Mr. Brian Cowen:

Thank you, Chairman, and good morning to you and the members of the committee. I'll be as, move as quickly as I can through this statement. I'm here to resume my evidence and discuss with you matters relating to this inquiry during my time as Taoiseach from May 2008 to March 2011. I wish to reiterate a couple of points I made the last day regarding my own approach to the events and policies that relate to the Government I led during my time as Taoiseach. In setting out my position and answering all questions, it is not my intention in any way to pass my responsibility to others. I'm stating clearly from the outset today that I accept my share of responsibility for what happened to our country and our people during the time in question. Last Thursday, I pointed out that we pursued an economic policy that had a plausible basis, based on the assessment of risks, leading up to the crisis. I've stated that it is now evident that there was a clear misjudgment of the risks and the possible impacts. The overall conclusion, when looking at risks and opportunities for the economy during those years and the mid-term outlook at the time, was that there would be a continuation of economic growth, and that we wanted to expand the productive base of the economy by investing in our infrastructure and improving the provision of public services. I provided ample evidence that this developmental approach is one that was broadly shared across the political spectrum at the time and much of the public debate was whether the rate of improvement and investment was going fast enough. I've also accepted in my evidence thus far that had we spent less, we would have been less exposed when the crisis hit. It would have come at a cost of having less employment and economic growth but that in turn would have reduced our ability to come out of the recession as relatively quickly as we have. One way or the other the impact of the financial crisis has meant a serious adjustment in the public finances, which could not have been avoided in any event.

I will now outline, to the inquiry, some key elements of my written submission. The domestic standing group continued its work after I became Taoiseach throughout the summer months. On the banking front this ... the briefing remained that the Irish banking system was soundly based on all key indicators of financial health, solvency, liquidity, acid quality and profitability. Irish banks had no meaningful exposure to the sub-prime securities, which were deemed to be at the root of the international liquidity crisis overall. Irish banks were experiencing significant challenges in rolling over their funding sources and international sentiment was negative. While banks were working intensively to exploit any funding opportunities available internationally, the banks in Ireland had built up large reserves of assets that were eligible to be used as collateral against lending by the ECB in the event that other funding sources weren't available. In general, Irish banks were reluctant to access this funding owing to the risk that it would send a negative signal to the market and lead to the shutting down of other credit lines. The Financial Regulator and the Central Bank were monitoring the liquidity position on the banks on an ongoing basis. The Financial Regulator was impressing upon banks' boards and top management about the need to examine all options to pre-empt the emergence of any difficulties. It was stated that State intervention is only appropriate in circumstances that problems in an individual institution run the risk of creating systemic difficulties in the national financial system as a whole. Strong performance in recent years of Irish financial institutions was providing a good cushion, it was believed, to deal with the then financial market environment.

By late June, the continued disruption of wholesale financial markets and its effects on banks securing funding on an ongoing basis had persisted and commentary was now suggesting that it would extend well into 2009. The scale of the impact on the sub-prime housing market in the US was gathering momentum. Work was also being done in relation to competition policy issues in the case of one financial institution being taken over by another participant, or the prospects of that, and the need to ensure that any Competition Authority approval could be speedily provided if required.

Liquidity issues continued to be monitored over the July-August period. The assessment of the international financial market situation as it was affecting Ireland stated that in the context of the general loss of confidence in the financial sector, the perceived vulnerabilities in the Irish domestic financial sector and the high levels of exposure to the property and construction sectors had come into sharp focus.

The share prices of individual banks at this stage were worth about half of their values compared to February 2007. Irish banks were coming under pressure to maintain dividends. There had been a decline in growth and lending. New mortgage lending had declined from €16.5 billion in the first six months of 2007 to €13.8 billion in the same period in 2008. There was little international financial investor appetite in Irish financial institutions.

In the context of international concerns regarding the growth and dependence by banks on liquidity from central banks, while it was noted that the overall level of ECB funding availed of by banks in Ireland had increased from €39.5 billion to €44 billion, domestic banks accounted for just €15 billion of the total, though this figure fluctuates over time. The increased costs and reduced availability of wholesale funding on international credit markets, particularly for longer terms, had led Irish banks to tighten lending standards coinciding with the downturn in the real economy driven by the necessary adjustment of the construction sector. The principal focus remained on the restriction of liquidity to the Irish financial institutions. Contingency planning in relation to legislation related primarily to bringing an individual lending institution under State protection and at no stage did the work of the DSG embrace the possibility of a systemic risk to the whole banking system.

