be the need to communicate the wisdom of restraint to the public, even when resources allow, and the desirability of using surplus funds to reduce debt now to lessen the burden for the future. It also seems that the EU believes that closer monitoring of member states, more constraints on our freedom of action, and firmer rules on budgetary policies will bring about greater fiscal responsibility. Hopefully this will not be at the expense of democratic responsibility. In short, there are important lessons to be learned and there are important issues to be reflected on in the remit of the inquiry on which I hope I can help in that regard. Thank you, Mr. Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. McNally, for your opening comments. If I can now invite Senator Michael D'Arcy to commence questioning. Senator, you've 25 minutes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. McNally, you're very welcome.

Mr. Donal McNally:

Thank you.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I'm going to start, Mr. McNally, with a quotation from the former Taoiseach, Garret FitzGerald, who said in 1984 that the Government is going to keep its hand out of the till from now on. In terms of expenditure in your period, in the senior role in expenditure, did the Governments, successive Governments, keep their hand out of the public expenditure till or not?

Mr. Donal McNally:

Well, my role in public expenditure was after the ... after the crisis started, and in that case there was significant cutbacks in spending. As regards the period from 2000, I think the picture varied. There was some years in which there was quite strong expenditure growth, and I think in 2003 and 2004 that fell to 7% or 6%. And then, after that, it returned to a level of 10%. So there was very strong expenditure growth. I mean, it was a time of plentiful resources. There were also Government commitments and social partnership commitments, so that these added to the pressures for public spending.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. McNally, the level of expenditure from 1998 by the State was €20.5 billion. Ten years later it was €62.5 billion. That's a trebling of expenditure on behalf of the State in a relatively short period. Did the Department do any international peer reviews with trading partners or anything of that nature to see ... to gauge the expenditure by the Irish State with other states?

Mr. Donal McNally:

I don't think so. I think the metric we used was as a percentage of GDP. And, you know, it remained around the 32%, 33%, 34%, which was far less than in neighbouring countries, maybe with the exception of the UK, and on the same level as the US. So that is the ... that's the main metric we used. I mean, different countries had different traditions. The Scandinavian countries have high expenditure, high taxes. We were trying to run high expenditure and low taxes, which the growth and the economic resources allowed, for a time.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. John Moran, in his evidence before us, I'm not sure if you had the opportunity to hear what he said in relation to the deficit from your period '08 to when you left, or to date, that the deficit for that period was in the region of €100 billion. And that on the basis of that €100 billion, that that is part of the national debt. Could I ask your analysis of the €100 billion and how, in the future, the future generations will be obliged to pay that back?

Mr. Donal McNally:

Well, I'm not quite sure of the figures, but I take it-----

Mr. Donal McNally:

-----what's said. I mean, we had this problem before in the '80s when we had debt, GDP, or GNP ratios of over 100%, that you got up to 130%, or close to it at one stage. And the interest rate regime, I think, payments were taking up a lot of the income tax receipts were going on paying the national debt.

Unless there's some debt forgiveness, then the only way we can fund that is by growing and reducing the burden in that way, so that we have more capacity to pay the interest. We did it before. It took some time to do but that's the main way. Now, obviously, before there were high interest rates we weren't part of the euro. So, you know, to the extent that the monetary policy in the euro works, and fiscal policy ... the debt burden in terms of interest rates will be a bit more manageable than it was before.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. McNally, can I ask you, in relation to the narrowing of the tax base over that period, and the reliance ... the over-reliance on the transactional taxes that were attached to the construction sector, was there comment within the Department that there was a prospect that if those taxes were not as buoyant as they were, that the State could be exposed, potentially, to a shock?

Mr. Donal McNally:

Well, there are various figures given for the reliance on these taxes. There's a figure mentioned of 30%. That includes corporation tax, and corporation tax is paid mainly by the multinational sector and is more related to foreign GDP than it is to domestic. And, in the case of stamp duties, the fact is that there's no stamp duty on new houses, it's ... stamp duty is on second-hand houses; it's VAT that's on the new houses. So, there was a concern that if the economy turned down sharply we could be exposed, but the general opinion was that there would be a soft landing, in which case there would be less tax, but there would be some facility either to raise tax in other ways or to let the deficit ... incur a deficit, which is allowable if ... to a certain extent, if growth reduces.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. The ... can I ask, Mr. McNally, is it possible for a civil servant, even a very senior, experienced civil servant to say, "No, you can't do that, Minister, it's too far, it's beyond the pale", that it's irresponsible to implement a specific type of policy?

Mr. Donal McNally:

Well, I suppose it is. It depends on the context. But if you put the arguments to the Minister, and put them in the budget strategy and memorandum, then there is a matter for political decision what the level of public spending should be and what the tax to fund that should be. So, I'd say, yes, you could say ... you could argue against it but if the Minister decides, or the Government decides, generally, as a civil servant, you do what the Government decides.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Can ... can I ask ... you were involved in ... during the period of ... two high-profile policy decisions. The SSIAs: can I ask what was your view about the SSIAs? They were €15 billion with the State contributing a portion of that.

Mr. Donal McNally:

Well, the advice that was presented to the Minister was not to introduce such a system, or, that tax on savings ... it was difficult to know if it increased net savings or not. I think there was some OECD evidence to suggest that it just moved the savings around. I don't know whether that was the case or not, but the Minister was strongly of the view that, given the - this is what he expressed to us - given the prosperity, given the level of consumption, that people had forgotten how to save, and that this was a way of encouraging people to think of the future and put some money aside. So, my advice was against the SSIAs, as was the Department. I didn't have an SSIA myself because I believed that if I'd argued against it, I would have been, I won't say dishonest, but I just thought I shouldn't invest in something that I had argued against myself.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And, the extent in which you can argue against the Minister, how far can you go? How far can you take it?

Mr. Donal McNally:

Well, generally, what ... in making tax submissions, what we did was marshal the arguments on both sides, and the Minister made a decision on that basis. But, I mean, you can argue ... you're free to argue with the Minister and put the point of view, but if he decides, then that's the policy.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And, can I ask you in relation to the budget 2003 decentralisation programme that was announced ... can I ask your view in relation to that?

Mr. Donal McNally:

Well, I'll-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It was a cost to the Exchequer for the decentralisation.

Mr. Donal McNally:

Well, there was a cost. I'm not quite sure what the cost was, but it was also felt that there was a benefit in terms of spreading around some of the prosperity throughout the country, and in helping some areas. I wasn't involved in the decentralisation It was kept a fairly closely guarded secret until it was announced, and there was a small team working on it. I mean, there are pros and cons in favour of it. I must say I had a neutral viewpoint on it.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. If I could just go back to the SSIAs, Mr. McNally, could you give me ... could you outline the reasons why you opposed the Minister's savings programme?

Mr. Donal McNally:

Well, I ... we marshalled arguments. We looked at various different incentives, incentives on the principal amount, incentives on the interest, but the main reason would have been possible cost and the fact that we weren't sure that this would incentivise savings. I mean, it may have; I don't know if it did or not. We tried to build in factors to stop the SSIAs being used to finance consumption. So, they were the two main reasons - the cost and whether it would be effective in stimulating saving.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And were you just opposed to all SSIAs? The idea that people that are very wealthy getting a 20% top-up from the State - did that occur that that was unfair and unreasonable?

Mr. Donal McNally:

Well, all I can remember at the time was the lady who spoke ... who was, I think it was the Joe ... what's the thing at 2 o'clock? Joe Duffy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Talk to Joe.

Mr. Donal McNally:

I think she was complaining about the fact that ACC had closed some current accounts, and she explained that she used to put the children's allowance money into the SSIA, so I said to myself, that's tax-free money being put into a tax-free account. So, you know, I ... I'm not too sure ... I didn't favour SSIAs, and I favoured it even less when I heard that.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I just want to move on to the ... to your core booklet, Mr. McNally, page 101, in relation to the report. Sorry now, it's not 101, it is page 105 onwards about economic and fiscal implications of a reduction in housing output, where it says that for every 10,000 units, private units ... would reduce that there would be a fiscal deterioration of €1.8 billion. It's 105 onwards.

Mr. Donal McNally:

Yes, I have the reference there. I think the €1.8 billion was that ... a question was asked, if private housing output decreased by 10,000 and you built 10,000 local authority housing, what would be the cost? And the €1.8 billion refers to that, as far as I can see from the documentation. The actual cost in terms of the 10,000 decline, for each 10,000 decline it was €570 million. The 1,800 was made up by the increased capital expenditure on the local authority houses.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And were ... was that a major concern for the public expenditure side of the Department, in terms of the reduced revenue that would be coming in every ... because there was a ... analysis concluded that there would be tens of thousands of units that would not be built in that period, going forward.

Mr. Donal McNally:

Well, as I recall it, the analysis suggested a soft landing, which would have meant that housing output would decline. I think there was a figure of 6,000 or 8,000 per annum, in which case there would be lower income taxes and VAT, and higher live register payments.

If it proceeded at that rate, it was possible, I mean, it could be possible to raise money in some other ways to try and offset that or to run a small deficit. We were in surplus or in balance for most of the period.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. As early as 2001, a paper presented to the MAC meeting on 26 April shows the Department were facing a specific skills challenge and had a broad spectrum of skills requirements among others in economic modelling. Can you give us your view if efforts were made by the Department, if they were sufficient after 2001 to improve the skills shortage?

Mr. Donal McNally:

My main area was the economic side. I don't know about the other side but the financial side, there would have been also IT skills but I do admit there was a problem in terms of resourcing on the economic side. I found this out early on when the economic forecaster, who I think was Robert Watt, who is now the Secretary General of PER, I think he was the short-term economic forecaster. I was seeking somebody to replace him and I had some difficulty because there was a reluctance to go on to the economic side, because people thought that their career prospects were better if they had a more broader experience and they weren't identified as being too technical or working too long in one particular area. I said to the person that "look you will only be there for a couple of years, you will be replaced" as a way of trying to get him to agree. As a result of that, I spoke to the Secretary General, John Hurley, who became Governor of the Central Bank, and he arranged for the Central Bank to second an economist, John McCarthy, who has since gone on to be the chief economist. That was sort of a stop-gap measure to an extent.

When Derek Moran, the current Secretary General, came in, he conducted an analysis of the leads of the section and proposed a plan to recruit economists directly, which was done, and to bring in some other people from other parts of the Department, from the NDP - the national development plan side - who were, that was running down their engagement there. We also took on another economist in 2006 from the Central Bank. So something, things were done. I don't think there was any lack of quality, it was more an issue of quantity. The Wright report did say that the analysis presented by the economic side was as good as any else and there were no complaints that I heard from any of the international bodies they dealt with to that extent. While they might have had a small economic side, it did work with the ESRI and the Central Bank and the Commission so to an extent they were able to use their resources as well in their activities and the Commission would have had regular meetings to discuss the economic methodology and the economic forecast.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Could you explain to me, Mr. McNally, then if, as you say, the Wright report said that there was nothing wrong with the quality of the analysis, how did the downturn ... how did the recession sneak up on the Department of Finance to the extent that it did and how was it so bad if the forecasting was of quality?

Mr. Donal McNally:

I looked at the figures for 2008 and we were predicting growth of, I think, 4.5% or so. So was the IMF and the OECD and the Commission. So it wasn't just us that were taken by surprise. We just got it wrong and I can't explain it in any more detail than that. We relied on ... perhaps we placed too much trust in a soft landing, not allowing for the fact that these things could go wrong.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Was the Department of Finance aware of the level of bank balance sheet growth that was occurring for the previous years?

Mr. Donal McNally:

I knew there was a credit expansion but I regarded that as part of the remit of the Central Bank to address and if they had any problems in that respect, they had the tools and the policies ... levers to use, so I didn't take ... I didn't look in that great detail at the credit expansion.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And in terms of, say, financial stability within the Department, did nobody ever raise that issue?

Mr. Donal McNally:

I don't recall that, no. I mean, the financial stability report indicated that the banks were well capitalised and as far as I can remember, did not give explicit warnings that there was doom around the corner.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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What policy initiatives, withdrawal of tax incentives, increased capital requirements across the sector were considered by Government to address the risks emerging in the economy during your tenure in the Department of Finance?

Mr. Donal McNally:

I do not understand what-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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What initiatives, what changes did the Government engage in to address the risks emerging in the economy?

Mr. Donal McNally:

The main one that was done was to finally get rid of the tax reliefs. I mean, since 1997, some of them had been got rid of - the seaside resort scheme, the Temple Bar scheme, the Custom House docks scheme - and we would have recommended to the Minister certainly that these reliefs should go and I recall reading the 2003 budget where it said they would go in 2004 but when 2004 came, they were extended because as far as I remember, because of worries that there were schemes still incomplete. So when the new Minister came in, we put a proposal to him to try and get rid of most of these property reliefs but he asked for a special study to be done so that it could be explained to the public why this was being done, and not sudden. So that was the main one within my purview.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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In terms of that report, can I ask your opinion of the appropriateness of some of those schemes, seaside resort one, there are others? Can I ask your view, your personal view on the appropriateness of them, the benefit that they had to the Irish economy?

Mr. Donal McNally:

Well there are numbers. The urban renewal scheme was brought in in 1986 and, I think, as was the Custom House docks scheme. So the Custom House docks scheme certainly did help develop the IFSC and there was also a BES, which was ... I think property was allowed in the BES scheme. That was got rid of because property was ... the BES was supposed to be risk-taking, not investing in bricks and mortar. The schemes were reviewed in 1996 and I think the conclusion was that there was some benefit in the areas in which the schemes were concentrated and some which ... what they call a shadow effect in areas beside it, but it was difficult to conclude whether that had led to an overall increase in output in the economy or not. The seaside resort scheme, we were never convinced of the wisdom of it, and I think the idea was, and it may have been well-founded in the sense that some of the traditional resorts had ... were a bit down at heel and the accommodation wasn't as good as it should be and the amusements and facilities.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Senator, maybe you can ask Mr. McNally as to who was not convinced of the wisdom, if we could just establish that there?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Yes. Who was not convinced? Was it you personally or-----

Mr. Donal McNally:

I was talking about myself and the view in the Department.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It was the view within Department.

Mr. Donal McNally:

Yes, just on ... within the tax side of the Department, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Was it the accepted view or was it the general view?

Mr. Donal McNally:

I would say it was ... well, it was the view amongst those who were directly concerned with it. I don't know about the generality of everybody else.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. So it was a political decision to advance those schemes. It wasn't with the behest of the Department of Finance?

Mr. Donal McNally:

No, we didn't propose the schemes. They had been proposed, I think, in 1992 ... I think the Department ... the Minister didn't proceed, but in 1995 it was decided to go ahead with them. While there may have been some sense behind them in terms of trying to restore the attractiveness of seaside resorts in Ireland, I think most of the investment went into accommodation, rather than into facilities and, I suppose, that is to be expected if there is tax relief for investing in property or for investing in amusements and things, the likelihood is that property will win out.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. And then just to revert back to my question previously, Mr. McNally, in relation to transactional taxes which, in 1987, were a total tax take of 8%. That increased up to 30% in 2006; you said corporation tax was a portion of that. Did the Department highlight that concern, that issue, to the Minister over those number of years because it wasn't just-----

Mr. Donal McNally:

Well, I think-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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-----a single year?

Mr. Donal McNally:

Yes, I think, from reading the documents, it was highlighted by the Secretary General that the ... that it wasn't wise to rely on ... on taxes that might not remain permanent, that might not yield the same. I mean, the problem ... one of the issues with the stamp duty was ... the stamp duty was raised from 6% to 9% in 1996 when residential property tax and, I think, local authority charges were removed. This was a way of restoring the ... the revenue. But the stamp duty rates applied not on a tranche basis, not, sort of,1% of the first €100,000; 2% of the next. Once you went over the-----

Mr. Donal McNally:

-----the threshold, you paid the whole lot. You paid 2% on €101,000 as opposed to 1% on €90,000. So, that meant, when prices rose, there was ... there was significant elasticity and that was one of the reasons why the yield went up so much. We did think was there a better way of restructuring the stamp duty because, you know, 9% was quite a high rate and we didn't go to the Minister on this because this was just talking amongst ourselves in the tax division. But the problem was that any attempt to ... to restructure the stamp duty rates would probably have meant a lowering of the rates ... just the way the process works. And lowering the stamp duty rates could have added fuel to the fire of the house prices, so, you know, we were ... we had a system that brought in a lot of money. It probably wasn't the most judicious system but making changes in it could have raised other problems.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And did the Department ... did the Department-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final question.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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-----communicate that advice to the Minister or was it ... or not?

