Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

The motion is not about whether we will exit the programme because we are exiting the programme as a matter of fact on 15 December this year. The question that is being put to the House by the Government is whether the Government has made the right decision not to apply for a precautionary credit line. That is the essence of what we are debating.

I very much welcome the fact that Ireland is on course to exit the programme. It is a significant and positive milestone for the country. Entering into a formal troika programme three years ago was a dark chapter in Irish history. The Irish people have made tremendous sacrifices both in the couple of years prior to entering the programme and in the three years since to ensure we can come out of the programme and in a sense stand on our own two feet as an independent country subject to all of the normal and extensive oversight provisions that currently exist.

The issue we are debating this morning is whether the Government has taken the right decision to exit the programme without having a precautionary credit line or insurance policy in place. That is the issue I will seek to address specifically. As I said during Question Time, the conditions are very benign at the moment. I very much hope they prevail, because if they do then the Minister’s decision will have been the right one and Ireland will not under any circumstances need a precautionary credit line. We live in a very uncertain world and significant risks face Ireland, as we exit the programme, and other countries. The real test of the sustainability of our exit will be when the National Treasury Management Agency, NTMA, goes back into the markets probably in the first quarter of next year to issue long-term Government bonds and whether it can dispose of them at the kind of interest rates we currently see in the secondary markets - in the region of 3.5% for ten year money, which is quite a low cost of borrowing. If that continues, then the NTMA will quite easily be able to borrow and meet our funding needs in the future.

However, we know that the international markets are volatile. They are responsive not just to events in this country but to events outside of this jurisdiction in the eurozone and the wider world. My essential position is that we do not know the cost of what the insurance policy would be. The Minister has not addressed the matter in his speech, perhaps because he does not know what conditions would have applied. Ireland did not formally apply for a precautionary credit line so there was no formal discussion on the type of conditionality that would have applied in this case. I am sure that in the course of his discussions with the various stakeholders the Minister would have teased out the type of conditionality that would have applied to Ireland. Let us considers the very extensive measures to which we will already be subject - the formal post-programme monitoring, the excessive deficit procedure of which we are part, the fiscal compact requirements in terms of debt-to-GDP reduction and deficit reduction. The fact that we have already had an extension of the loan maturities means we would be subject to more intensive scrutiny by the troika until 75% of the loans we owe them have been repaid. It is my job to ask a question of the Minister about any additional conditionality to which we might have been subject in order to avail of a precautionary credit line. We have not got an answer to that question.

Deputy Creed mentioned corporation tax. From our point of view, it would be a step too far if an increase in this tax were laid down as a condition. There is no suggestion that a change in our corporation tax rate would have been a condition of any programme. The European partners would have had no legal basis whatsoever for seeking to impose a condition of that nature.

The Minister outlined a couple of key issues concerning the basis for his decision not to apply for a precautionary credit line. He addressed the issue of the ECB's outright monetary transactions, OMTs, which comprise the new policy initiative announced approximately 14 months ago by the current ECB president, Mr. Mario Draghi. That statement was unquestionably transformative. It certainly calmed the markets and resulted in a significant reduction in the cost of borrowing for many of the peripheral member states of the eurozone, in particular. The OMT tool has never had to be deployed since because the markets accept that it exists in the background as the ultimate backstop. The ECB has the power to step in and buy bonds of governments if conditions require it.

Page 4 of the Minister's speech outlines the conditions. First, there must be a systemic risk to the euro in order for the ECB to invoke the OMT provisions. Second, the Minister stated it is a necessary, but not sufficient, condition that a country would have a precautionary credit line. However, one should consider the actual statement the ECB issued, the press release of 6 September 2012, as referred to by the Minister. It is important to tease this out. It states:

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme [or a precautionary credit line].

In other words, there is one condition dealing with systemic risk - we accept it is in place - and another that there be a precautionary credit line in place or else the state must enter a full programme. That is the nub of the issue and my clear interpretation of the measure. Ireland should negotiate now from a position of strength to put a precautionary credit line in place. If over the course of the next year we need to invoke the OMT with the support of the ECB, which would have the ultimate decision, having the precautionary credit line in place would tick the right box. If we do not have it in place, we will face a full macroeconomic adjustment programme under the EFSF-ESM. I ask the Minister to address that when wrapping up because it is clearly what the press release from the ECB states.

