Joan Burton (Dublin West, Labour)
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Question 47: To ask the Minister for Finance the reason the promissory notes issued in respect of Anglo Irish Bank, Irish Nationwide and EBS carry coupon rates ranging from 4% to over 6%; if consideration was given in structuring these notes to the use of zero coupon notes; if consideration was given in structuring these notes to the use of shorter term money, rolled over at lower interest rates, as was the case with the National Assets Management Agency bonds; if he will give consideration to the use of zero coupon notes, or another interest minimizing mechanism, to finance the remaining €9.1bn to be granted to Anglo Irish Bank and Irish Nationwide by end 2010, potentially reducing the 2011 General Government Deficit by some €700m based on the prevailing 10 year sovereign bond rate on 4 November 2011; and if he will make a statement on the matter. [41829/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The purpose of the promissory notes issued to the institutions referred to in the Deputy's question is to enable the State to provide them with the necessary capital to meet regulatory capital requirements in a way that ensures the cash burden on the Exchequer over a period of years is manageable. The promissory note structure was designed to achieve the most efficient financing outcome for the Exchequer and corresponds to that of a conventional Government bond. Under their terms, the notes have fixed annual cash flows and a fixed redemption profile. This meets the Exchequer's objective of having certainty of cash flows. The coupon rates on the notes are set by reference to yields on government bonds at the time of issue. This feature explains the variation in the coupon rates referred to in the Deputy's question.

In order to meet their primary objective, it is essential that the notes are valued at their nominal or face value in the financial accounts of the recipient institutions. The notes must, therefore, bear interest at the appropriate market interest rate to ensure the current value of the cashflows equate to face value. Any lower coupon, set for example as suggested by the Deputy at a zero or short-term money market rate - as applies to NAMA bonds - would under the applicable accounting standards result in a fair value adjustment to the face value of the promissory notes in the financial accounts of the recipient institution. To compensate for this and to ensure the relevant institutions fully met their regulatory capital requirements, a substantial increase in the face value of the notes would have been required.

As set out in the technical note published on my Department's website on 4 November last - which accompanied the publication of the information note on the economic and budgetary outlook for the period 2011 to 2014 - the terms of the promissory notes will provide that no interest will be chargeable in 2011 and 2012. It has been confirmed with EUROSTAT that, as a result, no interest will be recorded on the promissory notes in those years, on either a cash or accrual basis. This means the general Government valance for 2011 and 2012 will be unaffected by interest payments relating to the promissory notes. A higher rate of interest will be chargeable for the remainder of the period - commencing from 2013 onwards - so that the cumulative amount of interest paid over the period of the promissory notes will remain at an average rate sufficient to allow the notes to be recorded in the institutions' balance sheets at face value, notwithstanding the zero rate of interest charged in 2011 and 2012.

Joan Burton (Dublin West, Labour)
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When did the Minister become aware of the potential impact of these promissory notes on the general Government balance? When the Labour Party received its briefing in the Department of Finance, it was perfectly clear that the officials had not worked out what might be the implications of those notes. I have been trying to ascertain the position in this regard - through the tabling of parliamentary questions - since the Minister announced the establishment of the promissory note structure last Easter. Was the Minister aware of what might be the impact of promissory notes or was he unaware of the position in this regard? If he did know of the possible impact, did he simply choose not to inform the Dáil that they could lead to the payment of an additional €1.5 billion per year? At the end of the year there will be some €31 billion outstanding.

The international markets have lost confidence in Ireland because the facts relating to this matter have only just emerged. Promissory notes worth €9 billion are due to be issued before the end of the year. Ireland's bond rates currently stand at more than 8%. This means that the promissory notes to which I refer will be issued at a rate that will be somewhere between 6% and 8%. It is to be hoped that the rate will decrease to some degree. However, if today's rate applies, then the amount in interest we will be obliged to repay will be extremely high. The Minister and his colleagues are leaving an appalling liability in respect of these promissory notes for their successors in government.

Brendan Howlin (Wexford, Labour)
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The Deputy should pose a question.

