Eamon Gilmore (Dún Laoghaire, Labour)

An article in today's The Irish Times states:

[This is] the most important debate, declaration of war aside, in which members of Dáil Éireann will ever participate ... At stake is €90 billion of taxpayer's money - three years' tax revenue – the international reputation of Ireland as a haven of cosy crony capitalism, the cost of international borrowing and the future health of the economy.

Those are the words of Professor Brian Lucey of Trinity College, taken from what he wrote in an article in today's edition of The Irish Times describing the debate on this motion. Such is the sheer scale of the problem in our banks, the implications for our economy and the losses that will be inflicted on our children and our grandchildren for decades to come by the Government's bailout plan.

This House is faced with a stark choice. Will we live up to the principle set out in Article 45 of the Constitution where it states, "That in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole." Or will we pursue a course that risks imposing untold costs on the people as a whole?

Throughout this economic crisis, there are two features that have distinguished Labour's approach to the economy. First, we have made jobs our number one priority. Again and again we have made the point that it is the real economy, and not just the public finances, that is the central issue. Second, we have sought to protect the taxpayer from the consequences of Fianna Fáil's mishandling of the banking crisis. Labour stood alone to vote against the banking guarantee. We took some criticism for that decision, but events have proven that we were correct to do so.

The motion before the House brings together these two central concerns. Its purpose is to protect the real economy, as far as possible, from the effects of the banking crisis. Our objective is to re-establish the flow of credit to the real economy – to jobs and businesses - in the fastest, most effective manner and, crucially, at least cost to the taxpayer. We are not advancing bank nationalisation as part of an ideological agenda, but as an essential emergency measure. This is not a decision to be contemplated lightly, but it is a necessary decision.

Such is the scale of the economic calamity facing our country and such is the extent of damage done by Fianna Fáil's mismanagement of the economy, that we are left with no option. The alternative – NAMA or an bord bailout – is a proposition that will burden our children and our grandchildren for decades to come.

This motion proposes the temporary nationalisation of the institutions covered by the reckless banking guarantee as the quickest, most effective and least costly means of dealing with the banking crisis. Its purpose is to ensure the restoration of credit to the Irish economy, which is vital to ensuring the survival of jobs and businesses. The banks would be taken into public ownership for a limited period, during which time their balance sheets would be cleaned up, before being re-privatised at the earliest possible date. This would involve substantial State investment but the amount would be far less than the NAMA approach.

This is the solution to the banking crisis that is favoured by economists and banking experts from across a wide spectrum of opinion. The case for temporary nationalisation was articulated clearly and convincingly by a group of 20 economists representing a wide range of political views. It is also an approach that is gaining increasing international support. This is not a matter of ideology – it is about brass tacks and how people will survive in the real economy. It means putting aside vested interests and ideological blockages to deal with an economic emergency.

Ireland is experiencing an economic contraction of unprecedented proportions. Not since the 1930s has the economy of a developed country contracted to such an extent. Unemployment is set to hit 17% next year – equivalent to a live register of more than 500,000 people. Everywhere I go I hear again and again about the problems businesses are having getting access to credit. Viable businesses and good jobs are being lost for the want of basic bank lending.

The IMF has not only warned that Ireland's banking crisis will cost the State more than any other country, it has also pointed out that recessions associated with banking crises are generally deeper and longer lasting than any other downturns. We must take this extremely seriously. A decline of one tenth in national income is an enormous shock but our capacity to recover from it and to begin to grow again and to create new jobs will depend on having a functioning banking system. We must address the banking crisis urgently and coherently. In March alone, lending by the banks to non-financial corporates fell by approximately €1 billion. This is a clear indication of how the banking crisis is having its impact on business. Business needs credit to function. It needs working capital. It also needs to bridge the gap between dispatching an order and getting paid. It needs to be able to pay suppliers and to have funds to meet its payroll. It also needs credit to engage in international trade.

We are eight months on from the banking guarantee but instead of a coherent strategy what we have had from Fianna Fáil is a series of blunders and U-turns. The worst of these was the banking guarantee put in place on 30 September last year. What was painted by Fianna Fáil as bold and decisive action was in fact the worst economic policy decision made by any Government since the economic war. It tied the hands of the State in its dealings with the banks and it was implemented without the terms and conditions that should have been included. Neither has this Fianna Fáil-led Government ever explained why Ireland's guarantee had to be so much wider than the guarantees offered by other countries. Why, for example, was dated subordinated debt guaranteed in Ireland but nowhere else? Why was the guarantee put in place instead of nationalising Anglo when that proposal was, I understand, on the Cabinet table that evening?