Things escalated in September when, first of all, there were rumours about INBS. It was evident that confidence was fragile among the individual depositors and this lack of confidence rapidly spread to all lending institutions. Reports of people withdrawing their money from Irish lending institutions became amplified through media commentary and there was a general disquiet at what was happening at home and abroad. A silent run by depositors had begun on Irish banks. It was felt, as a first step, that ordinary individual depositors needed to be reassured in response to this worrying development. The Government decided after a consultation with the relevant authorities to increase the existing deposit guarantee scheme from €20,000 to €100,000 and to increase cover from 90% to 100%. This appeared to have the desired effect in reassuring people about the safety of deposits up to €100,000. As a result of that Government decision, the amount of money covered under the new terms of the deposit guarantee scheme was over €70 billion. This decision had the desired effect of providing confidence to depositors who had deposits in accounts up to that amount, in that Government was standing behind those accounts. The number of depositors covered was numerically large, although wholesale deposits were significantly of greater value. It temporarily bolstered confidence in the system generally, though deposits of over €100,000 remained outside the terms of the scheme.

Analysis up to this point was based on information from and conversations with PwC regarding Anglo and Goldman Sachs regarding INBS. The initial focus by Merrill Lynch had been on Anglo and INBS but this soon expanded to include all six banks, encompassing Irish Life & Permanent, EBS Building Society, Allied Irish Banks and Bank of Ireland. The Merrill Lynch draft preliminary analysis presented a number of options and the main elements of each option were considered. On 28 September Merrill Lynch presented a memo containing more information and an in-depth analysis and this memo stated that, liquidity issues aside, all of the Irish banks were profitable and well capitalised. However, liquidity for some banks could run out in days rather than weeks. The memo highlighted the need for the Government to preserve the stability of the Irish financial system as a whole and to safeguard the interests of bank customers to avoid widespread panic. PwC was engaged to review the loan books and the capital position of the six Irish banks covered by the guarantee. The PwC report stated under a number of stress test situations that all of the Irish financial institutions which they reviewed would have sufficient capital to meet the regulatory requirements up to 2011. We knew over the weekend of 27 and 28 September that Anglo and Irish Life & Permanent were going to find it hard to get through the following week in terms of having cash to conduct their day-to-day business.

At the Government meeting on Sunday, 28 September, the Minister for Finance gave an oral presentation to update the Cabinet on the evolving situation. He made them aware of the context in which we were operating in general terms. It's noted that no decision was taken at the Cabinet meeting on that day in relation to this matter. The international banking situation was very volatile and the liquidity position of Irish banks was being seriously affected as a result. At that meeting the Minister for Finance reiterated the position that the Government was committed to the stability of our financial system.

The Government wanted to protect the whole financial system and secure its stability and ensure that all deposits in Irish financial institutions were safe. By Monday, 29 September there had been more banking casualties: Hypo Real Estate in Germany, Fortis Bank in Belgium and Bradford and Bingley in the UK.

Regarding the guarantee night, I wish to state that what I relay here about what happened on the night of 29th and 30th ... sorry, the 29th and the morning of the 30 September 2008 is, to the best of my recollection, knowledge and belief, a true and accurate account. However, I cannot be absolutely certain of the exact chronology or events as they unfolded but I believe that this account provides a substantive recollection of that night's events and the process by which decisions were reached.

Money continued to leave the system and the rate run increased to such an alarming degree that arrangements were made for a meeting to take place at the Department of the Taoiseach after close of business on the 29th to review the situation. This took place in the meeting room adjacent to the Taoiseach’s personal office. It's worth remembering that over the course of that evening, while I remained in the meeting room, some people left the room for the purpose of consultation, information gathering or to undertake some technical work. All major decisions were taken in the meeting room.

From the beginning of the meeting, those in attendance were: myself; the Minister for Finance, Brian Lenihan TD; Attorney General, Paul Gallagher SC; the Secretary General of the Department of Finance, David Doyle; assistant secretary of the Department of Finance, Kevin Cardiff; the Governor of the Central Bank, John Hurley; deputy governor of the Central Bank, Tony Grimes; chairman of the Financial Regulator, Jim Farrell; chief executive of the Financial Regulator, Patrick Neary; and Eugene McCague, from Arthur Cox and Company, solicitors. The Secretary General of the Department of the Taoiseach, Dermot McCarthy, joined the meeting after it had started having been delayed performing other duties in preparation for a Cabinet meeting the next day. I have a recollection also that another Department of Finance official, William Beausang, was present for some of the meeting also. The meeting began around 6.15 p.m. - 6.30 p.m. and as I was chairing the meeting, I didn't take any notes myself.

