If there is a legal contract in place from before September we cannot vary it. We have not taken the power to vary legal contracts. As the Deputy knows, we took power to vary some types of contract yesterday evening, but not those. It is the position under the guarantee scheme that no new arrangements may be entered into.
The retirement package for the regulator has occasioned considerable public comment. However, we have had a very big debate on public sector pay in recent weeks and the package was that which a person at his equivalence obtains. This should be noted in the general context of the debate.
Deputy Bruton mentioned the need for fresh blood in the banks. It is very difficult for the Bank of Ireland or any such institution to recruit chief executives at present. There was a wide field. The Governor undertook to report to me the progress he had made on the matter and I spoke to him during the week. He indicated there was a field of candidates and that Mr. Richard Boucher was the best candidate available. I understand there was one well-qualified external candidate who, in the event, did not express interest in the position. This is hardly surprising when one considers that the remuneration is now subject to a Government committee and that the bank's position has been called into question in some circles. Under those conditions it is not as easy as formerly to recruit a chief executive. We must think our way through our position with regard to the current banking crisis. Mr. Boucher's appointment is a matter for the bank. I am not qualified to pick a chief executive of a bank but I am satisfied that Mr. Boucher is a person who has the confidence of the bank. He is an excellent person and I believe he will bring a fresh dynamic to the Bank of Ireland. I thank the bank for the co-operation it has extended to the Government at all stages of the financial crisis.
We can argue about who is or is not appropriate to be appointed as chief executive. Clearly, the bank took a view. It had a number of candidates, assessed them and came to a conclusion. I am satisfied the process was transparent and proper. The fundamental point is that a proper process was followed with regard to the recruitment of a new chief executive. As Deputy Bruton rightly said, it is important that Oppositions should ask questions and it is understandable that they do so. However, the idea that one might find a person to be chief executive of the Bank of Ireland on the salary scale proposed by the Deputy in the Private Members' motion yesterday might be unrealistic.
I was asked about the guarantee and a possible extension to it. Clearly, on 29 September the Taoiseach and I and the various persons advising us in Government had a very difficult decision to make. The guarantee was given in wide and unqualified terms. The Labour Party has always criticised the fact that some dated subordinated debt was included but we believed that no doubt should attach to any of Ireland's banks' obligations during the guarantee period. For that reason we did not guarantee undated subordinated debt. The guarantee will lapse on 29 September 2010. Obviously we need to consider a more limited extension of the guarantee beyond that date because without such the banks will develop a funding issue as the end date approaches. The Government is, therefore, considering whether longer term issues could be guaranteed under the guarantee scheme. We are in consultation with the European Commission in that regard and will bring it our proposals very soon. There is little long-term money in the markets at present but it is very important that we start working on this now because timescales can catch up very quickly. The State itself had a three-year issue today which was a success. The extension of the guarantee is under consideration.
Deputy Bruton asked about the market views on recapitalisation. The market view of the Irish banking system at present is very negative and shares are traded at very low levels on the markets. Professor Honahan made a very good point in respect of recapitalisation in a considered comment he wrote on the subject. He made the point that while the capitalisation plan might not achieve all that we would wish it was an essential step in safeguarding the position of the banking system. It would not be possible for the two larger banks in Ireland, whose shares are trading at such a low level, to enjoy any international confidence without a demonstrated capital investment commitment by the Government in the absence of private capital. For that reason alone, capitalisation was essential.
We will probably discuss the entire issue of capitalisation in greater detail later. My assessment is that it is essential to recapitalise the institutions. If we do not do so we send a signal to markets around the world that these banks will continue to trade at very low share prices and this will inevitably impact on their liquidity. The wider question is raised as to what the core issue is for Irish banking throughout this global crisis. The core issue has been the problem of liquidity, namely, the problem of accessing funds for a banking system abroad. Again, this is not unique to Ireland as a small country but is a problem shared with many other small countries. It is exacerbated in the case of Ireland because Irish banks borrowed extensively on world wholesale markets in recent years and those borrowings were used to finance lending in Ireland on a scale not hitherto witnessed.
