Please be assured that the Department and the special liquidators will appear before the committee as soon as the litigation is resolved.
Returning to the Comptroller and Auditor General’s report on the accounts of the public service 2016, chapter 3 of this report sets out an estimate of the net outturn of the banking stabilisation measures taken by the State as at year-end 2016. The gross cost of recapitalising the banking system during the period 2009-2011 stands at €66.8 billion, which was funded through a combination of funding from the Exchequer and National Pension Reserve Fund. Taking into account the cost of servicing the debt to end of 2016 of €14.8 billion and the income earned on investments to the end of 2016 of €25.1 billion, the net cost estimated by the Comptroller and Auditor General was €56.5 billion as at the end of 2016. When the estimated value at that date of the State’s remaining shareholdings in AIB, Bank of Ireland and Permanent TSB - a combined €13.6 billion - and NAMA’s projected surplus of €3 billion are taken into account, the estimated net outturn at the end of 2016 is a cost of around €39.9 billion. This shows a reduction of approximately €3 billion since this analysis was last conducted at the end of 2014, which reflects additional receipts of €5 billion and the recognition of the estimated €3 billion surplus now expected when NAMA winds down in 2020. This was offset by the increase in the cost of debt servicing associated with these investments by €6.1 billion over the period.
At the end of 2016 the value in the State’s shareholdings in the three quoted banks was €13.6 billion. Since then the State realised €3.4 billion from the initial public offering, IPO, of AIB in June this year leaving it with a 71% remaining shareholding in that bank. The IPO of AIB was managed by the Department and was the second largest IPO globally in 2017, the largest in Europe in 2017 and the largest on the London Stock Exchange since 2011 as measured by the level of funds raised.
As of the close of business on 12 December 2017, the market value of our remaining investments in these banks stood at €12.4 billion, indicating a net increase in the value of our shareholdings since the end of 2016 of almost €2.2 billion when the proceeds from the AIB IPO are taken into consideration.
In respect of banking stabilisation-related Central Bank income, for the years 2009 to 2016 the examination by the Comptroller and Auditor General has estimated that in the region of €7.7 billion of the Central Bank's surplus income of €12.5 billion was attributable to financial instruments held as a result of banking stabilisation measures taken by the State. These financial instruments were in the form of exceptional liquidity assistance and Government bonds held by the Central Bank. The report estimates that 97% of the €7.7 billion portion of the Central Bank’s surplus income for the years 2009 to 2016 is attributable to transactions between the Central Bank and IBRC.
Subsequent to the liquidation of IBRC in February 2013, the Central Bank acquired just over €25 billion of floating rate notes, FRNs, and €3.46 billion of fixed rate treasury bonds. Between 2013 and 2016, the Central Bank earned net interest of €2.7 billion from the bonds and realised gains of €3.2 billion from the disposal of some of these bonds. The Central Bank stated in its 2016 annual report that it intends to sell the remaining floating rate bonds as soon as possible, provided conditions of financial stability permit.
As at 13 December 2017, the bank has so far disposed of €9.5 billion nominal of the floating rate notes, significantly exceeding its minimum targets outlined in 2013. While the pace of these disposals is significantly ahead of the minimum schedule, it is positive that the NTMA is locking in current low market rates now rather than some time in the future, at which point rates could be higher. Furthermore, the cancellation of these bonds will also increase the amount of Irish debt that the ECB can purchase in the sovereign debt markets, which should help in further reducing the cost of the State’s borrowing. Notwithstanding these positives, clearly this acceleration needs to balance the negative consequences of the purchase and cancellation which includes the potential creation of excess supply in the market and the forgoing to the State of ongoing Central Bank profits related to these bonds.
The debt-related cost to the State associated with the investments in the bank was in the region of €14.8 billion over the period 2009 to 2016. These costs are estimated by the Comptroller and Auditor General and reflect the additional annual debt servicing costs and other related costs incurred by the State as a result of the borrowings used to invest in the banks.
The Comptroller and Auditor General highlights that the Exchequer continues to incur the cost of servicing the debt associated with the net €56.5 billion cost of the investments in the banks and the report estimates that this cost is likely to be in the region of €1.7 billion for 2017 with over €1 billion of this in respect of IBRC and a further €0.6 billion in respect of AIB. The ongoing annual cost of servicing the debt associated with Permanent TSB is estimated at around €50 million per annum. The State has recouped its investment in Bank of Ireland and therefore incurs no ongoing debt servicing costs in respect of Bank of Ireland.
The long-term cost of servicing the debt associated with the bank investments will depend on a number of factors, including the amount the State realises from its remaining investments; the period for which the Central Bank continues to hold government bonds; and the cost of funding for the State as it refinances existing debt when it matures. The State guaranteed certain bank liabilities under three main schemes, namely, the deposit guarantee scheme, the credit institutions (financial support) scheme, and the eligible liabilities guarantee scheme. By the end of 2016, the State had received net income in the region of €3.7 billion under the schemes with the majority of this relating to the eligible liabilities guarantee scheme. Included in this figure is €280 million received as an interim dividend from the special liquidators of IBRC and it is expected a second interim dividend of €280 million will be received in the next few weeks following the announcement last week of a further 25% payment to admitted unsecured creditors of IBRC.
In respect of NAMA, its board has approved a projected terminal surplus of up to €3 billion over the course of its life, which is dependent on favourable market conditions being maintained when realising remaining assets. This surplus will be paid to the Exchequer to reduce the overall cost of banking stabilising measures.
I thank the Chairman and committee for their attention. I hope members will appreciate that the stance adopted by the Department today is in the interests of protecting the position of the State in the proceedings that have been brought against it. I would welcome any follow-on questions.