Since that night, it has been the banks and not Government that have driven economic policy. Whereas in the UK where the chairpersons and CEOs of the re-capitalised banks were gone overnight, in Ireland the same failed boards and management teams were left in place for months. As Ireland's international reputation sank and our sovereign debt was downgraded, Fianna Fáil attacked pensioners but protected bankers. It has only been through a process of scandal, revelation and attrition that senior bankers have stood down. Even today, many remain in place.

For months now, the Labour Party has been demanding regime change in the banks – the replacement of boards and senior management teams. This is not a matter of personal attack but a matter of credibility. It is simply not credible to say that the people who brought the banks to this position can get them out of it. As a simple matter of managerial credibility, there should by now have been a comprehensive clearout, not just to satisfy the public but to show a level of seriousness to the international financial markets.

Our proposal is that this process should be supervised by a banking commission. This would be made up of people of the highest international reputation; people whom the international markets would trust to oversee the process and whose reputation would assist in rebuilding ours. Instead, Fianna Fáil has invented an bord bailout – NAMA - an agency that will buy up property developers' loans from the banks and make the taxpayer liable for their losses. It will do this without insisting on regime change in the senior management of the bank and expose the taxpayer to potentially enormous losses.

Once the bank guarantee was put in place, the Irish State effectively became responsible for the bad debts of the covered banks. That is a reality and we have to face up to it.

Unless action is taken to deal with the bad loans, Ireland risks the zombie bank syndrome, where banks attempt to nurse their bad loans, avoiding write-downs and lack the capacity to engage in lending that would support productive activity.

As the Labour Party has consistently argued, therefore, it is necessary to find a means to deal with the bad loans, so that they do not act as a drag on the rest of the financial system. How this is achieved, however, has potentially enormous consequences for the taxpayer and the economy. A key issue is how the losses are apportioned between the taxpayer and the banks. In the "Bord Bail-out" model, the loans are bought from the banks at some unspecified discount from their nominal value. Given the state of the Irish economy and the property market in Ireland and overseas, it would be extremely difficult to achieve a fair assessment of the value of the loans. The higher the price paid by an Bord Bail-out, the greater the loss carried by the taxpayer. The lower the price paid, the greater the loss borne by the bank, but this would be likely to trigger the need for further investment by the State in the bank. Since the Government says it is committed to obtaining ordinary shares in return for further recapitalisation, the State could eventually end up owning a majority of the banks. Given the pattern of events so far, there are grounds for believing that the State will simply overpay and enormous losses will be transferred to the taxpayer.

It is difficult to avoid the conclusion reached by the 20 economists who wrote on this issue in The Irish Times. The article states:

There is ... a fundamental internal contradiction in the Government's current position. The Government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership.

These three outcomes are simply mutually incompatible, and we are greatly concerned that the NAMA process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement. This would arise if NAMA purchases the bad loans at a discount – but still well above market value.

With €90 billion in loans to be purchased, the consequences to the taxpayer of overpaying for bad assets by 10 to 30 per cent are truly appalling.

Knowing what we know about the Fianna Fáil record on this issue, and its determination to favour the banks over the taxpayer at every opportunity, we have every reason to fear that the economists' prediction will be proven correct. The alternative approach is to temporarily nationalise the banks. This avoids the requirement to value the bad loans in this highly uncertain environment. The State would take ownership of the loans and the banks. The process of writing down the bad loans would be vigorously pursued and the normal lending would be resumed.

I would envisage that units would be established within the banks to deal with the bad loans. That would be sensible business practice. As many of the loans are likely to be syndicated, a clearing house mechanism may also be required to deal with them and to minimise the legal costs involved in dealing with them. If a developer owes money to a number of institutions, all owned by the State, it makes sense that they be dealt with on an integrated basis. Ultimately, there could be a transfer of outstanding loans to a clearing house, or transfer of loans between State-owned banks. This would be a transfer from one State-owned institution to another, removing the risk to the State of having to value the bad loans. Once the banks' balance sheets had been cleaned up, the State would return the banks to the market. The return to the State from the resale of the banks would significantly offset the cost of bad loans that the State is required to pick up.

