Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Bill 2009: Second Stage (Resumed).
Wednesday, 4 March 2009
Dáil Eireann Debate
Deputy James Bannon: When the debate adjourned last night, I was speaking of the Government’s complete loss of credibility. Moreover, we have only reached the starters on the menu, as the main course of the great Cowen-Lenihan-Coughlan depression of the new millennium’s first decade has yet to come. It has been caused by a Fianna Fáil-led government that has been in power for nearly 20 of the past 22 years.
In the last few years of that time, the Government has been squandering and wasting the years of plenty, to be followed now by what looks like years of famine. What cheer do the good people of Ireland have to which to look forward? Basically none, but rather a summer of discontent that will come to its natural conclusion at the polls sooner rather than later. The first test will be on 5 June, when Fianna Fáil and the Green Party will be wiped out in the local and European elections.
Deputy James Bannon: The Taoiseach owes the people of Ireland an apology for the role he played as Minister for Finance in bringing this country to its knees. In a ghastly mirror image of the Irish situation, the British Prime Minister is being held to account for his misguided strategies as Chancellor of the Exchequer and, like the Irish people, the British now are bearing the brunt of this mismanagement. At least the Prime Minister’s colleagues have the decency to ask him to apologise. Can Members expect the same from Fianna Fáil? I think not, particularly in light of the standing ovation they gave to him and to the Minister for Finance, Deputy Brian Lenihan, for his disastrous budget of 2009.
Members have seen how President Barack Obama’s presumed feelings for a fellow Offaly man were slow to translate into an invitation to the White House for St. Patrick’s Day. The fear of contamination is real and the perceived carrier of the virus may no longer be top of the invitation list in certain circles. After all, with a popularity rating of a mere 10% for his party in his own country, why should such a leader be particularly welcome elsewhere?
Had the wealth of the Celtic tiger, which was in the hands of the Fianna Fáil Government, been properly managed, Ireland would have been in a strong position to cope with the fall-out from global recession. However, as Members have seen repeatedly, as one Government fiasco after another is highlighted, the money was squandered and we were left unprepared and unable to withstand the pressures of the global downturn. The Government is in meltdown, unable to cope with the insolvency crisis in the banks, with 90% of deposits leveraged to the building industry. While the banks are bailed out, people are losing their jobs at a unprecedented level and low and middle-income earners are forced into insolvency. The collapse of lending standards has left thousands of young people with enormous personal debt. In some cases, their earnings are only a portion of their mortgage liabilities.
The wholesale destruction of our economic future is the outcome of the greed of chief executive officers in the corporate, banking, brokerage and real estate sectors. Primarily, however, this destruction is the result of actions taken by the Government. As Minister for Finance, the Taoiseach, in particular, failed to take the radical decisions necessary to protect our people and our economy. Fianna Fáil and the Green Party were so unprepared that they sat back and denied there was a recession. Meanwhile, the recession they failed to acknowledge continues to worsen while the Government frantically plays catch-up at the expense of the taxpayer and the public service. With the live register increasing to 330,000 and the prospect of it reaching 400,000 by the end of the year, the future is bleak. I meet frightened people on a daily basis who have been made redundant and are now falling into mortgage arrears. I urge the banks to work with home owners who are left unable to meet their mortgage commitments. The banks must take a more humane approach and forget about repossession orders or legal proceedings.
Farmers and businesses have been plunged into a cash-flow crisis because of the actions of the Government. It makes no sense for the Minister for Agriculture, Fisheries and Food to deny farmers what they are owed at a time when the Government is ploughing €7 billion into the banks. The reality is that the Government was and always will be in bed with the banks, property developers and construction industry. Ordinary people are left to clear up the mess, while corruption among the wealthy is rife.
It was reported in Monday’s newspapers that the Minister for Finance, Deputy Brian Lenihan, remarked at the weekend that if the Government had foreseen the economic downturn it would have acted differently, but there is no point “in beating ourselves up about it”. Neither the Minister nor his Cabinet colleagues are “beating themselves up”. Instead, they are targeting the young, the old and the most vulnerable in order to make good their mismanagement and lack of foresight. Why did the Government not foresee the downturn? We on this side of the House saw what was happening and predicted the consequences of the Government’s mismanagement of the economy in recent years. How are we to have confidence in a Government that is prepared to dip its hands into the money earmarked for public sector pensions, education, services for people with special needs, health, medical cards for the over 70s and so on? In short, the Government has struck anywhere it senses vulnerability. Meanwhile, the wealthy are protected and the bankers who caused the collapse are rewarded with obscene pay-offs and bonuses.
The Government caused the downturn in public finances. It turned a blind eye to excesses in the public sector such as those associated with the Health Service Executive. It also ignored the excesses among its own ranks, such as the appointment of additional Ministers of State and the establishment of new Oireachtas committees. We had overpaid chiefs at the expense of underpaid Indians. The February figures show an escalation in the deterioration of the Exchequer. The Government is now floundering in its response to the banking crisis.
Retrospectively bringing in legislation to deal with the raiding of the public service pension fund is only a small reaction to the problems that beset the country. The creeping and insidious targeting of lower and middle-income earners by means of an income levy, pensions levy and now a pending income tax hike is nothing less than immoral. I call on the Minister for Finance and the Taoiseach to lay off those least able to cope with financial demands and finally, once and for all, to target those at the upper end of the economy who creamed off the wealth during the Celtic tiger years. What justification is there for hitting those who never saw any gain from the boom years but are now expected to pick up the tab for the Government’s mistakes?