Mr. Donal McNally:

That was just internally, ourselves.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You didn't communicate that advice to the Minister?

Mr. Donal McNally:

Well, we didn't suggest revising the ... or revamping the stamp duty. We just talked about it amongst ourselves.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Senator Sean Barrett. Senator, 25 minutes.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you. And welcome to-----

Mr. Donal McNally:

Thank you.

Photo of Sean BarrettSean Barrett (Independent)
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-----Mr. McNally. One of the earlier witnesses, Mr. McNally, Professor John FitzGerald, said:

There was a culture change in the Department of Finance in the last decade. It became more concerned about the politics of things and less interested in the technical detail. I would have had less interaction.

What's your own view of John FitzGerald's comments there?

Mr. Donal McNally:

Well, I think ... I think he must have been referring to the number of instances mentioned by him when some people took exception to what was being said in the report-----

Mr. Donal McNally:

-----but, you know, I didn't detect a political change, as he ... as he had done. I mean, the Ministers didn't get involved in economic forecasting or anything of that matter, so I was a bit surprised when I ... when I read it.

Photo of Sean BarrettSean Barrett (Independent)
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Okay, thank you for that. The Regling and Watson evidence book has that after 2004, the IMF, the OECD and ECOFIN all clearly recommended a tighter fiscal stance and the building up of a cushion for the time when the income from the property-related transactions would fall. Why, in your opinion, were these recommendations not more forcefully highlighted in policy?

Mr. Donal McNally:

Well, I mean, they were highlighted in the budget strategy memorandums, as far as I recall, but it was Government decisions on the level of public spending. We did have a very low debt ratio, I think it fell towards 20%. We also had assets in the National Pension Reserve Fund which, I know, were to be ring-fenced for other purposes but they did reduce the net debt, so I think we thought we were doing as much as we ... as we could.

Photo of Sean BarrettSean Barrett (Independent)
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And just in this segment, the final one, that the Department advised the Minister in July '08 that economic growth would recover, even after allowing for a 45% decline in housing completions to 45,000 a year. And there was earlier research, in 2004, that every 10,000 reduction in housing output would cost the Government €500 million, so what was happening to our forecasts in that period?

Mr. Donal McNally:

Well, I'm not quite ... I'm not quite sure. This is in 2008?

Photo of Sean BarrettSean Barrett (Independent)
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2008, yes. Well, I'll give it to you again: the Department advised the Minister that economic growth would recover after allowing for a 45% decline in housing completions to 45,000 a year and a further decline of 23% to 33,000 units in 2009. And the earlier work had been, in 2004 ... that every 10,000 reduction in housing output would cost the Government €500 million in ... in revenue.

Mr. Donal McNally:

Well, the earlier report was in relation to a specific question and that was the metric in terms of the loss of revenue. I left the budget side on 1 May, so I don't ... I don't recall the forecasts that were made. I'm sorry.

Photo of Sean BarrettSean Barrett (Independent)
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Okay, thank you. Could I bring you back to your ... your first posting in banking in the Department of Finance, I see here, 1986 to 1992. So, I'll put that question to you: when Donal McNally was in charge of banking supervision, the banks were solvent, the bank manager in the local town was an honoured member of the community - where did it all go wrong, the €64 billion of what we're investigating now? What ... have you been keeping an eye on this sector ever since you were its ... involved in its supervision back then?

Mr. Donal McNally:

Well, just before that, I was involved in insurance supervision in the Department of Industry and Commerce-----

Mr. Donal McNally:

-----and had some peripheral ... I wasn't centrally involved in the PMPA and the ICI events in 1982 and '84, I think it was, or 1982 and 1985, so I knew the value of close supervision. I wouldn't have gone for this light touch regulation because, as in most of these cases, the State ends up having to pay the bill and the State should be extra vigilant. In terms of banking policy at the time, I was involved in the Central Bank Act, which was passed in 1989, which was to strengthen the powers of the bank to ... the Central Bank to supervise banks, to attach conditions to licences, to apply codes of conduct and other matters. But my recollection was of trying to take initiatives with the banks to get them to lend to ... especially to ... I think there was a young entrepreneur scheme which the Minister at the time, Minister Reynolds, persuaded the banks to lend ... or to provide €100 million for. I'm not quite sure how he did it but he managed to do it. And there wasn't the ... there wasn't the culture of ... I didn't detect a culture of profit maximisation; they might have wanted to grow the size of the banks. And I don't think there was the same culture of bonuses so, you know, the culture ... there was a cultural change in terms of seeking after profits and rewarding those who sold the most and contributed most of the profits.

Photo of Sean BarrettSean Barrett (Independent)
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So, in your early time, would banks have a different philosophy, interpreting what you said, a sort of community-----

Mr. Donal McNally:

Well that's-----

Photo of Sean BarrettSean Barrett (Independent)
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-----service, minding people's savings, was that, sort of, their emphasis?

Mr. Donal McNally:

Well, I don't know if they were as ... as altruistic as that, but I do remember one gentleman who was in the ... head of the Trustee Savings Bank in the UK relating that when he joined and somebody came in to take out money, they would do their best to persuade them to leave the money where it was; that, "You don't need this money really, you don't need a car, you have a bicycle, you can use that." Whereas, you know, 20 years later when he was in charge of the organisation, he was finding ways to get people to borrow money. So I think the emphasis changed from guardianship to-----

Mr. Donal McNally:

-----seeking to lend as much as possible.

Photo of Sean BarrettSean Barrett (Independent)
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And do you think the culture of the management and the boards of Irish banks changed?

Mr. Donal McNally:

Well, I think so, from the ... from my experience, from my observation, I would think so, yes.

Photo of Sean BarrettSean Barrett (Independent)
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When you were then back in Finance, you mentioned to my colleague, Senator D'Arcy, that you were trying to restrain the growth of public expenditure and to drive down the debt-to-GDP ratio.

Did it ever occur in those conversations that maybe the correct stance from the Department of Finance would be to look at the rate of growth of credit? Central Bank was telling you to control cost and improve competitiveness. Did you ever say, "We could do with some assistance from Dame Street in view of the high rate of credit growth"?

Mr. Donal McNally:

Well, as I said earlier, I'd left that to the Central Bank, and, as you remarked to some other witness, maybe we should have been writing letters to the Governor instead of the other way round. So I didn't focus on the credit expansion; I'd left that to the bank itself.

Photo of Sean BarrettSean Barrett (Independent)
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Wouldn't it have required massive physical surpluses to counteract such huge monetary expansion?

Mr. Donal McNally:

Yes. I remember that, when we were subject to the recommendation, asking my Italian colleague what were we doing wrong. We had a surplus of 4%, and what he said was, "Well, with your rate of growth, you should have a surplus of 8%", which is probably true economically, but not really ... I don't see how you could do that politically. I did ask him if Italy ever had a surplus and he said once, in 1861. So I was speaking to the right man, obviously.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. Did it ever arise that people would say, "We're now in a currency union dominated by Germany and that it's risky for Ireland to expand credit into the economy faster than the dominant country", i.e. Germany?

Mr. Donal McNally:

No, I wouldn't have asked that question myself. I'm sure that's a question the Central Bank must have asked.

Photo of Sean BarrettSean Barrett (Independent)
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Was the definition of competitiveness - and you have that on page 3 of your written address - was it inadequate in that the very rapid rise in house prices was not really reflected in the consumer price index so that houses were getting from two and a half times incomes up to ten times incomes and ... and there was nothing to restrain that, in the interest of competitiveness?

Mr. Donal McNally:

Well, the competitiveness was looking at the unit labour cost compared with other countries. A lot of the competitiveness may have been due to compositional shifts in the economy so that, you know, when housing assumed such a greater proportion, the overall competitiveness would have gone down.

Photo of Sean BarrettSean Barrett (Independent)
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And the sectoral concentration of all this lending did that ... was that discussed in the Department of Finance?

Mr. Donal McNally:

Not in ... not to my knowledge, and I wasn't aware of the breakdown of the credit.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. Thank you. And the commercial lending, which the evidence to this committee was extremely volatile was ... did that set off any alarm bells or discussions and so on in the Department?

Mr. Donal McNally:

Not that I recall, no.

Photo of Sean BarrettSean Barrett (Independent)
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The ... so we were operating ... your own quote there, on page 6, "To offset the pro-cyclical effect of low interest rates and easy money would have required running a significant General Government Surplus ...". Was that going beyond any bounds of political feasibility, that the surplus required to have €64 billion ready on 29 September 2008 would have been impossible for any Government to generate?

Mr. Donal McNally:

Well, I think what we tried in the memorandum to suggest was not huge surpluses, but they stayed close to balance or in a surplus and that would keep the overall debt down, which would give you the facility to borrow when economic circumstances change.

Photo of Sean BarrettSean Barrett (Independent)
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You said, on page 7, that there was only limited contrarian views in the Department of Finance, but I think you've expressed a good number of them about those property proposals and the SSIAs and so could you tell us about how decisions were made?

Mr. Donal McNally:

In relation to the Department?

Photo of Sean BarrettSean Barrett (Independent)
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In the Department of Finance, yes.

Mr. Donal McNally:

Well, on the tax side, proposals would be considered in the run up to the budget, the Minister might have some proposals, the Department might want to propose some changes. A memorandum was prepared, which set out the ... analysed the proposal and set out the pros and cons and then there'd be a discussion with the Minister and the Minister would give his ... either his agreement or not, and there would be discussion within the tax side ... on the relevant side between the various people involved in coming up with the proposals.

Photo of Sean BarrettSean Barrett (Independent)
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But you presented this morning a picture of more discussion than might be indicated here. You say that there was ... in your presentation there was only "limited contrarian views", but there seemed to have been a bit more discussion than that, that if you had doubts about the SSIAs or certain seaside resort building schemes and so on, that that was actually discussed within the Department.

Mr. Donal McNally:

Yes, well, maybe I was understating the case. I mean Finance does tend to express doubts and scepticism on ... I don't want to say nearly everything, but I mean there is a tradition of debate and discussion.

Photo of Sean BarrettSean Barrett (Independent)
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Yes, there was a famous member, who shall be nameless, of course, whose nickname was "Dr. No" for that purpose.

Mr. Donal McNally:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Are you talking about James Bond or a politician there like?

Photo of Sean BarrettSean Barrett (Independent)
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He was in the Department of Finance, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right.

Photo of Sean BarrettSean Barrett (Independent)
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In relation to the Wright report, how did you react when you saw that? Because he was ... he's very critical of the lack of specialist economists. In fact, I think he had only 7% of people at the top level had degrees in economics at master's level or above.

Mr. Donal McNally:

Yes, well I ... you know, I think the Wright report was a fair review of the Department, and we initiated it ourselves to see what lessons could be learned from it. I was surprised at the level of economists they mentioned in the finance in Canada. I mean, we're a smaller country with smaller resources, and, as I said, even though there might have been limited numbers on the economic side, the quality, as far as I could see, was good, and they had available the economic ... economists in the other institutions that were being dealt with. So, I was a bit surprised to find that we were so underweight, and, you know, we had tried to improve that. And I think the initiative of the Government in the Government Economic and Evaluation Service is a worthwhile initiative in trying to recruit people to that particular job, and then giving them the opportunity for career development.

Photo of Sean BarrettSean Barrett (Independent)
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And your advice to us, I think, on page 9 is that you found it difficult to recruit staff being labelled in a technical area, which presumably includes economists. And there was also some documents we saw that those people should have only a three-year contract, I mean ... I think ... you're an integrationist, I think, if I interpreted you correct that those economists should be, in the general scheme of things, in the Department. Is that correct?

Mr. Donal McNally:

Well, yes, but across the ... the Civil Service as well. I mean, a lot of work was being done on evaluation, and the ... more could have been done on the use of economists in that respect, and that's what's being done now in the Government Economic and Evaluation Service. The idea ... there was a feeling that at interviews what people were looking for was people with broader experience having worked in different areas and not being ... I mean, it's wrong to say technical, because being an ... and having studied economics, it is broader than simply crunching numbers. But there were ... there was a view that people were hampered in some way by being too closely defined with a special area. I mean, I did experience it myself in interviewing people who were excellent on the budgetary numbers and on all the number crunching but when asked a question outside their area, showed great difficulty. So there was something in what was being said, but we needed to have economists; we needed people to work in the area, and, you know, getting somebody from the Central Bank was a help, but it was only a ... it was a stop-gap in some ways.

Photo of Sean BarrettSean Barrett (Independent)
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Now, you've two clear experiences from your CV that are, I think, of interest to this committee as we, sort of, try to plan future recommendations.

You served on an bord snip, the second one, isn't that right? And ... or was ... or was it way back the first one? I think it is the second.

Mr. Donal McNally:

I'm not quite sure which one - it's called an bord snip nua.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. The more recent one with Colm McCarthy. Was that-----

Mr. Donal McNally:

That was the one I was on, yes.

Photo of Sean BarrettSean Barrett (Independent)
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And you also, I think, served on the McLaughlin report on local government.

Mr. Donal McNally:

That's right, yes.

Photo of Sean BarrettSean Barrett (Independent)
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So, you know, how should governance be addressed in Ireland, you know, to make sure we don't get into the kind of troubles of 2008-'11 and, indeed, the years leading up to that time?

Mr. Donal McNally:

Well, the very fact that we have gone through the experience means that there will be more caution in future and people will understand the need to run surpluses. I mean, as I understand it, the Finns run a large surplus because of the history they had, as do some of the other Scandinavian countries. As to how governance should work, I did suggest that there is ... possibly it needs to be explained or some sort of social compact or social consensus that you don't have to spend all the money just because you have the money and that there's a need to ... whatever you have, rainy day funds or some way of segregating some of the surplus to be used later. The other way is to have some sort of rule which limits expenditure. I know there's one in the EU which was changed a bit at our request. So it's either learn the lesson, agree something at a social level or have a rule that limits the growth to spending when the resources are there - a sort of counter-cyclical spending rule.

Photo of Sean BarrettSean Barrett (Independent)
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Can I ask you, finally, on the one-off tax revenues that you described with my colleague, Senator D'Arcy, was there any recognition in the Department of Finance, "These are one-offs"?

Mr. Donal McNally:

Well, there were one-offs for a succession ... over a good number of years. There was a recognition that, you know, it couldn't keep going at the same rate, but if you subscribe to the view of a soft landing then it was possible to cope with that when the revenue reduced.

Photo of Sean BarrettSean Barrett (Independent)
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Because when we've moved to the recurrent taxes like the property tax annual and the water charge annual, we've kept development levies, I think, at €60,000 a house in south Dublin, so is the Department of Finance getting the best of both worlds? It both gets the one-off taxes and has invented new forms of recurrent taxes.

Mr. Donal McNally:

Perhaps. I thought ... didn't think development levies were raising that much money nowadays. That was one of the most cyclical taxes because when development stopped the revenue went. I mean, the stamp duty was a good revenue earner but it could not be relied upon. It obviously depended on the amount of transactions. The property tax is better because it'll be more stable but I didn't detect, during my time, a great enthusiasm for property tax. We had done some work on it for the tax strategy group in 1996 but it wasn't really on the agenda.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you very much. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Very good. Can I just deal with a couple of matters there, if you don't mind, before we move on? Just in follow up there to Senator Barrett's question, Mr. McNally, and it's just to ask that after 2004, did you or the Department undertake any additional or new reviews on housing completions and the impact upon economic growth?

Mr. Donal McNally:

Well, the impact on economic growth would have been as set out in this document in terms of, I think it was a 0.5% reduction for every 10,000. I'm not aware that we did anything further than that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And maybe if I could-----

Mr. Donal McNally:

And the ... the-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, sure.