As the meetings began, the seriousness of the discussion become clear very quickly. Governor Hurley outlined what had been happening during the course of the day regarding the lending institutions. He referred to a situation which had developed at Anglo where it had lost €2 billion in deposits that day and they expected the rate run ... sorry, the run rate to continue the next day. Before Monday, the opinion was that Anglo would have sufficient funds during the course of that week - this was now not going to happen. The issue was going to have to be addressed immediately. Bank shares were down in the stock market and he pointed out that Anglo had run out of cash. He said a very serious situation had developed. Other institutions were also having significant liquidity problems and unless the outflows stopped and reversed, we were heading into a very dangerous territory indeed. This had developed into a system-wide crisis.

Mr. Neary and Mr. Farrell, from the regulator’s office, outlined their serious concerns. I recollect that they were of the view that something significant had to be done immediately to stabilise the situation. In that respect, they spoke of the need for the introduction of a guarantee to be considered in view of the serious situation which had developed across the financial system. I recall I asked the Governor what the view of the ECB was and to provide us with an update as to what the ECB’s position was at that point. Governor Hurley had been in touch with the president of the ECB, Jean-Claude Trichet, over the weekend and confirmed to the meeting that there was no euro-wide initiative in the offing and just as other countries had to take decisions on their banks, it was clear that we were on our own, we would have to deal with this at a national level.

The position of the ECB, of which Governor Hurley was a member of the governing council, was that no bank was to be allowed fail because of the contagion effects that would ensue in the euro area. In other words, there could be no Lehman Brothers type event in the euro area. Confidence had to be restored as a matter of urgency or else the run rate of outflows would ... could accelerate and leave us with an irretrievable situation. The Governor made the point that we would have one go at addressing this and if it didn't work, we may not get a second chance to revisit it as confidence could be gone. Where a first initiative may be deemed inadequate by the market, putting forward a second course of action could then completely undermine our credibility. His outlining of the seriousness of the situation had an immediate impact on all present.

The Minister for Finance contributed to the meeting at this point and agreed with the analysis and the up-to-date position given by the Governor. He indicated that he felt part of the solution would be the nationalisation of Anglo Irish Bank. I did not think that nationalisation should be a first course of action and I said so. As I said, my first thoughts in assessing the situation that had been outlined was that if ... I did not find ... that I did not find the nationalisation option attractive as a first response. I had a number of reasons for thinking like that. First of all, I did not see it as a confidence-building measure at that stage given the volatility in the markets. For example, would it create an expectation that other nationalisations were to follow? Secondly, nationalising a bank meant taking all of the assets and liabilities onto the State’s books there and then, immediately.

The nationalisation option was, in effect, an open-ended guarantee. The guarantee option looked like a safer option if it was time-limited. Given the sentiment in the markets and the state of the banking inquiry internationally, as well as the ... sorry, the state of the banking industry, internationally as well as domestically, there was no likelihood of what has subsequently been termed a "temporary" nationalisation, but a temporary guarantee was a possibility.

The question I was asking was: how do we get liquidity back in to the system and quickly? That was the most important immediate objective. Without doing that successfully, all of the banking system could drift into insolvency because the shortage of cash in the system would mean that day-to-day operations in the banks could not continue within a short space of time. The view was that the banks in Ireland were solvent but illiquid to varying degrees, depending on the institution, and the best of them had, at most, only a few weeks left, assuming the deposit outflow rates did not accelerate. The Financial Regulator confirmed to the meeting that all the institutions had sufficient capital and were solvent. Allowing Anglo to fail was simply not an option on the night. It would have implications for the whole system. The costs involved in terms of causing a run on other banks as well would put the whole payments system at risk and cause irreparable damage to the economy as a result of a banking meltdown. It would, in Governor Hurley's words, "set the country back 25 years", as he put it.