This grossly unfair Bill brings the House into disrepute. It is a retrospective move to legalise extortion from the public sector. Fine Gael will oppose it in the House today. The Government is attacking the most vulnerable in our society, including the elderly and the young. Its behaviour in the two years since it was re-elected has been shameful. We are coping not only with a recession but with a full-blown depression. This has arisen because of the behaviour of Fianna Fáil, which has been in government for 20 of the past 22 years. We will remind the public at every opportunity of this reality.
Deputy Frank Fahey: I welcome this carefully constructed legislation which will have a significant impact in supporting and assisting the banking sector. A properly functioning banking system is vital for the economy. I welcome the approach we saw from Fine Gael and Labour this morning. This represents a far more responsible approach to the crisis in which we find ourselves. Therefore, it is disappointing to hear Deputy Bannon say that Fine Gael will oppose the Bill. I simply cannot understand this.
This legislation enables the National Pensions Reserve Fund to invest in Bank of Ireland and Allied Irish Banks under a commercial investment mandate. It is a good deal for the Exchequer. Contrary to Deputy Bannon’s contention, we are not ploughing money into the banks. The National Pensions Reserve Fund is making a commercial investment in the two banks.
Deputy Frank Fahey: The State will receive an 8% dividend on that investment. In addition, the State is allowed, through the purchase of preference shares, to appoint 25% of the directors and to have 25% of the voting rights. The National Pensions Reserve Fund is getting a much better return for its investment in the two banks than it would obtain from any investment anywhere in the world.
The 2000 Act provided for a minimum payment of 1% of GNP into this fund from the Exchequer in each year from 2001 to 2055. The objective of this was to meet, as far as possible, the cost to the Exchequer of social welfare and public pensions from 2025 onward. It is important to emphasise that the State will continue to invest that €1 billion per annum during the course of this crisis. Of the €7 billion total, the National Pensions Reserve Fund will invest €4 billion in Bank of Ireland and Allied Irish Banks. Another €3 million, €1.6 million this year, which is provided for in the recent budget, and €1.4 million next year will be invested by the Exchequer. The Exchequer will continue the key principle, even in these tough times, that we will continue to put away 1% of GNP, which was the original intention of the Bill. I refer to the absolute importance of this reserve fund, which amounted to €16 billion at the end of last year. At its highest point, it was some €19 billion. It is probably down somewhat now.
Deputy Frank Fahey: It amounted to €16 billion at the end of the year and it is vitally important that the Government retains the principle in good times and in bad times. I was concerned by proposals from the Labour Party, whereby the fund would be raided in good times to invest in capital projects.
Acting Chairman: I am surprised at Deputy Bannon. I want to continue this debate by allowing Deputies to speak without interruption. Members have had an opportunity to speak or will have an opportunity in the future.
Deputy Frank Fahey: I have a question for Deputy Burton that she can answer in her own time. Does she now think that it would have been a good idea to raid the National Pensions Reserve Fund when the advice of the independent National Treasury Management Agency was that it was not in the best interests of the fund and that it did not adhere to the principles on which the agency was set up to invest money in any area other than——
Deputy Frank Fahey: The reality is that the Labour Party, and particularly Deputy Burton, wanted to raid this fund against the advice of the National Treasury Management Agency at a time when we were spending major amounts of money in this country——
Deputy Frank Fahey: It is just as well that those kinds of policies were not implemented and the Government did not give in to Deputy Burton or to the Labour Party when they were suggesting irresponsible policy at that time.
Deputy Frank Fahey: I have no doubt that the investment, the first €4 billion invested in the two main banks, will have a significant impact in ensuring that we have a good banking sector in this country. While there are no proposals to put more money in at this time, and we hope there will not be, this is enabling legislation that allows for further investment in the banks if necessary.
Deputy Frank Fahey: It also allows for the setting up of a company or body corporate as an investment vehicle. This will allow the commission the flexibility to invest through the investment vehicle where it is more efficient than investing directly. That is an important and significant amendment that will allow for future requirements in respect of liabilities that may have to be taken over as we try to correct the difficulties in the banking sector.
Deputy Frank Fahey: It requires the disclosure of positions in financial instruments. As we have seen recently it is vital that investors with a significant investment in particular companies or banks should declare them and these should be known to the markets. Damage was done in that respect and it should not be repeated.
I wholeheartedly support this Bill and I hope the Labour Party, in becoming a more responsible party than it was in the past, will recognise the folly of its proposals when it tried to raid the fund to increase public expenditure when it was not in the best interests of the fund.
Deputy Michael Kennedy: This is important and necessary legislation. Anyone who suggests we should allow bank failures in this country is living in cloud cuckoo land. The savings of our pensioners, the money of small and big businesses, and the money of local authorities, etc., demand that we have a proper banking system in the national interest and for economic reasons. Anyone who suggests the Government had an alternative is not living in the real world. Taking away the small number of detractors in the Labour Party and Fine Gael, the vast majority of business people and the public recognise that the actions of the Government with regard to the banking system, guaranteeing deposits last September and investing in Allied Irish Bank and Bank of Ireland, are necessary.
I reject criticism constantly levelled at the Government that this is an Irish problem. It is a worldwide problem. We see media reports of the meeting between President Obama and Prime Minister Gordon Brown. They issued a joint statement referring to the two important issues. They are working towards a new global regulatory system for banks and a fiscal stimulus package. Mr. Gordon Brown is quoted as saying that he regards the battle against the global recession to be greater than fighting fascism throughout Europe in the 1940s. That puts it into perspective. We are not alone in this, countries such as Germany, France, Spain, Belgium and the UK have the same problems. This House should be big enough to recognise that and to stop petty bickering with regard to our national financial position. I understand the members of the European Central Bank will meet on Thursday to revise the forecast it made less than two months ago. The EU Commission revises, almost on a daily basis, where the world and European economy is going. To suggest that this is purely an Irish problem is to live in cloud cuckoo land.