Mr. Donal McNally:

It wouldn't change. I mean, the same metric would apply.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And that kind of brings me into the space of the whole issue of a soft landing and what attempts were made to quantify the effects of a soft landing and what impact this would have on Government finances in terms of loss of revenue and increased expenditure and so forth, and what advice was given to Government on this regard. So maybe if I could ask you to recall, what was the discussion kind of going on from that period afterwards then as to what was the discourse and evidence that was supporting the discourse of a soft landing?

Mr. Donal McNally:

Well, what I took was from the work done by the economics side and the information of the OECD, the IMF-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Mr. Donal McNally:

-----who foresaw continued growth, that there was the capacity to grow. I'm not quite sure how one can prove it or not.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You didn't see any proof yourself. Is that what you're saying, is it?

Mr. Donal McNally:

Well, you know, it's a forecast. It's an estimate.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Maybe if I can draw attention to one document there. It's in your evidence book and it's the Central Bank 2007 annual report and a summary is given at the top of it there, Mr. McNally:

... the Central Bank is forecasting that growth in both GDP and GNP terms will be "significantly less than 1 per cent" this year, with some modest improvement in prospect next year with growth forecast to be about 2 per cent. Unemployment is forecast to average 6 per cent this year, mainly on foot of the construction and slowdown, and Ireland like others is facing ... difficult inflationary pressures. In terms of public finances, the Bank concurs with our assessment. The Bank reiterates the assessment that Irish Bank's [sic] are well capitalised with good quality assets and that the banking sector's shock absorption capacity remains strong.

Do you recall that document and that advice at the time, do you?

Mr. Donal McNally:

Well, I don't recall it particularly-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Mr. Donal McNally:

-----because there was ... this was a common enough-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, but the general projection of that advice, yes?

Mr. Donal McNally:

There was a ... it was a common enough document that we gave a synopsis to the Minister of what the Central Bank was saying. So, I mean, there seems to be nothing exceptional there that the-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, okay. And was this the advice that was being given to Government from the Department of Finance then as to how to base your budgets and decisions upon?

Mr. Donal McNally:

Well, my recollection was that the forecasts, from what I remember, were 4% or 5% for 2008.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Right, okay. Looking back at it now, given that a lot of these figures were based upon the construction sector, incomes coming from consumption taxes, a lot of them construction-related, so you'd have the VAT on a house being constructed, you'd have white goods that would come afterwards, carpets and all the rest of it, and 24% of the Irish economy and the construction sector employment levels inside there and all the net cost that would come with that. How do you view that advice now in terms of what actually happened subsequently?

Mr. Donal McNally:

Well, in retrospect, we didn't give enough attention to the fact that the construction sector was such a large part of the economy and that was probably generating some of the fundamentals on which we were basing our assessment of a soft landing.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And where did that gap of information or knowledge of awareness come from? It would have been ... the general discourse at the time would have been morning, noon and night, every radio show, newspaper had property construction or something very much to the forefront.

Mr. Donal McNally:

I'm not sure, and I ... that was the general view that there would be a soft landing. I'm not quite sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Was there any evidence that the Department of Finance, to your knowledge, engaged, researched, carried out, that supported their soft landing theory or was it drawn from external commentaries and a general consensus, or was there a hard book-----

Mr. Donal McNally:

Well, I don't think there was such research. I think it was from the internal analysis and from what others were saying as well.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I just need you to ... to clarify that with you. Is it that this was a mirroring and a re-echoing of ... it's like somebody going ... if I was heading to the doctor this morning and somebody says, "You're all right, you don't have to go to the doctor." And I go up to the doctor and I says, "Well, I don't need to be here this morning, because somebody said I'm all right on my way down." That's external advice. What I'm trying to find out here is that the Department of Finance would be the nation's doctor in terms of its finances. Were you carrying out your own diagnostics or were you taking second-hand information and making a diagnosis on that?

Mr. Donal McNally:

Well, there would have been ... there would have been analysis carried out within the economics side and there would have also been compared with what others were saying as well.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And what detail was that diagnostics carried out at? How detailed and how in-depth?

Mr. Donal McNally:

I didn't go into details of that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. Donal McNally:

And I can't recall.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. All right. Thank you. Deputy Pearse Doherty.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I just want to pick up ... go raibh maith agat, a Chathaoirligh, agus fáilte roimh an tUasal. I just want to pick up on that point because we've been hearing evidence from different agencies, the Department of Finance as well, and your own evidence, and from the ESRI, the Central Bank. Can you explain to me this ... because we've heard a lot of people say, well, in terms of the soft landing or in terms of that consensus view, that, "Well, the Department of Finance said it." And then the Department of Finance say, "Well, the IMF were saying it," and the IMF don't do their own analysis so they're saying, "Well, the Central Bank were saying it." The Central Bank will tell us, "The Department of Finance were saying it."

So, where did this originate from? Did it come from on high and everybody just started passing the parcel, or was there original work done within the Department of Finance that concluded that there was a soft landing was what was going to happen?

Mr. Donal McNally:

Well, there was ... there would have been projections made within the economic side and they would have been compared with what others were saying, but, maybe, we were relying a bit much on each other and going round in a bit of a circle.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And you would have seen those projections?

Mr. Donal McNally:

The projections from others?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, the projections ... forget about others for this point, because you're speaking on behalf of the Department-----

Mr. Donal McNally:

Yes, I would have seen those.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You would have see those. So what did the projections say? What did the ... how did, what-----

Mr. Donal McNally:

This would've been projections in growth, broken down into consumption and investment. And this ... I would have compared this with what others were saying in the private sector as well as international bodies.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So, the projections for a soft landing, we're talking about. So what did they look like in terms of how soft was this landing going to be or how hard was this landing going to be? What did you see?

Mr. Donal McNally:

Well ... what was ... what I took from it was that it could be managed, that that was what a soft landing meant.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So what type of drop in house prices were they suggesting, and ... on the document, the internal document to the Department-----

Mr. Donal McNally:

I'm not quite sure about the prices, but the ... that housing output would return to more normal levels of 40,000, 50,000 and that projections were made of, I think, 6,000 to 8,000 per annum, which, you know, if it happened like that would have been capable of being managed.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And what was the impact, from your point of view, in relation to taxation and employment and, therefore, other pressures on the service as result of that? What hole did that create, in terms of the soft landing, from a budgetary point of view?

Mr. Donal McNally:

Well, the figures that were given there in terms of the lower income tax and VAT and the higher payments, which is higher live register payments, which is €570 million.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And was that first round effects only?

Mr. Donal McNally:

That would be the first round effects.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did you model the entire effects of a soft landing?

Mr. Donal McNally:

I'm not sure on that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. How did you get it so wrong in relation to the soft landing, first of all. And it seems that there would have been more effects even if you were to see a drop in house prices of the nature that was suggested by the ... to the Department or by the Department?

Mr. Donal McNally:

I'm not quite sure how we got it so wrong; we just did get it wrong. We relied on external advice and on our own assessment but it turned out much worse.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. McNally, there's a parable in the book that you swore your oath on; it's called the parable of the two builders. It talks about one builder who builds his house on rock and the other who builds his house on sand. One was foolish and one was wise. Was the Department's strategy, budgetary strategy, foolish or wise during your time in office?

Mr. Donal McNally:

Well, it wasn't wise, as events turned out; I can't quibble with that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You've been employed with the Department of Finance in a range of roles since 1986, and appointed to the second secretary general in 2002. In your views, what changes do you believe were necessary to the operation of the Department prior to your appointment to the Department, and what steps have you taken to highlight any perceived shortcomings or improvements in fiscal strategy and budgetary strategy, or the interaction with the Central Bank?

Mr. Donal McNally:

Well, I didn't have very much interaction with the Central Bank at my level. I mean, the main things I've tried to do, in terms of the strategy to try and reduce the rate of growth in public spending and to remove the property tax reliefs from the economic environment. But I can't claim much for change or ... I mean, I took the system as it was. Maybe I was wrong but I can't claim credit for change.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did you believe that changes were needed prior to your appointment as ... in the Department of Finance as second secretary general?

Mr. Donal McNally:

I can't say that I did, no.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, okay. You mentioned in ... on, in your opening statement, page 10, you talk about external, expert advice. You say:

In relation to the use of outside expert advice in my time this was mainly in the area of tax issues and tax relief schemes where independent advice was seen as necessary. The standard of this advice was good and generally followed.

So what were the main tax issues and tax relief issues that you were getting outside advice? And who was giving that outside advice? And how was it generally followed?

Mr. Donal McNally:

Well, the main advice that I recall was, first of all, the study of the urban renewal incentives in 1996. I forget who carried that out. There was also the Bacon report, which made some changes and suggestions, which the Government accepted at the time-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Would you say they accepted ... sorry for interrupting, would you say they accepted the majority of those recommendations, or a minority of them, or all of them?

Mr. Donal McNally:

Of the Bacon?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. Donal McNally:

I think it was accepted fairly generally, from my recollection. There was also the review carried out in 2005 or 2006 ... 2005. And then there were various reviews by ... of individual schemes, like the film relief, BES and things like that, which were carried out, one of them, by Indecon. So that ... I mean, you could review these internally, but generally, given that we would have a particular view on tax, I think it was felt that it was wiser to get some independent advice.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, and in relation to your own ... the internal opinion, as opposed to the external advice. The internal opinion in the Department of Finance in relation to the continuous extension of property tax reliefs was in the negative, you were ... am I right in saying you were arguing with the Minister, or recommended to the Minister that they should be abolished or not extended?

Mr. Donal McNally:

Well, the general view was that it was better to, if you had the resources, to lower the tax rate generally rather than to favour reliefs. So we would have been sceptical about them and would have sought to bring them to an end, especially in a ... at a time when the property market was booming and there's less need for them.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You mentioned the Minister for Finance, which would be Charlie McCreevy at the time of 2003 and 2004. You said there was an expectation, or there was an announcement that the rates would be abolished, and in 2004 they were extended. Clarify one thing for me, first of all, if Minister McCreevy did nothing on budget day, those tax reliefs would be gone, am I correct in relation to that, because there was a cut-off point for them?

Mr. Donal McNally:

Well, if they weren't extended in 2004 they would have gone, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Basically, if he did nothing ... as in ... if the Finance Bill wasn't changed, then they-----

Mr. Donal McNally:

They would have terminated, yes-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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They would have terminated.

Mr. Donal McNally:

But, you know a conscious decision has to be made whether to let that go ahead or not. I mean you wouldn't ... you would mention to the Minister that these were due to end, and the Minister might have a view on whether they should or should not.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, but they were due to terminate in 2004?

Mr. Donal McNally:

Well, there was a termination date put in. I mean, part of putting in so-called sunset clauses was to make sure these were reviewed periodically.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, but the point I'm making, they're not like income tax, where the tax is there indefinitely. These were tax reliefs for a period ... a set period of time, which were supposed to ... and the decision was taken by Minister McCreevy, am I right in saying, against the recommendation of the Department to extend those for another period of two years?

Mr. Donal McNally:

Well, I think we would have set out the pros and cons. I'm not quite sure if we recommended ... I mean, our general view was that they should have ended, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Well, if it's your general view, did you ever express that to the Minister? Or was ... did anybody express that to the Minister?

Mr. Donal McNally:

Well, they would have been expressed in the notes going to him, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Do you understand why the Minister rejected the views of the Department in that regard?

Mr. Donal McNally:

Well, I think the Minister was persuaded by representations that some of these schemes should continue, that they were a work in progress.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Which representations would they be? Were they representations from the sector, representations from other-----

Mr. Donal McNally:

Well, in general, they would be from people who are making use of the reliefs.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So the property developers, speculators, individuals who were investing into the reliefs?

Mr. Donal McNally:

Well, I don't know if they were speculators or whatever. They were people who were using the reliefs would have made representations.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And the reliefs in ... the reliefs, the review of the reliefs ... am I right in saying this that they were to the benefit to the most wealthiest in society as opposed to those in the middle or those on the bottom?

Mr. Donal McNally:

Well, in 1996 and 1997 when we were talking ... in fact, it was with Ann Nolan, who was with you just this morning ... we were talking about these reliefs and what could be done to ... to attenuate them, or what effect they had. We did persuade revenue to do a survey of the top 400 earners, trying to find out which reliefs were being used or not.

And, you know, the conclusion was that these were favouring those with the money to invest and with the taxable income to offset it against and as a result ... and those reviews are published each year, but there was a change made in 1998 Finance Act which limited the amount that could be set off by passive investors against other income. So, you know, it was known that these reliefs benefited high earners, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Senator Marc MacSharry. Senator.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Thanks very much. I think Deputy Doherty has covered most of the specific questions that we'd agreed to ask. Just to follow on slightly from the soft landing, was there ever a forum internally where assistant secretaries, senior principal officers would sit down and say, "Okay, the consensus from the IMF and the ESRI and the OECD and various other people and the data and, indeed, our own individual units, is that we are going to have a soft landing."? So, was there a forum that that was discussed at ... that you can recall where it was decided, "Yes, that is the likely outcome so, therefore, that's the position"?

Mr. Donal McNally:

Well, there would've been annual presentations by the different business units, which is the only one that I'm aware of. There wasn't a general policy committee as there is now and, you know, perhaps that would've been a useful thing to have ... to have a general discussion outside the area of whether this soft landing ... was it just an assumption or was it a hope or was it a reality?

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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In the absence of the general advice council that operates now internally, were the various divisions a set of pigeonholes that didn't, perhaps, interrelate to the extent that they should?

Mr. Donal McNally:

Well, each did its own work and it was integrated at the management advisory committee and that ... the business presentations for people explained what they were doing and what the issues were.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So at the management advisory committee, was it never considered that, "Look, do we all agree that this is a soft landing situation?" or-----

Mr. Donal McNally:

I think it just took the advice from the economic side that this was the general consensus.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay, and so ... would it always be the case or was it often the case that when stuff came up from the various units, that the advice was taken as read, as was the case with the soft landing as you've suggested there?

Mr. Donal McNally:

I ... not necessarily. I mean-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay, but on the soft landing one it was-----

Mr. Donal McNally:

Well that's what I said, I was never-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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-----at management council, that was accepted?

Mr. Donal McNally:

Well, that's what I said. I wasn't aware of that much contrarian views. It was-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And you were on that at the time, the management council, so there was just a kind of a contentedness to accept that as the-----

Mr. Donal McNally:

Well, I don't know if you'd call it contentedness, but there was-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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How would you describe it, if it wasn't contentedness?

Mr. Donal McNally:

It was a consensus view.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So would that be ... if it was consensus, you were happy with the view, would that be-----

Mr. Donal McNally:

Yes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. So that view then ... would that view then, following a management ... would that be shared with the Minister or what way did it work from then?

Mr. Donal McNally:

Well, the Minister would be given forecasts and informed that that was the assumption. That's my recollection.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Can you ever recall the Minister saying, "Look, are you sure about this?" I mean-----

Mr. Donal McNally:

No.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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No. He was equally content.

Mr. Donal McNally:

Well, I don't know.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. Did you ever feel that the Government deliberately ignored your advice?

Mr. Donal McNally:

I don't think so. I think the Government assessed it or would've talked about it. I wouldn't think they ignored it or they ... they didn't have to follow it. I mean, the Department of Finance is not always right. So, you know, it's up to the Government to decide, in the public interest, what the ... what should be done.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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The Economic and Financial Council, under Article 99(4) of the treaty in 2001, recommended that - now I'm quoting from your own speech - that Ireland would "take countervailing budgetary measures [in] 2001 to avoid overheating." And I think you said in your statement that that was dismissed at the time. Was it dismissed by the management council or by the Government or by the Government having been advised as such by the management council or ... why was this dismissed?

Mr. Donal McNally:

Well, it wasn't dismissed as much in ... it was not accepted by the Government because we had one of the fastest-growing economies, we had very good competitiveness, we had recorded a surplus of 4% in 2000 and we were projecting one for 2001 and it was felt that, you know, we were the best pupil in the class and were being unfairly picked out for this piece of advice, which was a formal recommendation. I mean, there could've been other ways of dealing with it rather than - as, perhaps, we thought - trying to make some sort of example of us. So, you know, we didn't feel it was a justified ... especially when other countries were struggling to make the 3% deficit and were using a lot of one-off measures to comply with the Stability and Growth Pact.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And could-----

Mr. Donal McNally:

And the decision would've been ... I mean, it was a half a per cent, which was a small adjustment, but it came post-budget and I think the Government decided that the budget was right and that they weren't going to alter it.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Can you remember the reason for saying that we were overheating? Can you remember why they were, I mean, in a sentence or two, could you outline ... why were they saying that we were overheating?