We were clearly in an unprecedented situation, the dynamics of which were moving very fast. Emergency liquidity assistance is not designed to address a situation when all of the banks are in trouble. It can work in a specific institution which has liquidity problems once it does not come to public notice. The Northern Bank, sorry, the Northern Rock example, proves that in those circumstances the use of ELA can have a more destabilising effect and cause the opposite of what was intended. Putting together an ELA fund from the country's own domestic sources, made up of cash balances from the Exchequer and assets from the National Pensions Reserve Fund and the Central Bank itself and simply applying that to the liquidity requirements of banks was not going to restore international confidence and get capital flowing back into the banks from external sources. The options were narrowing down to a nationalisation plus a guarantee, or simply a guarantee of the system itself. The other options referred to by Merrill Lynch, which had been discussed, were discounted at that stage. It has to be emphasised that no decision was risk free. There was no one good or right option that would guarantee a solution to the problem. It was about trying to pick the least worst option, and make sure that if we had only one go at trying to stabilise the situation, that it would have every prospect of doing so. Trying to forecast where all of this would go next was extremely difficult to predict.

It was strongly stated to us by our own regulatory authorities that this was a liquidity problem and not a solvency problem. At no stage was it contemplated then or, indeed, until the NAMA valuation of loans emerged, that the funding gap for the banks would reach the levels that it did, or that the impairment of loans in the banks would be of the horrific nature or magnitude that came to pass. I was coming to the view that, given what was potentially at stake, whatever we did would have to have an immediate and dramatic effect in stopping the outflow of funds from banks and, indeed, reversing the trend if possible.

Word came into the meeting that the chairman and CEO of the two main banks were looking to meet with us. We further discussed it, and I adjourned the meeting for a short break. During that break I decided to get an external view. Mr. Alan Gray, an economist and a Central Bank board member, was someone whose views I also respected. I phoned him and asked him what he thought of a guarantee option being used. Mr. Gray emphasised that providing a guarantee would, obviously, give an advantage to those institutions to whom the guarantee would apply vis-à-viscompetitors, since they would have the backing of the Irish Government. In that respect, it was important to be mindful how other lending institutions would regard it, and he stated that compliance with EU state aid rules would be an important factor to bear in mind. In dealing with that issue, it would also be important to be seen to charge a proper fee for the value of that guarantee to those institutions who got the benefit of it. Mr. Gray also stated that if we were considering the introduction of a guarantee of any kind, that it should be strictly time-limited. This would assist in arguing that it was proportionate to meet the serious situation that was being dealt with. I thanked him for this advice.

During this break from the main meeting, the Minister for Finance and I weighed up options ourselves in my personal office as to where we were at that stage. We reviewed the discussions from the meeting thus far and he was minded to still go the nationalisation route for Anglo and guarantee the rest of them. I explained my reservations about it and reassured him that nationalisation was something that we couldn't rule out in the future and would remain an option available to us. I also told him that a time-limited guarantee seemed to me preferable than giving an open-ended guarantee which a full nationalisation would entail. I emphasise this point. We were talking the issues through and there was no question of our conversation being in any way adversarial or confrontational with each other. Both of us were deliberating and striving to find the best course of action for the country at this point in time.

The meeting resumed with senior officials in the main meeting room beside my personal office. We were reminded that the bank representatives were waiting in the building and after some time they were called into the meeting. The representatives from the banks confirmed that the position was every bit as bad as the Government believed and immediate action was necessary to address what was happening. We were informed that the money markets had decided that Irish banks were to be avoided. The bank representatives were concerned about INBS as well as Anglo and they wanted to be differentiated from those institutions in that respect. Without stating it openly, it was clear to me that they wanted those two institutions nationalised and a guarantee to be provided for their institutions. What was clear was that these two well-established banks were finding it very difficult to get money to keep going. They had enough at their present run rate to get through another couple of weeks. There was certainly no indication from either bank that they felt they were in any way exposed to the extent and level that they believed the other institutions were. They wanted to be treated differently and sought a guarantee. They felt there was an adverse reputational impact being imposed on them as things stood at that time. I did not comment on the presentations made by the banks. We would consider their views but they were not going to be participants in any decisions. They then left the meeting. It was clear that all the banks were running out of cash and, depending on the run rate, it could be days rather than weeks. This reaffirmed my view that something comprehensive would have to be done. I was also under no illusions that they were putting themselves forward as safer bets than other banks and what concerned me was that they were looking for a guarantee for themselves while telling us to take what they saw as problem institutions onto the State books immediately.

