Stephen Donnelly (Wicklow, Independent)
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Question 131: To ask the Minister for Finance the specific threats, as referenced explicitly by the Governor of the Central Bank of Ireland on national television, that were made by the European institutions to him or the Irish Central Bank or their officials by the ECB, the IMF or European officials or politicians with regard to not paying back unguaranteed senior bonds in the Irish banks; and if he will make a statement on the matter. [14537/11]

Michael Noonan (Limerick City, Fine Gael)
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I am not aware of any such reference that the Governor may have made on national television. In principle, the Government is in favour of burden-sharing with bondholders in banks and there are strong arguments for doing so, particularly in circumstances in which a bank has been provided with significant taxpayer support. The question of burden-sharing with senior unguaranteed bondholders of Irish financial institutions was raised by the previous Government in the programme negotiations with the EU-IMF and rejected. It was also discussed with the EU, IMF and ECB in the context of this Government's approach to restructuring the banking system as set out in my Statement to the House on Banking Matters on 31 March last. There was a serious concern that a unilateral move on Ireland's part would provoke great uncertainty in financial markets and create a contagion effect with the potential to seriously damage other banks and member states.

In my 31 March Statement on Banking Matters, I emphasised that it is vital that the proposed three banks (Bank of Ireland, AIB with EBS and IL&P) are able to operate in the market place following their reorganisation, including regaining access to normal funding mechanisms in due course. The Government therefore decided, informed by the reservations of the ECB, that these banks will not burden-share with senior bondholders of their constituent banks, whether guaranteed or unguaranteed. As the Deputy will be aware, work is underway to ensure appropriate burden-sharing by subordinated bondholders in AIB, EBS, IL&P and Bank of Ireland.

The ECB has been an essential source of funding to the Irish banking system since wholesale markets first saw disruption over three years ago, and particularly since these markets were closed off to the Irish banks. This support has been crucial for keeping the country open for business, and is provided by the ECB at an exceptionally low interest rate of 1.25%. The ECB announced, on foot of our stress test results, that the basis on which it provides this funding - in other words, how it regards and values the collateral it accepts - would not change even in the event of a downgrade by ratings agencies. This is a significant commitment which reassures markets about the funding position of the Irish banks.

Our radical downsizing and restructuring of the banking sector is intended to provide a secure financial system that will protect deposits and ensure the flow of credit to Irish consumers and businesses. This will result in a smaller, fit-for-purpose banking sector, that will be viable and independent from the State and in time will have a more normalised reliance on Eurosystem support.