Mr. Donal McNally:

Well, I think it was because of the fast growth rate and the service sector inflation, which is part ... I mean, if you're catching up with other countries, you will find that that inflation will be a bit higher on the services sector side, which has less productivity than the traded side ... that that will tend to show higher rates with inflation. So, I think that was their motivation.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Was there any focus on the reducing percentage of exports as a contribution to national income as opposed to-----

Mr. Donal McNally:

Not that I recall-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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-----transaction taxes?

Mr. Donal McNally:

Not that I recall in the-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Would your unit ever have recommended tax cuts?

Mr. Donal McNally:

There were ... I don't know whether you'd use the word "recommended". There would be a tax package which was set out in the memorandum, with resources available for that tax package. And then, when it came to the actual formulation of these, you would've put proposals to the Minister, or a range of options, in terms of whether it should be rates or bands or allowances, and then for the Minister to decide on that. I mean, formerly, in the budget strategy memorandum, we were only recommending indexation. We were recommending limited tax reductions.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So, the-----

Mr. Donal McNally:

But we wouldn't have recommended that they cut the top rated tax by X%.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And how would it work typically? Would a Minister say to the other Department or say to the secretary of the Department, who, in turn, might say to yourself, or maybe directly to you, "Look, we want to cut taxes this year. What are the options?" Does it happen like that or-----

Mr. Donal McNally:

Well, a range of options would be given to the Minister in terms of changes to the tax rate ... well, not so much the tax rates but to the bands and the allowances and keeping people out of the tax net and what this would cost. And the Minister would make the decision on the amount of resources he wanted to give. I mean, it wasn't always huge cuts, there was ... there were very substantial cuts. In 1999 I think it was €1.5 billion and in 2003 it was €300 million. And I remember the Minister saying to me that because of the advance publicity, people seemed to more grateful to get the €300 million than they were to get the €1,500 million because of the expectations that there were.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay, just three very last questions. Just quickly, I got your advice in terms of the SSIAs which were covered earlier on. Was that introduced at the time as a countermeasure to inflation ... to rising inflation? Was that the theory anyway, behind it, from a Government perspective or-----

Mr. Donal McNally:

Well, as I understood from the Minister, he wanted to encourage people to save rather than to spend and to put something aside.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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To spend. Okay. And did it work?

Mr. Donal McNally:

Well, it certainly cost a lot of money and-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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No, no, I didn't ask that. We know how much it cost. I'm just wondering, did it work as a countermeasure to inflation or consumer spending at the time?

Mr. Donal McNally:

I can't say. There wasn't any study ... regrettably, there wasn't any study-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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There's no study done on it, okay.

Mr. Donal McNally:

So ... and I'm not quite sure how you would prove this.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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No problem, I've just two more now. The ... you mentioned, in terms of tax issues and tax relief and something like that, sometimes independent advice was seen as necessary. Which areas of tax policy were looked at as necessary and what independent bodies was it sought from? I've one very last one after this, Chairman.

Mr. Donal McNally:

Well, as I mentioned, there was a review in 1996 of the urban renewal. There were regular reviews of the film relief following which there were some changes made and, as far as I recall, it was Indecon who did those. It was just ... obviously the Department of Finance, if it had it's way, would have liked to curtail or get rid of some of these reliefs, whereas there were those who felt that they were important for the economy. We would have thought that, for example, the film relief was too generous and it was necessary ... it felt necessary for somebody outside who would have the confidence of both sides to review both the reliefs.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Yes, okay.

Mr. Donal McNally:

That was the main reason for going for independent advice.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Just very finally and on a different issue, we had Tony O'Connell, the chief economist of the Central Bank in here, who, as part of his evidence, made reference to what he called "the political and property interests on the board". Can I ask, from your perspective in the Department of Finance, did the Department of Finance, you and your colleagues feel that there was any, sort of, a political or property complexion among the authorities in the Central Bank?

Mr. Donal McNally:

I wouldn't have been that aware of the membership but I take the evidence of others that they fulfilled their duty in a public interest manner. I mean-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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But I mean, you could have a view, I mean, if ... did you have a view at the time, the Central Bank was working well or there seems to be a very-----

Mr. Donal McNally:

No I didn't have a view.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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-----political property type-----

Mr. Donal McNally:

I didn't have any view that there was any political property type in the-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy, you want ... actually on that before I ... you move on from Senator MacSharry's questioning. Just on the SSIA scheme; was there any study before or after its implementation as to its merits, goals, objectives and if or how these were achieved?

Mr. Donal McNally:

No, there wasn't any study carried out subsequent. The only evidence there was, I think, OECD work on savings schemes and savings incentivised schemes, which suggested that the money was moved around rather than that there was an actual increase in the amount of savings. I mean, there should have been a follow-up review of it but there wasn't.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Was there something to review, when the SSIA scheme came out first, was it saying, "Here's a big document, this is what this going to achieve, this is what the rationale for it is", and all the rest of it, then four years later, when the scheme expired-----

Mr. Donal McNally:

No, it didn't ... it didn't work like that, no.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There wasn't ... was there anything at the start?

Mr. Donal McNally:

Sorry?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Was there any document at the start saying this is what the SSIA is going to do or the SSIA-----

Mr. Donal McNally:

Well, there would have been a submission to the Minister outlining the various schemes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Where did it originate if you don't mind me asking you, Mr. McNally? Did it originate from the Department or was it a political orientation?

Mr. Donal McNally:

I think it was the Minister's wish to encourage people to save, that people had forgotten about saving and that this would be a prudent measure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So this ... the genesis of this came at a political level not at a Department level, yes?

Mr. Donal McNally:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And was it the Minister himself or-----

Mr. Donal McNally:

It was the Minster himself, as far as I recall.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Deputy Eoghan Murphy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. Thank you, Mr. McNally, you're very welcome. Earlier today, you spoke about challenging the Minister on different areas of policy or different proposals that were being put forward because you disagreed with them. Is that correct? You would disagree with the idea or policy that was being proposed so you would-----

Mr. Donal McNally:

Well, we'd put forward ... if there was a proposal, we'd analyse it and give the reasons for and against and it wasn't challenging the Minister; it was just trying to advise the Minister as best we could.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But would you come down on a certain ... would you favour a certain advice? I mean, for example you talked about the SSIA and you talked about the holiday resort tax reliefs and you not being in favour of them. So would the Department present ... analyse the proposal and come back and say, you know, "We think X and Y but we're in favour of X"?

Mr. Donal McNally:

But we would have, well ... the memoranda would have set out pros and cons, but I think it would have been clear from the pros and cons where the Department's feelings were.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And, in those two instances, you think it was clear from the memo where the Department's feelings were and they were against those two schemes?

Mr. Donal McNally:

I think so, yes-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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What-----

Mr. Donal McNally:

-----because we were expressing doubt over whether this would incentivise savings.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, what other proposals that came from the Ministers you served under? Would memos have come back where the emphasis was clearly on the con side?

Mr. Donal McNally:

Well, the memo set out the options and when reading the pros and cons, you'd be able to get a good idea where the Department's view lay.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, so-----

Mr. Donal McNally:

It was up to the Minister to make the decision.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So what other proposals that came from the Ministers that you worked for did the Department basically disagree with?

Mr. Donal McNally:

Well, the SSIA one is just the only one I can think at the moment. The rural renewal - we would have expressed some doubts as to the generosity of the reliefs.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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What about decentralisation?

Mr. Donal McNally:

I wasn't involved in the decentralisation. I don't know what advice was given in that regard.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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What about tax policies like halving CGT?

Mr. Donal McNally:

Well ... the ... we would have taken the view that there would have been a cost. And ... to my ... I'm telling a story against myself but I estimated that the cut in CGT would cost something like €19 million, but over the next four or five years, the revenue increased by tenfold, so there was obviously a behavioural change. People used the lower rate to cash in. So I mean, wouldn't say we opposed the cut. We pointed out the consequences there might be, which, in my case, it was wrong, plain and simple.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And so following something like that where the Department provides advices and they prove to be incorrect - and I suppose in that case it's dramatically incorrect - do you think then that has an effect on the way those advices are then treated or regarded going into future budgets?

Mr. Donal McNally:

I don't think so. I don't think the Minister discounted the advice but he always said that it's up to us to propose and him to decide.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and so again in terms of this culture of ... I suppose robust culture of challenging the Minister on different ideas and different proposals and writing memos, did you ever do this work in relation to what was happening in the property sector and the housing boom and what contribution that was making to the economy?

Mr. Donal McNally:

I don't recall having inputted on that.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Right, so ... one of the pieces of evidence we've heard about in previous sessions in relation to Morgan Kelly's work and how he published an article on a potential house price bubble in The Irish Timesat the end of 2006, and later published a report on the same theme as part of the ESRI's quarterly bulletin in the summer of 2007. So, when outside people, were, you know, having an impact on the debate in that way, what was happening in the Department at the official level in terms of analysing that advice and considering whether or not to take it to Government?

Mr. Donal McNally:

We would have analysed the advice and looked at what the OECD had said in 1986 where they felt that a soft landing was the likely outcome but a hard landing couldn't be ruled out.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So this is written in 2006 and 2007 and you went back to work from the OECD from 1996, is that-----

Mr. Donal McNally:

No, 2006.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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2006, okay.

Mr. Donal McNally:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So you would have given serious consideration to Morgan Kelly's work at the time?

Mr. Donal McNally:

It would have been looked at, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. And then when we look at things like the pre-budget letters coming in from the Central Bank, I mean, how much consideration would have been given to them? Because in the pre-budget letter from 2000, towards the end of 2000, looking ahead to 2001, it warned of a hard landing. It drew attention to the commercial price rise in property, to the residential price rise in property, to overheating in the economy and it talked about a risk of a hard landing so-----

Mr. Donal McNally:

I don't remember this particular letter. Sorry, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, well, we have it in evidence but you don't recall anyone going back, say, instead to a Central Bank pre-budget letter to look for ... to test against what Morgan Kelly was saying?

Mr. Donal McNally:

Not as far as I recall, no.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. In the Nyberg report on the banking crisis, he states that there was a general ... in general a pervasive pressure for consensus and conformity of views across institutions and one of the reasons was to "adopt specific policies and accepted practices that later proved unsound". So, in your opinion, was there a pressure in the Department of Finance in the years up to 2006, this pervasive pressure for consensus?

Mr. Donal McNally:

I don't think there was a pervasive pressure for consensus. I think that was the view; it wasn't forced on people. That was the view that was taken having analysed in economic data.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. So you didn't feel like it was a culture or political pressure at work within the Department?

Mr. Donal McNally:

No, there wasn't ... I mean, Ministers didn't get involved in economic projections. There wasn't any political input of that sort.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Can you comment on what changes, if any, occurred with the change in Ministers in 2004 in the workings of the Department?

Mr. Donal McNally:

I don't think there was any real change in the workings of the Department, the process continued as before. I mean, the main change that was made was the abolition of the tax reliefs, as far as I was concerned.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But in relation, in terms of practices, preparations for the budgetary process, was there any change in how that went?

Mr. Donal McNally:

It would have continued the same, as far as I ... I mean, there are things that have to be done, the Estimates settled, the decisions made on tax policy. It follows a particular course, there's a schedule of things and when decisions have to be made, which is normal, I presume the same happens now.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But the Department continued to play the central role it had played up to 2004, after 2004?

Mr. Donal McNally:

Yes, I think so, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. The final question I wanted to ask was in relation to lessons for the future. You spoke about prudent being not spending all your tax receipts in a given year, so I just wondered what the current thinking is, in relation to when you have a surplus, is it to run a surplus, is it to direct a surplus into some sort of fund like a pension reserve fund, or is it to pay off the debt? What would be the prudent thing, looking forward?

Mr. Donal McNally:

At the moment, I think we still are trying to make the 3% deficit, so a surplus may be a bit off. But I would think that the main recommendation of the Department would be to use the surplus to run down the debt as that's a burden on the people, which, you know, if interest rates rise will be ... will absorb more of the tax revenue. That's what I would imagine; I haven't asked in the Department what the priority is, but that would be my sense of it. That's what I would be recommending anyway, to use the resources to get down the debt or to find some way of minimising the debt.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you. Thank you, Chair.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Okay, I'll just deal with one question myself, Mr. McNally, and then we'll move towards the wrap-up and I'll invite both Senator Barrett and Senator D'Arcy back in again. If I could just relate to, and I think Senator MacSharry touched upon this with you just a moment ago, on 24 January 2001, the European Commission concluded that Irish fiscal policy was inconsistent with the broad European policy guidelines. They further asked Ireland to avoid further overheating of its economy, and there's a document, I think, coming up on the screen there now, but you make reference to this, I think, actually in your own opening address today, where you mention, I think, it's on page 4 of your opening statement:

The only notable exception to this is the recommendation issued to the State in 2001 by the Economic and Finance Council under Article 99(4) of the Treaty to take countervailing budgetary measures during 2001 to avoid overheating. This recommendation was not felt warranted and was not accepted by the Irish authorities.

And if I just, the document is there, if I just move one or two pages into it, it's page 13 of the document itself, on the bottom, it's ... next one ... next one again ... just page 13 of it. And if you look at the last paragraph of it there, Mr. McNally, just come in there about three lines down, it says:

Against this background, the Council finds that the planned contribution of fiscal policy to the macroeconomic policy mix in Ireland is inappropriate. The Council recalls that it has repeatedly urged the Irish authorities, most recently in its 2000 broad guidelines of the economic policies, to ensure economic stability by means of fiscal policy. The Council regrets that this advice was not reflected in the budget [of] 2001, despite developments in the course of 2000 indicating an increasing extent of overheating. The Council considers that Irish fiscal policy [of]2001 is not consistent with ... broad guidelines of the economic policies as regards budgetary policy.

And it goes on and on.

Now, we've had reports from some institutions like the IMF and others that said in around 2005, 2006, they were getting things wrong. But this one would seem to be very, very strident in its language and in its indication of action required and so forth. So could you, as I say, I think the document is of 12 February 2001, this, so ... and the European Council recommend that countervailing measures be taken, as I just cited. Could you tell us what action was taken by the Department of Finance on receipt of this very, very strong advice as outlined from the European Council?

Mr. Donal McNally:

Well, the ... I would have been advised just before that meeting of the Economic and Finance Committee, that they were planning to make this recommendation and I would have reported back to the Minister, who felt that it wasn't justified, and I would have argued at the Economic and Finance Committee that the recommendation was not warranted. I agree that they did, in the 2000 broad guidelines, say that we should stand ready to use countervailing measures. But we had a surplus of 4.3% in 2000 and were planning another surplus of 4%, so, you know, that is taking a lot of resources out of the economy. What they were suggesting was another 0.5%. In the end, the economy slowed in 2001, and the Commission did not renew the recommendation, it, sort of ... a draw was called, I suppose.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But, was the slowdown at the end of that year what you might call a quarter aberration that you get, you get a couple of weeks or a couple of months in the year but then the Christmas retail market comes along, expenditure, then growth and inflation kick off again, and it's business as usual? So is a one-quarter observation of an economic trend sufficient to say that things have changed?

Mr. Donal McNally:

Well, I just note the point that the Commission were asking us to do a lot more, or somewhat more, than what we were doing. And the economy did slow down; the initial forecasts were for no growth, that turned out to be growth in the end. But, you know, it's ... there was a feeling that we were being picked on, somewhat unfairly, and that did influence the view that was taken.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Was that an official view or a political view, that you were being picked on?

