Priority Questions - Banks Recapitalisation

Wednesday, 18 April 2012

Dáil Éireann Debate
Vol. 761 No. 3

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  2.  Deputy Peadar Tóibín  Information on Peadar Tóibín  Zoom on Peadar Tóibín   asked the Minister for Finance  Information on Michael Noonan  Zoom on Michael Noonan   if he will provide an update on the work of the troika technical group dealing with the Anglo Irish Bank promissory note; if he will provide an update on his discussions with the ECB and EU partners on this matter; and if he will outline what he would consider a successful outcome on the matter of the promissory note. [19546/12]

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  As the Deputy is aware, the Government has been committed to reviewing the arrangements that were put in place to capitalise the Irish Bank Resolution Corporation, IBRC, formerly Anglo Irish Bank and Irish Nationwide. The purpose of this review is to determine if there is a way to reduce the overall cost to the State. Part of the capitalisation of IBRC was provided using promissory notes as consideration.

While the development in relation to the end of March promissory note payment is positive, we must continue to work towards the greater benefits that would derive from the re-engineering of the promissory note. There are potential improvements for the banking sector which could also stem from the ongoing technical discussions.

It is for these reasons that we must look at the recent developments as an initial step in a process. This is a medium-term project. The Government is focused on developing an alternative solution to the promissory note arrangement in IBRC.

It is too early at this stage of the process and indeed it would be inappropriate to predetermine what a successful outcome will look like or to indicate how the various stakeholders have reacted or may react to various proposals. We want to arrive at a successful conclusion that is in the interests of Ireland and the European Union.

Deputy Peadar Tóibín: Information on Peadar Tóibín  Zoom on Peadar Tóibín  First, I take this opportunity to share my sympathies and those of my party with Deputy Pearse Doherty, who lost his father suddenly in the last week. This is a sad time for Deputy Doherty. Ar dheis Dé go raibh anam an Uasail Uí Dhochartaigh.

[497]Some of the Minister’s backbenchers have been enthusiastically telling the world that the scheduled payment of €3.06 billion to IBRC, which was due to take place on 31 March, did not, in fact, happen. Of course, the Minister and I know different in that regard. It would be interesting and important for the Minister to put what exactly happened on the record. Is it not the case that the IBRC was paid this money from NAMA cash reserves, which are in essence, public money? Is it also not the case that subject to the approval of Bank of Ireland’s board the money will then be reimbursed to NAMA by Bank of Ireland and, in turn, Bank of Ireland will hold it for 13 years and the Irish Government bonds to which the Minister referred in his statement will be repaid by the State in full? What happened on 31 March was that the State did pay the IBRC €3.06 billion but from a different source than was originally intended.

An Leas-Cheann Comhairle: Information on Michael Kitt  Zoom on Michael Kitt  The Deputy must ask a question please.

Deputy Peadar Tóibín: Information on Peadar Tóibín  Zoom on Peadar Tóibín  The first question is to put the issue on the record. The second question is that the most immediate consequence of the smoke and mirrors element to this is that there will be a cost to the State of €90 million this year. The money must come from somewhere. Where will it come from? Will it come from cuts or increased taxes and what part of the economy will suffer as a result?

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  I appreciate the difficulty in understanding every detail of the transaction because it was quite complex. There were probably simpler ways of doing it but we were not free agents in making the arrangements. If one looks at it in its totality, the European Central Bank, ECB, provides emergency liquidity assistance, ELA, funding to IBRC — formerly Anglo Irish Bank and the Irish Nationwide Building Society. That money had to be paid back because some of it was underpinned by a promissory note. The first repayment is the payment back of money to IBRC which is European Central Bank money. The bond is being repo’d by Bank of Ireland — if the shareholders agree to the deal, and there is no indication they will not. At the shareholders’ meeting following that, the bond will be repo’d, in other words, effectively turned into cash, but that will be done with ECB money as well, because the money into Bank of Ireland is coming through the liquidity window, which is going into the Irish banking system anyway so that is ECB money as well. The money which we accessed for bridging finance from NAMA was money which is due to be repaid to the ECB for the loans it gave to NAMA to acquire the impaired assets in the bank. Again, it is ECB money that is providing the bridge. What will happen is that when the circle is completed and the shareholders give their consent, which is my expectation, the NAMA funds will be restored and NAMA will do what it intended to do last month, namely, it will repay another portion of what it owes to the ECB. It has already paid €1.9 billion back last year and it will continue to repay in accordance with its schedule. There are three different involvements of the ECB. It is a good deal for Ireland. There is no doubt about it but it is only one step. I do not wish to exaggerate it and I did not when I presented it originally.

