My statement issued earlier today, along with statements issued by the Central Bank on the capital requirements of the Irish banks, brings closure to the process of determining the level of State support required to maintain the stability of our banking system. Since the Government's announcement of the banking guarantee two years ago, the State has been required to stand behind the domestic banks and building societies to safeguard the financial system and the economy. In my statement to the House last night on the motion approving the ELG scheme, I recalled that the Irish banking system was teetering on the brink on the 29 of September 2008. In an unprecedented development, international credit markets had ceased functioning. In stark terms, the liquidity that our banking system needed to lubricate normal day-to-day financial operations was running out. In the absence of radical action, the banking system was facing closure within days.
As I reminded the House yesterday, the report by the Governor of the Central Bank, Professor Honohan, confirms this scenario in all its objectively frightening detail. The Governor clearly endorsed in the report, and has recently confirmed his endorsement, of the need for an extensive guarantee for the banks, which guarantee was provided by the Government on 29 September 2008 on a blanket basisin order to send a clear and unambiguous message to what the Governor characterised as hysterical global financial markets that the Irish State would take whatever steps were necessary to ensure the sustainability of our banking system.
My statement earlier today represents the final staging post in the journey initiated by the provision of the bank guarantee by bringing certainty and clarity to the proposed costs for the State for the resolution of our most distressed institutions. It is a key milestone in ensuring that broader-scale restructuring of the banking sector overall is successfully achieved in order that we have for the future a banking system that is firmly focused on meeting the needs of the real economy, sustainable employment creation and the savings, investment and credit needs of ordinary individuals, households and businesses.
The overriding theme of my banking statement and the shared objectives of all the authorities, including the Central Bank and the NTMA, which played such a pivotal role in the process underpinning it, is the urgent need to reinforce international market confidence in the restoration of our banking system to health, and our capacity to take the steps essential to achieving the enduring sustainability of our budgetary position.
International financial markets have been clamouring for some time for greater certainty on the final costs of repairing the very substantial damage wrought by irresponsible and reckless lending practices and systemic failures in corporate governance and risk management. With my announcement this morning and the publication by the Central Bank of the assumptions and methodology underlying the capital figures, this clarity has now been achieved.
The public is understandably and rightly angry about what has happened in our banking system in recent years. I share that anger but anger is not a policy on its own and we must now turn to the resolution of our problems. The information I have provided to the markets demonstrates that the Government's strategy for ensuring that, and although we are recognising these huge banking sector costs in our deficit this year, which is projected to spike at 32%, we have a mechanism to spread these costs over an extended period in excess of ten years. This will ensure that these costs will be manageable in terms of our current requirement to finance very significant levels of public expenditure through borrowing by the NTMA in international markets. The assessment that these costs are manageable within an appropriately revised framework for fiscal consolidation in Ireland is one that has been expressed by the Governor of the Central Bank on several occasions and is stated clearly in his statement also issued earlier today.
I said in my statement that it is imperative that we remain focused on our major challenge, which is to ensure that our public finances are returned to a stable and sustainable path. This objective is not, of course, an end in itself; rather, it is the main prerequisite to returning the economy to a path of stable and balanced growth to ensure the future economic well-being of our society. The fiscal challenges that face us in restoring the sustainability of our public finances are substantial but I am convinced that they are surmountable.
The projected Government deficit of 32% of GDP includes once-off capital support, as detailed in my statement, of almost 20% of GDP. It is crucial to recognise that were it not for this once-off spike, we would broadly meet our budget targets for this year.
I have set out in my statement the steps the Government will take in the coming weeks to demonstrate a credible pathway over a four-year period to achieve our budgetary goals. A high level of certainty regarding the final NAMA discounts for each of the participating institutions has provided us with the detailed basis for concluding our assessment of the capital needs of the banking sector. An assessment by NAMA of the loan-by-loan valuations carried out in respect of the transfer of approximately €27 billion of land and development and related loans into NAMA together with the comprehensive and detailed information now available to it on the remaining loan books has allowed the agency to refine its estimates of the discounts on the remaining loans to be transferred to a high level of accuracy. These final estimates have in turn allowed the Central Bank to update its assessments of the capital position of all of the institutions participating in NAMA following the prudential capital assessment review, PCAR, earlier in the year and the EU-wide CEBS stress testing exercise carried out in July.
As I announced, the Government has agreed a number of steps to provide certainty about the impact of NAMA transfers including that all remaining NAMA transfers should be completed in one single tranche for each of the participating institutions and the accelerated transfer of NAMA-eligible loans to complete the process by mid-October in respect of Anglo Irish Bank. In addition, the Government has decided that where the total exposure of a debtor is below a €20 million threshold in Allied Irish Bank and Bank of Ireland, that debtor's loans will not now be transferred to NAMA. The previous threshold had been set at €5 million. This will ensure NAMA can operate to the highest level of efficiency and effectiveness in the management of its loan portfolio.
All of these actions will be undertaken in accordance with the NAMA legislation and the European Commission state aid approval for the NAMA scheme, in particular the principle of a loan-by-loan valuation of all NAMA transfers. I very much welcome the statement by the Competition Commissioner, Mr. Almunia, this morning in regard to the Irish banks. He welcomed the comprehensive assessment contained in my statement this morning on banking, indicating that it brings clarity with regard to the remaining transfer of assets to NAMA and the capital needs of some banks and building societies. The Commissioner indicated that the announced changes to the way NAMA manages loans are in line with the Commission's approval of the NAMA scheme.
