Dáil Éireann debate -
Tuesday, 28 Apr 1998

Vol. 490 No. 2

Written Answers - Currency Reserve Fund.

Charles Flanagan

Question:

39 Mr. Flanagan asked the Minister for Finance the value of the currency reserve fund; the amount of this fund which will be required by the European Central Bank; and the Government's intention in respect of the balance. [9596/98]

Minister for Finance (Mr. McCreevy)

In responding to the Deputy's question I would first like to clarify the position generally. All central banks hold assets of various kinds. In most countries, a proportion of those assets is held in foreign currencies, known as the external reserves. Such external reserves are held for two principal purposes — to assist in protecting the currency and to ensure that the country does not lack the foreign currency needed to pay for essential imports.

With the establishment of the European Central Bank and the adoption of the single currency, it will be the euro-area as a whole rather than individual participating member states, such as Ireland, which will need such external reserves. Consequently, the ECB is empowered under its statutes to call up, from participating national central banks, up to 50,000 million euro in foreign exchange reserves — that is, assets in currencies other than the euro. Each national central bank's contribution will be in proportion to its shareholding in the ECB, which in turn will be in proportion to each member state's shares of the euro-area's GDP and population — like shareholdings in the EMI at present.

On that basis, the Irish contribution to the EMI currently is 0.8 per cent. The initial Irish contribution to the ECB will depend on the final figures for GDP and population in recent years, the member states in EMU in 1999 and the total assets actually called up. However, it is likely to be around 0.9 per cent of the total; something around £350 million, depending on the conversation rate and the actual proportion. In addition, the Central Bank will be subscribing to the capital of the ECB, which is to total 5,000 million euro; the Irish subscription is likely to be around £35 million. These will remain assets on the balance sheet of the Central Bank, although they will not be under the control of the bank. However, it should be noted that both the foreign reserves contribution and the capital shareholding will earn income for the Central Bank and thus indirectly for the Exchequer, as the participating national central banks will share the profits of the ECB among themselves.

This will leave a substanial amount of assets, both domestic euro assets, and foreign non-euro assets, with the Central Bank of Ireland. However, just because they are not needed as official external reserves does not make them "surplus". The Central Bank of Ireland's balance sheet includes liabilities as well as assets; these include deposits from financial institutions, the Exchequer deposit, and legal tender notes. The bank will also continue to need its own external assets, as well as those provided to the ECB, to play its part as a member of the European System of Central Banks.

The Central Bank does have some assets which are not needed to meet liabilities; these are known as the bank's "accounting reserves". However, the value of these reserves fluctuates, depending on changes in the values of the assets held by the bank.

As of the end of February 1998, the latest date for which published figures are available, the official external reserves held by the Central Bank of Ireland totalled £4,739 million. The accounting reserves stood at £1,160 million.

It is too early to say what the balance sheet of the Central Bank will look like immediately after 1 January 1999, in EMU. There are important unknowns: the approach to be taken by the ECB to the management of foreign assets — both its own and that of participating central banks — and money market operations; and how the foreing exchange market will initially perceive the euro. What we can say with certainty is that both the overall level of assets and the surplus reserves of a central bank contribute to its credibility. For example, adverse exchange rate movements could, in the absence of a sufficient level of accounting reserves to absorb such movements, have negative consequences for the net asset position of the Central Bank. It is not my intention to act in a fashion which could undermine either the credibility of the Central Bank, and indirectly the ESCB, or the credibility of the Irish Government.

It is not possible to assess whether the Central Bank will have assets in EMU which are surplus to its requirements and I do not intend to engage in any precipitate action. However, the situation is being kept under review as the shape of EMU unfolds.

The contribution which any surplus assets of the Central Bank would make to the Exchequer should not be exaggerated. Assets of the bank earn a return for the bank. The Exchequer receives the surplus income of the bank, thus indirectly benefiting from the bank's reserves. If the assets, corresponding to the accounting reserves, were used by the Exchequer for other purposes, we would be losing the benefit of that income. To the extent that the bank's accounting reserves would be used to reduce the national debt, the net annual benefit to the Exchequer would be the difference between the cost of servicing the repaid debt and the return on the assets in the accounting reserves, that is, effectively the margin between the interest rates for borrowing and lending. Use of the accounting reserves for purposes other than repayment of debt by the Exchequer would not be in accordance with the strict control of public expenditure which is central to Government budgetary policy.