The US, having put €750 billion into the banking system, last week had to put a further €40 billion into Citibank, and only yesterday it had to put another €40 billion into AIG, a company which has had to be funded for the third time. That puts everything into perspective, as this occurred having let Lehman Brothers collapse in the hope that it would resolve all the toxic debt problems.
Last week Mr. Jean-Claude Trichet in Dublin spoke highly of what the Irish Government did and how it was resolving its problems. Last week the Government put a €4 billion bond in place over three years. This was completed at a competitive rate and without any major difficulties, which speaks volumes about the confidence in the Irish economy. We should not lose sight of that fact. Anything people say to detract from our country’s finances should be put in the context of how international investors and funders see us. We are at a very crucial time and making disparaging remarks about our banking system or otherwise is not in the national interest.
When Fine Gael and the Labour Party were in Government in the mid 1980s, they had to bail out a bank. We all recall that a company called the Insurance Corporation of Ireland got into major difficulties. I was fairly familiar with the chairman because I worked in the insurance business. It was of paramount importance that the company be saved because it would bring down AIB. That cost the State in the order of £450 million and nobody in their right mind would suggest that AIB in the 1980s should have been let go to the wall. Equally, nobody today should accept that the Government should sit idle and not make every effort to resolve our banking difficulties. This Bill is about resolving difficulties that both AIB and Bank of Ireland have.
I would have thought that Labour and Fine Gael might have recognised that they had the same problem as today’s Government in terms of bailing out banks. The day for cheap political posturing is over when we are talking about the national finances and our economy in general. I want to put to bed once and for all these smears that any Fianna Fáil Minister was involved with the Anglo Irish Bank fiasco. The Minister for Transport, Deputy Noel Dempsey, summed it up pretty well at the weekend when he made his remarks. We on this side of the House abhor the actions of certain bankers for their own personal gain which risk the security and stabilisation of the banking institutions. The Opposition should accept that. Smearing Members across this House does nobody any good. International investors and bankers are looking at us and we must move on.
I send my condolences to Deputy Bruton, whose father died over the weekend. I hope he and Deputy Burton will have a good look at our country’s finances and that having got all the information, they will come to accept that we are at a very serious point in time regarding our finances. I sincerely hope that having studied those figures, they will see the need for passing the Bill today.
I cannot tell them what to do but I exhort them, in the national interest, to consider the bigger picture and think outside the box. This country needs a stable banking system and does not need people talking it down. It Fine Gael and Labour back this Bill it would show that they are responsible parties which have the country’s interests at heart. To Deputy Burton in particular I suggest that we move on and take the actions required by the country in the national interest.
We are getting a good investment with this Bill in terms of what is proposed. We will have €560 million in income deriving from this investment in the two banks. That is twice, at 8%, what one would get in the open market. The €560 million will be put to good use. As Deputy Fahey stated on the National Pensions Reserve Fund, the fact that it was in place showed foresight on the part of previous Fianna Fáil-led Governments.
On the provisions for bank lending, the 10% provision for banks to lend to business is essential, and the quicker we pass the legislation and get the €4 billion into the system, the better it will be. The banks will do what we want and what the country — and specifically business — needs in lending money. The same is true of the 30% provision for first-time buyers.
Deputy Ulick Burke: Last evening the Minister for Finance, Deputy Brian Lenihan, introduced Second Stage of this Bill by stating that the Bill was needed “to allow the State, through the National Pensions Reserve Fund, to invest in Allied Irish Bank and the Bank of Ireland under the terms of the recapitalisation programme announced on 11 February.” One of the first reasons outlined was that the State would not let any relevant financial institution fail, with a second reason being that any State involvement in financial institutions would protect the interests of the taxpayer.
We have seen everything this Government, the Taoiseach and the Minister for Finance has attempted to do. We are now told there will be a fifth attempt at rectifying the country’s financial position, and we have been promised a budget in the first week of April, as announced by the Taoiseach this morning. Every attempt made until now has obviously failed. It is not just a matter of anybody in this House saying that it has failed, as the international markets have clearly outlined through what has happened to shares and so on, that there is no confidence in what the Government and Minister for Finance has done to date.
The Minister for Finance stated that “through the bank guarantee scheme we created a space to assess for further measures.” How much space does the Government need before it takes realistic action to correct the position? We are now told that we must wait until April for a corrective budget but only a few days ago the Tánaiste said the finances were fine and under control. A couple of days later we are told we need €5.3 billion. We also need a mini budget to rectify this situation. All of this clearly indicates that nobody in the Government or in the Department of Finance has been realistic or capable of correcting the situation. When difficulties arose in recent decades, we had good advisers and prudent people in the Department of Finance who were capable of advising the then Government and Minister for Finance of the difficulties that might arise and how to correct them. I must say, without fear of contradiction, that the personnel in the Department of Finance have failed during the past 12 years when there was a boom to indicate to the Government of the day and to Ministers that they should rein in on their policies that resulted in the wastage of public finances on various schemes. They never warned the public at large or anybody else, although I am not sure whether they warned the Minister for Finance or the Government, about what approach that was needed. They had not recognised the approach that was needed prior to the last general election when the then Government said that its members were the only people who could handle the economy. The economy has been in autopilot mode for the past six or eight years. Regrettably, confidence in the personnel in the Department of Finance must be at an all time low, not only among the public but also among people in Europe.
