Tuesday, 2 March 2010
Dáil Eireann Debate
Deputy Enda Kenny: Today saw the publication of the worst ever results from Allied Irish Banks with losses of €3.5 billion. When the guarantee scheme went though the House, the Minister for Finance said that we were now deeply embedded in the banking sector. Conditions were laid out for recapitalisation and what its consequences might be. It is coincidental that the amount of recapitalisation put in by the Irish taxpayer is also €3.5 billion. In the intervening period we have had no credit being loaned, no return for the taxpayer and no dividend.
Deputy Enda Kenny: As I understand this, Allied Irish Banks will come cap-in-hand to the Government for a further recapitalisation sum of between €3 billion and €5 billion. When the banking crisis started, the Taoiseach’s response was to say that we would write whatever cheque was necessary. When Allied Irish Banks come to the Government for more money, on top of what taxpayers will have to pay for toxic loans transferred to NAMA, what conditions will the Taoiseach lay down to protect Irish taxpayers? Will he tell Allied Irish Banks that there will be no more money unless they dispose of assets that are of no value to the Irish taxpayer or will he bail out the banks and drown the next generation of taxpayers in debt? What conditions will he lay down before he considers giving any further money to Allied Irish Banks?
The Taoiseach: As the Minister for Finance has pointed out, we are preparing a comprehensive response to all of those issues. Today’s issue, however, relates to the results that have arisen in AIB. Those results show that NAMA is forcing the banks to face up to the reality of their bad loans. Everybody knows that the banks loaned far too much to speculative property development. NAMA is making the banks take the losses on these property loans up front. That is what is reflected in the large losses that AIB is reporting. Without NAMA the banks would have inevitably tried to do what Japanese banks did in the 1990s, which was to spread out the losses over the next decade to the detriment of lending to viable small businesses and households.
I am glad to note that when he addressed the Committee on Finance and the Public Service earlier today, the Governor of the Central Bank said he believes NAMA and the recapitalisation of the banks will create the foundations for the recovery of banking. It is important to point out that from the Government’s point of view, we stand ready if necessary to provide recapitalisation to the banks.
The Taoiseach: The indication that they are seeking to raise private capital, in the first instance through the disposal of assets or a rights issue, is an option that is available to the banking sector. We have made it clear in our recapitalisation statements that we will be prepared, if necessary, in the interest of a viable banking sector to proceed on that basis.
Deputy Enda Kenny: The Taoiseach did not answer my question. I asked what conditions the Government was prepared to lay down before it considered giving any further taxpayers money to Allied Irish Banks. Is the Government prepared to make AIB dispose of overseas assets that are not of any interest to the Irish economy? The Exchequer figures for February will be issued at 4.30 p.m. today and these will, more than likely, indicate that the Government will have to borrow a further €20 billion this year. Whatever case can be made for Allied Irish Banks, no case can be made for giving another €6 billion of taxpayers’ money to Anglo Irish Bank. It is, effectively, a dead bank which will not lend any further moneys.
Deputy Enda Kenny: However, the Taoiseach will come in here and say we need a further €6 billion of taxpayers’ money for Anglo Irish Bank. There will be revolution on the streets if the Taoiseach does that.
Deputy Enda Kenny: The Fine Gael Party put forward a credible and workable solution for Anglo Irish Bank. We suggested it should be broken up into a good bank and a bad bank. Is the Taoiseach prepared to tell the Dáil and the country that he will not put one further cent of taxpayers’ money into Anglo Irish Bank unless it comes to him with a proposal to break the bank up into a good bank and bad bank? He must do this so that those who invested in speculative fashion for return can share some of the pain and so that the Government can see to it that good loans that are prepared to work and where there is a possibility of future jobs can be protected.
The Taoiseach: The management plan from Anglo Irish Bank, which has been submitted to the European Commission, suggests, in the aftermath of the relevant loans being transferred to NAMA, setting up a self-contained bad bank within Anglo Irish Bank and providing for a new good bank. This plan has already been submitted to the European Commission, but it remains to be seen whether it will be approved. There is ongoing interaction on that. Therefore, this is not a Fine Gael idea. It is an idea that has come from the executive management of the board of Anglo Irish Bank.
The Taoiseach: This has been in the public domain since well before Christmas. On the other matter, the issue then was that the bank would be nationalised, long before we nationalised it. That would have meant plugging a large hole in the bank’s balance sheet at that time, but the funding position for the State and the banks was very challenging at the time. The State was paying an interest rate of more than 6% on its borrowings then, compared to 4.5% today. That approach would have forced the State to try to borrow huge amounts of additional money at the worst possible time. At best, that would have been a very expensive mistake for the taxpayers.