It is worth noting, for example, going back to 1992, that the net external borrowings of the Irish banking sector were less than the external borrowings of the State. The position today is that the gross external borrowings of the State are at quite a modest level, approximately €50 billion. The net sum is even lower if one takes into account the pension reserve fund, €34 billion. The State has been a modest borrower in recent years but the banking sector has been an immodest external borrower. The banks are faced with the challenge of re-financing their external borrowings in much more difficult international circumstances. That core issue of liquidity is what I and the Government, the Central Bank and other authorities have had to grapple with since last summer. No matter whether it was a guarantee or recapitalisation, the "bad bank" or the "legacy bank", as Deputy Bruton chose to christen his version, the problem is the same. It is how to generate, in straitened world markets, sufficient confidence in the Irish banking system that funds can be obtained in world markets.
Deputy Bruton asked about the possible danger of the banks, because of a shrinking loan book, pursuing their own independence at the expense of the national economy. This is an important point. It is one I had very much regard for in the context of the recapitalisation discussions. I sought definite commitments on lending to small and medium-sized enterprise, lending for environmentally important projects and lending for home purchase. Obviously this is something we must watch all the time and that is why we set the coupon at 8%. I do not believe we would have obtained a much lower coupon sanction from the Commission. We set the coupon on the preference shares at 8%. As members will know, at an earlier stage the United Kingdom set the coupon at the much higher level of 12%, which amounted to a very substantial constraint on the capacity of the British banking system to lend.
One turns then to the question of the loan book, its quality and the degree of disclosure that can take place. There has been an amount of disclosure. Concerning Allied Irish Bank and Bank of Ireland, our due diligence is now under way or about to be so, and both banks will be subject to a wider investigation than was produced in the PricewaterhouseCoopers operation, although building on that. It is important to understand the nature of the work in which PricewaterhouseCoopers is engaged which occasioned a controversy in the House recently. PricewaterhouseCoopers was engaged by the Government to begin work before the date of the guarantee. It had taken a preliminary working look at Anglo Irish Bank in the weeks leading up to that date, perhaps a week or ten days beforehand. The work would not have been at a very advanced stage. Of necessity the work is a form of digging and then digging deeper. We could spend a very long time digging. The work that went on in October involved successive drafts that looked at different aspects of the operations of the six guaranteed institutions. It focused primarily on the development loan book and on the risk exposures contained therein. A formal summary was made to me in mid-November by the Governor of the Central Bank which outlined the findings at that stage in general terms. The advice I received from the Governor was that we could continue drilling until May or June of this year, but that we had to make decisions to safeguard the banking system. We had to go with the best information we could obtain at that time.
Side by side with the PricewaterhouseCoopers exercise we have commissioned an auctioneering assessment of the report. The report was contracted with the regulator. It is best described as a rolling process which has produced various documents. Between the time at which they were commissioned at the end of September 2008 and the end of November the firm carried out a report on each of the institutions. It produced a consolidated report and a summary overview and it carried out various stress scenarios.
Deputy Bruton raised the issue today of how public we can be in respect of the matters set out in the report. The various drafts written in the autumn are to some extent dated because time does not stand still. The stress scenarios were applied at the NTMA with Merrill Lynch, which it has engaged as advisers. The stress scenarios were imposed on the basic factual data established in the report. It is important to note that time does not stand still.
Let us consider the three major institutions. In the case of Bank of Ireland when the initial recapitalisation was agreed in December, Bank of Ireland immediately commissioned a report by Oliver Wyman, a firm of independent consultants. The purpose was to assess, in the light of PricewaterhouseCoopers report and in the light of the due diligence which it was aware the State was about to embark upon, what its exposures were and a more detailed analysis of its position. As I understand it, the substance of that report was then disclosed to the market by the Bank of Ireland on the day following the recent recapitalisation announcement. The bank was anxious to make a clean breast of it as soon as the recapitalisation was announced and outline where it saw its prospective losses. For that reason it produced that report on the day following the recent recapitalisation announcement two weeks ago. The State will supplement the work of that consultancy firm, which was retained by the Bank of Ireland, with its own due diligence in the weeks ahead prior to any actual investment by the State.
