Martin Mansergh (Tipperary South, Fianna Fail)

The Irish banking system has faced its most significant crisis ever. The core of the problem has been the scale of reckless lending that took place over many years. The consequence of such reckless lending must now be faced and the capital position of all the viable banks is being restored in order that the banking system will be in a position to meet adequately and responsibly the needs of the country and its citizens. The Minister's statement on banking on 30 September was a very important milestone on that road to recovery as it sought to bring finality to the capital requirements of the banks and the extent to which the State will be required to fill the breach.

The State's involvement in the banking sector, going back to September 2008 and the initial bank guarantee, has at all times been focused on the requirement to protect and support the financial and economic position of the State. Although this has been said on many occasions, it needs to be repeated. Given the very stressed international financial environment at that time and the significant reliance of the banking system on external wholesale and debt funding, in the absence of a State guarantee, the Irish banking system as a whole would not have been able to fund itself and the system would have faced the risk of immediate collapse. While we have faced very difficult economic, fiscal and unemployment problems over the past two years, a sudden failure of the financial and banking system in the autumn of 2008 would have had a very much graver impact. As former President Clinton put it pithily on his recent visit to Dublin: "If you don't have a banking system, you're toast."

This crucial step of introducing the guarantee gave the Government vital breathing space to address the fundamental problems of the banking system. The Government availed of that opportunity. It established NAMA, which has forced the banks to face up immediately to the losses on their land and development and associated loan books, and it recapitalised the banking system, which included taking some of the banks and building societies into State ownership and taking substantial stakes in the two main banks. This has not been an easy route. It has proved to be a difficult and expensive, but also necessary, process if the banking system is to be repaired in the interest of the economy and the citizens of this country. The Minister's statement on banking on 30 September 2010 has been a very important step in this regard.

A very important objective of the Minister's statement has been to restore international confidence in the banking sector. Certain steps have been taken in that regard, not least the reforms to the regulatory system and the appointment of people with real expertise and credibility in key positions. Key legislative changes have also been made. The Central Bank Reform Act 2010 commenced on 1 October 2010. This Act provides for the establishment of a new unitary Central Bank combining both central banking and regulatory functions. It will be governed by a new Central Bank commission chaired by the Governor, Patrick Honohan. This is the first in a series of Bills to reform the Central Bank. The next Bill, to be published later this year, will add to the powers and functions of the Financial Regulator. Further legislation early next year will consolidate and make more transparent the body of law relating the Central Bank and the regulation of financial services. The new legislation will equip the Financial Regulator with the powers necessary for the more hands-on financial regulatory regime that is now required.

The Minister indicated previously that he is examining options for the introduction of legislation to deal in a systematic way with distressed financial institutions. His aim is to ensure that the State has in place a range of tools to address problem institutions effectively in the interests of maintaining financial stability, minimising reliance on public moneys and ensuring continuity of key banking activities. In view of the role performed by central banks in resolution frameworks for financial institutions, the Department of Finance is in consultation with the Central Bank with a view to the development of draft legislative proposals which will be considered in due course. This is a complex area where policy is evolving internationally. It is necessary, therefore, to ensure any model introduced in an Irish context conforms to best international practice.

The most distressed of our domestic banks is Anglo Irish Bank. The future plan envisages the splitting of the bank into two licensed and regulated credit institutions - a recovery bank focused on recovering maximum value for the State from the loan assets and business of Anglo Irish Bank not being transferred to NAMA and a funding bank to safeguard fully Anglo Irish Bank's deposit base. The Central Bank has determined and advised that in the expected loss case an additional €6.4 billion in total capital will be needed for the recovery bank and funding bank structure to continue to meet the minimum capital requirements in the coming years. A total of €22.9 billion has already been provided by the State since Anglo Irish Bank was nationalised early in 2009. This additional capital requirement brings the projected total gross cost of the restructuring of Anglo Irish Bank to €29.3 billion. This additional capital estimate was based on the information available, including estimates from NAMA of the likely discounts on loans transferring to it based on its own analysis. This additional capital will be provided by increasing the promissory note issued by the State and by appropriate burden sharing exclusively by holders of Anglo Irish Bank subordinated debt instruments. The Central Bank has estimated that in the stress case the level of losses in Anglo Irish Bank could potentially be €5 billion higher than in the expected case of €29.3 billion. The stress case indicates the upper boundary of the level of losses. It should be emphasised that it does not represent the Central Bank's expectation of the likely outcome. The Government will, therefore, capitalise the new structure to the expected case requirement of €29.3 billion.