I recall Kevin Cardiff, assistant secretary of the Department of Finance, being asked at some point by the Secretary General, David Doyle, to give his view having heard all of the arguments. Mr. Cardiff was of the view that a nationalisation of Anglo and a guarantee for the rest of the banks was his preference. He accepted it was a judgment call and there was no single right answer to our dilemma. The liquidity problem was the essential initial hurdle that had to be jumped for us to have any chance of getting through the first stage of this crisis. The market was going to react to whatever initiative was put out there: our collective hope was that it would react in the right way. I remained of the view that we needed to keep this as simple as possible so that nationalisation was not ruled out down the line, if such a measure proved necessary, as I had explained earlier to the Minister for Finance. The Governor emphasised again that we only had one go at it and we needed to convey a message that was easily understood for it to work and even at that it might still not work. The discussion continued about the nationalisation or guarantee options. I recall too that if we decided we were going to go the guarantee option that it would be limited to two years.

Eventually, I put it to the table that it seemed to me that a full guarantee option provided the best prospects of addressing the urgent liquidity problem and of sending a clear message that Ireland was standing behind the financial system - which would be understood by the markets - and for a limited time. We hadn’t much room to manoeuvre. It would have the benefit of being an impactful measure which could solve the immediate and pressing problem. It is my recollection that I then asked everyone could we run with a guarantee-only approach in principle. There was agreement on that and further details would now have to be worked out. The question arose too that we needed to make some contingency arrangements if the announcement didn't work and Anglo needed some support the next day. The bank representatives were brought back into the meeting and the issue of liquidity support for Anglo was raised with them. My recollection is that their response was very cautious and ... as it was a technical issue and ultimately was dealt with in discussions in another part of Government Buildings afterwards.

We went on to discuss then what way a guarantee would be structured. The pricing mechanism and the category of cover was also discussed.

When that meeting ended, bank representatives left; it was time for detailed decisions to be taken. In deciding upon the senior bondholders, it is important to point out that the holders of these type of bonds in Irish financial institutions include proceeds of Irish pension funds, large credit union deposits as well as deposits from religious and charitable trusts. While no one would suggest that those funds should be at risk, in law, all holders of bonds of the same category, whether foreign or domestic, have to be treated the same way. In other words, you cannot protect some senior bondholders and not others. When considering the case for including existing senior bondholders in the guarantee, we decided that if these bondholders were disadvantaged by not being included, the system would end up relying exclusively on new bondholders to lend their money to the financial institutions with the prospect of driving away existing funders at a time when confidence in lending to those institutions was so low.

Later on that night, the question of including junior bondholders, i.e. dated subordinated debt, came up. I have a recollection of being in the room with the Governor of the Central Bank at the time when this issue was raised. It had been mentioned earlier in the Merrill Lynch stuff but we decided that, given the uncertainty that was in the market, it might be best to include junior bondholders on balance as they were a very small percentage of the total securities that were being covered and we wanted to maintain maximum market access to the ... for the Irish financial system from outside. I have made the point before that the great portion of this subordinated debt did not mature during the two years of the guarantee in any event and 80% to 90% was not paid back because these junior bondholders were excluded from the eligible liabilities guarantee which was ... we adopted, I think, in November 2009. And that ... the maturity of those bonds came up after the September 2010 two-year deadline when the first guarantee had expired. This meant that there were substantial haircuts when it matured for payment after 2010. It represented just 3% of the total liabilities covered. At some point, I was notified that the TARP proposal had been voted down by the US Congress when this was going on as well and I immediately said to myself, "If there were problems on money markets today, what's it going to be like tomorrow?"

The Attorney General emphasised the need to get together to marshal the arguments for the EU competition director general to ensure that the guarantee complied with EU state aid rules. The necessity to deal with an extreme disturbance in the economy is allowed under those rules. We obviously had to meet the criteria and there was also work to be done to prepare for the Dáil the next day. I do recall there was a drafting process regarding the wording for the guarantee decision itself and arrangements had to be made for the announcement and publication of the decision before the markets opened the next morning. At one stage in this drafting process, Mr. Cardiff voiced his concerns to me that the draft wording which the banks had given him was too vague. I told him to make sure that only what we had decided on would be included and to tie that down to his own satisfaction. Minister Lenihan had at a late stage to ... gone home because he had a very busy schedule to fulfil from early the next morning. I had suggested to him that he might do that. He told me some time afterwards that he wasn't present in the room when the dated subordinated debt issue was decided upon. The decision having been made, an incorporeal Cabinet meeting took place. Ministers were contacted and the decision was confirmed. The minutes of the incorporeal meeting that confirmed the decision were adopted by the Cabinet meeting we held on the next Tuesday morning, that following morning, 30 September. My recollection is I left the building around half three.