What was needed was a degree of trust. From mid-summer 2008 until two days ago the banks, particularly AIB and the Bank of Ireland, said that everything was fine and that they had the resources and capacity to lend, but nothing could have been further from the truth. The revelation in recent days that AIB handed out loans to the value of €5.4 billion to 30 developers shows that it, like Anglo Irish Bank, was involved in the same routine. It was competing with a discredited bank and it also engaged in such dealings. I am sure AIB will reveal its difficulties in due course. The only thing Mr. Sheehy could do in the context of declaring these loans was to say he regretted lending to those 30 people. Regret was the sentiment he expressed. This morning we heard another chairperson of the board of a financial institution say she was sorry. It was the first such effort, but pressure was brought to bear on her to make that apology for that bank’s dealings.
The AIB has written off €2.9 billion in loans. How could anybody have confidence that the proposal before us will be successful? The international markets have declared this recapitalisation scheme for the banks a failure given that the value of shares in AIB and Bank of Ireland are insignificant and have fallen so low that they have nearly gone off the horizon.
One of the many conditions of this recapitalisation programme is that the banks would provide funding for small businesses to continue in operation. However, that is far from being the case at the coalface. The Bank of Ireland and Allied Irish Banks have committed to public campaigns to actively promote small businesses and mortgage lending at competitive rates to increase transparency about the criteria to be met. When the Minister announced the recapitalisation programme, that was the stated commitment given by AIB and the Bank of Ireland, but nothing could be further from the truth. They have contracted the resources being made available to small businesses. Many ordinary small businesses throughout the country are on their knees begging those lending institutions, Bank of Ireland and AIB, to provide even overdraft facilities to allow them to continue in operation not to mention financing prospective projects. These are the people who are providing employment and likely to retain workers.  Unlike many international companies that have relocated — which were supported to a large extent by taxpayers — resulting in people losing their jobs and having to seek employment overseas, these small businesses will remain in this country. If there is not a sea change in the attitude of banks to lending proposals at local level, serious problems will arise.
Many small businesses have closed and the towns in which they were located are becoming ghost towns. Reference was made to such places in County Louth, close to the Border. That trend is not necessarily unique to that area. It is happening throughout the country. I regret there is a commitment in this scheme to provide additional finances for Enterprise Ireland and IDA. There is a need for the Minister and the Government to reassess the cost of each job created by those institutions because something has gone out of control within those organisations in terms of what they are trying to create.
Deputy Seymour Crawford: I thank my colleague for sharing time and welcome the opportunity to speak on this important Bill. There is an urgent need to bring some stability to the main banks and it is clear that can only be done through recapitalisation. The Minister, Deputy Brian Lenihan, stated in his contribution this will ensure that the Bank of Ireland and AIB will be in a position to provide necessary commercial credit facilities to their customers and the general economy. He also advised that the two banks are committed to increasing the lending capacity to small and medium-sized enterprises by 10% and to provide an additional 30% capital to first-time buyers. I hope that on this occasion those promises are delivered on because, as the last speaker said, they were made previously and nothing happened. In fact, things got much tighter. The Government promised this previously and it must keep its promise this time.
Fine Gael has tried to be as supportive as possible on all occasions when positive proposals were put forward by Government to save the situation or improve it as far as the banking structures are concerned, but the fact that in this proposal there is still no effort to deal with the serious bad debt situation or with the level of income earned by bank executives and the position of board members or auditors leaves much to be desired. When one hears a bank executive say that he will have to make do with a salary of less than €2 million, one must ask what it is all about. These mega figures create huge dissatisfaction among the general public, the public servants who are having levies imposed and those who are losing their jobs. I have no doubt that must be dealt with.
In the past 12 months Members of the Dáil from all parties were advised through the committee structure that all banks were in a secure and safe position, but we know now that was not true. We had a Financial Regulator who clearly did not do the job that we thought he was supposed to do and yet on his retirement he got a package of €630,000 plus a generous pension. Where were the Central Bank and the Director of Corporate Enforcement during all this period? I welcome that Anglo Irish Bank is being investigated and given the legal situation, I do not want to make any further comment. However, it is impossible to understand how all these different things went on under so-called regulation. Regulators were appointed by this House as independent regulators and were supposed to do a job as our watchdogs.
It is clear a small number of inner circle people could do what they wanted, when they wanted as has now been clearly shown by what happened in Anglo Irish Bank and between that bank and other lending institutions. The chairman of Anglo Irish Bank was able to transfer debts of great significance from his own bank to another for the end of the financial reporting year on not one year but a number of years. Questions about the entire regulatory system were never asked. Who knew what was happening and why was a blind eye turned to all these structures?
Equally one must question how ten individuals could be supported in borrowing €30 million each to buy shares in the same bank. I welcome that some effort is being made eventually to recapitalise and stabilise our two main banks but clearly this effort without some plan for the future will give little hope to those who are unemployed or in the process of losing their jobs. This is where the Government has fallen down dramatically in recent times. It is not giving any hope for structures to lead us out of this.
The fact that 26,000 more people joined the dole queue during the month of February adds at least another €500 million charge to the economy and this is the why Fine Gael is asking the Government to consider seriously ways and means of supporting employment or even, dare we say it, creating some. As the Taoiseach has stated, one person on social welfare having lost his or job costs a total of €20,000 on an annualised basis between social welfare payments and taxes lost.
It is clear that even in dire economic times it is good business to spend money on job creation, including through PRSI reductions for increased employment or low interest loans towards job creation. The Government must reconsider the use of FÁS schemes and other means of even giving part-time employment so that much-needed community structures can be improved and maintained.