Allied Irish Bank is in a closed period. It did not produce an independent report to date, but it is making its return next Monday. On Monday, it will give a preliminary statement and publish its results but it will not hold the annual general meeting. As Deputies and Senators are aware, the bank issued a profit warning last week. We will build on the results and carry out an intensive due diligence into the position at Allied Irish Bank.
The position of Anglo Irish Bank has been documented in much public exchange. Essentially the PricewaterhouseCoopers exercise was published by me last Friday in edited form. Clearly, we could not identify the customers of the bank, but it gave a general sense of the property exposures of the bank and a general sense of how the PricewaterhouseCoopers exercise proceeded. The PricewaterhouseCoopers exercise in respect of Anglo Irish Bank was supplemented by our own due diligence operation in January. One good conclusion from that due diligence which heartened us was that our due diligence confirmed, by and large, the position of property exposures at Anglo Irish Bank. There was no substantial divergence between our due diligence and what the PricewaterhouseCoopers exercise had already established. However, in respect of the ethical exposures a somewhat different picture emerged, which has been very much in the public view in recent weeks.
Three issues arose in the course of our due diligence at Anglo Irish Bank. First, the question of the loans to Mr. FitzPatrick arose, which was already in the public domain, and in particular the detail and nature of the matter. The second issue which arose in our due diligence was the question of the arrangements put in place between Irish Life & Permanent and Anglo Irish Bank and the back-to-back arrangement in place on 30 September and in the days preceding. Third, the whole question of the Quinn stake in the Anglo Irish Bank arose, including the unwinding of the contracts for difference and the nature of the transactions which were put into operation.
There has been much talk in public debate concerning leaks and statements from sources within Anglo Irish Bank alleging various degrees of knowledge on the part of the regulator and the Department concerning these transactions. As members of the committee will be aware, I became concerned following an examination of the reports of the various banks about the amount of disclosed lending to directors that was taking place at Anglo Irish Bank. I requested from the regulator a report on that matter. Some days later Mr. FitzPatrick approached my Department following a meeting with his board at which I pointed out there would be a due diligence of the institution prior to recapitalisation. Essentially, he made a full disclosure of these matters to the Department. In respect of the Irish Life & Permanent transaction, it had been intended to bring this matter into the public domain at the time of publication of the Anglo Irish Bank report. When there was a premature disclosure of it, I asked to see the chairman and chief executive of Irish Life & Permanent and they accepted that there was no evidence available to them to suggest that there was any prior authorisation, sanction or appropriation of this transaction on the part of the regulator, the Central Bank or my Department. It is true to say that elements of the transaction rather than its character were notified to the regulator some weeks later and that there was no immediate response on the part of the regulator to it.
The general character of the problem with the Quinn transaction was in the public domain for some time. However, again there has been no suggestion that the details of the transaction were in some way sanctioned or approved by the relevant authorities. These matters are subject to extensive investigations and if members have further questions to put regarding the time lines for those investigations I am in a position to give that information.
I refer to the question dealing with disclosure. As the sole shareholder in Anglo Irish Bank I was in a position to disclose the subject in a discussion with the board. I was also in a position to disclose the PricewaterhouseCoopers report in respect of that institution. The position of disclosure in respect of Allied Irish Bank and Bank of Ireland has to some extent been superseded by events and it will be superseded by events in respect of the other institutions in due course. Clearly, it would require the consent of the relevant institution for me to disclose that information or due diligence information, because it was obtained on a confidential basis.
