Michael McGrath (Cork South Central, Fianna Fail)

I wish to share time with Deputy Kelleher. I will take ten minutes and Deputy Kelleher will take the balance.

This debate is taking place against an extraordinary back-drop of uncertainty and fear. My party will be supporting the motion before the House. I do not believe we have any choice as a country. The consequences of ending the eligible liabilities guarantee scheme at this time would be extremely serious. It would inevitably result in a deposit flight from Ireland and our banks would suffer devastating consequences as a result. At this time investors, the markets and the international community are very sensitive to any policy shift, however minor it might appear to be, but ending the ELG at this time would be a fundamental shift of policy and would certainly result in changed behaviour in terms of where deposits are being based. In that context and against that back-drop it is important that the motion before us is supported.

I will not spend time discussing the politics of this; it got a good airing on the Order of Business and I am sure it will again later in the debate. It is fine when in opposition to discard the advice of the National Treasury Management Agency and the Governor of the Central Bank, as the then Opposition parties did in December 2009 when the ELG scheme was first introduced by the then Minister for Finance, the late Brian Lenihan. In September 2010, when the ELG scheme was being extended for a further year to the end of 2011 and the amount being guaranteed under the ELG scheme had been substantially reduced from the CIFS scheme down to €147 billion, it was again opposed by Fine Gael and Labour. They are now proposing an extension of the same guarantee substantially on the same grounds set out by the then Minister in late 2010 for it to be extended.

We must acknowledge that people are very fearful about the security of their deposits. When they watch the news every night and hear political leaders in the European Union talking about having days or weeks to save the euro it sends shivers down the spine in terms of the safety of their money. Along with many other Deputies, I am sure, I am taking telephone calls from very concerned constituents who are worried as to what they should do with their money. We all want to advise them that the euro is safe, that the Irish banks are safe, that there is a guarantee in place, and that there is no risk whatsoever but that advice is undermined by what they are hearing every night on the news. It is essential that finality to the greatest extent possible is brought to this crisis at next week's European Council summit.

In that regard I welcome the co-ordinated intervention yesterday by the main central banks across the globe - the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, the Bank of Canada and the United States Federal Reserve - in making unlimited US dollars available to European banks. That in itself should be a precursor to a far more aggressive government bond buying programme by the ECB. It has been speculated that the ECB would target a limit on government bond yields or on the spread between the interest rate on German and other government bonds. That would be a significant boost to confidence in the wider market.

The fact that the central banks have moved ahead of the politicians is in itself instructive. As well as providing help for banks, the co-ordinated action sends a signal that the central banks will not wait on political instruction before they act. That is implicitly acknowledged in the statement by the Bank of Japan, for example, which stated:

There is ... a possibility that Japan will be adversely affected, should conditions in global financial markets deteriorate further. The Bank of Japan will continue to maintain financial market stability in close co-operation with other central banks.

Given the endless rounds of crisis meetings and summits we have had at European level in recent months it is reassuring to know that we are not depending exclusively on the outcome of any negotiations at Franco-German level to design a solution to this crisis. Next week's summit will be of critical importance and I hope next week will mark another milestone in terms of the interest rate being charged by the ECB, which could provide some easing of the burden for tracker mortgage holders and, hopefully, variable mortgage holders, if the governing Council decides to reduce the main interest rate further at next week's governing Council meeting.

The extension of the ELG scheme is the correct decision for the Minister to make. The banks are still rebuilding their deposit base and that process would be quickly put in to reverse if the guarantee were suddenly withdrawn. The risk of deposit flight is certainly real and substantial.

To put this in context, I have been looking at some numbers going back over the last few years. Total deposits at the six covered institutions came to €425 billion at the end of 2008. By the end of March this year, when the financial measures report was published, that figure had fallen to €311 billion. The most significant move in the banks' deposit base was in their non-domestic deposits, which collapsed from €196 billion to €76 billion; a fall of €120 billion. Domestic deposits had actually increased over the period from €229 billion to €235 billion. This showed that in terms of stabilising domestic deposits, the guarantee had broadly worked, but the banks' ability to attract funds from outside the domestic economy evaporated over that period of time.

The banks have made up this loss of deposits via an increase in reliance on central bank liquidity, both from the Central Bank of Ireland and the ECB. At the end of March, the banks had borrowed €180 billion from this channel. This is ultimately not a sustainable situation. The ECB simply will not term fund the Irish banking sector, and the need for the Irish banks to attract further deposits, while carefully reducing their loan books, is the biggest challenge facing them. At the same time, we are demanding of them that they meet the credit needs of the economy. They have a very difficult challenge to meet in that respect.

The timetable on the deleveraging of the banks' balance sheets, set out in the memorandum of understanding with the ECB and the IMF, needs to be revisited and renegotiated. Forcing them to carry out deleveraging in the manner agreed will be unhelpful and is inconsistent with the requirement that we all want them to fulfil, in terms of meeting the domestic needs of the economy. In respect of the sale of the non-core assets and the rebuilding of the banks' loan to deposit ratios, the Minister should consult with the Central Bank, examine the terms of the MOU and seek to renegotiate a lengthening of the time for the banks to meet those criteria.

The banks are making some progress in this regard, which is welcome. Bank of Ireland reported an increase of 3% in deposits in the three months to the end of October. The covered banks have reduced their dependence on Central Bank funding to a total of €148.6 billion.

The State has become quite dependent on the level of fees being paid by the banks on foot of the ELG. The Minister acknowledged the figures in his own contribution. The State has received €1.8 billion under the ELG since it was introduced in December 2009. It received €969 million to end of October in the Exchequer returns. That is more than three times the receipts that the State received over that time from CAT or CGT. It is effectively becoming a new form of stamp duty. When the ELG eventually ends, there will be a hole in the public finances. If the ELG had ended this year and the fees were not paid, it would have been to the tune of €1 billion. As the banks are weaned off the guarantee, this money will be available to the banks to offer more attractive deposit rates or to improve their profitability. The corollary of this is that in time, the income will be lost to the State and the Minister will need to plug the gap in the State finances. I am sure he is well aware of that.

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