Thursday, 5 July 2012
Bank Debt Restructuring
Question 2: To ask the Minister for Finance if in view of the fact that the European Council has agreed in principle to the separation of banking debt from sovereign debt, and agreed in principle to the possibility of ESM funds being used to directly recapitalise the banks, and agreed to consider the retrospective application of such funding in the case of Ireland, he will confirm that it is his intention to explore the possibility of European Stability Mechanism funds being used to directly refinance the Anglo Irish Bank promissory note; if he will remove the promissory note debt from the States debt to GDP ratio; and if he will remove the liability from the taxpayer for the repayment of this toxic banking debt. [32924/12]
The Government has been fully committed to reviewing the arrangements that were put in place to capitalise the Irish Bank Resolution Corporation, formerly Anglo Irish Bank. The purpose of this review was to determine whether there is a way to reduce the overall cost to the State. The first step in this process was the settlement of the March 2012 promissory note repayment with a long-term Government bond. It is for these reasons the end of March payment was seen as an initial step in a medium-term process. The recent and very welcome euro area summit statement represents a major shift in European policy in terms of breaking the vicious circle between the banks and the sovereign. This is something the Irish Government has been saying is needed at European level to help tackle the crisis. It has been agreed that when an effective single supervisory mechanism for banks in the euro area and involving the ECB is established, the European Stability Mechanism could have the possibility to recapitalise banks directly. This is an agreement in principle and the detailed work will now begin to advance the process further.
The Government has been working very hard to secure a deal on Irish bank debt. The agreement at last week's euro area summit as set out in the statement provides an opportunity for the issue of the bank debt to be addressed at an EU level. While the policy position is very positive indeed, it would not be possible at this stage of the process to attempt to quantify the benefits which will accrue to the economy and Ireland generally.
While the details, structures and arrangements have yet to be finalised, the policy statement released following the euro area summit provides a basis for a euro area solution to what is essentially a euro area problem. This will be one of our key priorities between now and the end of year, with the initial formal steps, at a European level, taking place at the euro group meeting on 9 July.
The agreement reached at Council level was significant and could have significant benefits to this State and to our citizens. The Minister was at the finance committee last week when I wished him well in his attempts to separate the sovereign debt from the banking debt. I have listened to the conclusions of the summit and the devil is in the detail. I am afraid that he is not being ambitious enough on what the Government is going to seek. I listened to his ministerial colleagues speak at the weekend on what this could possibly mean. They said that the vicious circle has been broken between banking debt and sovereign debt and that we have won the principle of retrospection. The litmus test on that is Anglo Irish Bank and the €28 billion promissory note.
My understanding of separating banking debt and sovereign debt is that if Anglo Irish Bank was to emerge in Germany in two years, it would be the ESM that would fund that bank and it would be the ESM that would absorb the losses if such losses were incurred. If we are to work on the principle of retrospection, then regardless of the fact there is not any longer any value in Anglo Irish Bank, the same solutions that would be applied in other member states in the future must be applied to what happened in Anglo Irish Bank. While I know we cannot determine the outcomes, is that the Government's starting point at least? Is the Government putting up the full €30 billion and more that we have put into IBRC, and does it want that to be absorbed by the ESM and the losses absorbed across the euro system?
I am not too sure the devil is in the detail in this case. The eminent economist, Colm McCarthy, was saying during the week that in this case, the devil is in the principle. Getting the principle right is probably the most important thing and we can work out the detail subsequently. It is not as clear cut as the Deputy saying that the ESM will be the funder. It looks as if that will be the way it may go, but there is no power within the ESM treaty at the moment to recapitalise banks. There is a catch-all provision at the end which it is stated that the governors or the ministers for finance may, by unanimous decision, take almost unlimited powers of intervention and give them to the ESM. Therefore, that step is there before the ESM can act.
Doing something about Spain's banks is imminent and I think it will occupy our work on Monday and Tuesday to a large degree. However, I understand that the funding mechanism in the first instance will be the EFSF and not the ESM, and there will be subsequently some transfer from the EFSF onto the ESM. That seems to be the general intention at the moment. We will be watching that very carefully, because if the principle of equality is sacrosanct, the manner in which the Spanish banks are dealt with will be an important precedent for our negotiations.
The agreement is that this vicious cycle of sovereign and banking debt is to be broken. If that were the case and if Anglo Irish Bank were to emerge in France and massive losses were to be incurred, it is likely the ESM would incur those losses. Is the Irish Government going to argue that if that is the process to be put in place - the ESM absorbs the losses rather than taxpayers - then we should put that on the table? Are we going to argue that we want the losses which we know exist in Anglo Irish Bank, or IBRC, to be absorbed by the ESM if that is what will happen with other banks? I know there will be difficulties in Europe with this because they are realising losses immediately. However, if they are willing to countenance realising potential losses into the future and if the principle of retrospection is to apply properly, then they need to realise the losses we have already incurred within our banking system.
I am fearful we will just end up with a longer duration for the promissory note and that we will swap our shares in the living banks for the current value of the €28 billion injection, which is estimated by the NTMA to be €9.6 billion and which is probably overvalued. That is of no direct benefit to the State for a long-term solution because there is a value in the shares. As Deputy McGrath said, we must show more ambition. The €64 billion in total must be put on the table and the principle of retrospection must be enforced. The Minister has to fight hammer and tongs on the principle of retrospection. If it is good enough for Spain, Italy, Germany or any other European country, then it needs to be applied to Ireland, given what we have experienced.
There will be no lack of ambition as we proceed. As I said, a lot of bottom-up solutions were being introduced on an instalment basis but they were all behind the curve and the market did not believe in it. There is change now and an overarching policy has been put in place, so we will now fill in in accordance with the overarching policy. A lot of the detail will have to be worked out, not only in respect of Ireland but also in respect of Spain and of Cyprus, which has also applied for a programme. It is the banks that are also dragging Cyprus down as a result of the kick-on effects from Greece. It is like a very detailed line drawing which we have to colour in. It will take a while before we can do that and I do not want to jump any fences before the fences in front of us. I believe the Deputy knows my negotiating position. I was clear about it at the finance committee and it has not changed. We will not lack ambition.