Written Answers - External Reserves.
Noel Ahern
Question:
112
Mr. N. Ahern
asked the
Minister for Finance
the level of Ireland's external reserves; the portion of these to be handed over to the European Central Bank on joining the EMU; the balance which will be left; if it has been decided what will be done with this balance; if it will be available for repaying national debt, for capital expenditure or be held as some form of reserve; and if he will make a statement on the matter.
[28213/98]
In responding to the Deputy's question, I wish 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 (ECB) 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 European Monetary Institute, the forerunner of the ECB, at present.
The Central Bank of Ireland is transferring to the ECB the equivalent of around 419 million euro, or around £330 million, which will be Ireland's share of the ECB's pooled reserves. The amount transferred amounts to about 6.3 per cent of the bank's total foreign exchange reserves. The Central Bank is also subscribing around £42 million euro, or £33 million, to the share capital of the ECB.
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 substantial 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, in order to play its part as a member of the European System of Central Banks. The remaining reserves will continue as heretofore to be managed by the bank in accordance with risk parameters and benchmarks set by the board of the bank. The aggregate of the national central banks' non-euro assets plus the pooled reserves transferred to the ECB will comprise the foreign exchange reserves of the ESCB.
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 October 1998, the latest date for which published figures are available, the official external reserves, held by the Central Bank of Ireland, totalled £5,616 million. The accounting reserves stood at £1,191 million.
At this stage, it is too early to say what will happen to the balance sheet of the Central Bank in the early stages of the single currency. 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 or independence of the Central Bank, and indirectly the ESCB, or the credibility of the Irish Government.
My Department has sought the advice of the Office of the Attorney General as to the legal position of the accounting reserves of the Central Bank. In summary, the advice is that any transfer of the accounting reserves should only take place with the agreement of the Central Bank and, as appropriate, the European Central Bank. The bank and the ECB are the appropriate bodies to determine the level of reserves which are required for the purposes of the monetary policy of the euro area and in order to achieve price stability, 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, i.e. effectively the margin between the interest rates for borrowing and lending.
