Michael Noonan (Limerick City, Fine Gael)

Ar an gcéad dul síos gabhaim buíochas le gach éinne a bhí páirteach sa díospóireacht seo go dtí seo.

In proposing this counter motion I am pleased to present to the House today the Government's measured and structured approach to issues facing the financial sector as the best way to secure the position of the financial services sector. There is little to be achieved at this juncture in regurgitating the failure of past policy approaches. Suffice to say that the initial response of the Government of the time in September 2008 was to provide a full unconditional guarantee for bank debt of the covered institutions. In effect the Government guaranteed hundreds of billions of private bank debt and in that single decision transferred the liability for private bank debt to the taxpayers of the State. Subsequent decisions taken by the Government in regard to the banking sector were clearly driven by the need to ensure that there was no possibility of a call on the guarantee. Effectively, a firm policy was established that no bank or financial institution in the State would be allowed to fail. This policy was underwritten by a guarantee provided by the State. Decisions to capitalise the banks, to nationalise Anglo Irish Bank, Irish Nationwide Building Society and the Educational Building Society all flow directly from and reflect the underlying need to prevent, at all costs , a call on the guarantee. Further, the exposure of the State in terms of direct and indirect support for the banking system was a major causal factor in the necessity for the EU-IMF bailout.

It goes without saying that the collapse of the banking sector has been at the heart of Ireland's economic difficulties. In repairing the banking system, the over-arching challenge for the current Government has been to restructure the sector by, for instance, boosting its resilience and right-sizing it relative to the needs of the Irish economy and providing for the work-out, in a structured way, of Anglo Irish Bank and Irish Nationwide Building Society, INBS. Significant progress has been achieved in recent months in forming pillar banks, merging EBS with AIB, combining Anglo Irish Bank with INBS to form Irish Bank Resolution Corporation, IBRC - an institution that has no role to play in the future of the Irish banking landscape, recapitalising the banking sector and strengthening the governance framework of the banks. At this stage, it is fair to say that there is a growing consensus that a line has now been drawn under the banking crisis and that a steady improvement is under way.

In terms of boosting resilience, a final €24 billion recapitalisation of the banking sector took place following the PCAR process and earlier steps taken by the State during 2009 and 2010. The PCAR process is regarded as robust and comprehensive, a point underlined by the outcome of the European Banking Authority stress tests announced recently. With the additional PCAR capital, Irish banks are now among the best capitalised banks anywhere in the world. It is worth highlighting that around one third of this capital injection was sourced from the private sector, through liability management exercises with subordinated bondholders in the various banks, anticipated asset sales and the injection of private capital into one major bank. The contribution of the private sector is larger than originally envisaged and I view this as a clear vote of confidence in the Irish banking system and in the future of the Irish economy.

At the same time, the programme of asset deleveraging is well under way. For instance, Bank of Ireland recently announced that it had achieved some €5 billion of asset sales so far this year; AIB is also performing in line with its deleveraging targets. As it is sometimes overlooked, I stress that more than 80% of the assets to be disposed of by the Irish banking system by the end of 2013 are located outside of Ireland. To put it simply, deleveraging of these assets will have no effect on the Irish domestic economy because the assets are held outside Ireland.

The merger of Anglo Irish Bank and Irish Nationwide Building Society into IBRC, the disposal of deposit books is completed and the work-out of the remaining loan books is progressing. All of these measures are helping to continue the process of rebuilding international investor confidence in the Irish banking sector and we are confident in and committed to the bank restructuring plans.

The motion, from the Opposition, asks the House to agree that the former Government were wrong to issue the promissory note; that this Government enter in discussions to have the promissory note withdrawn and that the Government intervene to prevent Anglo Irish Bank from using taxpayers money to repay unguaranteed senior bondholders. There are two distinct issues in this motion, they are the promissory notes and payment to unguaranteed senior bonds.