Deputy Peadar Tóibín: Information on Peadar Tóibín  Zoom on Peadar Tóibín  It is interesting that the fanfare which accompanied the initial announcement by the Minister has disappeared because the agreement that was originally envisaged to be about to occur did not happen — unfortunately for the Minister.

An Leas-Cheann Comhairle: Information on Michael Kitt  Zoom on Michael Kitt  The Deputy must ask a question.

Deputy Peadar Tóibín: Information on Peadar Tóibín  Zoom on Peadar Tóibín  Given that Bank of Ireland is part of the infrastructure to give loans to potential home owners and to businesses in future and given that a chunk of the money will come from Bank of Ireland in at least the short to medium term, there must be an opportunity cost to the money coming from Bank of Ireland into the real economy. ISME indicated that 49% of small businesses have difficulties in getting loans currently. Is it not the case that the [498]Byzantine solution which the Government has concocted will have a negative effect on the real economy?

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  First, there was absolutely no fanfare. I announced twice in the House what was happening and I did it in the most modest way. I made no attempt to turn it into a PR occasion and I described it as a first step. I know Deputy Tóibín’s party is disappointed because it thrives on things going wrong. He and his colleagues hope to build the party on the sufferings of the Irish people. That is the party’s policy.

Deputy Peadar Tóibín: Information on Peadar Tóibín  Zoom on Peadar Tóibín  Could we focus on the questions?

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  The wish of its members every day is that nothing succeeds and everything collapses and then out of disaster the party will grow. What is the Sinn Féin Party policy? We know the party’s position, but the Deputy should stick to the record and to the truth. I have described in detail what has happened.

Deputy Peadar Tóibín: Information on Peadar Tóibín  Zoom on Peadar Tóibín  What is the opportunity cost?

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  There is not an opportunity cost because Bank of Ireland is getting additional funding from the ECB to repo the bond through the liquidity window. If one looks at banks all across Europe they are getting far greater quantities of money than the Irish banking system is getting. It does not impair Bank of Ireland’s day-to-day business whatsoever. I agree with those who have said this is not a full and final settlement. I said that myself. It is only a first step which improves the situation for this year

  3.  Deputy Stephen S. Donnelly  Information on Stephen Donnelly  Zoom on Stephen Donnelly   asked the Minister for Finance  Information on Michael Noonan  Zoom on Michael Noonan   the way in which the €90 million cost of the recent arrangement on the March promissory note payment is arrived at; the final beneficiaries of this €90 million; if there was agreement from the European Central Bank, prior to his announcement of 29 March, to lend the required funds to Bank of Ireland; if so, at what rate, or if Bank of Ireland will use its own capital to fund this; and his views on the use of National Asset Management Agency assets to offset Government debt. [19452/12]

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  The €90 million is the estimated difference, for the remainder of 2012, between borrowing under the programme at an estimated 3.5% and the impact on the deficit of the new Government bond. The State is the ultimate beneficiary as the coupon on the new Government bond is paid to its wholly owned subsidiary, IBRC.

My Department is currently updating its macroeconomic and fiscal assessment for the forthcoming stability programme update, SPU. The SPU will give an update of, among other things, the general Government deficit estimate for 2012, taking account of all of the latest available economic and fiscal data, both positive and negative. The SPU will be published at the end of the month. On foot of the Exchequer returns for the first quarter of the year, I am confident we will meet our budgetary targets for the year.

The ECB had expressed a clear preference that the financing arrangement would be between IBRC and a bank that was not in majority State ownership. The transaction would then be financed by Bank of Ireland, through standard ECB money market operations, using the Irish Government bonds issued as collateral. As NAMA had the funds available, as a short term interim measure, pending the results of Bank of Ireland’s shareholders’ vote, I directed that the financing of the bond would be through a collateralised facility provided by NAMA to IBRC on equivalent commercial terms as the financing with Bank of Ireland.