One Government supporter said to me today that there is now a budget every week. I would say to the Minister it is vital that this capitalisation programme, which I am sure will be voted through in the next few days, not only works but is also backed up by a comprehensive new budget on the first week in April that not only creates stability but also provides clear direction and leadership towards better employment structures and growth for the next three years. We will not take ourselves out of this mess through charges and taxes alone without some leadership and job creation leading towards much needed exports.
I remember the early 1960s and the early 1980s, but never anything like this. There is a real need for leadership at this point in time but we are not getting it. We are getting desperation. The Taoiseach is spelling out the real difficulties, but is not coming forward with any plan. If we do not plan for the future we are heading for disaster. It is as simple as that. We on this side of the House want to see the economy starting to turn the corner. We want to see some hope.
We do not have the escape valves that we had in the 1980s when our young people were able to find jobs elsewhere. I have heard of young people who went to Australia, the United States and other places having to come back because there are no opportunities there either. I know we are in a global recession, but we are also in a recession created by ourselves to a large degree. We must take responsibility for that. The Minister must take responsibility for it.
Over the past five years Deputy Bruton has been warning that these difficulties were coming. The former Taoiseach boasted about us building 95,000 houses per year and comparing it with the UK and other countries with greater populations. That property bubble has burst. Allied Irish Bank, Bank of Ireland, Anglo Irish Bank and others gave out colossal loans that were off the wall to individuals for the purpose of buying properties in this city and throughout the country. When we hear of bankers arriving at people’s houses at 9 p.m. to shove massive sums of money into their hands to buy property, we know something is wrong. We did not give the leadership to call a halt to the lunacy at that time. The ordinary people are now paying for this through income and pension levies, and now the Minister says that they will pay higher taxes from 1 April. I wish the Minister well in what he is trying to do. However, I say this to him clearly. For God’s sake create a plan that will give us some hope.
Deputy Bobby Aylward: The convulsions and the relentless turmoil in the banking system in recent months have left everyone reeling. Confidence has been very badly eroded and people are genuinely apprehensive about their capacity to make any real progress or even to continue to subsist in these dire economic times. The ordinary man and woman in the street do not claim to comprehend the very complex nature of how banks and finance operate or what exactly has caused these grave problems. It is an extraordinary maze and events have moved at an alarming pace to compound the problems which are emerging in the economy.
However, the ordinary man and woman understand that to a very great extent money indeed makes the world go around and that there is an important co-dependence between the real economy and the financial institutions. For those who rely on a steady flow of money and credit — and that is pretty much everybody in this day and age — the continued availability of money is crucial if the economy is to function actively and productively. It is also imperative that the source of that money is reliable and is not subject to any unnecessary interruption. Clearly, when the flow of money dries up, serious inter-related problems begin to emerge. These problems escalate and feed off one another. They interact and a bad situation is compounded even further.
There is a very clear synergy between the ability to acquire money or credit and general buoyancy in the economy. The regular, uninterrupted flow of money is the lifeblood of trade and commerce, and the lifeline of industry and of business. It is the indispensable lifeblood which sustains living standards for everyone. The consumer, the farmer, the businessman, the professional, the hotelier, the tradesman and the technician all bear the brunt when money becomes scarce. It is the typical domino effect that permeates into every single facet of the economy and, as we all know, it has devastating human affects in terms of the consequences it visits on quality of life and expectations. It becomes the proverbial vicious cycle into which everyone is sucked.
Of course, we are not unique here in Ireland. We have not been insulated against the forces of the international crisis which is gripping the world at the moment. As an open economy, Ireland’s position is acute in the context of exposure to the effects of the global recession. We have experienced a truly terrible confluence of events and all of these, however remote they may seem, are hurting everybody on an economic, social and human level.
While we are striving to readjust our spending priorities and as we get used to a change in our lifestyle and living standards, it is imperative the Government acts prudently and responsibly. The very stability and future of our economy is at stake and the Government is forced to take the drastic measures which are vital if we are to sustain our brittle economy and recover over time from this biting recession.
Irrespective of whether we like it, a healthy banking system is integral to our economy and we have to ensure viability and stability is restored and maintained. We all know that money has a velocity of its own. The regular availability of money and of credit lines keep that momentum going in any economy and allows it to expand and prosper. In recent months, international and domestic circumstances have conspired to hamper the ready availability of money and this, in turn, has had a very dangerous and tangible impact on all our activity and our ability to do business. Individuals and businesses alike have been unable to secure credit, loans and mortgages. All of this, in turn, creates a huge impediment to normal business and enterprise.
I am aware of numerous cases where businesses have been forced to let staff go or reduce their number of working days because customers are unable to get the necessary finance to buy products, merchandise and goods. Naturally, this in turn diminishes further the various tax receipts to the State as business is stifled and depressed. In addition, it puts an added burden on the State in terms of more social welfare payments to those who lose their jobs as a result of business inertia. Manufacturers, wholesalers and distributors cannot engage in active business and so the awful cycle continues and spirals, and does untold damage to confidence and morale. All of this has a suffocating affect on the economy and stagnation inevitably sets in unless some sort of remedial action is taken to reverse the trend.
All the banks have taken a very heavy hit in the past six months or more, and we have all suffered the consequences to a greater or lesser extent. Trade, industry and commerce were all finding it very difficult to secure credit lines and loans anywhere and this has a crippling affect which trickles throughout the entire economy. The stark reality is that the whole economy could become paralysed if money and credit dry up. This is precisely why it has been necessary to recapitalise the two major banks in this country. These two banks represent a pivotal component in this economy and each of them is of enormous strategic importance in the effective functioning of the economy.
I am fully supportive of the Government’s initiative to recapitalise these banks and to inject sufficient funds into each of them to ensure they can resume lending to their customers and to business generally. I fully support the Bill before the House. It enables the Minister for Finance to utilise moneys from the National Pensions Reserve Fund and to invest that money in the two major banks, each of which is integral to the country’s financial and economic activities.