My key concern is that we now negotiate a precautionary credit line from a position of some strength. The backdrop is certainly very benign and sentiment towards Ireland is positive. All of the fiscal targets are being met. We are exiting the programme. I am confident that we could negotiate a credit line with acceptable conditions. The alternative is taking the risk now and eventually having to avail of the ECB's OMT policy. A condition of access would be signing up to a full macroeconomic adjustment programme which, I presume, would be akin to the one covered by the memorandum of understanding with the troika, whose programme we are about to exit. That is a fundamental issue. I have yet to hear it properly addressed. I hope the Minister will do so this evening. There is firm evidence that the precautionary course of action would be to put in place the insurance policy at this point in time.

The second issue concerns the stress tests and the banks. It is a potential risk factor that we face. The Minister made the point quite reasonably in his speech that there is no evidence that this test or the ongoing balance sheet quality review will generate any additional capital requirements for our banks. I have no such evidence either. The truth is that neither the Minister nor I knows whether the stress test next year will identify additional capital requirements for the Irish banks. What we do know very clearly is that if a hole is identified in the balance sheets of the banks, the hierarchy pertaining to how it is to be filled will have been agreed at European level. The first to be affected are the private markets and investors or shareholders, followed by junior bondholders that might be left and national authorities and, finally, the ESM. The junior bondholders in the Irish banks have already been burned, and burden-sharing has been imposed on them. Bank of Ireland will probably stand quite a good chance of raising some capital on the markets, if required, given the fact that it is mainly privately owned. It is fair to assume that if AIB and Permanent TSB, in particular, are found next year to require additional capital, the buck will stop at national level. In other words, the Irish Government, on behalf of the Irish people, will be required to inject additional capital ahead of the ESM. That is what was agreed last Friday in the absence of an overall agreement on how the ESM is being invoked. It is a potential risk for the country because there is no doubt but that if the results of the stress tests next year identify that there is a hole in the balance sheet of any of the banks, it will have adverse consequences for yields in respect of Irish Government bonds. This is unquestionable. The risk factor is one that we need to take into account seriously when making a decision in addition to the risk factor associated with the banks' balance sheets and whether they are recognising the losses there carrying.

There are serious questions to be asked as to whether the banks have fully faced up to the extent of the losses they are carrying on their SME loan books and mortgage books. One reason the banks have not fully dealt with the mortgage arrears crisis is that they are concerned that if they face up to the scale of their potential losses, it will have serious negative consequences for their capital positions. The Minister outlined the figures in his response. On the face of it, the banks are now very well capitalised and there should be little likelihood of their needing additional capital in the foreseeable future, but that is on the assumption that they have properly recognised and provided in their accounts for the losses they are carrying on their balance sheets. I am not at all convinced that they have done so. It is not for me to reach firm conclusions on that; it is a matter for the Central Bank and the ECB next year. We look forward to hearing what they have to say.

There are significant risks to economic growth. The Minister had an exchange earlier with Deputy Boyd Barrett on the centrality of growth in respect of Ireland meeting its requirements under the fiscal treaty, in particular. I refer to the deficit reduction and the lowering of the debt-GDP ratio to 60%. We have made growth forecasts of 2% next year in real GDP, 2.3% the following year and 2.8% in 2016. These levels should be achievable but the reality is that we simply do not know whether they are. The achievement of these growth levels is largely outside our control as a small, open trading economy that is exporting 80% to 90% of the goods and services it produces. The latest economic data from Europe are not encouraging. The quarter 3 data are particularly weak. France is sliding back into a contraction and German growth is weaker than expected. Nobody hopes more than me that the eurozone economy will experience a strong recovery because that will, unquestionably, drive the Irish economy up with it. However, there are major concerns that if the eurozone economy does not recover it will have a knock-on impact on our growth that will compromise our capacity to achieve the deficit targets and debt-GDP targets.