Joan Burton (Dublin West, Labour)
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Has the Minister considered whether the further €9 billion worth of promissory notes should be issued at the very high market rates which obtain at present or whether another mechanism might be employed? I suggested to his officials that they needed to check how the promissory notes would be treated in the context of the national accounts. Does the Minister agree that on foot of my action in this regard, his officials have at least obtained an interest holiday from EUROSTAT? The officials were not even aware of the possibility of using this mechanism prior to my visit to the Department. Does the Minister intend to issue €9 billion worth-----

Brendan Howlin (Wexford, Labour)
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The Deputy has put her question.

Joan Burton (Dublin West, Labour)
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-----of further promissory notes at sky-high interest rates before the end of the year?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The Deputy asked a number of questions. In respect of my level of awareness, at all stages prior to the execution of the promissory notes this year, my Department advised me that there were difficulties in the context of EUROSTAT's treatment of this matter with regard to the capital sums that we would be obliged to pay on foot of those notes. My officials also advised me at all stages on the capital implications that would arise. In other words, it was made clear that they could lead to a substantial increase in the debt to GDP ratio for this year. Having consulted the Governor of the Central Bank, I took the view that the best course would be to ensure the maximum amount of that exposure - in terms of the capital embodied in the notes - would be taken on the general Government balance this year. This means that next year the Government - and whatever Administration is in place in 2012 - would not be saddled with any further once-off spikes in the general Government balance caused by the capital treatment of promissory notes.

It was drawn to my attention in September that there would be implications for the general Government balance in future years in respect of the interest payments to which the Deputy refers. Various solutions were explored by my officials long before she adverted to the matter. On the question of the interest rate that will apply in respect of any note which must be structured prior to the end of the year, I will examine any suggestion the Deputy may wish to put forward and my officials will consider the various options.

Joan Burton (Dublin West, Labour)
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I thank the Minister for his reply. At least he has acknowledged that it was only in September that he discussed with his officials the matter of how the interest would be dealt with. This country is facing an incredibly difficult future as a result of the millstone of €31 billion in promissory notes relating to Anglo Irish Bank and Irish Nationwide that has been placed around our necks.

Brendan Howlin (Wexford, Labour)
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The Deputy should put a brief supplementary question. We are well over the time allocated for this question.

Joan Burton (Dublin West, Labour)
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Does the Minister agree it is the interest relating to the promissory notes which has completely distorted the position and which is largely responsible for the increase in the savings - from €7.5 billion to €15 billion - that will be required in the next four years? Who provided the Minister with advice on the promissory note system prior to Easter? Why did he come before the House on the Tuesday prior to Easter without first fully checking the position with regard not only to the capital implications but also to those relating to interest payments? Was someone in the Department responsible for making suggestions in respect of this matter? Senior civil servants in the Department of Finance and senior officials employed by the Central Bank, the Financial Regulator and the various other institutions which are responsible to the Department are meant to provide advice to the Minister. Did they not provide that advice?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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With regard to the interest, they were not in a position to advise me.

Joan Burton (Dublin West, Labour)
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I find that outrageous.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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If I might conclude without interruption, the position in this regard turns on the treatment which EUROSTAT adopts in respect of interest payments. My officials were not in a position to immediately ascertain the relevant information because EUROSTAT's precise treatment of all these matters varies and is subject to revision and final judgment by that organisation.

The Deputy's principal question related to whether these notes in some way contributed to the increase in the four-year target from €7.5 billion to €15 billion. Her assumption in this regard is simply incorrect. Let us be clear with regard to this matter. Leaving aside any interest payments which must be made on moneys borrowed in connection with banking, there has been a substantial gap between what the State spends-----

Joan Burton (Dublin West, Labour)
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The Minister should just multiply €1.5 billion by six to get the relevant figure.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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May I please conclude?

Brendan Howlin (Wexford, Labour)
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The Deputy should allow the Minister to reply.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The gap between Exchequer expenses and receipts for this year is €19 billion. The €1.5 billion to which the Deputy refers is not even included in that figure. Let us place this matter in perspective. The State has been spending far more than it has been taking in.

Joan Burton (Dublin West, Labour)
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The Minister is replying to a different question.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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No, I am answering the Deputy's question. This is the one item of information she never wishes to hear. The gap to which I refer is real and the Deputy is of the view that we should try to reduce it by only €4.5 billion next year. Leaving aside any interest payments which must be made on moneys borrowed in connection with banking, it is that gap which lies at the heart of our fiscal and budgetary difficulties.

Joan Burton (Dublin West, Labour)
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Will the Minister give us a schedule off the make-up of the €15 billion?