Martin Mansergh (Tipperary South, Fianna Fail)

As Members will be aware, the key documents which together set out the policy conditions of the financial support being provided to Ireland, and which I shall refer to collectively as the programme, have been made available to the House. I wish to outline briefly the documents involved. There are five documents :the memorandum of understanding on specific economic policy conditionality, MoU, the memorandum of economic and financial policies 2010, MEFP, the letters of intent to the IMF and the EU authorities and the technical memorandum of understanding, TMU, attached to the letter of intent to the IMF. While these documents have not yet been completely finalised, they are not expected to change in substance.

The programme consists essentially of two parts, one on bank restructuring and reorganisation and the other on fiscal policy and structural reform. The fiscal policy and structural reform elements are effectively the same as the national recovery plan. Financial support is being provided from Europe through the EU's European financial stabilisation mechanism, EFSM, and the European financial stability facility, EFSF, as well as through bilateral loans from the UK, Sweden and Denmark, in conjunction with IMF assistance.

There have been various derogatory terms used to describe the financial assistance for Ireland which has been agreed by the Government with our euro area and EU partners and the IMF. I wish to make two fundamental points about this. First, without this programme, our ability to continue to fund essential public services such as social welfare payments and salaries for doctors, nurses, teachers and the Garda would have been seriously compromised and highly uncertain. Second, the stability support which is being provided for Ireland is self-evidently indispensable to safeguard both our own financial stability and that of the wider euro and EU areas with which our economic welfare is intrinsically linked.

A total of €50 billion of the €67.5 billion we are receiving from our European partners and from the IMF relates precisely to the funding of vital public services over the next three years. This is money which we would be borrowing in any event but will now be doing so at rates well below what is currently available in the markets. Indeed, should there be an opportunity to return to the markets at better rates in the coming period, we can clearly do so. It is obvious that in the difficult and unprecedented situation confronting the public finances, the only responsible course of action for any Government was to accept the EU-IMF financial assistance fund.

Let us be absolutely clear about this. Ireland is not accepting external financial assistance as some sort of basket case. On the contrary, the country is funded until the middle of 2011 and holds reserves in the form of the National Pensions Reserve Fund. Moreover, the people of this State have demonstrated remarkable resilience and flexibility over the past two years in facing an unprecedented economic and financial crisis which has to be seen in the wider context of the recent global turmoil. Irish people are recognised internationally as a proud and resilient people who have capably overcome many challenges in the past and who will do so again now. Financial assistance from Europe and the IMF will be applied alongside our own resources.

The Government's success in stabilising the public finances and the banking strategy we have pursued have been endorsed by the international team with whom we have negotiated. They have also accepted our four-year plan for national recovery and have built their requirements around that plan. I emphasise this because it demonstrates that we have been pursuing the correct policies and that what has been achieved through difficult and challenging circumstances can now be built upon in the context of the programme. The fact is the economy is showing signs of recovery. As the Minister for Finance, Deputy Brian Lenihan, reminded the Dáil last week, GDP will record a very small increase this year based on strong export growth, exports are expected to grow by about 6% in real terms this year, driven by improvements in competitiveness and a strengthening of international markets; and conditions in the labour market are also beginning to stabilise.

The outlook for next year is much improved. As forecast in the plan, growth is expected to be around 1.75% next year, again driven by a remarkably robust export performance. It is not possible to make definitive projections for growth for a very open economy such as ours in the present circumstances of international uncertainty. The European Commission has taken a relatively more conservative approach in its forecast of just under 1% growth in 2011. At the same time, I point out that the Commission has also made a substantial upward revision in its forecast for international trade, which will benefit a small open economy like ours in which growth, by common consent, will be export-led.

There is also the point that under the programme the time provided for reducing the general Government deficit to below 3% of GDP has been extended by one year to 2015. This is designed precisely to take account of the fact that economic circumstances could prove relatively more difficult than at present envisaged. While this is welcome, I must emphasise it does not change our budgetary plans as set out in the national recovery plan. We remain committed to pursuing €15 billion of adjustments by 2014, but, obviously, the extension of the deadline provides some additional flexibility, if growth turns out lower than expected. I note, however, that in the later years the Commission forecasts are similar to those of the Department of Finance, while others, such as the ESRI, consider that the Department's forecast is too pessimistic.

The programme has adopted in its entirety the measures set out in the national recovery plan as a roadmap to return our economy to sustainable growth. The programme has accepted the adjustment of €15 billion by 2014 and endorsed the planned breakdown of €10 billion on the expenditure side and €5 billion in revenue raising measures. Budget 2011, which the Minister for Finance will present to the Dáil on Tuesday next, will set out the details of the first €6 billion of this adjustment. The programme has also taken on board the programme of structural and labour market reform in the national recovery plan aimed at improving our competitiveness. Performance in this regard will be monitored on a quarterly basis.