Even in the past 24 hours, the OECD projected that the 2015 deficit will be 3.1% and that we will miss the 3% target by a whisker. We will not argue about 0.1% because it all comes down to whatever assumptions one uses in one’s economic model, but it brings home the point that the margins between achieving and missing the targets are very fine. It is not all within our control by any means, and that is a point we need to bear in mind.

The fundamental point I make to the Minister regarding his decision on a precautionary credit line is that we should be having a discussion on what type of conditions would have been attaching to such a credit line. Perhaps the Minister does not know what those conditions would be but I suspect he has a good idea. However, he does not know the finer detail of any such conditions because the Government never formally applied for a credit line. I heard the Minister for Public Expenditure and Reform, Deputy Howlin, on the radio last week making the point that because we did not apply, there was no detailed discussion on the issue of the conditions. Therefore, we are turning down an insurance policy without knowing the cost of that policy. I believe, as does my party, that this is a mistake. It is a mistake which may not cost us anything if current conditions prevail but if they do not, then we could be facing very significant costs because we would have to sign up to a detailed programme with specific conditionality from a position of weakness if the markets turn against us. We should know from experience that when the markets turn against one, they turn against one. We can look back at the history of events three years ago to see that. At the end of September 2010, the NTMA was borrowing long-term money at about 4.5% which, in terms of the spread between that and German bonds then and where we are now, at 3.5% and the spread with German bonds, is quite proportionate. That was two months before the bailout. When the markets turn, they turn completely against one and they would not think twice about putting Ireland into such a situation. That is a key concern.

It is only two months since the Minister and the Taoiseach spoke openly about applying for a precautionary credit line and about the need for a safety net. A figure of €10 billion was put on that and the Minister said we would be entering discussions. He certainly gave the clear impression that he was favourably disposed at that stage to making such an application, albeit without any formal decision being made. He was absolutely right to explore that option. I have the residual feeling that the situation in Europe and the lack of a new German Government is significant. I know the Minister has said that Wolfgang Schäuble asserts that there is a German Government and that it has the authority and mandate to make decisions, which of course it does. However, it certainly would have been a complication for the Germans to have to go into the Bundestag and seek parliamentary approval for a new programme for Ireland, a precautionary credit line with some level of conditionality attached. It would have been a complication at a time when the CDU's prospective coalition partner, the SPD, is raising the issue of Ireland's corporation tax rate. There is no doubt it was far more convenient and politically suitable for them to avoid such a scenario and they have avoided it.

It is a statement about Europe's lack of preparedness for countries exiting a programme that there was no clear road map for putting in place a precautionary credit line. There was no clear road map for the type of negotiations that would prevail and, more importantly, the type of conditionality that would apply. I believe, even though the Minister will not want to admit it, that this was certainly a factor in the Irish Government's position. There was an absolute lack of clarity from Europe as to how this would work, the type of programme to which we would be required to sign up and, most importantly of all, the conditionality that would apply and, in particular, the interest that would apply to a €10 billion credit line. The troika funds of which we have been availing for the past few years have come in at a blended rate of a little more than 3%, which is quite a good rate. The rate dropped from the original figure of 5.8% on the back of a reduction in the interest rate secured by the Greek Government some time ago and we also availed of that.

Deputy Doherty raised the issue of the retroactive recapitalisation of Irish banks earlier. Our debt to GDP ratio this year is approaching 125% but without a deal on that and if growth conditions are weaker than expected, our debt sustainability will get into very real difficulty quickly and the markets will see that. I must say that while we warmly welcome the fact that Ireland is exiting the programme, as planned, on 15 December, I believe the Minister has got it wrong in not applying for a precautionary credit line. We are facing very significant risks as a country and it would have been prudent to take out an insurance policy against those risks. The Minister has decided not to take out such a policy and he has not told this House what the price of such a policy would have been. I believe that is a mistake and I regret the manner in which he has worded the motion before us because it forces us, as an Opposition party, while welcoming our exit from the bailout, to vote against it. The question he has put is whether the right decision has been made on the insurance policy but I believe it has not.

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