Naturally, we would all much prefer if this course of action was not necessary. Needs must, however, and I believe the Government has been absolutely correct in its approach to the recapitalisation issue, and that it is the right corrective action in this very hostile climate. In essence, the Government will inject €3.5 billion into Allied Irish Banks and the Bank of Ireland and the practical effect is that it will increase the level of capital or cash reserves to absorb any future losses on loans. It is the Government’s intention to use €4 billion from the National Pensions Reserve Fund, which was valued at €16.4 billion at the end of last year. As the global economy crisis continues to worsen, losses on loans are expected to spiral and institutions have been unable to source investments privately as a result of the international banking crisis. Cash injections into the banks are necessary to shore up capital in anticipation of these heavy losses.
The Government proposes to take preference shares in the banks in return for the €7 billion recapitalisation. This means the Government will be paid dividends ahead of ordinary shareholders despite all the banks having cancelled dividends to shore up capital in expectation of severe loan losses. The Government intends to charge interest of 8% on the investment. This “coupon” effectively means that the State will receive €560 million in yearly payments from the two banks in question. This represents a good return on the State’s investment in the banks. In the current negative environment, the upside potential is solid and the investment is guaranteed.
A number of issues more relevant to the recapitalisation strategy have been raised in the proposed amendment to the motion for a Second Reading. I do not accept the case for the amendment. Indeed, in regard to the Fine Gael Party, I am disappointed it tabled a motion in the House suggesting that the Government recapitalisation strategy for Allied Irish Banks and Bank of Ireland has already been dismissed by the financial markets as lacking in credibility.
These institutions, which are our two largest banks, have substantial numbers of employees throughout Ireland. At all stages in the different debates we have had on banking, it has been made clear that the security and stability of these institutions is something which all sides of the House were anxious to see assured. It is disappointing that the main Opposition party, in tabling an amendment to the Bill, decided it knows what the market knows is something I do not know.
We all need to act in a responsible manner in regard to our banking system. We all need to recognise and we all accept, certainly in this House, that great mistakes were made and that many of those who made mistakes must take responsibility for that. Equally, however, the whole purpose of the recapitalisation strategy was to give confidence to these two institutions through a substantial investment by the State which would assure those investors who look at these institutions throughout the world that the State was prepared to put money on the line to ensure the survival and viability of these institutions. It ill becomes the main Opposition party in the State in regard to these two institutions to table a motion in Dáil Éireann stating that the recapitalisation strategy has been dismissed by financial markets as lacking in credibility.
The reality of course is that we all want to see these institutions flourish. I do not question the goodwill of the Opposition parties in that respect. Indeed, Deputy Burton on behalf of the Labour Party has frequently alluded to the importance of securing these institutions. I am surprised Fine Gael would make its own private assessment of what the markets believe about these institutions.
Their shares are trading at a very low stock but shares of all financial institutions throughout the world are trading at a low stock. The crucial point here is that because the shares are trading at a low stock, the Government believed, and I would have thought all sides of the House would have agreed, it was essential to secure these institutions. I certainly accept there is room for a wide measure of disagreement, debate and argument about how we secure them but on the basic principle of how they are viewed throughout the world, it is not a good idea for the main Opposition party to raise questions about this in a motion in the House.
With regard to the second feature of the Fine Gael amendment, namely, “the Government has refused to provide an assessment of the superior ‘Good Bank’ recapitalisation model put forward by Fine Gael Finance Spokesman Richard Bruton TD”, I am quite happy to give an assessment of the “good bank” recapitalisation model put forward by Deputy Bruton. As canvassed by Deputy Bruton in the House, it involved an actual default on our international obligations on the part of the banking industry. Again, it is unhelpful for the main Opposition party to suggest we should contemplate default in regard to banking obligations.
With regard to the question of the income cap for bank executives, I agree with the spirit of that element of the Fine Gael amendment. We very definitely need an income cap on bank executives; we need to insist it happens and I support it. The report of the Covered Institution Remuneration Oversight Committee, CIROC, has arrived in my Department and while I have yet to study it, I assure Deputies it will be brought before the Government with all due haste.
In the debate in this House on the Government’s proposed recapitalisation of Allied Irish Banks and Bank of Ireland, I highlighted the detailed preparatory work undertaken before the Government announcement. The loan book assessment undertaken by PricewaterhouseCoopers was supplemented by an assessment for the Financial Regulator by independent valuers Jones Lang LaSalle of elements of the bank’s property-based loan portfolio and the value of collateral underlying it. This allowed PricewaterhouseCoopers to make a complete report on the loan books of these two banks and provided a basis for an assessment by the NTMA, assisted by Merrill Lynch, of the level of capital required.
The total amount to be invested in AIB and Bank of Ireland, €7 billion or €3.5 billion for each bank, was determined following consideration of advice on likely trends in property values and on various stress scenarios for the economy and property values. The State’s investment will significantly strengthen the core tier 1 capital of these banks, increasing it well in excess of regulatory limits. The recapitalisation proposals are subject to approval by the banks concerned at EGMs to be held in late March and early April.
Deputy Brian Lenihan: The Deputy expressed a specific concern about the adequacy of the capitalisation which was proposed for each of the institutions. It is important to note that the impact of the Government’s proposed investment has been assessed to increase AIB’s core capital to €12 billion and Bank of Ireland’s to €11 billion. In addition, Deputies should be aware that the existing reserves of the banks will be supplemented by ongoing profits with the result that the banks are well equipped to deal with the expected losses. It is important to highlight that in the House because the suggestion has been canvassed in some quarters that the sums identified by the State as part of the State investment are somehow inadequate because they do not correspond to the anticipated losses of the institutions. It is important to note that there are not alone existing reserves at these institutions but there are also ongoing profits out of which expected losses can be met.