In the period post-guarantee, the Department of Finance, along with Central Bank, Financial Regulator and NTMA, worked with Anglo and other financial institutions to examine all options to maintain stability and proper functioning of the banking system. Arising from these discussions, in early December 2008 the Government announced its decision to support a recapitalisation programme for financial institutions in Ireland of up to €10 billion. Despite the Government's efforts to reassure the market by pledging capital support to the bank, negative market sentiment towards Anglo continued. In December, the board of Anglo told the Government that it required help to raise ... in raising capital. Merrill Lynch and PwC were sent in to advise the Government and the Minister on what the next steps should be.

Liquidity concerns mounted over the course of December and January and approximately €3 billion in corporate deposits were lost, and the liquidity position in the days leading up to nationalisation were extremely fragile. Further credit rating downgrades were imminent, which were expected to drive a further €6 billion of outflows in the near future. At that point in time it was not felt that the use of Central Bank or NTMA options to replace this liquidity would be appropriate. It was decided, following consultation with the Central Bank and the Financial Regulator, that greater certainty could be provided by taking the bank into State ownership. NTMA and Merrill Lynch were in agreement with the nationalisation.

At the time the decision was made I was in Japan leading a trade mission. I received a phone call from the Minister for Finance stating that it was necessary to proceed with the nationalisation decision immediately. His advisers and the Central Bank and the Financial Regulator were in agreement that this was now necessary to protect our banking sector. He confirmed that this was his own view also and then authorised the Tánaiste to call a Government meeting and a memorandum from the Minister for Finance be put to Government for decision that day.

An important factor in the decision to nationalise Anglo was the concern that corporate governance issues could destabilise the bank itself and threaten the stability of the wider financial system. The Government could not allow a situation to develop where the collapse of the bank might have occurred and the Government and the taxpayer would have been faced with the prospect of immediately having to pay out billions of euros to customers who had deposits at the bank.

Throughout the bank guarantee period, September '08 to September 2010, it is readily recognised that the European Central Bank provided significant liquidity assistance to the Irish banking system, enabling it to continue to function with the necessary cash for day-to-day operations, which was indispensable to the functioning of the economy. From the time Greece required external assistance from other member states in April or May of 2010, the interest rates on Irish sovereign debts started to increase significantly. And by September 2010, Mr. Trichet of the ECB began to articulate concerns to Minister Lenihan regarding the pressure that was coming to bear on our fiscal and banking situation.

The Government was committed to developing a four-year plan that would set out how Ireland was going to reduce down its structural deficits to 3% by the end of 2014 as an effort to rebuild confidence in the international credit markets about our ability to bring the public finances back into reasonable balance. Although the ECB was very concerned about the large commitment they were continuing to make to the liquidity of our banking system, they also wanted restructuring proposals. Throughout the financial crisis there were more frequent meetings taking place, both at the level of Council of Ministers and Heads of State and Government level. We were anxious not to have too big a time gap between the announcement of a four-year plan and the budget for that year ... for the following year. The European Union, through Commissioner Rehn's office, was anxious to know what we had in mind in terms of the fiscal parameters of the plan. The ECB were liaising very closely with the EU Commission on these matters. I would say that they were more hawkish in terms of the rate of adjustment they felt the markets needed to see in order to restore confidence, which had been shaken since the Greek crisis erupted. Minister Lenihan had developed a very good relationship with EU Commissioner Rehn and indicated to him that what we had in mind was a €15 billion adjustment, with budget 2011 the first instalment of €6 billion. I recall this indication was given in early November. Being funded until June 2011, we felt that maybe a precautionary programme could be discussed with the EU, to be available if we needed it.

It became very clear to me very quickly that people were trying to bounce us into a programme in principle. I have no doubt that there were elements within the EU institutions who were providing inspired leaks to the media with that agenda in mind. Subsequently, the rumour machine went into overdrive from what were termed generally as "eurozone sources" that suggested we were applying for an EU-IMF programme. The Cabinet meeting on Tuesday, 16 November heard from Minister Lenihan on the outcome of the previous two days discussions. He had to go to a Eurogroup and ECOFIN meetings that week and, on the basis of the progress that was being made, he was continuing to engage and report back to Government. The pressure was intense at those meetings. The ECB were at all times pushing for this position of Ireland being in a programme without explicitly confirming that it would continue to support the Irish banking system.

At the start of ... going back for a moment, at the start of 2010, though in deep recession, Ireland, through the NTMA, was able to borrow at rates that were only slightly higher than normal.