Deputy Bruton referred to the wider question of the sovereign position of Ireland as a borrower. This is a very important issue. However, it is an issue which is faced by Governments throughout the world at present, because there has been a significant extension in the amount of borrowings in which sovereign States are engaging. This is partly because of the vast numbers of bank recapitalisations, many of which are far more ambitious than anything we have undertaken. As Deputy Bruton remarked, the fiscal position is vital. It is fair to say that the Government has demonstrated a willingness to take whatever steps are necessary. This is clear from the adoption of the legislation which will be enacted this week. The recitals to the legislation clearly demonstrate a recognition of the grave position the State faces in fiscal matters. The Government will take whatever action is necessary to stabilise our fiscal position. Deputy Bruton referred to the five year fiscal correction plan submitted to the commission. One would want to be a cross between a prophet, soothsayer and clairvoyant to predict what will occur after 2011. I have tended to place emphasis on the importance of a sustainable two-year plan, this year and next year, for correcting our public finances. That involves fundamental decisions for the budgetary balance. In the budget introduced last autumn substantial reductions were made on the non-pay side of day-to-day expenditure. Their impact will continue to be felt in 2009 and 2010. For example, the savings from the bitterly contested adjustments in education and social welfare will continue on an ongoing basis this year and next. I have made it clear at all stages since the budget that if further corrective action is necessary, it will be taken. The Government was naturally anxious to persuade the social partners of the need for a social solidarity pact to work together in these difficult times. The correction required on the day-to-day expenditure side was on the pay roll side. The Government formulated the proposal in the most acceptable way possible, a contribution to the very extensive cost of a pension provided gratuitously by the sovereign from taxpayers' funds. That was the option put before and discussed with the social partners and there has been far too much attention on the idea that this emerged in the middle of the night. The Government had signalled for some time that it was interested in this approach. When we could not get agreement from the social partners, we decided we had to make and implement decisions. That is what we have done. We will continue to do this to ensure the public finances are corrected. It requires that we ensure each Department maintains strict control of its own expenditure this year. If there is any departure from this — there are social pressures in the welfare and health areas, for example, an increased demand for medical cards due to growing unemployment — we must devise appropriate responses to ensure all Departments live within their budget.
We must decide, well in advance of 2010, how we will reform and rationalise our tax system and the overall tax burden must increase. How we distribute that and ensure those who can afford to pay most do so must be structured carefully and in a way that will not do real damage to the economy. We live in an economy in which there is significant unemployment. We have seen the nature and scale of its growth in recent weeks. Income tax presents the only option to secure an immediate increase. Were we to have recourse to this in a year when Ireland is predicted to have a figure of between -4% and -5% and in which joblessness is increasing it might have further serious implications for the position. It is worth recalling that the budget provided a substantial stimulus package this year because of the net amount of external borrowing involved. If there was one year in which a stimulus package could be justified it is this because of the major contraction envisaged in the economy. The contraction next year is not envisaged on such a large scale. That is why we should be careful about rushing into immediate responses. I understand, in the light of the intensive public debate, why there are those who will advocate further drastic measures but public servants face an average reduction of 7% by virtue of the pension levy, although that is in gross terms and the figure net of tax is somewhat less, and the idea of imposing additional income tax increases would further increase the stress on those in public service employment.
We must weigh up the budgetary position but it is important to examine day-to-day expenditure. The work of the expenditure control board is well under way. We made a start with the budget last year. We have made a further and decisive addition in respect of the pension contribution voted on in the Dáil last night. We must examine the work of the expenditure control board in all Departments, identifying where real economies, efficiencies and savings can be produced, building a solid foundation for a further reduction in day-to-day expenditure next year.
We have a substantial capital budget this year. There was a marginal adjustment in the recent package announced but given the fall in contract and tendering prices, this can be accommodated having regard to the scale of the projects involved. We have tried to re-focus the capital programme on labour intensive areas to ensure the maximum multiplier effect on the economy. Next year we must reduce our dependence on borrowing for capital projects and reassess our capital budget. All the elements of policy are directed to ensuring there will be a real decrease between 2009 and 2010 in our dependence on borrowing. That is the vital signal that Ireland must send. Four, five and six year plans are fine but nobody in the global economy knows what will happen in that time. People will respect Ireland if it puts its house in order now. That is what we are doing. I appreciate Opposition parties must make legitimate criticisms and hold us to account. That is their function. As far as the Government is concerned, we will continue to make whatever decisions are necessary to stabilise the public finances and restore competitiveness to the economy.