The promissory notes are a mechanism to provide capital to the institutions without having to pay the cash up front. The previous Government did not pay for these capital contributions in Anglo Irish Bank and INBS with cash. The previous Government effectively issued an IOU, in the form of a promissory note. An IOU means precisely what it says and as the debt is deferred rather than being paid immediately, an interest charge is payable until the debt is settled. The interest charge in question was set by reference to Government yields at the date of issue. The total cost of the promissory notes out to 2031 is around €47.8 billion. That includes not only IBRC but the small amount in the EBS. The reality for the Government at that time was that having set out on its mistaken and misguided journey by committing to unconditionally guarantee the bank's debts, it had no option but like a losing gambler to follow the money by providing capital to those distressed institutions and by committing to maintaining the institutions as going concerns. To do otherwise, in the circumstances of the guarantee, would be to create a situation of default possibly leading to insolvency of the institutions and a call on the State guarantee. Having given the guarantee, the last thing the previous Government wanted to do was to trigger a call on the guarantee. That is the key to what happened. Every policy decision the Government took was to prevent a call on the guarantee. The provision of a guarantee was foolish in the first instance, but it would be a disaster if it was called in. That in a nutshell explains the policy of the previous Government and why it got into such difficulty. Such a situation was simply unthinkable in terms of the implications for the State, so it continued the rake's progress, pledging good money after bad.

If we now consider the impact of withdrawing the promissory notes from the institutions at this time the implications are similar - the institutions will be insolvent. Quite simply if you remove €30.6 billion as an asset from the balance-sheet of the institution you have to fill it from some other source or the institution fails. This situation will require payment of all amounts due under all contracts, even the guaranteed ones, so the State may have to pay up a large amount of cash. A further impact of being insolvent would mean the Central Bank of Ireland and the ECB would no longer be funding IBRC, and that funding of €45 billion would have to be unwound. The €45 billion is predominantly State backed. If the ECB had supported our unwillingness to pay, the situation might have been different but the ECB would not support this course of action despite many discussions with Mr. Trichet and others.

Again, given the level of support provided by the ECB to both IBRC and the other Irish banks, a failure to pay could have a dramatic impact as it would create a doubt over the future of the €110 billion in funding being made available by the ECB and Central Bank of Ireland to Irish banks at a low interest rate. The ECB never issued a threat or said it would withdraw funding but all we had to do was tweak the interest rate slightly and we would lose an awful lot more than we would gain by following the advice we are now getting from across the House. Indeed, it is advice I would not disagree with if we could carry it out with the support of the European institutions, particularly the European Central Bank. It would be unwise, also, to disregard market sentiment in any situation where a sovereign reneges on its obligations or perceived obligations.

I am, nonetheless, eager to have the promissory notes examined to see if they can be re-engineered in a better way for the State by, for example, lengthening their maturity or reducing the interest rates on them or both. As I indicated recently discussions are ongoing with the relevant authorities at a technical level in this regard.

On the payment of unguaranteed unsecured senior bonds it has always been my position that, given the significant cost of Anglo Irish Bank and INBS to the Irish taxpayer, there should be no repayment of this debt. To avoid such repayments, the most logical option would have been to put the bank into administration. This was an option available to the previous Government but, instead, it put the taxpayer on the line for the liabilities. It should have gone into administration. My predecessor, Brian Lenihan, was misled, I believe, with the information he was given. When he came into this House talking about Anglo Irish Bank he said total liabilities were €1.5 billion. It crept up by instalments until it reached €33 billion and he followed the bet all the way because, having taken the first step to guarantee, he could not get off the roundabout. That was the essential problem. It is a tragedy but it is what happened and is why we are now in such a difficult situation.

There was, however, an alternative. When Deputy Michael McGrath's party said it had no alternative, the alternative was to put Anglo Irish Bank into administration and let it work out, letting the debts fall where they would. There was a solution.

If we were to suspend payments to creditors in IBRC this would have a significant impact on both the bank and ultimately the State. This senior debt, unsecured as it is, is an obligation of the bank. If the IBRC does not meet such obligations it would again lead to a default and following that, most likely, insolvency. Insolvency would result in a significant increase in the cost to the State to resolve IBRC and would have a very significant impact on the credit worthiness of our sovereign State, given the guarantee and the fact that IBRC is owned by the State.

Many people, including members of the Opposition, have sought to draw a distinction between guaranteed debt and unguaranteed debt in IBRC. This distinction is spurious, as subsequent to the guarantee, the Irish Government nationalised Anglo and INBS. It took these institutions into public ownership and took on moral responsibility for all their liabilities. The obligation to guaranteed bondholders deriving from the guarantee was now matched by an equal obligation to unguaranteed bondholders, deriving from ownership of the institutions. The mistaken decisions were taken in two steps; the guarantee and then the taking into ownership of the banks. Each step incurred liabilities.

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