Concerning Anglo Irish Bank, from a competition point of view, the Commissioner said it is clear that the foreseen restructuring and resolution of the bank addresses competition distortion created by the large amounts of aid at stake. Once the Commission receives details of the plan, it will proceed rapidly toward a final decision. Mr. Almunia also welcomes the announcement that subordinated debt holders will make a significant contribution toward meeting the costs of Anglo Irish Bank. This is line with the Commission's principles on burden-sharing since it both addresses moral hazard and limits the amount of aid, to the benefit to the taxpayer.
The Commissioner noted that Allied Irish Bank will require further capital in the form of state aid which will have to be notified to the Commission for approval. He indicated that he will follow this process very closely and he has no doubt that as in all previous cases, the collaboration between the Irish authorities and the European Commission will be satisfactory. He also notes positively that Bank of Ireland will be able to continue its restructuring process without further recourse to State resources and noted the earlier approval of the bank's plan in terms of aid and restructuring.
With regard to the building societies, the Commission remains in close contact with the Irish authorities. In the case of the Irish Nationwide Building Society, the Commission will await the notification of the additional capital as well as details on the institution's future and will assess them thoroughly and swiftly. In regard to the EBS, the Commission is in the process of analysing its initial assessment of the restructuring plan submitted in May.
It is clear from the Commissioner's statement that the relationship between the Commission and the Government in regard to these matters has advanced to a very close level of collaboration. I am confident the various measures we have announced today will secure the necessary approvals in due course.
In regard to Anglo Irish Bank, the Central Bank has carried out a detailed analysis of potential losses in the bank in the coming years. The examination has drawn on comprehensive information and analysis of Anglo's non-NAMA loan book carried out both by the bank and its advisers and independent consultants in preparing the bank's restructuring plan for the European Commission. Information has also been made available by NAMA from a review of assets securing the loans in Anglo's remaining NAMA tranches. This review has enabled NAMA to determine and advise the Central Bank of the expected discount of 67% on the remaining €19 billion of the bank's loans that are due to be transferred.
The Central Bank has therefore established as definitively as possible the level of capital required by the new structure, that is, an additional €6.4 billion in total capital will be needed. This additional capital requirement brings the projected total gross cost of the restructuring of Anglo Irish Bank to €29.3 billion. This additional capital will be provided by increasing the promissory note issued by the State and by appropriate burden-sharing exclusively by holders of Anglo Irish Bank subordinated debt instruments, as I outlined in my statement.
The severe stress-testing carried out by the Central Bank as detailed in its statement, including a 70% discount on the remainder of Anglo's NAMA loans, has concluded that the stress case level of losses in Anglo Irish Bank could potentially be €5 billion higher than in the expected case of €29.3 billion. As made clear in my statement, the stress case indicates the upper boundary of the level of losses; it does not represent the Central Bank's expectation of the likely outcome and is not the basis for the final capitalisation of the bank. The Government will capitalise the new structure to the expected requirement of €29.3 billion through the promissory note structure which extends the cost and the funding burden over a period in excess of a decade. The authorities will also press ahead with the restructuring of the bank with a view to achieving the split of the bank early in 2011.
As I had previously indicated, my statement also clarified the position regarding the Government's policy for achieving burden-sharing by holders of subordinated debt in Anglo Irish Bank and the situation of senior debt obligations. The position is that under Irish law senior debt obligations rank equally with deposits and other creditors. I have no plans to change this position. There is, therefore, no question of seeking to impose losses on holders of such senior debt in Anglo Irish Bank or indeed in any credit institution in the State through any legislative measures.
Indeed the legal competence of this House to effect such changes is very much in doubt having regard to the provisions of the relevant EU directives which prohibit differentiation between creditors and the provisions of our own Constitution which protect vested rights. I am not saying on the record of this House that it is not legislatively competent to impose haircuts on creditors, but were we to impose haircuts on senior bondholders, equivalent haircuts would require to be imposed on depositors. It is important that this is understood in this House. Quite apart from the commercial and economic arguments involved in the location of Ireland as a major centre of multinational investment, the dependence of the NTMA on external funding and the dependence of our banks on external funding are major factors which should be weighed very carefully by Members of this House and by commentators in assessing the desirability of those policies that have been advocated from time to time and which point unequivocally in the direction of default in regard to these bondholders.
As I indicated in my statement this morning, the question of subordinated bondholders is entirely separate and can be addressed through appropriate legislation, which the Taoiseach indicated this morning is listed for publication this year. In any event, all the subordinated instruments in both the Irish Nationwide Building Society and Anglo Irish Bank do not mature for payment of their principal sums for a considerable period of time. In regard to appropriate burden-sharing by holders of subordinated debt, that is a principle with which I agree and to which the Commission subscribes. As can be seen from the figures I have outlined, the losses in the bank are substantial and it is right and proper that subordinated bondholders should share the costs that have arisen. It is my view that a very steep discount must apply to these bondholders. The NTMA will advise me on how to maximise the saving to the taxpayer in this regard. If the issue were not addressed, the principal sums would fall due for payment eventually with substantial hazard to the taxpayer.