Mr. Donal McNally:

It would have been both, because I would have been at meetings where some countries managed to stay within the deficit by the use of once-off measures that couldn't be relied upon and others who managed to stay within minus 2.94%, just barely scraping within, and there wasn't that great level of growth in Europe. My view would be that they should have been concentrating on those issues, rather than on ourselves.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Senator Michael D'Arcy, five minutes to wrap up, please.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. McNally, can I just ask your view on the SSIAs again, please? Was that an example of the Government putting its hand into the national till for their electoral gain, in your opinion?

Mr. Donal McNally:

I think that what it was, was the Minister trying to encourage people to save and this was the way he saw as best doing so. The relief was given at 20%, which was the standard rate, and was given by means of a top-up, so everybody got it, irrespective of income. But I didn't see a political motivation behind it; at least, I wasn't aware of one.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And the decentralisation programme, could you clarify for me, please, you were unaware of that being announced in budget '04, is that ... did you say that?

Mr. Donal McNally:

Well, I knew there was work going on on decentralisation but it was kept within a fairly tight team, so that I wouldn't have known the details beforehand.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You didn't know the-----

Mr. Donal McNally:

I didn't, no.

Mr. Donal McNally:

I just knew that there was space in the budget speech for this announcement.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Okay. But you were one of the most senior people in the expenditure side.

Mr. Donal McNally:

No, I was on the budget side at that time, I wasn't on the expenditure side.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But you were one of the most senior people on the budget side.

Mr. Donal McNally:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And how many people were above you?

Mr. Donal McNally:

Just the Secretary General.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Just the Secretary General. And you didn't know about it in the-----

Mr. Donal McNally:

I knew there was something planned on decentralisation but I didn't know the details.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You didn't know the details, okay. Can I just ask one final question, Mr. McNally, and it's ... Rob Wright said he would have pressed the red button within the Department of Finance if he had been there. Is there a red button in the Department of Finance to press?

Mr. Donal McNally:

Well, I haven't seen one, myself.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you very much.

Mr. Donal McNally:

But you know, if, the Department would, if it saw the danger, would advise the Minister.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But there's no red button as such to press?

Mr. Donal McNally:

Not that I'm ... well-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I think the question is very pertinent to a time that he would have pressed the proverbial red button. Do you have a view as to when that proverbial red button would have been pressed, Mr. McNally?

Mr. Donal McNally:

I beg your pardon?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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The question ... the concept of the red button arose when it was put to Mr. Wright as to when should the brakes have been put upon things and would you have had a view as to when the brakes should have been put upon things?

Mr. Donal McNally:

Well, we were trying to advise the Government to step on the brakes ... that when you're ... when the economy is favourable, the time is to put some money in reserve and to, you know, slow down. So, I don't know whether it would have been a specific moment but we were trying to get this message across for some time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Senator, that it? Okay, thank you. Senator Barrett.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman, and thanks, Mr. McNally. When you were in the budget and economic advice section, Mr. McNally, 2000-2008, do you recall being "under siege" in 2007? Did that phrase be ... was it used at that time?

Mr. Donal McNally:

I don't recall being under siege in 2007, no.

Photo of Sean BarrettSean Barrett (Independent)
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Because Simon Carswell gave it in evidence and I'll give you the context now:

At one point the Department of Finance was described by one of its own officials as being "under siege" in [a] lobbying campaign by the financial industry. The aim was to get legislation passed to allow banks to issue bonds backed by commercial mortgages. The financial sector won out. The legislation was passed in early 2007, [right] at the peak of the property boom, making it easier for banks to borrow more money to provide more loans to more customers.

And this was the Asset Covered Security (Amendment) Act, No. 13, 2007. Were you involved in that debate?

Mr. Donal McNally:

No, no.

Photo of Sean BarrettSean Barrett (Independent)
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That doesn't refresh your memory?

Mr. Donal McNally:

No, not in any way and, I mean, I don't doubt ... I accept what is said there but I wasn't involved in that piece of legislation.

Photo of Sean BarrettSean Barrett (Independent)
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Because Mr. Carswell gave evidence that named bankers were particularly active at knocking on doors in the Department of Finance but yours wasn't one of them?

Mr. Donal McNally:

No, there was nobody knocking on my door on that piece of legislation.

Photo of Sean BarrettSean Barrett (Independent)
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In relation to your work on the McLaughlin commission, how does that stand now? Do you see the reforms that were recommended having had any impact at all or do you feel a certain amount of frustration?

Mr. Donal McNally:

Well, we were ... I know one of them was done in relation to motor tax and when vehicles are off the road. I'm not quite sure what was done in the follow-up on the other efficiency measures. I didn't keep track of that.

Photo of Sean BarrettSean Barrett (Independent)
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Because there were concerns about managerialism and bureaucracy and so on in that report, quite strong ones, directors of services, I mean, large surpluses. In fact, the excess numbers were quantified.

Mr. Donal McNally:

Yes. I didn't keep up with that, I'm afraid.

Photo of Sean BarrettSean Barrett (Independent)
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No. Have we wasted a good recession in that phrase then if we don't reform when these reports are there and we go through all the financial stringencies that we have had in this number of years?

Mr. Donal McNally:

Well, there have been cutbacks in numbers in the public service and there have been reforms undertaken. There's been the pay issue dealt with where pay scales got a bit too ... too generous but I don't know whether we've wasted this recession or not.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you very much. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Excellent. Thank you very much, Senator, and I'll bring things to a conclusion, Mr. McNally, and before I do, I just would like to give you the opportunity, if you have any final comments or remarks or a consideration that you might like to add as I bring matters to a close.

Mr. Donal McNally:

Thank you, Mr. Chairman, and thank you, committee members. I'm conscious that I may not have been as helpful as I set out to be because some of the issues were not directly my concern but I do hope that some lessons can be learned for the future, that some device is found whereby the natural inclination to spend the money when you have it, can be replaced by a more prudent and far-seeing course and I wish you well in that regard.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Are you familiar with the term "euphoric recall", Mr. McNally, are you? The term "euphoric recall". It's used in terms of recovery, particularly with addiction studies and stuff like this, and by means of a time to find a relapse. They also ... they note with addicts that they start recalling the past in a different type of light to the type of damaging way it was. Would you ... considering that you are maybe now retired but you're observing things as we move into the future, do you see any sort of dangers like this? That we look back to the past? Things like the SSIA scheme that we were discussing earlier and we might reshape them in our heads that might create difficulties for us going into the future.

Mr. Donal McNally:

Well, there's always that ... there's always that danger but hopefully the work and recommendations of the committee might be able to dispel that particular phenomenon. I'm not familiar with addiction.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Well put, that's a good point to close with, we'll keep you on. With that said, I would like to thank Mr. McNally for his participation today and for his engagement with the inquiry. The witness is now excused and I propose that we will break for one hour, resuming at 2.45 p.m. Is that agreed? At which time, we will hear from Mr. Charlie McCreevy, former Minister for Finance.

Sitting suspended at 1.50 p.m. and resumed at 2.50 p.m.

Department of Finance - Mr. Charlie McCreevy

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, will I call the meeting back into public session? Is that agreed? Okay. And we'll now commence with session 2 of today's public hearings with a discussion with Mr. Charlie McCreevy, former Minister for Finance. The Committee of Inquiry into the Banking Crisis is now resuming in public session. And can I ask members and those in public Gallery to ensure that their mobile devices are switched off? This afternoon we have the first of a number of hearings with senior members of Government who had key roles in the run-up to the crisis period. At this afternoon's session we will hear from Mr. Charlie McCreevy, former Minister for Finance. Charlie McCreevy was a member of the Dail for County Kildare from 1977 to 2004. He held several senior posts in Government and was Minister for Finance from 1997 to September 2004, after which he became EU Commissioner for Internal Market and Services from 2004 to 2010. Mr. McCreevy, you're very welcome before the committee this afternoon.

Mr. Charlie McCreevy:

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. And I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which will overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.

Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.

The witness has been directed to attend the meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. McCreevy, please.

The following witness was sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Once again, if I could thank Mr. McCreevy for being here this afternoon. And if I can invite you to make your opening remarks or statement to the committee please, Mr. McCreevy.

Mr. Charlie McCreevy:

Thank you, Mr. Chairman. I was Minister for Finance from the 26 June 1997 to the 29 September 2004. As directed by the committee, I submitted a statement on specific lines of inquiry relating to my role as Minister for Finance. As my period as Minister for Finance ended in September 2004, some considerable time before the banking collapse, my statement deals only with those areas of interest of which I might have some direct knowledge or which would have arisen during my tenure as Minister. This opening statement refers briefly to areas of my written statement.

The new regulatory structure was set up during my time and culminated in two separate Bills in 2002 and 2003. In 1998 the Government agreed in principle to the setting up of a single regulatory authority for financial services. Interestingly, the idea of an SRA was first mooted in 1989 but it was decided not to go ahead with same at that time. We asked Michael McDowell to chair the implementation advisory group. It consisted of nine persons and produced two reports, a majority report and the minority alternative model. It took some time to reach political agreement as to the new structure, which eventually led to the two Bills as referred to above. There was considerable disagreement and not just between the politicians. If you read the commentary on stances of that time, there was not universal agreement as to how and where the new authority should be located. I've noted with a certain degree of irony that a number of the politicians and commentators who wished to keep the Central Bank out of the key role at that time were to the forefront in advocating the return of all powers to the Central Bank post the recent financial crisis, and that has now been done.

Practically all of the debate of those years centred on the consumer protection angle, and little on prudential supervision. I outlined in my statement the various reasons for such debate orientation. I further outlined in my statement that the rules for the capital requirements for banks were designed internationally following the Basel committee recommendations. There has been a recurring notion in much of the Irish media commentary of recent years that principle-based regulation, also referred to as light-touch regulation, was an Irish invention. In particular, some commentators have gone so far as to advise that light-touch regulation was even a Charlie McCreevy invention. Much as I might be flattered to think that I might own the copyright, it is not the case, and light-touch, principle-based regulation was a long time in vogue internationally, and years before I arrived as Minister for Finance. At least some of the earlier evidence to this committee has at least scotched that notion.

I have outlined in my statement as to how capital requirements for Irish banks were managed under the same formulae and policies which applied to all the other European banks.

As the new structures were in the embryonic stage of development before I ceased as Minister in 2004, I can only comment in a cursory way on the co-operation and integration of the new bodies. However, during the setting up of IFSRA, I was strongly of the view that there was an excellent level of co-operation between the chair of IFSRA and the Governor of the Central Bank. The new structure allowed the Central Bank to concentrate on the macro level and to produce financial stability reports which contain guidance for the financial regulation to follow. IFSRA had responsibility for the individual institutions under their remit.

I now turn to direction from the committee on advice. Strictly, the reprimand from Brussels on our 2001 budget would fall under the heading of "advice". The European Union was of the opinion that our budget and stability programme update were inconsistent with the broad economic policy guidelines and issued this reprimand early in 2001. However, in November 2001, the Council of Ministers lifted its earlier reprimand and stated, "Unexpected economic developments were such that the inconsistency underlying the recommendation has lost its force." This says much about the whole art, if it is one, of economic forecasting. In fact, during the course of 2001, the international economic slowdown had gathered force arising from a number of factors, and economic activity in Ireland had declined sharply. In fact, the year-on-year increase in real GDP in Ireland decelerated from 13.1% to 0.1% in the last quarter, thus the 2001 Irish budget was then seen in a different light in Brussels. I shall also mention that, in 2001, there was much criticism of the EU reprimand, and not just from the Irish Government. Many commentators, nationally and internationally, were critical of the EU stance. As many referred to at the time, there appeared to be one set of rules for the larger countries, and a different book for the smaller member states.

On the issue of advice given to governments from many quarters, the Department of Finance, Central Bank, ESRI, OECD, European Union, IMF, and others, the line taken by all democratic governments is that it is just what it says on the tin, advice. Democratically elected governments must, at all times, with their freedom, do what they consider best, in the interests of their people. Yes, this means the ignoring of some advice and the taking of others. I note with some wry amusement that the current Government, as is their right, seems to be steadfastly ignoring advice from a plethora of sources. The Fiscal Advisory Council, established in law by the present Administration, are saying that the projections for growth, consumer spending and population are too optimistic. Also being sidelined are commentaries from the ESRI, the European Commission, and the IMF, not to mention some domestic economists and commentators.

My high regard for the Department of Finance and the staff is well known and has been documented many times previously. However, it is not a criticism when I note the very obvious. Very few worthwhile initiatives of different political Administrations would never have seen the light of day if advice from the Department of Finance had been followed. One of the most groundbreaking changes in Ireland was the introduction of free secondary education in the sixties by the late Donogh O'Malley. This was done without the approval of Finance, and those of an historical bent know that the Department was so exercised, that it got its Minister, the late Jack Lynch, to formally complain to the Taoiseach. Finance were totally unaware of the proposal, and O'Malley was, indeed, in contravention of Cabinet rules for making such a major announcement without informing his other colleagues, and, in particular, the Minister for Finance. Wasn't it a good job for Ireland that Seán Lemass ignored the angst of the Department of Finance?

I look back on the advices from a number of the already mentioned sources. For example, in 2002 the main theme seemed to be the threat of inflation, and there was little talk of housing prices, or that general area, in any of the commentary. In fact, a leading economist was so concerned in 2002 on the slowdown, that he suggested the diverting of funds, of the annual contribution of the pension reserve fund, and putting that money into capital projects. Some commentary always referred to the fact that we had €1.5 million people between the age of 50 and 34, and that the demand for housing would continue to be very strong. To illustrate, again, the futility of forecasting, I would draw attention to the 2000 report from the long-term issues group of the Department of Finance. It predicted a total population of 4.1 million in 2056. It's about 4.6 million today. And that the Exchequer debt would be wiped out entirely by 2012. During my time as Minister for Finance, I was painted as a right wing ideologue, possessed of a Scrooge-like parsimony when it came to public spending. On the other hand, post the financial crisis, I've been turned into a kind of Santa Claus and the philosophy most often attributed to me by my detractors is supposedly encapsulated in the quote, "When you have it, you spend it". It is ironic that this comment was made on the publication, in November 2001, of the following year's departmental Estimates. The headline in the Irish Independenton the following day was entitled, "McCreevy takes the axe to public spending". The first line of that article reads, "Finance Minister Charlie McCreevy last night brought to a shuddering halt the big-spending era that went with the economic boom", end of the headline. Later on, in that article, it refers to me saying, "When you have it you spend it. The mistake is to try to spend it when you haven't got it". Now, however, I think it can be fairly said that the above actual comments of mine, when I was answering a question as to why I was reducing public spending, have been distorted and non-contextualised to an extraordinary degree. The comment at that time attracted little attention but seems to have got a special lease of life during the economic downturn. The reason for such misrepresentation ... well, to quote from another scribe, "It might just be an interesting example of the way popular quotes get distorted over time to better fit the public perception of the person who made them".

I vigorously disagree with the assertion that the Government, during my term as Minister for Finance, misspent the proceeds of the stellar economic growth of that period. We did increase spending in a large number of areas to make up for lost time, and for the under-provision of services in the previous decade and a half. As a percentage of GNP, in 1986, Government expenditures stood at 58%, and Government debt at 122%. At the end of 2003, the respective figures would have been 38% and 35%. In respect of spending during my time in office, I've set out, in tabular form, the percentages for total Government expenditure and gross current expenditure. These figures are taken from the public document Budget Statistics 2014, published by the Department of Finance. The figures I quote are in respect of GNP and, of course, the percentage figures in terms of GDP would be lower. In terms of GNP, gross Government ... gross current expenditure ... I'll leave ... the figures for Government expenditure are in a different column; I'll just refer to the gross current expenditure figures. As a percentage of GNP, in 1997 it was 35.2%, and that relates to a previous Government of Fine Gael and Labour. In 1998, for me, it was 31.7%; in 1999, it was 30.4%; in 2000, it was 28.1%; in 2001, it was 29.5%; in 2002, it was 30% even; in 2003, it was 29.8%; and in 2004, it was 29.8%. No matter how these figures are interpreted, it is quite clear that there was no splurge over the period. This was a period of considerable economic success. The numbers for people at work increased massively; there was practical full employment; the scourge of forced emigration ceased after 150 years; we experienced the welcome new phenomenon of migration to Ireland; the population increased dramatically; we increased spending considerably in the areas of health, education and social welfare; the pension for the aged was increased to a proper level; child benefit more than doubled; and many other improvements in public services. And, during all of those years, we ran substantial Exchequer surpluses, except for a small minus in one year. This was achieved after paying for a massive public capital programme, the most visible example being the now excellent road network, and yet there was still a surplus. We also set up the National Pensions Reserve Fund, setting aside most of the proceeds from the Telecom privatisation, and setting aside 1% of GNP annually. This fund was intended not to be touched until after 2025, and was there to provide for future pension liabilities. Since the recent financial downturn, critics are suggesting that we should not have spent all of this money.