[499]Deputy Stephen S. Donnelly: Information on Stephen Donnelly  Zoom on Stephen Donnelly  The back and forth exchange with Deputy Tóibín and the answer the Minister just outlined reinforce what was a very disappointing statement. The Minister made a statement in the Chamber. He told us he was spending €90 million of our money and he refused to answer any questions but he did have time for an interview with RTE afterwards. We have only come back after a two-week gap. It was very disappointing to be given that little information and not to be given a chance to ask the Minister reasonable questions. Deputy Michael McGrath and I, and many other Deputies, spent three and a half hours with the Governor of the Central Bank, Mr. Honohan, earlier in the week and the story he gave us of what he believed would happen was substantially different to what we are hearing in terms of the detail now. There was no mention of NAMA or Bank of Ireland.

An Leas-Cheann Comhairle: Information on Michael Kitt  Zoom on Michael Kitt  Could the Deputy ask a question please?

Deputy Stephen S. Donnelly: Information on Stephen Donnelly  Zoom on Stephen Donnelly  The nub of my question is who is the beneficiary. My understanding is that the ECB will lend the money when the bond is repo’d to Bank of Ireland at 1%. What I would like to know is at how much is Bank of Ireland going to lend the money to IBRC and whether Bank of Ireland will walk away with a profit. The Minister stated that the €90 million additional cost is entirely circular. I hope it is so that ultimately there is no long-term cash cost to us because it stays within the circularity of the financing, but that is not the case if Bank of Ireland lends the money to IBRC at anything above 1% because then State money will go to Bank of Ireland in which we only have a small minority stake. Could the Minister confirm the rate at which for at least the nine months in question Bank of Ireland will lend the €3.1 billion to IBRC? Could he also confirm that the Bank of Ireland will or perhaps already has borrowed the money from the ECB at 1%?

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  I will deal with the €90 million calculation first and then with the second part of the Deputy’s question. The €90 million is estimated to have an incremental impact on the Exchequer which is calculated as follows. The status quo was estimated as the cost of borrowing under the programme for the promissory note instalment, namely, €3.06 billion at 3.5% for the remainder of 2012 giving an interest cost of €80 million. On 29 March, before the Government bond was issued it was estimated that the bond power value would be €3.53 billion. The coupon was known to be 5.4%. In 2012 the interest cost was therefore €140 million. There is also a technical adjustment under the Government accounting rules which increases the deficit impact to €170 million. The €90 million was therefore the difference between the estimated status quo of €80 million and the estimated deficit impact from the new Irish Government bond of €170 million. The cost to the Exchequer arises from the interest payable on the Government bond not on the margin which Bank of Ireland is getting. Bank of Ireland is a commercial bank of which 15% is in State ownership. Of course it is doing this because it is going to make money on it. Its margin is 135 basis points above the cost of the money. As Deputy Donnelly correctly states, the money is coming at 1%. Of course, that is cheaper than the average cost of funds. The alternative was that we would go back to the European funds, the EFSF fund or whichever fund would provide the funding, where it would cost us on average 3.5%. Because we are getting it cheaper, there is a margin. There is a cost, but if one sets the €90 million off against the fact that we are not borrowing an additional €3.06 billion in 2012, one can see that there is a big advantage because that €3.1 billion remains as money on which we can call if we need it, for example, next year.

Deputy Stephen S. Donnelly: Information on Stephen Donnelly  Zoom on Stephen Donnelly  I appreciate the advantage of not using the troika facility, but we are still borrowing. The Government merely issued a bond for it. In real terms, we have merely borrowed it.

[500]Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  Yes, but for a longer term and cheaper.

Deputy Stephen S. Donnelly: Information on Stephen Donnelly  Zoom on Stephen Donnelly  Hopefully.

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  That is the objective.

Deputy Stephen S. Donnelly: Information on Stephen Donnelly  Zoom on Stephen Donnelly  Am I correct in thinking that, broadly, Bank of Ireland will make approximately €30 million this year out of that deal? If we take 135 basis points on €3.06 billion over nine months, there is approximately €30 million for Bank of Ireland out of the deal.

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  I stated it might make a little more because I hope the bank will commit for 364 days, not for nine months. It will be nearly a full year.

Deputy Michael McGrath: Information on Michael McGrath  Zoom on Michael McGrath  Some €45 million.

Deputy Michael Noonan: Information on Michael Noonan  Zoom on Michael Noonan  Of course, there are handling costs and there are administrative costs as well. It is entitled to its profit. I hope that it will not have any difficulty with their shareholders but I must stand back from that because shareholders have an independent function and cannot be influenced by the Minister.

Deputy Stephen S. Donnelly: Information on Stephen Donnelly  Zoom on Stephen Donnelly  That is a real additional cost.


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