Much has been said about senior debt obligations in Anglo Irish Bank. The position is that senior debt obligations rank equally with deposits and other creditors under Irish law. There are no plans to change this position. The Minister has indicated clearly that there is no question of seeking to impose losses on holders of such senior debt in Anglo Irish Bank or in any other credit institution in the State through any legislative measures. Any alternative strategy as advocated by some creates a significant risk of jeopardising the banking system and the State's access to international debt markets and cannot be countenanced on that basis. Commentators and critics, expert or not, do not have to take responsibility for the consequences if their view is acted upon. Markets do not always - perhaps seldom - act in a perfectly rational manner. Governments must take decisions, often under pressure, in real time and will not take conscious risks that may endanger the whole system.

The principle of appropriate burden-sharing by holders of subordinated debt, however, is one which the Minister accepts. In keeping with this approach, the Department of Finance, in conjunction with the Attorney General's office, is working on resolution and reorganisation legislation which will enable the implementation of reorganisation measures specific to Anglo Irish Bank and the Irish Nationwide Building Society, INBS, which will address the issue of burden-sharing by subordinated bondholders. The legislation will be consistent with the requirements for the measures to be recognised as a reorganisation under the relevant EU directive in other EU member states.

Although smaller in scale, INBS is arguably in an even more distressed position than Anglo Irish Bank. The fact that the State, which now controls the society, is required to inject €5.4 billion in capital is testament to this. This level of capital injection amounts to around 45% of the society's liabilities at the end of 2009. This stressed position of the society is the outcome of very risky and poor lending provided by the society over a number of years. It is a real indictment of the board and senior management of the society over that time that the taxpayer is required to deal, especially on such a scale, with the consequences. As a small gesture, the former most senior manager in the society voluntarily offered to return some of the bonuses he received from the society over recent years. This offer was made, it was stated, out of his respect for the members of the society. Despite this statement, the bonus remains to be returned to the society. Given that the owner of this distressed institution is now the people of Ireland, the Minister has expressed his full support and encouragement to the board of INBS in its efforts to see this offer by the former chief executive of the society honoured in full.

The Minister has made it clear that he does not see a future for INBS as an independent stand-alone entity and he has asked the NTMA and his other advisers to explore the options open to him to bring finality to the position of the society. The European Commission will be fully involved in this process. The further capital investment by the State in INBS will reassure depositors in the institution that, whatever the future may hold for the society, all its deposits will remain secure.

Regarding the other covered institutions, AIB has already taken steps to meet its capital requirements by the sale of its Polish subsidiary, among other steps. This is expected to generate capital of €2.5 billion. In view of the increased NAMA discount for AIB, however, the Central Bank has concluded that an additional capital over and above the amount identified last March will be required. As indicated in the banking statement of the Minister for Finance on 30 September, the new total capital requirement for AIB, after taking into account the capital generated by the sale of its Polish subsidiary, is €7.9 billion. In the current stressed market conditions, the bank is unlikely to be able to conduct a traditional privately underwritten transaction on a substantial scale. To afford every opportunity to AIB to raise as much as possible of the required capital from the markets and to minimise further Government support, it has been decided that this capital requirement will be met through placing an open offer to shareholders of AIB shares to the value of €5.4 billion. This transaction will be fully underwritten by the National Pensions Reserve Fund Commission and is expected to be completed in 2010. If necessary, the commission's underwriting commitment will be satisfied by the conversion of up to €1.7 billion of its existing preference shares in AIB into ordinary shares along with a new cash investment for the balance of €3.7 billion in ordinary shares. This transaction structure assumes the disposal of other assets in due course. In the event that AIB's residual capital requirement is not met through asset sales by 31 March 2011, any shortfall will be met by the conversion of a proportion of the remaining €1.8 billion of preference shares. As a consequence of these actions, it is likely that the State will hold a majority shareholding in AIB.

Regarding Bank of Ireland and EBS, the Central Bank has advised that no further capital over and above its existing level in the case of the Bank of Ireland and that already announced last March in the case of EBS is required. EBS is in discussion with a number of parties about its future, and any adjustment in its capital need that arises for the State will be accommodated in the outcome of those discussions in due course.

As an historian by background, I am conscious there have been other more summary ways of dealing with the authors of these problems or those deemed to be such. The original Star Chamber of Henry VII and the chambre de justice during the prime of Louis XIV were designed to make financiers who had made vast sums in contrast to the penury of the state disgorge their ill-gotten gains. There are faint echoes of this in the treatment of some Russian oligarchs in much more recent times. As a sometime 18th century French historian, recent events have given me new insights during the revolution into the unpopularity of financiers who had accumulated vast wealth, very often at the expense of the state, in the last decades of the ancien regime. Despite Ireland being a republic that originally took its inspiration from the ideals of the French and American revolutions and despite the best efforts of the statutory authorities, we need to reflect on the reasons the wheels now seem to move so slowly and whether any legal and constitutional protections unintentionally make it more difficult and cumbersome than it should be to bring people to justice or, more relevantly, to make them disgorge gains they are not entitled to hang on to.

