Dáil debates

Wednesday, 10 November 2010

Other Questions

Banks Recapitalisation

3:00 pm

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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Question 54: 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 more attractive interest rates, as was the case with the National Assets Management Agency bonds; and if he will make a statement on the matter. [41624/10]

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I refer the Deputy to my earlier answer to Priority Question No. 47. 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 that 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.

Additional information not give on the floor of the House:

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 that the current value of the cash flows equates 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. In order to compensate for this and ensure that the relevant institutions fully met their regulatory capital requirements, a very 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 2011-14, 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 that the general Government balance 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 beginning in 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 promissory notes to be recorded in the institutions' balance sheets at face value, notwithstanding the zero rate of interest charged in 2011 and 2012.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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I will repeat the question I asked earlier, which the Minister did not have an opportunity to answer. Is the Minister still committed to issuing further promissory notes to the tune of approximately €9 billion at the interest rates which now prevail, which today are 8% and which, even if the rates fall back a bit, are still likely to be over 6%. Strategically, is this the best approach for Ireland? The Government was able to issue bond notes at 1.5% in respect of the banks and NAMA and there are provisions for a zero coupon rate on promissory notes. I am sure the Minister's officials have advised him of the effect of that. Has he considered the issue? It will mean an additional interest charge of approximately €700 million per year on the €9 billion at current rates. That is not to be sneezed at.

What is the position in regard to the former Anglo Irish Bank employees who will not share the encryption codes for accessing its records? Does the Minister propose to take action and has he entered into discussions with the bank's management?

Photo of Brendan HowlinBrendan Howlin (Wexford, Labour)
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That is worthy of a separate question and cannot be asked without notice.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I am not in a position to deal with the issue of encryption codes.

Photo of Brendan HowlinBrendan Howlin (Wexford, Labour)
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It is a separate issue.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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The Government is committed to meeting the capital requirements of the relevant institutions through the issue of a promissory note and plainly such a note will require to be issued before the end of the year. The capital figures have already been disclosed in the announcement on 30 September. As I indicated in my supplementary response to the previous question, I am open to constructive suggestions about how the interest structure in the notes can be devised. However, any such interest structure must carry credibility in terms of the core objective of providing for the capital requirements of the institutions concerned.

In regard to NAMA bonds and the zero coupon rate, that was a different arrangement and the EUROSTAT treatment has been very different. We discussed that issue at length during our parliamentary debates on NAMA.

Photo of Michael NoonanMichael Noonan (Limerick East, Fine Gael)
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If the Minister had not taken the interest holiday on the promissory notes, what would be the extent of the estimated correction for 2011 on the budgetary side?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I do not have the information before me but as I understand it, the figure for 2011 is 0.8%.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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It is 1.4%. It was on the table.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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In Stability and Growth Pact terms the impact on the general Government balance as a proportion of GDP will be between 0.8% and 0.9%.

Photo of Michael NoonanMichael Noonan (Limerick East, Fine Gael)
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We are coming close to the €7 billion the Minister's officials never intended.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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Given that the Minister is open to reconsidering the promissory notes, I strongly recommend that he do so. I suggest that he consult widely on the issue because the €31 billion for which we are on the hook is precisely what is dragging the country down. How can we regain the confidence of the bond markets until this issue has been mitigated?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I do not accept the Deputy's analysis of our current market difficulties in the context of the promissory note arrangement. It has been made clear to the markets that the promissory note arrangement is the accounting treatment of the problem. The cashflow implications of spreading the loss over an extended term have been fully explained and are understood in the markets. I do not accept her assumption that it is the sole cause of our difficulty in the markets. I am open to constructive suggestions not on the principle of the issue of the notes but on the structure of interest embodied in them.