To turn to the area of assets at risk in the institutions, there has been much debate both domestically and internationally in recent times on solutions to deal with the asset side of bank balance sheets, whether this is a “good” bank’, a “bad” bank’ or a “legacy” bank as Fine Gael chose to name its option, or a form of asset insurance. On 11 February, the Government committed to examining proposals to deal with the assets that were at risk on the balance sheets of the banks, specifically land and development loans, with a view to bringing greater certainty and transparency to the operations of systemically important financial institutions. In examining possible options in this area the Government will have particular regard to developments internationally, especially at EU level where the Commission and the ECB have already issued guidance. Discussions are also ongoing between the Finance Ministers at Ecofin on this subject.
Any arrangement on asset risk management would require detailed preparatory work to define the categories of assets covered, and the State’s role in managing and reducing risk associated with these assets. I have appointed Mr. Peter Bacon to work with the National Treasury Management Agency and to report and advise me, with the agency, on the options available to Government in this area. I made the point to Deputy O’Donnell, who opened the debate for the Fine Gael Party, that it is important that we appreciate there is a cost associated with the management of risk. There is a sizeable up front cost for the taxpayer in the capitalisation or funding of a “bad” bank institution, for example. Clearly the loans must be purchased by the “bad” bank and there is a cost annexed to this. I have noticed in public debate that the “bad” bank is often compared to a skip or a local authority vehicle into which one can dump these loans, harmlessly. That is far from being the case. Were we to establish a “bad” bank there would be a definite up front funding cost for such an institution, which initially would have to be borne by or borrowed from the taxpayer.
That is the reality of the bad bank option and those who glibly canvass this option must cost their proposal with great care. I do not say it is a bad option or that necessarily it is not the option that should be pursued here but it requires a great amount of analysis and necessitates an up front cost in funding. I do not believe this has been recognised in public debate on the subject to date. The other options that have been canvassed relate to some form of insurance whereby the financial institutions pay the State up front for the cost of insuring the loans and the State undertakes to indemnify the banks in respect of future losses. Analysis of that proposition immediately reveals that, in certain circumstances, it could amount to a time bomb for the Exchequer and the taxpayer.
With regard to pay levels in the banks I have previously stated, and it is accepted internationally, that the pay regime within banks needs to change to ensure that any rewards in the sector are structured to meet the long-term objectives of the banking institutions and the overall health of the financial system. The Government recognised from the outset the need to limit pay levels in banks benefiting from State support. Under the guarantee scheme the remuneration packages of directors and executives, including total salary, bonuses, pension payments and any other benefits are subject to review by the Covered Institution Remuneration Oversight Committee, CIROC. I have just received the report and am considering it. Caps are proposed for the remuneration of the various senior executive positions within each institution. I will take into account points made today in respect of the report.
The Bill strikes a prudent balance between the need to recapitalise the financial institutions in the current difficult market conditions and, in the context of maintaining long-term budgetary stability, the need to preserve the National Pensions Reserve Fund as a means of providing for as much as possible of the cost of welfare and public sector pensions when the full impact on pension costs of an aging population begins to kick in about twenty years from now.
Deputy O’Donnell asked me to clarify what is intended by the provision that the Minister for Finance may transfer a shareholding or other interest to the National Pensions Reserve Fund Commission. Deputy Rabbitte referred to the credit institutions not listed on the stock exchange, namely the mutuals, the EBS and Irish Nationwide. The Government announced its proposals in respect of the recapitalisation of the two main banks. It also announced it is in discussions with the other covered institutions, Irish Life & Permanent, EBS and INBS, concerning their respective capital positions and about the review of the guarantee scheme.
Deputy O’Donnell also asked what would happen if further funds were needed to recapitalise the banks. There are several options. It would be possible to invest Exchequer moneys directly under the Credit Institutions (Financial Support) Act 2008; to provide moneys from the Exchequer to the NPRF Commission for investment in a listed credit institution under this Bill; and it would be possible under this Bill for the Minister for Finance to direct the commission to invest in a listed credit institution from its own funds. I make it clear that none of these options is under examination at present. I clarify this matter for Deputy O’Donnell because he asked about the legal reach of the Bill rather than about any concrete proposals the Government might have in that regard.
Questions were raised about the transparency of the provisions that enable the Minister to make additional directed investments in the future. Deputy Rabbitte also touched on this issue. First, the annual 1% of annual GNP contribution to the fund is being maintained and will be provided for in the Budget each year as heretofore. Second, when the Minister makes an additional contribution from the Exchequer for the purposes of a directed investment Dáil Éireann will be aware of this. However, directions of this nature by the Minister can only be made in circumstances where the Minister is of the opinion, having consulted the Governor of the Central Bank and the Financial Regulator, that the direction is needed to remedy a serious disturbance in the economy or prevent serious damage to the financial system. In this type of circumstance, there may be a balance to be struck between transparency and the need to withhold — at least for a time — market sensitive information about investments which the NPRF is being directed to make in the public interest.
Deputy Olivia Mitchell said we were raiding the NPRF and purloining the next two years’ contribution. In fact, the investments made by the NPRF in the banks will be part of the fund and the returns earned on them will accrue to it. Through the dividends from the banks which are part of the recapitalisation scheme, the fund will earn in the short term a very attractive rate of return in present market conditions, namely 8%.