Fine Gael claims it has a credible banking policy alternative. As I said last week, Fine Gael’s banking policy is to threaten to default. We are somehow led to believe that threatening to default on those who provide funds to the banks will reduce the cost of funding the banks. In other words, we say will not pay, but we want more money at a lower interest. That is how credible Fine Gael policy is. Its other idea is to set up a national recovery bank.
The Taoiseach: Fine Gael claims the ECB will fund the national recovery bank idea, but there is no basis upon which a bank will be funded solely from ECB funds. Were one to seek to obtain funds and chase deposits from other banks in the system, that would clearly increase the demand on funding and increase interest rates. Therefore, the Fine Gael proposals would create an even more difficult situation.
The Governor of the Central Bank and others have confirmed that the approach we are taking is the best possible approach. NAMA is forcing the banks to face up to their losses and take those losses up-front. The policy of the bank has been to indicate that asset disposal and rights issue is a possible means of raising private capital, if it is possible to do so, but obviously the State must stand ready, if necessary, to provide capital as well.
Deputy Eamon Gilmore: Government policy on the banks is not working. Even in the short time since we met last week, Postbank has announced it will cease operations, with a possible loss of 160 jobs, Hughes & Hughes bookseller has gone into receivership, with 225 jobs lost, clothing retailers Vero Moda and associated retailers are losing 80 jobs, SIAC Butler’s Steel is losing 55 jobs, and we do not know how many more jobs have gone from various small businesses around the country. However, we will probably get some indication when the Government leaks the live register figures later this evening in anticipation of their publication tomorrow morning. Meanwhile, we hear from businesses — the ICC monitor companies — that 952 companies became insolvent last year and ISME has informed us that more than half of companies that apply for loans or overdraft facilities are refused. What is happening is that the banks are not lending to businesses. They are not lending. The Government policy on banking is not working and because of that many people in the country are no longer working.
We are now in the third calendar year of this recession. It is a year since the Government announced its policy to establish NAMA. To date, as I understand, not a single loan has been transferred to NAMA. The Government banking policy is not working. Last year, the Government rejected the Labour Party proposal for a temporary nationalisation of the banks. Now it looks as though the Government will gradually nationalise the banks by default. Does the Taoiseach have any plans to change Government policy on the banks or will we have a continuation of a policy which has resulted in little or no credit being made available to businesses and consequences for the survival of those businesses and for jobs? Will he continue with a policy that requires taxpayers to dig deeper and deeper into their pockets to pay over thousands of millions of euros to Anglo Irish Bank, Allied Irish Banks and the other covered institutions?
The Taoiseach: I do not agree with Deputy Gilmore. With regard to the job losses he mentioned, there were also 250 jobs lost in Athlone and 200 lost in Dundalk within the past week. That aside, the core of the Deputy’s question relates to banking policy. The Labour Party idea was to proceed with nationalisation of the banks 12 months ago and order a huge write-down of the value of the banks’ property loans. The scale of the write-down would have been arbitrary, as the loans would not have been individually valued. That action would have forced the State to immediately recapitalise the banks to plug the large hole that proposal would have created in the banks’ balance sheets. The funding position for the State and banks last year was far worse than it is currently; therefore, the costs of plugging that hole would have been greater. That would have been an expensive mistake for the country to make.
The Taoiseach: It is true. Throwing jibes is not a policy. The cost of plugging the hole that nationalisation policy would have made, would have been significant, far greater than the interest rates we are paying now.
On the question of trying to provide credit into the economy, the issue is that the purchase price of the assets, through the loans under the NAMA process, will determine the level of losses incurred by the banks. That loss, combined with other variables such as existing capital, profitable operations and other assets will determine the level of capital required by the financial institutions. We have made it clear from the first recapitalisation statement that if additional capital is required, our preference is that it should be raised from private sources in the first instance; if this is not possible, the State will provide the capital. If the State provides capital to a financial institution it will take ordinary equity in that institution. We stand ready to provide capital if necessary, as it is essential to have a financial system that can provide credit to protect and create jobs. That is the reason we have had recapitalisation — to protect and create jobs.
