Statement by Minister for Finance Brian Lenihan to the Dáil on the EU/IMF Programme for Ireland and the National Recovery Plan 2011-2014
First of all, a Cheann Comairle, I want to inform the House that I am circulating to members the five documents which set out the policy conditions for the provision of financial support to Ireland by EU member states and the International Monetary Fund. These documents underpin the three year Programme of banking and economic measures on which we have now embarked.
The documents are:
* the Memorandum of Economic and Financial Policies 2010 (MEFP)
* The Memorandum of Understanding on Specific Economic Policy Conditionality (MoU)
* the Letters of Intent to the IMF and the EU Authorities
* the Technical Memorandum of Understanding (TMU) attached to the Letter of Intent (LoI) to the IMF.
These documents are not yet finalised but they are not expected to change in substance. The Memorandum on Economic and Fiscal Policies (MEFP) is the foundation document of the IMF and EU elements of the programme. It sets out the reasons for the programme along with its principal policy objectives which are:
- banking reorganisation
- fiscal consolidation
- renewing growth
And it outlines the substantial external financial assistance to support these policy objectives.
The Memorandum of Understanding on Specific Economic Policy conditionality sets out the conditions for the disbursement of the assistance being provided under the European Financial Stabilisation Mechanism), the European Financial Stability Facility and the bilateral loans by the UK, Sweden and Denmark. So this document relates to the EU element of the Programme although it does refer to the IMF. The memorandum sets quarterly targets for the achievement of the specified policy objectives and requires detailed quarterly reporting in respect of the achievement of these objectives. This document closely reflects our own National Recovery Plan.
It also requires the Government to consult with the European Commission, the ECB and the IMF about the adoption of policies that are not consistent with this Memorandum.
The Technical Memorandum of Understanding, as its name suggests relates in the main to the definitions and reporting for fiscal aggregates. It also requires that foreign debt arrears are not be incurred.
The letters of intent are Ireland's formal applications for support to the EU authorities and to the IMF.
The question has been raised as to whether this support programme has the status of an international agreement. I am advised by the Attorney General that the Programme, and these supporting documents do not represent international agreements and do not require the approval of the Dáil. I am presenting the documents to the Dáil, for information and to inform discussion of the programme.
A Cheann Comhairle, amid the sometimes hysterical and contradictory reaction to the external assistance programme, it strikes me that one quintessential point has been overlooked and it is this: without this Programme, our ability to fund the payments to social welfare recipients, the salaries of our nurses, our doctors, our teachers, our gardai, would have been extraordinarily limited and highly uncertain.
Fifty billion of the €67.5 billion we are receiving from our European partners and from the IMF will go to fund those vital public services over the next three years. In those circumstances, the only responsible course of action for any government was to accept the EU/IMF financial assistance fund.
Nonetheless, we enter this Programme not as a delinquent State that has lost fiscal control. We enter it as a country that is funded until the middle of next year; as a State whose citizens have shown remarkable resilience and flexibility over the last two years in facing head on, an economic and financial crisis the severity of which has few modern parallels.
The team with whom we have negotiated has acknowledged our success in stabilising our public finances and they have endorsed our banking strategy. This is borne out in the documents I have just circulated. They have also accepted our four year Plan for National Recovery and have built their prescribed Programme around that Plan.
This needs to be emphasised because it shows that we do have the capacity to get out of our difficulties and that we have already made considerable progress in that respect. The fact is our economy is showing signs of recovery. As I have already reminded this house last week
* GDP will record a very small increase this year based on strong export growth.
* Exports are expected to grow by about 6 per cent in real terms this year, driven by improvements in competitiveness and a strengthening of international markets.
* 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 ¾ per cent next year again driven by a remarkably robust export performance.
The Fine Gael leader referred to the European Commission's less optimistic forecasts in the Dail yesterday which he suggested had undermined our Four Year Plan. He ignored the substantial upward revision of the Commission's forecast on international trade which will benefit a small open economy like ours in which growth, by common consent, will be export led.
It is also the case that, under the Programme, we have been given an extra year to reach the deficit target of 3 per cent of GDP precisely to take account of the Commission's lower growth forecast. I welcome this step but it does not alter our budgetary plans as set out in the Plan. In other words the target of €15 billion of adjustments by 2014, remains but there is further room for manoeuvre in the event that growth is lower than expected.
In the later years, the Commission's growth forecasts are similar to my Department's. It is also the case that others - such as the ESRI for example - believe that the Department of Finance 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 adjustment of €15 billion by 2014 has been accepted as has the breakdown of €10 billion in spending reductions and €5 billion in revenue raising measures. The details of the first €6 billion of this adjustment will be contained in the budget which I will present to the House next Tuesday.