So if we had spent less, it would have meant larger budget surpluses and some have gone on to say we should have built up further rainy day funds, apart from the pension reserve. Now, are these people for real? In a political democracy, it is especially difficult to run any kind of a budget surplus and many were even against the idea of the pension reserve fund. It is difficult to run a surplus in a democracy. If there was one patient untreated by the health services, one family without a house, one special needs person without proper services, one pay demand unmet, what justification would any Government have had for increasing the reserve fund and initiating further buffers? Not alone would it be politically unacceptable but I suggest it would be morally wrong also.

The next theme of the committee refers to the property sector and, by implication, the question of tax incentives in that area. Activity in the construction sector has always been a key driver of economic activity. Despite the gains made in residential construction over the years, Ireland's housing stock is still below the EU average in units per 1,000 of population. This is particularly obvious in 2015, which results in rents climbing substantially. Furthermore, it has always been part of the Irish social culture for persons to actually own their own home. This led the Government to initiate various reports of the housing market, which resulted in some changes. Tax incentives for the property investment have been a feature of the Irish tax code for over 50 years. As far as I can research, there are incentives as far back as the 1959 Finance Act. Some have sought to give the impression that the property tax incentives only really started after the '97 Government came into office. However, if you look at the list of incentives by non-Fianna Fáil-led Governments, you will find many others, such as urban renewal, seaside resorts, designated islands and many more.

My attitude to property tax incentives is summed up in my budget speech on the 2003 budget, when I was going about ending the deadline for some of the schemes. I proposed ending many on 31 December 2004. As I said in that speech, "the existing demand for property investment and the desire to improve equity in the tax system, there is no justification for a continuation of these reliefs beyond 2004". Regarding the philosophy of property tax incentives, I stated, "I am a supporter of properly-focused, clearly defined, specific reliefs which can encourage the development of goods and services, including public services, which might otherwise not be provided, or where provided, are too little or too late." So to conclude, quite recently an Irish commentator wrote the following:

The reality is that economics is a social and not a physical science. Economic outcomes are generally driven and shaped by human behaviour, and unfortunately human behaviour is rarely possible to predict with any degree of certainty.

During my time as a student in University College Dublin, what is now the department of economics was then known as the faculty of political economy. The longer I was in politics, the more I understood the accuracy of that old definition in UCD. Thank you very much.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. McCreevy, for your opening statement and we'll get matters under way. I just want to deal with one item first with you if you don't mind and maybe that is just to ask your comments from contributors to the Wright report indicating that there was a lack of leadership and direction in the Department of Finance during the period of 2000 to 2010, and its effectiveness was limited. Would you agree with the comments made and what should have been done or is still to be done to improve the Department's role and effectiveness going forward?

Mr. Charlie McCreevy:

On the basis that there is nothing being done today that couldn't be done better and I suppose there are things being done today in the Department of Finance which are being done better than they were during my time but ... so, I am sure the Department of Finance has taken on board some of the commentary in Wright and other inquiries that they made themselves and the ongoing work that they do to improve themselves. I can only speak for my time at the Department of Finance. I found the officials there very helpful, working extremely long hours, prepared to - at the drop of a pin - to go and do things which were way above and beyond the call of duty. I found them helpful in every respect. They argued their viewpoint very forcibly, they ... and then when, if you wanted to go in another direction, they went off and did what you told them to do. That's the job of what good public servants do and I can only say that I think they vigorously fought their corner. I found nothing during my time to say that there was anything but the highest level of intellectual capacity applied to all the problems and the best officials I think in the public service were there.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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One of the continuous themes running through the Wright report is the positioning of counter-cyclical policies that may have been advocated by the Department of Finance and issues relating to potential overheating in the economy. The question, as I put it to you, was that Mr. Wright makes a critique of leadership and direction in the Department during that period, in terms of trying to make those arguments and that it was very very limited. Would you agree with Mr. Wright's analysis or would you have a different opinion?

Mr. Charlie McCreevy:

Well, I found the Department of Finance came along and put their views. But, like, unless we want to go to another kind of structure on ... whatever kind of democracy you want to call it, it's the Government of the day that makes the decisions and it's the Minister of the day that runs his Department. There is no ... in the words of a former Secretary General at Finance, still alive I know, there is no such thing as a departmental view of government. There are only Ministers' views. I am some time intrigued in recent times to read when politicians, and we all have done this, try to get out of trouble as to why something can't be done. They come along and say the Department of Finance won't let us. That's only a cop out. If you convince the Minister for Finance - that's the person to go to and he can overrule his officials if it's a good enough case. I am sure if you go back over my 27 years in the Dáil when I was a backbencher, I perhaps used that as well. I don't recall so doing but it's an absolute ... so if the Department of Finance come along, argues it case, it puts some of those things in writing and they fight their case. Then the Minister goes and makes the decision and the Government makes the decision based on what the Minister and the Government want to do. So, therefore, there is no difficulty, I found no difficulty with the Department of Finance giving their views. I don't really understand what Mr. Wright wants the officials in the Department of Finance to do. Maybe to stand outside Merrion Street with a loud hailer or something like that. But you couldn't run any democracy on that basis. I am sure when Deputy Pearse Doherty becomes Minister for Finance and Deputy Joe Higgins is Minister for Public Expenditure, that they will get loads of advice from the Department of Finance and they'll blindly ignore it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. McCreevy, and you are correct in the points you are making there and I made it to Mr. Cardiff there last week when he was before us. Just to remind both witnesses and members of the committee that as we look at public servants and we look at politicians, while public servants may give advices and bring advices to Ministers of the day, the decision rests solely with the politician, not with the finance-----

Mr. Charlie McCreevy:

Correct and that is the way it should be, and that is the way it is in every representative democracy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay thank you. Deputy Pearse Doherty.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, a Chathaoirligh, agus fáilte roimh an tUasal McCreevy. Can I begin first of all by asking you through 1999 to 2003, the Governor and the Central Bank warned you of excessive growth in the credit markets, warned you about the housing markets, commercial property markets, overheating in the economy and, finally, the possibility of a hard landing and this could lead to unhappy economic and social consequences. So Mr. McCreevy, with hindsight, and given the advice you were receiving, should you have been more cautious in taxation and spending policies in your budgets?

Mr. Charlie McCreevy:

Well, I have outlined in my opening statement as to what the success of that economic period gave us and what we spent the money on and at the same time, we see we ran budget surpluses. And during my ... there was, of course, an increase in house prices over that period but there has been an increase in house prices long before that period as well. In fact, I took a little liberty of going back and looking at Central Bank kind of commendations for the last 30 years or so and you'll nearly find the same thing in every report of a central bank in Ireland and elsewhere as well. Central bankers are by nature, and rightly so, obliged to worry about things like inflation. They'll always advise the Government to run surpluses if they can run surpluses and even when we had large indebtedness, they were saying back years ago "well you shouldn't give any tax concessions at all and you should more or less cut down the public services entirely."

And Governments took some of that advice on board and trained their budgets, as I did in my time, in what I considered the best possible way and the proof of the pudding has been in the eating. We achieved economic growth of considerable measure. We did the things which I've outlined there earlier and no disaster came to pass. So I don't accept that, in my time as Minister for Finance, until 26 September 2004, that any of these disasters occurred as predicted by all these people. It just didn't happen.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So, would that be a "No"?

Mr. Charlie McCreevy:

A "No" to what?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The question I asked you. The question was, in relation to the warnings that the Central Bank were issuing you in relation to your policies in terms of the credit market, the housing market, the commercial property, the fact that they were warning of the possibility of a hard landing which could lead to unhappy economic and social consequences, with hindsight, and given the advice you were receiving, should you have been more cautious in taxation and spending policies in your budget?

Mr. Charlie McCreevy:

No.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, I appreciate that. Do you accept at all that your policies had ... well, first of all, can I ask you do you believe that there was a property bubble?

Mr. Charlie McCreevy:

Well, I think, at the end of 2003, I think an interesting few figures - and I'm sure the committee has got these from the Central Bank and from other organisations as well - I think if you look at the lending figures to ... in this whole area of residential development and commercial development, when you summate it from all the banks, you come at one ... there's a fairly ... it's a reasonable figure, but it's ... but, by the end ... over the next ... from 2003, say, to 2007, I think ... it went up by an extraordinary amount, the amount of moneys that banks were setting aside in this general area. I'm sure the committee has the figures-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, we do.

Mr. Charlie McCreevy:

-----from other sources. Like, it's a colossal change so I'd be pretty satisfied, at the end of 2003, and I was also responsible for the budget for 2004, I didn't see any of the dangers to which you are referring to, no.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So ... but do you believe, do you acknowledge that there was a property bubble-----

Mr. Charlie McCreevy:

Well-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----at some stage?

Mr. Charlie McCreevy:

Well from 1990 ... you must remember at different periods, different things happened. At the end of ... in early ... if you look at the figures, when we implemented some of the Bacon recommendations regarding interest and other ... the interest, deductability, etc., etc., whether it was as a result of that or other factors in the global economy or in the Irish economy, construction activity fell off markedly in that particular period and we were ... instead of employment going up in the area and prices going up, they started to come down. But we're also looking ... look, as I said in my earlier address, economic growth in that ... from the first quarter of 2001 to the last quarter went from 38% to 0.1% and so, therefore ... therefore, it wasn't a universal spike all the while where it's going upwards in terms of property prices either. There was that period as well. But you must remember, in Ireland, like, the population of Ireland increased dramatically. I was here in the Dáil since 1977 and-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, I appreciate that, Mr. McCreevy.

Mr. Charlie McCreevy:

-----the population went as low as 3.5 million and now ... it increased dramatically so there was a continuous demand for housing-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I know. I understand. I am not-----

Mr. Charlie McCreevy:

-----and houses were in short supply.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----looking for an answer in terms of the demographics, I just wanted to know, as a former Minister for Finance, do you believe that in any time there was a property bubble in the last 15 years in Ireland? Just to find some basics as to what your thinking is.

Mr. Charlie McCreevy:

Well, I'm only ... I was only directed by the committee to refer to my role as Minister in my time as Minister for Finance and that ended in 2004 and I'm answering for my stewardship.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And any other questions that the committee deem relevant and this is one of the questions to try and understand your thinking, whether you're a person who denies that there was a property bubble in the run-up to the crisis or whether you're a person who accepts there was a property bubble and then it will lead me on to looking at your policies and seeing did your policies have a role-----

Mr. Charlie McCreevy:

Well-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----on that either fictional property bubble or a property bubble that you acknowledge exists.

Mr. Charlie McCreevy:

Well, I can only answer from my time as ... in the role as Minister for Finance and that's all I've been asked to do.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. McCreevy, there would be relevance and I would try to be consistent with all witnesses and I usually wrap up with asking witnesses if there's anything they could offer in terms of advice to this committee to the future - you might just stop the clock there for a moment - because one of the things I would hope that everybody would want to see at the final report when this committee has completed its work is to ensure that the type of trauma and difficulties that was put on the shoulders of ordinary people in this country do not have that revisited upon them again. So, what we ... so I would see a relevance to different decisions made at different times and the systemic consequences of them. That's not to say that you're to blame or to fault, but whether there is a relationship or not a relationship. So, in that regard, I would allow a freedom to be discussing things beyond 2004 that may be related to decisions ... or decisions that were or were not taken during the period leading up to 2004.

Mr. Charlie McCreevy:

Well, can I just say, Chairman, the following. You can check the record to establish that this is correct or not. I ceased as Commissioner in February ... European Commissioner in February 2010. I have not made any comments on any aspect of Irish public policy since that time. In fact, during my time as Commissioner I was very reluctant to say any comments at all, but since that time, despite requests from all types of media, journalists of all descriptions, people that write books, etc., I ... and I've been very tempted on occasions to so do, I have never, ever made a comment either to defend my own record-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sure.

Mr. Charlie McCreevy:

-----or anything else. I said that's what I was going to do when I finished public life and I've stuck by it, even though I've been sorely tempted-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sure.

Mr. Charlie McCreevy:

-----and I'm not going to break it today.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, but I would still ask you ... because you are under direction and you are under oath to ask questions that are put to you by members that are in order.

Mr. Charlie McCreevy:

They can, of course.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Doherty.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So, will you answer the question?

Mr. Charlie McCreevy:

Which question?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The question again is do you ... are you somebody who acknowledges that a property bubble happened in this country in the lead-up to the crisis?

Mr. Charlie McCreevy:

I have answered the question to the best of my ability ... is that, what I was ... what were the figures when I ... during my time as Minister for Finance, which ended in 2004, and I didn't think at that time that there was a property bubble.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Do you acknowledge that a property bubble emerged after your time as Minister for Finance?

Mr. Charlie McCreevy:

I'm sure that's what the committee is going to deliberate upon and come to a conclusion when it makes its report.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I'm looking for your view.

Mr. Charlie McCreevy:

I don't have one.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You don't have a view?

Mr. Charlie McCreevy:

Well, I don't have a view which ... I am not going to break the edict I put on myself, is that, in commenting on what happened after my time.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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See, can I ask the Chair ... just a minute. I want to ask the Minster for ... I want to ask the former Minister about property tax reliefs that you introduced and continued to extend and did they have an impact to fuel the property bubble. I need to determine here, at the committee, whether you believe there was a property bubble or not. I cannot ask the questions because you're avoiding answering a very simple question which I think is very relevant to this committee-----

Mr. Charlie McCreevy:

Well I don't know-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----and which has been ... you know, which has come from the Honohan report and other reports. Chairperson, I'm asking-----

Mr. Charlie McCreevy:

You see, I don't believe-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----for a direction here.

Mr. Charlie McCreevy:

But, Deputy, I don't believe that there was a property bubble during my time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. I ... Mr. McCreevy ... and if need be, we can kind of break into private session to discuss this and iron out the legalities of it, but I'd rather not do that. There is-----

Mr. Charlie McCreevy:

I've no trouble answering a question about property tax incentives. That's not going to a problem at all.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. I think the question that ... that would be leading to is a systemic relationship between decisions - action, outcome and consequence and so on - and the issue here is policies taken at a particular time, did they have systemic consequences to lead to something else. And the question that Deputy Doherty is presenting is did these actions add to something happening afterwards and, within the terms of reference, I would consider that to be a fair question. Deputy Doherty.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Again, could you answer the question? Do you believe that there was ... a property bubble had emerged in this country before the crisis?

Mr. Charlie McCreevy:

I ... when I left as Minister for Finance in September of 2004, I didn't think there was a property bubble.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And, Chair, I'm going to ask for ... that we adjourn because this is just ... we need to deal with this, unfortunately, but I've asked the question now five times and I'm halfway through my time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, we'll adjourn. I'd propose that we adjourn. In doing so that the ... and we're suspending ... sorry, suspending, not adjourned. And the witness is reminded once he begins giving evidence he should not confer with any person other than his legal team in relation to his evidence on matters that are being discussed before the committee. With that in mind, I now suspend the meeting until I deem it time to resume again and I remind the witness that, while we are doing so, he is still under oath until we resume. So, I just need to go into private session for a moment, we'll get a legal position actually on this, and then we shall resume. So, if I can clear the public Gallery, please, and the ushers will indicate when we're back in public session.