Deputy Eamon Gilmore: I remember the first time I raised the issue of banks with the Taoiseach. On 25 June 2008, I stated: “[T]he banks are closed to new businesses”. I said the banks appeared to be squeezing the life out of many businesses because they would not lend to them. That was before the collapse of Lehman Brothers and the introduction of the bank guarantee. The Taoiseach stated in his reply: “It is important to point out ... that, as the Central Bank has confirmed, the Irish banking system is well capitalised and is in a healthy state in terms of its own financial situation”. Three months later, we discovered that was not the case.
At that time, when the Labour Party challenged the introduction of the blanket guarantee, the Taoiseach said: “[I]t is my intention to ensure the Irish taxpayer will not be held liable in any way for any deficit that might occur in the event of there being a problem in the future”. We have paid €11 billion to the banks since the Taoiseach told us it would not cost anything, and now, apparently, we will have to pay more. AIB and Anglo Irish Bank have lined up with the lámh amach arís. They are coming again for more capitalisation, and the Taoiseach tells us he stands ready to provide capital. How many more times will he get it wrong before he realises the Government will need to change its position on the banks? How many more people will lose their jobs? How many more businesses will go to the wall? For how much more money does the Taoiseach intend to beggar those who are at work today, their children and possibly their grandchildren to pay for a failed banking system?
The Government’s banking policy is not working and because of this, people are out of work. It is about time it changed tack on the banking system instead of maintaining its dogged approach and saying it was always right. The Taoiseach told the Labour Party a year ago in the House that he would not accept the policy we were advocating at the time, which was temporary nationalisation. That is fair enough; we can differ over policy. However, even as recently as this morning, some fairly cautious commentators on the radio were telling us it was now inevitable that nationalisation would take place. How much does the State have to own before one can say a bank is nationalised?
It is time the Taoiseach woke up to the reality that the Government’s banking policy is not working. It is not working in the interests of the taxpayer, of businesses, or those who are losing their jobs, and it is time to change it. If the Taoiseach is not prepared to accept the alternatives proposed by the Labour Party, Fine Gael or anybody else——
The Taoiseach: I do not accept that the alternative policies on banking suggested by the Opposition are credible. The parties presented two very different policies, but each is entitled to its position. With regard to the policy of the Labour Party, I am simply making the point——
The Taoiseach: Yes, Deputy Higgins. The difference between our policy and that of the Labour Party is that it would have nationalised the banks 12 months ago. The cost to the State and to banking at that time was greater than it is now and therefore the exposure to the taxpayer would have been greater.
The Taoiseach: We put forward a position — that is, the establishment of NAMA — that was not supported by the other parties. NAMA puts banks in a better position to access funds and provide credit to viable businesses and households because it will increase investor confidence in the banks through the removal of risky assets and improve liquidity through the exchange of illiquid assets — that is, the loans — for more liquid assets, namely bonds.
The means by which we obtain liquidity is to take the illiquid assets — that is, the billions of euro worth of property and development loans — off the balance sheets of the banks, put them into NAMA and trade them for Government bonds. This will provide the reserve liquidity that is required so that people can go on to the wholesale markets and obtain funds in the sure knowledge that the difficulties with the banks’ balance sheets have been properly priced in. NAMA is proceeding with this and ensuring that banks face up to their losses. The losses announced today by AIB and those of other banks are precisely because the NAMA vehicle is involved. Were it not involved, banks would be seeking to protect their interests by spreading those losses over a longer period in order to protect shareholder interests only. That was the experience in Japan in the 1990s.
NAMA is bringing things forward. It is providing, through the exchange of Government bonds for illiquid assets — that is, the loans — the means for banks to access funding at an affordable cost. At the moment, banking institutions are chasing deposits. The interest rate they are paying on those deposits is greater than the amount they are lending out. That is not a sustainable position in the long term. We have implemented a policy which has the support of those independent commentators who are not partisan on the issue, such as the Governor of the Central Bank.
The question Deputies opposite need to answer is this: how do they propose to ensure credit is released? We all know the banks have curtailed lending, mainly because they are finding it a challenge to obtain funds, and the reason for this is that providers of funds are reluctant to deposit their money in banks with balance sheets of questionable quality. NAMA will remove that uncertainty and allow the banks to attract sufficient funding again. None of the parties opposite has come up with a workable proposal to achieve that end.
The Taoiseach: Having set up NAMA to clean up the banks’ balance sheets, the Government is determined to ensure that through the guidelines provided for in the NAMA legislation and the credit review system, the banks will begin to perform their proper role in the economy, which is to support viable and sustainable businesses and households. That is the Government’s policy.
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