The negotiations on the programme which took place over a ten day period were intense and at times difficult. They were conducted under the direction of the Minister for Finance and of the Governor of the Central Bank by the most senior officials from the Department, the Central Bank, the Financial Regulator, the National Treasury Management Agency and the Office of the Attorney General. While there has been various criticism of the outcome of the negotiations, we have yet to hear any suggestion of how we could have secured this package of financial assistance at less cost to the State. What is absolutely clear is that we cannot afford not to receive this assistance.

It has been suggested, for instance, that we are paying a higher interest rate than Greece, even though Greece is now seeking our terms. The interest on the Greek loans is 5.2% for three year loans. Ireland's interest rate will be 5.8% for loans with an average maturity of 7.5 years. It is a basic fact of sovereign borrowing that the longer a country borrows money, the higher the interest rate paid. However, if it transpires that there is an opportunity to borrow at a lower rate in the markets, we would of course plan to do so and there is nothing in the programme which would prevent this.

As regards the make-up of the €85 billion funding package, €50 billion is to provide the normal budget financing - this is money we would have had to borrow over the next three years in any event. The programme provides these funds at a much lower rate than currently available to us in the market. This level of funding is already included in the plan. Of the remaining €35 billion, €10 billion is for immediate additional bank recapitalisation and the remaining €25 billion is to be used as a contingency fund, only to be drawn down if required and based, for example, on the results of the updated capital assessments.

The State is in the strong position that it can contribute €17.5 billion towards the €85 billion package from its own resources, including the National Pensions Reserve Fund, NPRF. It will be possible to do this in tandem with the commitments in the four year plan to use funds from the NPRF for projects such as the water metering programme and retrofitting. There has been much confused criticism of the proposed use of the NPRF, including from parties who have consistently in the past questioned the very existence of the fund. This makes no sense. What is abundantly clear is that there would be no understanding on the part of the EU, the IMF or any other international body of our not using the very sovereign wealth fund which we have at our disposal. How could we expect taxpayers in other countries to support assistance to Ireland while we hold funds in reserve? We have a large problem with our banks, which has forced us to seek this external assistance. In these circumstances, it is surely appropriate that our cash reserves should be deployed to help solve that problem.

The bottom line is that we have had to seek external assistance because the problems in our banking system simply became too big for the State to handle on its own. We have succeeded in stabilising the underlying position of the public finances. The public finance problems are serious but we were well on the way to solving them. The combination of the two sets of difficulties in circumstances where the entire eurozone was under pressure was beyond our capacity. Therefore, the primary aim of the programme agreed last weekend is to support the recovery and restructuring of our banking system.

It has been clear for some time that our banks were facing serious challenges in terms of their liquidity position. Lingering concerns in the market regarding their capital position led to negative market sentiment. This was despite the substantial transfer of the banks' riskiest loans to NAMA and the detailed capital adequacy assessment made by the Financial Regulator in the summer, as well as the significant recapitalisation measures that flowed from that. The programme does not envisage any departure from existing policy. Rather, it is an intensification and acceleration of the restructuring process already being undertaken for the Irish banks. A priority here is to ensure that the size of the domestic banking system is proportionate to the size of the economy and is appropriately aligned with the funding capacity of the banks overall, taking into account stable sources of deposit and wholesale funding.

An important objective of the programme is also to demonstrate the capacity of the banks to accommodate any unexpected significant further deterioration in asset quality so as to rebuild market confidence in the robustness and financial resilience of the banking system overall. The Central Bank is requiring the banks to meet a core tier 1 capital ratio of 12%, which is a key measure of capital strength. If the banks cannot achieve this themselves, the State will inject the necessary capital. There is provision for this to be drawn from the €10 billion which is available immediately from the overall programme fund. A further remaining €25 billion will be available on a contingency basis.

I emphasise that a detailed and extensive review of the financial status of the Irish banks was undertaken by the external authorities in advance of the agreement on the EU-IMF programme. This focused, in particular, on the results of the Central Bank's assessment of the capital position of banks, the prudential capital assessment review or PCAR, carried out earlier this year and updated in September last. The Governor of the Central Bank recently confirmed that the external experts had found no fault with the methodology used for the PCAR. The Central Bank will under the programme carry out an updated PCAR exercise on the capital position of the banks in early 2011 based on stringent stress testing and detailed reviews of asset quality and valuation, which will also take into account updated assessments of the macroeconomic environment. This will provide that, over the coming years, the banks' capital ratios do not fall below 10.5%. This is a high standard in international terms and is intended to provide significant confidence to the market that our banks will be in a strong financial position. It will provide a foundation for the necessary reassurance to allow the banks to attract greater market funding in due course.