Sitting suspended at 3.29 p.m. The joint committee resumed in private session at 3.42 p.m. and went into public session at 3.48 p.m.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. McCreevy, thank you for coming back into the committee room and I just want to deal with some matters formally. And I would like to remind the witness that if you refuse to answer a question which falls within your direction, you may be subject to criminal sanctions under section 75 of the Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act 2009. Further, if you refuse to answer any question without being entitled in law to so refuse, the committee may make a finding of you that you failed to comply or fully co-operate with the inquiry in its final report under section 14 of the Act. Also, in your direction to come before the committee here today, you were also put on notice that the committee may make a recall of you on Wednesday or Thursday of next week, at which time we can amend the directions to actually broaden out the line of questioning, if we so desire, once it falls within the terms of reference of the broader inquiry. So, with that said, if we can now actually proceed with our line of questioning and if I can start ... restart the clock and ask Deputy Doherty to ask his question again, please.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Thank you, Chair. Mr. McCreevy, at any time in the decade preceding the crisis, do you believe that there was a property bubble in this country?

Mr. Charlie McCreevy:

Well, as I said before we were interrupted, certainly after ... from 2003 to 2007, all the figures would seem to indicate that the price ... house price escalation was of an extraordinary degree. So in that particular context you could call it, I suppose, a bubble.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. And in relation ... do you believe that your policies impacted on that bubble or helped to create that bubble or to sustain that bubble?

Mr. Charlie McCreevy:

I don't believe that the policies I pursued helped to create that bubble.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Okay.

Mr. Charlie McCreevy:

It's for others ... others can have a different opinion about this-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, that's ... yes.

Mr. Charlie McCreevy:

-----but I don't.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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That's fine. The Bacon report proposed a series of measures to curb price increases, including a 9% stamp duty rate for investors, a 2% anti-speculation property tax - measures that you initially supported, Mr. McCreevy, but then rejected. Why did you change your mind?

Mr. Charlie McCreevy:

Well, let's go back a little bit. There were three separate Bacon reports. They were commissioned by the Minister for housing. The first one was requested in November '97, and reported in April '98. The evidence in all of that time was on the first-time buyer. If you read the commentary in the newspapers and the Dáil debates, everybody was concerned that the first-time buyer was being forced out of the market, and he or she couldn't get their foot on the first rung of a ladder, so the Minister for housing requested the Bacon report. The Bacon report made, kind of, certain recommendations and that resulted in the Finance (No. 2) Bill of 1998. The main reasons for ... there were a lot of other things in the Bacon report related to housing supply, etc.-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We're ... we're aware, we've had Mr. Bacon before the committee and he gave us a good chronology of the report.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Allow Mr. McCreevy a bit of time to answer now as well, Deputy.

Mr. Charlie McCreevy:

But the Finance (No. 2) Bill 1998, the main things it did was it disallowed the interest on persons purchasing second homes; it changed the stamp duty regime substantially; we had a reduction of CGT and development of land from 40% to 20%, if it was to be developed within five years, and the penalty was to increase CGT to 60% if hoarded. There was an interesting, very interesting Dáil debates at the time. The two main Opposition parties opposed it. One of the Opposition parties was considerably against the interest ... the disallowance of interest deductibility. And I remember him saying, and you can check the Dáil debates, that all this would have unintended consequences. So that was the effect of the first Bacon report.

Then we have the second Bacon report, and when the second Bacon report came out, prices had slowed down since 1998, but rents ... prices had gone down on houses, but rents had gone up 24% in Dublin and 17% in the rest of the country. Apartment prices had gone up 24% and there were about 42,000 units completed that year. Now, actually that report of second Bacon 2 praised the new student accommodation tax relief that I had in budget 1999. And it also praised the new urban tax scheme for 43 towns cities that was in that time as well. And then we had the Bacon No. 3 report that reported in June 2000. And that report concluded firmly that rates of increase in prices on new and existing homes in Dublin were down sharply since 1998, and that's what the report said. It also said that immigration of 200,000 to the country was expected over the next seven years, and this led to the Finance (No. 2) Bill of 2000, and that third Bacon report and the subsequent Finance (No. 2) Bill 2000, led to the introduction of the 2% anti-speculative tax, and tax of 2% of non-principal private residences. Now, the interest deductibility and other changes were made subsequently, as Deputy Doherty has pointed out, and the reason for so doing was that we got a fair shock as to what was happening in the economy in 2001 into 2002. As I referred to early in my address, growth had fallen off considerably. There ... if you read the figures from the CIF and from the housing bodies, there was considerably less economic activity in the housing sector, or in the construction sector generally, and unemployment in that area was starting to rise, and that's why we reversed our approach on deductibility and the 2% anti-speculative tax did not take place. It was really made redundant as well.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And why did you scrap the ... the original question, why did you change your mind on the 2%?

Mr. Charlie McCreevy:

Because I just said ... because we thought ... we believed at the time and the figures had borne it out, is that the effect of what we done in Bacon No. 1, in particular, was in danger of killing off the whole construction activity in the country and-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So, it was to boost the construction activity? Or to maintain it at least, is that the answer to the question?

Mr. Charlie McCreevy:

Well, I think the second part of your question about ... to maintain it-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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To maintain the construction industry. Okay, Professor John FitzGerald of the ESRI was very critical of the changes you made, the fact that the 60% capital gains tax on zoned land along with the changes you made to the Bacon proposals. He told the inquiry on the 11 February, and this is evidence that he's given, he said:

The fiscal policy was most unwise, and it fuelled the programme. If we had a sensible fiscal policy, we would not be where we are now.

Do you agree with him?

Mr. Charlie McCreevy:

I do not agree. But then this wouldn't be the first time I disagreed with either FitzGerald junior, or late FitzGerald senior. I don't think I've ever found an occasion to agree with any of them ever. So, I certainly ... I read what he said and I didn't agree with it then, and I don't agree with it now.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay ... like, is it just personal or is there anything of substance that you can give us-----

Mr. Charlie McCreevy:

No, no, no ... it's not personal I don't know the gentleman at all but I do not agree what he said then and I looked at it, he said it again in the committee. In fact, I think he said to the committee that he took great pleasure in it ... in saying it was wrong-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In terms of the-----

Mr. Charlie McCreevy:

-----or words to that effect.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In terms of the property taxes, and you've mentioned a number of them there, urban renewal scheme, the rural renewal scheme. How many times did you extend those property taxes?

Mr. Charlie McCreevy:

I haven't looked it up quite recently but they have been ... you must remember property tax incentives had been ... the deadline for completion had been extended by many Governments over a long period of years, and as has been outlined during early inquiries of the committee with other witnesses, there were often very good rules in that. Some people start off a venture, there are a lot of hold ups, usually with planning permission, financing, etc., and we have to ... it comes to a stage when money ... a lot of money is being expended and you're going to call off that ... and most have been transitional arrangements which we have done and, on a few occasions-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did you extend them in the Finance Bill 2004?

Mr. Charlie McCreevy:

In the Finance Bill 2004 actually, I did the opposite. In Finance Bill 2004 ... was I ... bear with me and you could accuse me of a little bit of contradiction of what I had done in previous finance Bills. In Finance Bill 2004 I proposed the ending, and brought forward the dates to the end of 2004. That was the main change in Finance Bill 2004. If you look at what I said then I brought forward the closing dates to 31 December 2004, and that actually was against what ... would have been against the spirit and the commitment that people had entered into, because I think the dates originally were 31 December 2006, I think if not later, and I decided to cut off a number of reliefs. And as I said in my opening statement, I brought back the dates to 31 December 2004. So actually I did the opposite.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And you didn't extend any at all in that finance Bill?

Mr. Charlie McCreevy:

We did ... If you look, I-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Like many of these reliefs continued right up until 2008, Minister.

Mr. Charlie McCreevy:

Yes, because the Government subsequently decided, and since I'm going now after my term in office - and we had a little bit of a disagreement about that earlier - the Government subsequently decided, as I understand looking at the Finance Bill, to extend the closing dates of some of those particular schemes, that I had in budget and Finance Bill 2004 ... ceased, extended the closing date. It wasn't me that did that. I'm sure the Government were convinced that they had a reason to do it.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did you extend the transitional arrangements in those measures?

Mr. Charlie McCreevy:

I think we had ... I think there was ... I'd have to look up the ... I haven't had a chance nor would it be possible for me to so do ... of what all the details were, but, as far as I can recall, in 2004, what I did was that I brought forward the closing dates for a various schemes at the time. I mentioned in the speech what are the ones-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. If you don't have them at the minute-----

Mr. Charlie McCreevy:

If you look at the budget speech, you'll see it.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes. For budget 2006, Indecon took on a review of property-based tax incentives and, on page 32 of the report, it said, "The options of financial institutions, auctioneers, and accountancy tax professionals regarding the effect of the property-based tax incentives as well as other analysis undertaken by Indecon suggest that, in addition to increasing investment and projects, the tax incentives had led to an increase in site prices, financial returns to promoters and property prices." Do you accept that outcome ... that finding of the Indecon report?

Mr. Charlie McCreevy:

I certainly ... I was aware that the Government subsequently done a report that you’re referring to there but I certainly had never read the report, so I’m not too sure as to what they said. But the Government and the Department of Finance would at all times, even in my time, be assessing the validity of various schemes. So, I understand, in 2006, as you said, they got a big report done on all of those schemes. But it’s hard to like ... since I haven’t read the report, I can’t comment on the specifics of it, but it’s hard to make such a sweeping statement that all the property tax reliefs in all of that period contributed to house price inflation, in particular. Like, since the schemes to which I were responsible for introducing, were such like for nursing homes, rural renewal ... I certainly would ... I can argue the toss about rural renewal; it’s a fairly ... But it’s hard to think how the nursing homes relief escalated the property price of housing - child care facilities in the 1999 Finance Act, student accommodation I did in the ’99 Act, park and ride, which, I think, there was a very little uptake on it.

There wasn't ... as far as I know, in my time, from answering questions in the Dáil, I'm not too sure whether really did anybody take it up, up certainly to the end of 2002 in any event, maybe someone did. We brought in town renewal ... and actually town renewal ... the number of towns that took it up, were a lot less then we had envisaged at the outset ... there was a list of a couple of hundred. Private hospitals ... there was a relief brought in in 2000, sports reliefs in 2002-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. McCreevy, I just have to interrupt you one second.

Mr. Charlie McCreevy:

-----so it's hard to know how they would go to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry, Mr. McCreevy, I'll just interrupt you on that. I'm getting phone interference there, please, and I don't want to reading out a second legal warning this afternoon to somebody but will they turn off their phone please? Sorry, Mr. McCreevy.

Mr. Charlie McCreevy:

So, I just ... I can see what the Deputy is getting at but it's hard to relate that to some of these reliefs there that I had brought in as my time as Minister. Now there were, you must remember ... prior to my time as Minister, you must remember there were urban renewal which is being ... which came in in ... urban renewal actually started in 1986 Finance Act-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, we're aware of that------

Mr. Charlie McCreevy:

-----so, it is ... so but I'm saying that some of those reliefs there-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, but you were Minister for seven years. You'd brought in seven Finance Bills during ... where those urban renewals continued through that period. I want to move on to another question.

Mr. Charlie McCreevy:

I ... just a small correction, I brought in nine Finance Bills.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Nine Finance Bills. Well, there you go. One of the statutory objectives of the Financial Regulator was the promotion of the financial services industry in Ireland. To what extent did Government encourage the Central Bank to pursue this role internationally? And in your view, did the ... this objective compromise the prudential role of the Financial Regulator?

Mr. Charlie McCreevy:

I don't think ... I couldn't see for a moment how it would've compromised the role of the regulator in terms of the prudential supervision of Irish banks. And I'll tell you why I would believe that. There are many reasons why financial services have come to locate in Dublin or, now, in any part of the country. The main ... but the main reason for so doing, for the respectable funds, is to be ... is to be in an area, in a country, which they had ... is regarded as well regulated. That's what these firms and banks and institutions want to locate in Dublin for. You can make other cases about tax, etc., etc., but one of the primary reasons is to be located and regulated from a jurisdiction that's recognised as having good prudential rules and regulations. So it would be a negative, in the medium to longer term, for the regulator to not go about doing his job in a sufficiently robust way because the ... it would then get out that Ireland was not the place of proper regulation and, therefore, we would lose our cachet in attracting firms there. So, I do not believe that was the case.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. In your view, were the regulatory institutions of the State focused on the non-labelling of the IFSC as an offshore haven, instead of ensuring that the domestic banks were regulated in a sufficient robust manner to mitigate against the financial stability risks arising from the domestic sector?

Mr. Charlie McCreevy:

Well, during my time in Finance we were always grossly offended by anyone in the international press referring to us as a tax haven. In fact, we ... it was the one thing that concerned the Irish Government, the Department of Finance and the Department of the Taoiseach and they were exercised any time there was ever a hint in an article that Ireland was a tax haven. There were strict definitions of what a tax haven was by the OECD and others and we certainly were not then, or since, a tax haven. And so, therefore, we never ever ... Ireland would vigorously object in all of those years, including to the present day - I'm sure, the current Minister would say the very same - we do not regard ourselves as a tax haven. We have a low rate of corporation tax which-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, sorry, I am aware of that. The question was-----

Mr. Charlie McCreevy:

But not a tax haven.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The question was, were the authorities overly concerned with making sure that the IFSC was not labelled as a tax haven to the detriment of prudential regulation? That was the question.

Mr. Charlie McCreevy:

Well, I wouldn't know as to how they divided their resources in the regulatory office. I wouldn't be aware of that at all-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay.

Mr. Charlie McCreevy:

-----but I would regard it as, if the ... it would be a very short-sighted policy if they so do. But I didn't have any evidence, in my time, that that was done.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Can I ask you, you were responsible as Minister of Finance for appointing the majority of the board members to the central board and Financial Services Authority of Ireland board and the board of IFSRA. Can I ask you, how did you come about ... how did you decide on who to appoint to the board? And it seems, you know, your appointments to the board of the Financial Regulator included, besides others, a senior counsel, a former member of the Independent Radio and TV Commission, a journalist, a former CEO of the beef trading company and chairperson of the IDA - who was also former director general of the Irish Business Employers Confederation, IBEC, the former chairman of a large estate agency. And Brian Patterson, the former chairperson of the Financial Regulator, told this inquiry that he made you aware of his lack of experience in financial regulation at the time of his appointment. So, can I ask you, how did you come to deciding who to appoint and what were your reasons to appoint persons with very limited regulatory or banking experience to the board of the Financial Regulator?

Mr. Charlie McCreevy:

Well, I did see in the reports of the committee where Mr. Patterson had said ... referred to some discussion we'd had when he was appointed the chairperson of IFSRA. I don't recall the particular discussion but I know ... if Mr. Patterson said that, that's what he said. I take it that's what did occur. And, as I said in my opening statement and in my witness statement as well, all the ... in setting up the new structure, you can look at all of the Dáil debates and all of the Seanad debates and all of the commentary and you'll see all this concentration on consumer issues to the exclusion of nearly everything else. And bar myself and, once or twice the Front Bench spokesperson of Fine Gael, referring to the prudential area of things, that was about the only discussion you'll read at all about prudential in all of the debates on two Bills ... not alone the two Bills but all the four years that went by before we actually set up the bodies at all and all of the controversy there was about the difference between us and the Department of Enterprise, Trade and Employment, about where the location of new bodies should be.

When it came to the appointment, I actually ... I can't remember how Mr. Patterson came to be appointed. I certainly never knew him. I never knew him in any walk of life. So I assume he must've came up through a process that maybe the Department of Finance or the Department of Enterprise, Trade and Employment pursued at that time. We did try to ensure when we set up the body CBFSAI, the Central Bank of Ireland and Financial Services Regulatory Authority, we had them ... IFSRA here ... and we had the broader body then. We did have, I think, about six members of the IFSRA on all - including the chief executive chairman - on the board of the larger body as well. And that was done in order to accommodate and to meld the two organisations together because there'd be a lot of controversy about setting up this in the first place. But regarding the individual appointments, some of these people that ... if I can recall, were appointed to the board of the Central Bank by non-Fianna Fáil-led Governments. Exactly one person-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, I'm asking about you-----

Mr. Charlie McCreevy:

But I appointed those people ... most of those people that I appointed, we did it in a small process. We put forward a few names, we put a journalist on that ... a journalist and novelist, I'd call the person-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. Charlie McCreevy:

-----for ... to really give an emphasis on, say, really talking about consumer, so that other people had been, in all walks of life, had different experiences. And when you're appointing a board, you appoint people to a board that you think bring different experiences to the area. We ... at that particular time ... Deputy Doherty mentions why not some people with regulatory experience? Well, I don't know what people were around ... looking for ... with regulatory experience that we would've picked from but, in any event ... the board of a central bank, you'll need a broad range of experiences------

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Okay-----

Mr. Charlie McCreevy:

-----so, I wouldn't make much of that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can I ask you ... when I asked Kevin Cardiff, who was here, of who lobbied for the guarantee, your name popped up. He mentioned that at a meeting on 23 May, you suggested to him that a broad statement would be made. Can you enlighten the committee as to, first of all, your recollection of that conversation with Kevin Cardiff? What was your motivation for saying that to Kevin Cardiff? Had anybody spoken to you prior to that or subsequent to that? And in your opening statement you talk about the engagement you had with senior bankers, which was more at an authority level, but can you also discuss some of the private engagements you had, particularly in August 2008, with the very senior bankers in Anglo Irish Bank?