I take issue with Deputy Mitchell’s depiction of what this Bill will bring about. The National Pensions Reserve Fund was an important initiative to set aside moneys for investment to help meet the rising cost in the future of social welfare and public service pensions. The framework within which the fund operates was carefully structured in that the Commission was given discretion as to how fund moneys are invested and managed. Times have changed and we must consider how best to provide the funds needed by our financial institutions to re-establish their capital adequacy. It isreasonable to look to the moneys that have been put away for investment in the National Pensions Reserve Fund. In particular, I draw the attention of the House to the terms of the agreement under which the banks are to be recapitalised and the dividends and warrants the State has obtained.
Recapitalisation will work and it is the correct decision on the part of the Government in the face of the extraordinary turmoil in the financial system. We are not asking the NPRF to provide more than €4 billion at this time and therefore it will not have to liquidate any of its equity holdings for the present. As Deputy Mitchell noted, we propose to pay more than two years’ contribution to the fund this year, for investment in the two main banks. I am confident that will be a profitable investment.
Deputy Burtonproposed that there should be an annual report on the investments which the NPRF will be required to make in listed credit institutions. There is already a provision for the NPRF Commission to present an annual report on its activities and that report will contain information on its directed investments as much as on what I might call its traditional portfolio.
Deputy Burton also referred to section 5 of this Bill which disapplies section 7 of the Credit Institutions (Financial Support) Act 2008. Section 5 provides, inter alia, that certain provisions of competition and takeover law, and section 7 of the Credit Institutions (Financial Support) Act 2008 do not apply in respect of an acquisition or proposed acquisition by the Commission of an interest in a listed credit institution or a transfer into the fund of the Minister’s interest in a listed credit institution if the acquisition or transfer results from a directed investment.
|Ahern, Dermot.||Ahern, Michael.|
|Ahern, Noel.||Andrews, Barry.|
|Andrews, Chris.||Ardagh, Seán.|
|Aylward, Bobby.||Blaney, Niall.|
|Brady, Áine.||Brady, Cyprian.|
|Brady, Johnny.||Browne, John.|
|Byrne, Thomas.||Calleary, Dara.|
|Carey, Pat.||Collins, Niall.|
|Conlon, Margaret.||Connick, Seán.|
|Cuffe, Ciarán.||Dempsey, Noel.|
|Devins, Jimmy.||Dooley, Timmy.|
|Fahey, Frank.||Finneran, Michael.|
|Fitzpatrick, Michael.||Fleming, Seán.|
|Flynn, Beverley.||Gallagher, Pat The Cope.|
|Gogarty, Paul.||Gormley, John.|
|Hanafin, Mary.||Harney, Mary.|
|Haughey, Seán.||Healy-Rae, Jackie.|
|Kelleher, Billy.||Kelly, Peter.|
|Kenneally, Brendan.||Kennedy, Michael.|
|Killeen, Tony.||Kirk, Seamus.|
|Kitt, Michael P.||Kitt, Tom.|
|Lenihan, Brian.||Lenihan, Conor.|
|Lowry, Michael.||McDaid, James.|
|McEllistrim, Thomas.||McGrath, Mattie.|
|McGrath, Michael.||Martin, Micheál.|
|Moloney, John.||Moynihan, Michael.|
|Mulcahy, Michael.||Nolan, M.J.|
|Ó Cuív, Éamon.||Ó Fearghaíl, Seán.|
|O’Brien, Darragh.||O’Connor, Charlie.|
|O’Flynn, Noel.||O’Hanlon, Rory.|
|O’Keeffe, Batt.||O’Keeffe, Edward.|
|O’Rourke, Mary.||O’Sullivan, Christy.|
|Power, Peter.||Power, Seán.|
|Roche, Dick.||Ryan, Eamon.|
|Sargent, Trevor.||Scanlon, Eamon.|
|Smith, Brendan.||Treacy, Noel.|
|Wallace, Mary.||White, Mary Alexandra.|
|Bannon, James.||Barrett, Seán.|
|Broughan, Thomas P.||Bruton, Richard.|
|Burke, Ulick.||Burton, Joan.|
|Byrne, Catherine.||Carey, Joe.|
|Clune, Deirdre.||Coonan, Noel J.|
|Crawford, Seymour.||Creed, Michael.|
|Creighton, Lucinda.||D’Arcy, Michael.|
|Deasy, John.||Doyle, Andrew.|
|English, Damien.||Enright, Olwyn.|
|Feighan, Frank.||Flanagan, Charles.|
|Flanagan, Terence.||Gilmore, Eamon.|
|Higgins, Michael D..||Hogan, Phil.|
|Howlin, Brendan.||Kehoe, Paul.|
|Kenny, Enda.||Lynch, Ciarán.|
|Lynch, Kathleen.||McCormack, Pádraic.|
|McGinley, Dinny.||McHugh, Joe.|
|McManus, Liz.||Mitchell, Olivia.|
|Morgan, Arthur.||Naughten, Denis.|
|Neville, Dan.||Noonan, Michael.|
|Ó Caoláin, Caoimhghín.||Ó Snodaigh, Aengus.|
|O’Donnell, Kieran.||O’Dowd, Fergus.|
|O’Mahony, John.||O’Shea, Brian.|
|O’Sullivan, Jan.||Penrose, Willie.|
|Perry, John.||Quinn, Ruairí.|
|Rabbitte, Pat.||Reilly, James.|
|Ring, Michael.||Shatter, Alan.|
|Sheahan, Tom.||Sheehan, P.J.|
|Sherlock, Seán.||Shortall, Róisín.|
|Stagg, Emmet.||Stanton, David.|
|Timmins, Billy.||Tuffy, Joanna.|
|Upton, Mary.||Varadkar, Leo.|
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