The programme of structural and labour market reform aimed at improving our competitiveness has also been endorsed by the Programme. It set out a detailed quarterly schedule for the achievement of the agreed measures.
The negotiations on the Programme which took place over a ten day period were intense and at times difficult. They were conducted under my direction and that of the Governor of the Central Bank by the most senior officials from my Department, the Central Bank and the Financial Regulator, the National Treasury Management Agency and the Office of the Attorney General.
There has been the usual barrage of criticism of the outcome accompanied by the personal abuse of those involved that has become common place in our debased public discourse. But none of the critics explains how we could have secured the funds we require at less cost to the State.
Indeed the arguments put forward have been patently wrong. For example, it has been claimed that we are paying a higher interest rate than Greece even though Greece is now seeking our terms. The interest on Greek loans is 5.2 per cent for three year loans. Ireland's interest rate will be 5.8 per cent for loans that are on average for seven and a half years. A basic fact of sovereign borrowing is that the longer a country borrows money, the higher the interest rate paid.
Of course, if at any time during the three years of the Programme, it emerges that we could borrow at a lower rate in the markets, there is nothing to stop us from doing so.
I want to clarify the position of the €85 billion funding package and its impact on our debt levels. Of the total, €50 billion is to provide the normal budget financing: in other words, it 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 based, for example, on the results of the updated capital assessments.
Furthermore, the State is in the happy position of being able to contribute €17.5 billion towards the €85 billion from its own resources, including the National Pension Reserve Fund. It can do this without prejudicing the commitments in the four year plan to use funds from the NPRF for projects such as the water metering programme and retrofitting.
This use of the NPRF has provoked the most bewildering criticism of all from parties who, having for years fundamentally disagreed with the very existence of the Fund, have now become its most ardent protectors. And on this point the arguments make absolutely no sense. Why would we borrow expensively to invest in our banks when we have money in a cash deposit earning a low rate of interest? And how on earth can we ask tax payers in other countries to contribute to a financial support package while we hold a sovereign wealth fund? 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 reason we had to seek external assistance is because the problems in our banking system simply became too big for this State to handle on its own. Our 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.
So 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.
But the Programme does not propose any departure from existing policy: its prescription is an intensification and acceleration of the restructuring process already being undertaken for the Irish banks. A key objective 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.
The programme also seeks 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 per cent - a key measure of capital strength. If the banks cannot source it themselves, the State will inject the necessary capital. This can be drawn from the €10billion which is available immediately from the overall Programme fund. As I have outlined above, a further remaining €25billion. euro will be available on a contingency basis.
It is important to point out 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.
There was a very sharp focus in this work on the results of the Central Bank of Ireland's assessment of the capital position of banks - the Prudential Capital Assessment Review (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 terms of 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. This exercise will take into account updated assessments of the macroeconomic environment. It will ensure that over the coming years, the banks' capital ratio do not fall below 10.5 per cent. This is a high standard in international terms and it should give confidence to the market that our banks will be in a strong financial position. This in turn will provide 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 €20million 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 that 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 would like to 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. I certainly raised this matter 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 banks 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: and all for the sake of a cheap headline. It is a case of politics as usual even at this most difficult time.
The idea which is now commonplace, that some how 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 a quarter of million people in this economy. Any default on senior debt and the uncertainty that would cause would undoubtedly impact on the future investment decisions of these companies.
Subordinated debt holders are in a different position. As I said in my statement on the 30th of 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.
My 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 per cent. This process is still underway and will be concluded shortly.
Obviously this approach will also have to be considered in other situations where an institution receives substantial and significant State assistance in terms of capital provided to maintain their 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 I have indicated in the past 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. I believe 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 so that it can play its full role in supporting the development of this country.
Conclusion:
We have been through a traumatic two years. Of course, we would have preferred to avoid resort to external assistance. But we can emerge from it a stronger and fitter economy. The attributes that brought us the boom: the quality of our workers, our entrepreneurship, our pro-business environment; all of these remain in tact. During the boom we built a top class transport infrastructure, sport and cultural facilities and educational sector. Over the last two years, we have won back much of the competitiveness we lost during the boom.
This three year EU/IMF Programme will provide the basis for funding us through our current difficulties. It provides the funding to restructure and recapitalise our banking system. And it will guide us through the implementation of the necessary budgetary and reform strategies set out in the National Recovery Plan. A Cheann Comhairle, we have every reason to be confident about the future of this economy.