The Government will also undertake a process of significant restructuring and right-sizing of the banks to reduce their balance sheets. In this context, all land and development loans below €20 million in Bank of Ireland and AIB will be transferred to NAMA. Further work will be undertaken in the short term with the banks to identify how the sector can be reorganised to ensure we have a viable and financially strong banking system which meets the needs of the real economy and has the confidence of international markets. This strategy, developed in collaboration with the various international organisations and endorsed by them, builds on the measures adopted by the Government over the past two years to resolve our serious banking difficulties.

The programme allows for an integrated approach to the restructuring of Anglo Irish Bank and Irish Nationwide Building Society, building on the proposed asset recovery bank structure to seek to maximise value from their loan books. Revised restructuring plans for the two institutions will be submitted to the European Commission in early 2011 detailing the resolution of the institutions, in particular, the arrangements for working out of assets over an extended period of time.

I reiterate that all deposits held with the domestic banking system are safe and covered by the deposit protection scheme for sums up to €100,000. In addition, deposits in participating institutions under the eligible liabilities guarantee scheme are guaranteed in line with the terms of the scheme for sums over €100,000. The scheme has been extended in national law to the end of 2011.

There has been much commentary about the need for senior bondholders to accept their share of the burden of this crisis. This matter was certainly raised in the course of the negotiations, and the unanimous view of the ECB and the Commission was and is that no programme would be possible if it were intended by us to dishonour senior debt. The strongly held belief among our European partners is that any move to impose burden sharing on this group of investors would have the potential to create a huge wave of further negative market sentiment towards the eurozone and its bank system. That apprehension was confirmed by Professor Honohan in an interview last Monday when he said there was no enthusiasm in Europe for this course of action.

There is simply no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the ECB. Those who think we could do so are living in fantasy land. Worse still, those who know we cannot do so but who nonetheless persist with the line are damaging this country and its financial system, all for the sake of a cheap headline. It is a case of politics as usual, unfortunately, even at this difficult time.

The idea which is out there that somehow there are no costs associated with default is entirely incorrect. Ireland is hugely dependent on foreign direct investment.

These companies have large funds and investments in Ireland and, directly and indirectly, employ 250,000 people in this economy. Any default on senior debt and the uncertainty that would cause would undoubtedly have an impact on the future investment decisions of these companies.

There is an article in The Irish Times today by a regular Financial Times columnist, Mr. Wolfgang Münchau, suggesting we should default. To be fair to him, he does not disguise the enormous disruption that this would cause, both to Ireland and the eurozone economy. Foreign commentators who are regularly quoted, including Nobel prize winner, Professor Krugman, have agendas and priorities of their own that might be advanced by this country adopting particular courses of action. It does not mean to say those courses of action would be in our interest. They emphatically would not.

Subordinated debt holders are in a different position. As the Minister said in his statement on 30 September last, there will be significant burden sharing by junior debt holders in Irish Nationwide and Anglo Irish Bank. These two institutions had received very substantial amounts of State assistance and it was only right that this should be done.

The Department has been working with the Office of the Attorney General to draft appropriate legislation to achieve this and this is near finalisation. Parallel to this, Anglo Irish Bank has run a buyback operation which will offer these bondholders an exchange of new debt for old but at a discount of at least 80%. This process is still under way and will be concluded shortly. This approach will also have to be considered in other circumstances where an institution receives substantial and significant State assistance in terms of capital provided to maintain its solvency ratios. I hope to be in a position soon to announce this legislation.

We need a properly functioning banking system for this country. As the Minister has indicated, we need to shift to a banking system commensurate with the economy but one that is strong and capable of meeting our needs. That has been the overriding objective of all our efforts since this crisis began two years ago. The considerable funds provided by this programme will enable us to bring this crisis to an end and to secure the future of the Irish banking system in order that it can play its full role in supporting the development of this country.

The past two years have been exceptionally difficult. Needless to say, we would have preferred not to have had recourse to external assistance. This was not only unavoidable but necessary to secure our economic future. We will engage positively with this process and will emerge from it a stronger and fitter economy. The basic strengths that have been associated with the Irish economy remain: the quality of our workers, our entrepreneurship and our pro-business environment. These remain vital building blocks for the future. In the good years, we invested wisely in vital infrastructure, including top class transport infrastructure and education, sports and cultural facilities, in addition to many other important areas. Over the past two years, we have won back much of the competitiveness we lost during the boom.

The three-year EU-IMF programme provides us with access to vital funding in these difficult times. It also provides the means to restructure and recapitalise our banking system. It will guide us through the implementation of the necessary budgetary and reform strategies set out in the national recovery plan. We have every reason to be confident about the future of this economy.