At the end of April 2010 the budget was fully funded until mid-2011. Around this time EUROSTAT, the statistical agency of the European Commission, announced that the transactions involving the recapitalisation of Anglo would have to be included in both the measurement of the Government budget deficit and debt. Although this was largely a matter of statistical classification with no underlying financial impact, the optics were bad because it pushed up the budget deficit for 2010 as a percentage of GDP to a high level, albeit on a once-off basis. By April it was becoming clear that Greece would no longer be able to retain the confidence of market lenders, it had large budget deficits, long-standing structural problems and low growth, which put its public debt on a clearly unsustainable trajectory. International perceptions were not helped by a consistent pattern of Greece, unfortunately who had ... where there was data that wasn't correct ... that it provided to the EU and other international bodies. Greek Government bond yields soared to over 15% and its Government could not borrow any further. It applied for external assistance in April 2010. Standard and Poor's, the credit rating agency, gave an unfavourable rating assessment for Ireland in August 2010 and Irish bond yields, Irish Government bond yields, increased sharply. At the end of September 2010, the Government announced its intention to withdraw from the markets as a tactical move since we were fully funded until mid-2011. At the end of September, higher costs of the bank recapitalisation programme were announced. Mid-October, Chancellor Merkel and President Sarkozy declared that a new permanent euro area financial rescue fund would be set up by 2013 and would require private sector creditors to accept some debt restructuring. This statement was known as the Deauville declaration. It was clarified afterwards that the debt restructuring provision would only apply to new debt after 2013. The original statement had caused further market jitters and the damage was done and bond yields jumped further.

We had indicated in September 2010, to the EU Commission and to the ECB, that we were preparing a four-year national recovery plan to be published in November, prior to the budget, which would show that we were committed to an adjustment programme that would bring the budget deficit down below 3% by 2014. On 4 October Minister Lenihan received a letter from the ECB President expressing concern about the situation of Irish banks. On 8 November EU Commissioner Olli Rehn visited Dublin and on 11 November the bond yield rose to 8.6%. Governor Honohan suggested that bond yields would fall to more sustainable levels if the planned fiscal adjustment was implemented. On 12 November the ECB, the governing council, decided that it could not sustain its large exposure to Irish banks. On the same day, ECB-EU sources commenced off-the-record media briefings leading to reports that Ireland would need a bailout and the discussions were under way. On 13 November there were internal discussions with myself, Minister Lenihan and key officials. We were clear that if discussions were to take place it would be, if you like, talks about talks. In other words, we made no commitment at that point to formally apply for assistance until we were satisfied what the authorities had in mind and the conditionality attached to it. The off-the-record briefings were clearly trying to create a situation where a formal Irish approach for assistance was being portrayed as a fait accompliby those informed sources, without prior agreement on conditionality. This was unacceptable to us. We were not against exploring the issues with the EU authorities but neither should they presume or anticipate what decision the Irish Government would make. We wanted to know what they had in mind before we would indicate what position we intended to take. We were looking to explore what possibilities there were before giving our considered view.

At the Cabinet meeting on 16 November the Cabinet was brought up to date about the situation that was developing. I did not like the continuous anonymous briefing against Ireland, which I saw as an attempt to bounce us into a decision before we had further clarification. At the ECOFIN meeting in Brussels on Tuesday of that week, it was included in the Council's published conclusions that an EU delegation, with IMF staff joining them for the first time, would travel to Dublin to continue the consultations. I underestimated the impact of the "IMF coming to town" element, which immediately sent the message that this was now a done deal, rather than a genuine continuation of existing discussions up to then. This perception was further reinforced when the Central Bank Governor gave an interview with RTE, from Frankfurt, on the morning of the meeting in Dublin by saying that while it was a matter for the Government in the first instance, he said he believed that a deal would be done and a loan would be agreed. This development showed the Government in a bad light because the interpretation given to events, that we were keeping what was going on away from people.

In fact we were trying to put ourselves in the best position we could before any question of formally requesting assistance. We wanted to know exactly what we were getting into before we agreed to formally apply for the programme. On 19 November the ECB President, Mr. Trichet, sent a letter to Minister Lenihan threatening withdrawal of ECB funds in the absence of a formal bailout request. This was not well received by us. We knew that providing a fiscal framework under the EU-IMF programme gave us access to funds at a cost cheaper than was available on the markets at that time and into the future. It would provide in that respect funding certainty over a three-year period that therefore gave a better prospect to implement the plan that we were announcing. We knew that it would be difficult but the plan was robust and rigorous and we were confident that the growth prospects in it were achievable and could complete the journey begun in 2008 to try and turn the country around.