The Irish public finances have also been very severely impacted upon by the sharp deterioration in economic activity in recent years, particularly through our tax revenues. To put it in context, tax receipts in 2010 are likely to be some 35% below their 2007 peak, which would see them effectively back to 2003 levels. Following an era of surpluses for almost all of the decade between 1998 and 2008, large deficits, not seen for well over 20 years, have been recorded in more recent times. The 2010 budget set out a medium-term fiscal consolidation plan to bring our deficit to below the Stability and Growth Pact threshold of 3% of GDP by the end of 2014. We have taken substantial measures to correct the imbalance in the public finances. Fiscal adjustments designed to yield 5% of GDP in 2009 were implemented between July 2008 and April 2009. The 2010 budget implemented a further set of adjustments, mainly on the expenditure side, amounting to €4 billion or 2.5% of GDP.

As regards the emerging fiscal position for this year, it is encouraging that the most recent Exchequer returns of revenue and expenditure up to the end of the third quarter on 30 September provide further evidence that the stabilisation in the public finances continues. Overall taxes are exactly in line with target, while expenditure is almost €1.6 billion down year-on-year, demonstrating the impact of decisions taken by Government. An underlying general Government deficit of 11.9% of GDP is expected this year, which is broadly in line with the budget day forecast.

It is the case, however, that on a purely headline basis the general Government deficit this year will be extremely high at around 32% of GDP. This is owing to the accounting treatment by the EU Statistics Office of capital support being provided to some of the financial institutions. It should be stressed, however, that no additional borrowing is required this year as a result of this large headline deficit and the Exchequer is fully funded through the first half of 2011. In addition, the funding costs of the capital support to the banks are being spread out over the next ten years or so, thereby lessening the immediate impact on the Exchequer, which means they are manageable in that context.

The Government remains fully committed to bringing the general Government deficit below the Stability and Growth Pact threshold of 3% of GDP by the end of 2014. The focus now is on securing the necessary adjustments which must be delivered to maintain ourselves on a sustainable and credible path towards consolidation. Work is under way on a four-year budgetary plan, to be published in the first half of November, that will set out the annual measures required to ensure that target is met. Restoring sustainability to the public finances is essential to underpin future economic growth. An adjustment above the €3 billion figure will be required next year and the extent of the additional amount will become clearer in the coming weeks as the Department of Finance assesses the most up-to-date economic and fiscal data available in the context of preparing the four year budgetary plan. The 3% target has also been publicly accepted by the two main Opposition parties, which is a positive development, and officials from the Department of Finance have been providing technical briefings to Opposition spokespersons this week.

It is vital we have a credible path to show how we propose to reach our target. By ensuring a sustainable fiscal environment, we can set the right conditions to assist the economy in returning to growth. The four-year budgetary plan will set out our revised annual headline targets and the necessary adjustment to adhere to a credible deficit reduction plan over the medium term. The plan will take on board the most up-to-date economic and fiscal data and the implications for the fiscal consolidation process. To underline fully the strength of our resolve, the Government will make a significant consolidation effort in 2011. The Government is determined to take whatever steps are necessary to ensure the country returns to a sustainable fiscal position.

As part of the budgetary plan, we will also set out a strategy for underpinning and encouraging sustainable economic and employment growth over the medium term. It is only through adopting policies that enhance our economic growth and job creation prospects and improve our competitiveness that we will achieve the necessary targets. Encouragingly, the substantial improvement in competitiveness which has taken place over the past year or thereabouts is feeding through into stronger exports. Recent figures show a broadening of our exports, with a strong performance recorded across a number of sectors. Provided we continue to improve our competitiveness, for instance, through appropriate wage policies and raising productivity levels, there are grounds for optimism.

The announcement of the four-year plan and renewed commitment to tackling our public finance deficit has been generally well received by the international financial markets, with our bond spreads narrowing in response. The plan will be a pathway towards renewed fiscal sustainability. The 2011 budget, which will be presented to the Dáil on 7 December, will be another important step on the road to achieving this goal. The Government has, therefore, taken and will shortly take further firm decisions that are necessary to restore the economy and the public finances to a credible and sustainable position.