One point which the debate on the banking crisis tends to miss is the importance of avoiding delay. The longer it takes to achieve a resolution, the more businesses and jobs will be lost. While Fianna Fáil is attempting to set up an Bord Bail-out on an interim basis, it will in fact be extremely difficult for it to start work without a legislative framework to underpin it. Without a legislative basis for NAMA, the bank will be obliged to have regard to customer confidentiality. A non-statutory State agency cannot simply send people into the banks to start picking over loan documents unless they have adequate authority to do so. Indeed, it is questionable whether the Financial Regulator would even be in a position to hand over the PWC report to a non-statutory NAMA, without adequate supporting legislation.

There is a clear legal risk that the Bord Bail-out model will be dragged out and delayed in its implementation. Yet, until a solution is put in place, normal lending activity will remain on hold. Indeed, there may be areas where banks delay making sensible and viable loans because they believe that the loan might be transferred to NAMA and all the time, businesses are going to the wall, and jobs are being lost.

When Anglo Irish Bank was nationalised, the State initiated an assessment of the value of the bank and is committed to compensating shareholders for the value of the business, if any, that it took over. Of course, the State cannot simply seize the banks' shares. Shareholders have suffered through the poor management of the banks and it is appropriate to examine ways in which those losses can be mitigated. The State should establish, therefore, a trust or other mechanism, which would allow shareholders to retain an interest in the bank. Instead of cashing the cheque for the value of their shares, they could be given the option of putting their money into trust, to be converted into shares in the bank when it is reprivatised. The State should be proactive in looking at ways of giving shareholders some potential upside if they leave their investment with the banks. This could be as simple as an option to receive shares later or there may be other ways in which shareholders could enjoy some future upside.

Fianna Fáil is currently arguing that the State cannot directly run banks. No one is proposing that it should. The banks would continue to operate in a commercial environment and with a commercial mandate. The Taoiseach is arguing that nationalised banks would be subject to political interference. I see no reason this has to be the case, even with Fianna Fáil still in office. Rules and structures can be put in place to avoid political interference in the day-to-day running of the banks and the aim will be to return the banks to private ownership as soon as possible.

The Labour Party has proposed the establishment of a banking commission that would appoint the boards of the banks. The banking commission would be independent of Government and would be made up of people of the highest international reputation – some of whom should not be Irish. By bringing in people of calibre to oversee some key banking functions, we can contribute to the painstaking task of rebuilding our reputation abroad.

Fianna Fáil has also argued, or rather it has spun the line, that international markets will not lend to nationalised banks but it has yet to produce evidence to support this claim. Fianna Fáil is effectively arguing that the banks would not be able to borrow without State support and they will not be able to borrow with State ownership. How does that possibly make sense? The idea is also foreign to the IMF which argued in a recent report:

Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed. While permanent public ownership of core banking institutions would be undesirable from a number of perspectives, there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.

Is Fianna Fáil saying the IMF is wrong on this also? There is a need for honesty here. We need to face up to some realities, politically and as a country. The guarantee is in place. Fianna Fáil brought it in and I regret to say that Fine Gael and Sinn Féin voted for it. It effectively means that the State has to deal with the bad loans of the banks. We can do that through NAMA, or we can nationalise. One is slower and more expensive than the other but as a country, we have to demonstrate that we recognise this, and are ready to deal with it. We have to stand up, admit that there is a problem, fire the people who were directly responsible for it, and start dealing with it. That is what this motion proposes.

In any crisis, no matter how severe, there is always a road to recovery. There are always critical first steps that can and should be taken, to face up to the problem honestly, to take the first decisions that, even if painful, mean that we are moving in the right direction again. For the Irish economy, sorting out the banking crisis is one of those critical first steps. As the IMF has pointed out, recessions related to financial crises are generally longer and deeper than recessions caused by other factors. Restoring the flow of credit in the Irish economy is essential to protect jobs, create new ones, and stop the ongoing destruction of businesses that are otherwise viable. That is why we in the Labour Party have put action on the banking crisis at the heart of our jobs action plan.

This motion is not advanced on ideological grounds but in the interests of protecting jobs. I appeal to all the parties in this House to face up to the consequences of their actions last October and to begin to deal with this problem now by supporting the Labour Party motion for the temporary nationalisation of the banks.

See this speech in context