Mr. Charlie McCreevy:

Well none-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Was there any lobbying done-----

Mr. Charlie McCreevy:

No-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----in relation to any of this?

Mr. Charlie McCreevy:

No, I read what Kevin said to the inquiry. I have no recollection of the meeting or the conversation. He said he attended an event at which I was presumably the guest speaker, I'm presuming it took place in Dublin. And I don't know whether ... after the event, whether sitting around and having a cup of tea, whether I asked him ... I told him or he asked me for an opinion. But, so I've no recollection of what I said then. But I would have a clear view as to what I would've been thinking around that particular time.

I was in Brussels as EU Commissioner for Internal Market and Services and financial services had come to dominate the latter half of my term there as Commissioner and most of my cabinet would have been Irish members and we would have been reading the Irish newspapers, listening to Irish media outlets and all the debate was going on about Ireland and you certainly, we were very concerned just as Irish people, as to what was happening back home - as anyone would be - and it's probably, members of the committee know, your nationalistic fervour grows exponentially particularly when you're abroad in another country because you don't want other people saying bad things about your country. So there was all this emphasis on Ireland, so, as Kevin said at the .. the thing, and I'd say it's very accurate what he said, I said more or less to him "I think it's time", I probably said "Someone should make a broad statement about the situation." Now that is a long time, that was six months or so away before ever there was-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You think you said that because your statement-----

Mr. Charlie McCreevy:

Well I don't know what I said, but Kevin said in his statement, this is what he said and Kevin said ... I think you were querying or someone was querying whether ... querying whether it was a, a legal guarantee or a political guarantee and so Kevin said, in my situation, he just said casually that-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So was that the sum total? The other part of the question was, was that the sum total of all your conversations-----

Mr. Charlie McCreevy:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----like, and I mentioned the meeting that you had with Seanie FitzPatrick in August 2008. Was there any lobbying done?

Mr. Charlie McCreevy:

No, well, I don't ... where'd I meet Seanie FitzPatrick in 2008?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Well, sorry, it's reported that you met with a senior banker in 2008, in August 2008. That right?

Mr. Charlie McCreevy:

I don't ... I don't get ... I ... I have no recollection-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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My apologies if that's incorrect.

Mr. Charlie McCreevy:

I have no recollection of ever meeting ... in fact, I, I can speak of Seán FitzPatrick ... he-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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My ... my apologies if that ... if that's incorrect.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You are now going over matters that are taking place outside of this committee room Deputy.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, but the question is that you never discussed a guarantee with anybody else outside of Kevin Cardiff?

Mr. Charlie McCreevy:

No, no, I ... can I just point out at that particular time ... I ... we would ... I would have thought that, and I'd say others thought as well, there was a lot of commentary, a lot of articles written with the Irish situation and many Irish people of all types of backgrounds were writing and sending in opinions to everybody as to what should be done. But can I just put it; at that particular time I don't think there was ... it was just talking about broad support of the banks and I think that they subsequently to the guarantee, this legal thing about what was guaranteed became an issue. But I'll nearly wager most people here that around that time, and that would be September, there was no much talk ... there was no ... when you're talking about supporting the Irish banks, it wasn't talked about ... these wonderful terms like subordinated bondholders etc. etc. I doubt that there was any much comment at all about that because most people, most people were warning something will have to be done. And my view, just as a concerned Irish citizen and someone who had been in the Department of Finance and would have known the pressure the guys in finance would have been over, and knowing Kevin Cardiff I'd probably just say-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You have my apologies to Mr. ... my apologies to Mr. ... my apologies to Mr. McCreevy by stating as a fact, which I didn't determine what it was - it arises out of the fact that there's a chapter in this book called The FitzPatrick Tapescalled "Drinks with McCreevy [and] Dinner with Cowen" which gives, in great detail, a suggestion that there was a meeting between yourself and Seanie FitzPatrick in all this business-----

Mr. Charlie McCreevy:

Well I can even ... you did say it was Seán FitzPatrick, we'd better clear this up for a start. I know Seán FitzPatrick since 1973. He's a bit older than me but we qualified at the same time. We worked in Craig Gardner accountants - now PricewaterhouseCoopers - we were there as seniors for a year and a half or so, together with the leader of the Labour Party, Joan Burton, who was a classmate of mine in UCD. So I know Seán FitzPatrick for that length of time but my only thing is with Seán FitzPatrick as a banker was that at one stage he was chairman, I think, of the Irish Bankers Federation and so I think they had a lunch or a meeting one time where they met us around the big table. This is back in my time in finance. I ran into him many ... a few times socially. I never played golf with him even though he's quite a ... he's a very good golfer, people might like to know that, but I actually never played with him, as far as I know. And I know him that length of time, but like I've no communication with Seán FitzPatrick. And by the way, for the record, I haven't drank for over 20 years.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much Mr. McCreevy. Deputy Eoghan Murphy. Deputy 25 minutes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you Chairman and thank you Mr. McCreevy, you are very welcome. I want to go right back if I may just prior to you becoming Minister for Finance. In opposition you expressed a number of reservations about our entry into the euro and just two months before you were made Minister for Finance you said in an interview with Jane Suiter, "It will be interesting to see if you can have monetary union without an integrated process". So upon your appointment as Minister what did you do to protect Ireland from our entry into the euro, in terms of the shortcomings that you had seen?

Mr. Charlie McCreevy:

Well, one of the better committees that I was involved in in my political life, and that includes Ireland and Europe, there was a committee chaired by the late Jim Mitchell, set up in 1995 I would say, and I was spokesperson ... I was the finance spokesperson for Fianna Fáil to look at the whole area of our possible entry into the euro. And the late Deputy Mitchell brought all types of views before the committee; people who were very for joining it, people who were against. So we had a very robust discussion and no one ... we learnt a lot, all of us there, and it worked. We got very little headlines but actually it was very keen, so therefore all of the issues were thought about then. When I, as Deputy Murphy has alluded to, I would have had concerns about us joining the euro, as most ... as a lot of people did. Interesting enough, to show how ridiculous the economics profession is, our biggest, one of our biggest concerns at the time was that when we join the euro and our nearest neighbour wasn't joining. That was the big issue at the time, that we were going to join the euro and knowing that the United Kingdom wasn't going to join. Now it shows the development of the Irish economy since we joined the EU in 1973 that we were able to take that decision and consider it, knowing that our nearest neighbour, our biggest market, were not going to join. And one of the biggest issues that we had at the committee was the fear that we would join the euro, that the rate for the Irish ... the euro versus sterling would go totally in the wrong direction for us. And if you read some of the expert views we got done by many eminent economists who predicted that the Irish rate might go to €1.10 - €1.09, €1.10. Deputy Murphy will be aware that the total opposite occurred and we went in the other direction to as low as €0.66, €0.67. So it goes to show what all the experts ... but when we ... when we ... when I became Minister for Finance then in 1997, I actually was the Minister responsible then for making the formal decision and it took place ... or the euro notes and coins didn't start till '02 but we joined from 1999. And the major decision I had to make was at what rate we were going to join vis-à-visthe Deutsche mark and if I remember correctly, Ireland, when we devalued in '92, '93, we went to a rate, off the top of my head, the Deutsche mark from DM2.67 to DM2.41. It was then that the Irish pound kept appreciating against the Deutsche mark in '96, '97 and '98 up along, and the rate was when we were going to join and I said ... we kept our counsel very ... our cards very close to our chest and I finally made the call and we joined I think at the rate was DM2.48667. Why I can remember these figures I just don't know but I think they are fairly accurate.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Mr. McCreevy-----

Mr. Charlie McCreevy:

So the answer was, we had taken in the period of time, we had decided that it was in the best interests of the Irish economy knowing that ... knowing the difficulties of the UK not joining. Plus the difficulties of that we were joining a currency union without ... without central budgetary and fiscal policy, because take the United States for example. Well if there was a big crisis in Minnesota, the Federal Government can make a decision to put resources in Minnesota. You don't have that with the euro, we don't have a central government to decide. So we knew all those downsides but we decided that it was in our best interests that we would join, knowing the downsides.

Now, one of the downsides was that we gave up control over our interest rate policies and that, that, if I was to make any ... if I was to ask one thing that the ... would have lessened the economic impact of the housing crash that Deputy Doherty referred to I would say ... I would say the loss of interest rate control was the biggest, because without any shadow of a doubt if we'd been there, if we had our own interest rate setting policy outside of the euro we'd have had higher interest rates.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes, I want to ask you about this though because this was predicted in 1998 that once you fixed the exchange rate mechanism, that there would be a push for a fall in interest rates following which a wall of money would hit the Irish economy. So that was being written about in The Irish Timesin 1998, on the Monday just after you fixed the exchange rate mechanism, so what did you do to prepare the economy for that?

Mr. Charlie McCreevy:

Well, if you think you look back on the figures Deputy Murphy you'll find that the wall of money didn't hit the Irish economy immediately-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But it was predicted.

Mr. Charlie McCreevy:

No, but walls of money started hitting the Irish economy when the international banks and investors decided that you'd get a great return for investing in the paper that Irish banks were putting forward because Irish banks were making colossal profits etc. etc. and it was far better to do that. That's what happened subsequently.

But in the immediate aftermath that didn't happen - I think the figures will justify that.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But did you foresee the problem coming?

Mr. Charlie McCreevy:

Well, we, if you look at the committee of Deputy Mitchell, you ... I haven't looked at it for years ... God, that's 18, 19 years ago and I certainly, I wouldn't know where to find it, but I would be fairly, I think it would have been referred to, that particular report. But you must remember, we all decided, I mean all the political parties, Fianna Fáil, Fine Gael, Labour, I'm not too sure about any smaller, were there any other smaller parties then, we all decided it was in the best interests of our country to join. And by the way, I was often criticised when my nomination was put to go to Europe as Commissioner, I didn't always sing from the same hymn sheet as everybody about the greatness of having the euro project. I always knew that there were downsides to it. I would have signalled it as well, but it was in the, our overall best interests. We all thought we'd join the euro, and I still believe that to this day.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, just coming back to this idea of preparing for consequences of that decision, and the reduction in interest rates, and what that would mean for the Irish economy, and your time as Minister, not going back to the committee before you were Minister, what were you and your officials doing to prepare the economy for this new money coming in?

Mr. Charlie McCreevy:

Well, what we did was to, I think, I would have maintained anyway, Deputy Doherty might disagree, a pretty successful economic and budgetary policy for our period in office. You must remember, it was ... I know, I've said about high interest rates could have lessened the impact of the subsequent property crash but remember also that high, that low interest rates gave an opportunity for Irish businesses in the non-construction sector to actually try to make a bob, because we had been paying for years colossal interest rates and it was hard. How some businesses survived over the previous 40, 50 years is a great tribute to them, so there were benefits to having the low interest rates and the Irish economy had become very, very, very competitive over a period of time. And another thing may I say, if you look back at commentators when I was in government as Minister for Tourism and Trade when we had to devalue the Irish currency, we were forced to devalue the Irish currency, it wasn't working, and 19 out of 20 economists predicted that it would be a disaster and it would lead to rampant inflation. In fact, it was the makings of the economy-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Mr. McCreevy, could you just stick to the questions that I am asking, please? I mean, I appreciate that you have, you know, a right to answer the questions but I'm trying to pursue a particular line of evidence. Now you mention in your reply there about the success of your budgetary policy as part of you preparing for the dangers of, the risks associated with euro entry. But, in 2001, at the beginning of 2001, we see the censure from the Commission, and it states:

Given that the monetary policy is now set for the Euro area as a whole and no longer available as an instrument at national level, other policies, including budgetary policies, must be used more actively. ... The Council recalls that it has repeatedly urged the Irish authorities, most recently in its 2000 broad guidelines of the economic policies, to ensure economic stability by means of fiscal policy. The Council regrets that this advice was not reflected in the budget for 2001-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can you cite the document Deputy please, in fairness?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair, it's Vol. 1, page 13, "The Council regrets that this advice was not reflected in the budget for 2001, despite developments in the course of 2000 indicating an increasing extent of overheating." That's a censure that came from the Commission in 2001, which you have alluded to in your opening statement. So that's what the Commission is saying about Irish budgetary policy and fiscal policy, in 2001.

Mr. Charlie McCreevy:

Yes, and I've said earlier in my statement, and other times as well, we disagreed entirely with the Commission's assessment at that time and less than one year later, the Commission lifted the reprimand because it turned out the Irish ... it turned out that actually, the stimulus that they were complaining about being given in my budget of 2001 was actually what was, could be deemed to be, anti-cyclical by the end of 2001 so they lifted the reprimand.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Exactly. By the end of 2001; but this is the beginning of 2001. So, it was an accident.

Mr. Charlie McCreevy:

Hold on, Deputy, but as I said in other parts of my statement, nearly all, it looks like to me, at the end of my statement, like predicting things with certitude in terms of economics is a very futile exercise. It usually doesn't turn out that way and I've given many, many examples, and there are many other examples as well.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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This wasn't a prediction, this was looking back, at previous budgets. I'm not talking about their recommendations for the coming budget, that they would make recommendations together with the opinion, I'm talking about them regretting that the advice was not reflected in the budget for 2001, "despite developments in the course of 2000 indicating an increasing extent of overheating". They're looking back, in that judgment.

Mr. Charlie McCreevy:

No, they gave the reprimand in February, March 2001, the budget was in the previous December right? That was when the budget ... the budget was the previous December 2000, they gave a reprimand about the 2001 budget in February-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Based on overheating in 2000.

Mr. Charlie McCreevy:

Yes, but they had been, they were proved to be wrong.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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In relation to the recommendation for the future, because of what happened subsequently in the course of 2001.

Mr. Charlie McCreevy:

But, Deputy, we would have believed, and most other outside commentators would also believe, that the Irish economic situation, which was generating large budgetary surpluses, which was enabling us to reduce the national debt from the figure that it used to be, that all this was in the best interests of the long-term sustainability of the Irish economy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, let us accept that on the Commission side. The Central Bank pre-budget letters, the pre-budget letter in 2000 - this is coming in at the end of 2000 for 2001- talks about commercial property prices as a source of concern, this is page 83 in Vol. 2, it warns about competitiveness in the economy and the heightened "risk of a hard landing for the economy", because of decisions taken. So you're getting this from the Central Bank as well.

Mr. Charlie McCreevy:

But Deputy, like-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Are they both wrong?

Mr. Charlie McCreevy:

But you see, Deputy, in 2001, if you refer to when a hard landing occurring, okay, we'll say a hard landing occurred in 2008, 2009. This is maybe a decade before the hard landing took place and I noted that in subsequent Central Bank reports and in subsequent ESRI reports, as late as 2006 and 2007 and 2008, they were predicting a hard landing was not going to occur at all. So they were considerably wrong, in 2001 and 2002, because a hard landing certainly didn't occur in my time in office; in fact they changed their minds later in the decade and then it turned out there was a hard landing.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So the Central Bank and the Commission were wrong?

Mr. Charlie McCreevy:

Yes, they were, yes, and I think the proof of the pudding is in the eating. They were.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And did you pay any attention to the pre-budget letters that came from the Central Bank, in your time as Minister?

Mr. Charlie McCreevy:

I think I would have read the ...