We had a Government meeting on Sunday, 21 November and made the decision to formally request EU-IMF assistance. Based on the progress that had been made in Dublin, we decided to formally enter talks. Efforts had been made from time to time to put our corporation tax rate on the agenda, which we refused to countenance. We were adamant that our own four-year national recovery plan, which was approved by the Government before its detail was shown to the European authorities, would form the basis of any programme we would agree. We were determined to meet our responsibilities and build on the three budgets we had already introduced. Though now faced with a funding crisis, by the latter half of 2010 we had halted the severe contraction in the economy of the previous two years. We have greatly improved our competitive positionvis-à-visour EU partners and had seen the return to increased exports year on year for the first time since the crisis broke. The IMF and others were now predicting a return to growth for the Irish economy if the programme was implemented. When we tried to see if there could be a burden-sharing by unguaranteed senior bondholders during the subsequent discussions, the IMF personnel in London were sympathetic but when it was referred to a higher level within the IMF and the discussion took place with some of the larger member state contributors to the IMF, there was total opposition to it. Mr. Timothy Geithner, the US Treasury Secretary, was opposed because he claimed it would totally undermine market access for those European countries, including ourselves, that were in trouble. We also understand that the ECB were opposed to it for the same reason. Without the EU Commission, the ECB and the IMF all being in agreement, it was not possible to have the burden-sharing issue included in the programme. It was made clear to us that any attempt by us to burden share with senior bondholders would mean no programme for Ireland.

The Cabinet had adopted the four-year national recovery plan as policy. The troika representatives had sought sight of the programme before Cabinet considered and adopted it, so there was no question of that happening as far as I was concerned. We decided on the rate of adjustment over the four years in the best way possible for the country by the Irish Government. When the troika did get it after Cabinet approval, they agreed to adopt it as a central plank of the programme. It was, as we believed it to be, rigorous and realistic and designed to meet the economic challenges we faced. The EU-IMF programme was finalised and adopted by Government on 27 November 2010 and one additional year was allowed to reach the general 3% deficit threshold if required. On the banking side, the programme provided for an immediate €10 billion recapitalisation for the banks and they were required to deleverage. With the exception of Bank of Ireland, all financial institutions came into State ownership, deposits from Anglo and INBS were to be transferred to other banks and put into wind-down mode. Regarding the interest rate that would apply, there are two points I would make: the IMF part of the package was based on IMF rules and was a technical issue. In relation the EU side of the funding programme, we were faced with the fact that we were the first country into this EFSF-EFSM model of funding being provided by the EU and member states. The ECOFIN Council was anxious not to provide a rate which would make it attractive for countries whose risk premium on their sovereign bonds was so high that the rate available in the EU programme would prove attractive, while at the same time providing it at a rate that was affordable and less than the market price. Minister Lenihan negotiated ably and secured a 5.8% rate of interest with the proviso that if there were subsequent lower rates available, on the basis of equality of treatment we would avail of them. This subsequently proved to be the case.

The cost of this crisis has been borne by the people of Ireland. The banking crisis exacerbated a serious economic downturn, which caused job losses, emigration and a reduction in standard of living across all sections of our society. The Government took every remedial step it could to reduce the gap which opened up between what the Government was spending and what revenues were coming in. This resulted in a painful adjustment across all Government activity after more than a decade of prolonged sustained growth. These spending cuts and tax increases involved a total adjustment of over €15 billion in the four budgets we introduced, including the 2011 budget. It represented two thirds of the total required adjustment to bring our budget deficit below 3% as required by EU Stability and Growth Pact rules. We strove strenuously in the design of the four budgets we produced to spread the adjustment as fairly as possible. The depth of the recession and the measures needed to address it meant that people who were previously out of the tax net came back into it and those who were in it had to pay more. While highly unpopular, these measures were absolutely necessary as part of the process of bringing order back to the public finances since 2008 to date. The Government has met the growth rate set out in the plan and continues with the necessary structural changes to rebalance the economy. The EU-IMF programme also provided the means and the Credit Institutions Act 2010 provided the legislative basis to implement the necessary restructuring and downsizing of a domestic banking system to a more sustainable model for the future. Thank you, Chairman, I am happy to answer questions.