JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM debate

Exceptional Liquidity Assistance and IBRC Promissory Note: Discussion

Chairman

I welcome Professor Karl Whelan of University College Dublin, Professor Brian Lucey of Trinity College, and Dr. Stephen Kinsella of the University of Limerick. The format of the meeting will be that each of the witnesses will make their opening remarks and that will be followed by a question and answer session with the members.

I remind members, witnesses and people in the Visitors' Gallery that all mobile telephones must be switched off. Please switch them off now. If you forget to do so, they might ring at an inopportune time. There is television relay of these proceedings, which we welcome, and the mobile telephones interfere with the sound quality. Do not turn the telephones to silent or some type of vibration format, but switch them off entirely.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, you are protected by absolute privilege in respect of the evidence you are to give this committee. If you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise or make charges against any person(s) or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

Perhaps Professor Whelan will commence.

Professor Karl Whelan

I thank the committee for inviting me to the meeting today. I have circulated a briefing paper on the topic we are covering. There are many technical issues related to this topic and the paper covers many of them in detail. I will be happy to take questions on any of those issues later. In my opening remarks I will focus on the key policy issues, which are not as complicated. I will briefly describe the balance sheet of the organisation known as the Irish Bank Resolution Corporation, IBRC, what exceptional liquidity assistance, ELA, is and the role played by the European Central Bank, ECB, and I will discuss some ideas relating to restructuring of the promissory notes.

With regard to the IBRC, it is well known that the State has taken on huge debts that were previously the obligations of the privately owned financial institutions Anglo Irish Bank and Irish Nationwide Building Society, and it is well known that many of the debts were money owed to unsecured, unguaranteed bondholders. For this reason, much of the commentary still focuses on the idea that the burden of rescuing the IBRC institutions can be reduced by changing policies towards unguaranteed bondholders. However, it is worth stressing that the amount of unguaranteed, unsecured IBRC bondholders, at this point, is quite small at approximately €1 billion. That is small compared with the total debts of that organisation, which are still very significant. I estimate that the vast majority of the money owed by the IBRC, approximately €42 billion as of a few months ago, takes the form of so-called exceptional liquidity assistance loans that have been provided to it by the Central Bank of Ireland. This is a special form of assistance provided to banks that need liquidity support when they do not have the type of collateral that is used to secure a regular loan from regular euro system operations.

The IBRC will pay back its debts using two types of assets. The first is the loans that are still left on its books, the second is its promissory notes. Without the promissory notes the IBRC would have sufficient assets to pay off the remaining depositors, all of the remaining bondholders, all the money it has borrowed in its normal euro system borrowings and some of its ELA. Effectively, in that sense, one could say that the purpose of the promissory notes at this point is to pay off the ELA debts to the Central Bank of Ireland.

With regard to those debts, public coverage of this issue has been a little confused about two areas. The first is the role of the ECB. I have provided a full description in the briefing paper of the mechanics of what happens to the various balance sheets when ELA is issued and repaid. It is not the case, as has been reported in various media outlets, that the Central Bank of Ireland borrowed the ELA money from the ECB. Like all euro system monetary operations, ELA is money that was created at the relevant country's national central bank, in this case the Central Bank of Ireland.

The role played by the euro system and the European authorities relates to the fact that central bank lending to institutions that are insolvent violates the monetary financing element of the European treaty. Also, the ECB governing council can stop the ELA programme if two thirds of its members vote that it interferes with the ECB's objectives. In practice that means the ELA programme and all matters relating to the solvency of the IBRC have been under constant review by the governing council. Effectively, the payment structure for the promissory notes - we will have more to talk about in that regard over time - represents an implicit long-term timetable for the ELA. If the money is being put into the IBRC via the promissory notes in this fashion, that sets a schedule for how the ELA will be repaid. That is the role of the European authorities.

The second area of confusion relates to what happens when the ELA is repaid. As the ELA repayment goes from one publicly-owned body, the IBRC, to another public body, the Central Bank of Ireland, some people have concluded that these transactions are completely circular and there is basically no cost to the State. The truth is less attractive. When the IBRC repays its ELA debts, the money that was originally created to give the bank the ELA loans is destroyed and taken out of circulation. It is as if the money is being burned. There is no hidden benefit to the repayment of ELA. That means €3.1 billion per year, or 2% of GDP, is a full net cost to the State. There are no hidden benefits. This is a heavy financing burden on the State for the coming years, and any way we can restructure this to lighten the load on the State would be very beneficial.

Most of the public discussion of the cost of the promissory notes has ignored the question of the bank's ELA liabilities. To the extent that people have focused on restructuring the notes they have focused on the high average interest rate the notes carry. One regularly sees commentary pointing out that the total amount of payments on the notes will add up to €48 billion by 2031, which is €17 billion more than the original principal of €31 billion. In fact, reducing this interest rate will have very little impact on the long run cost to the State of the IBRC. Once the IBRC has repaid its ELA debts to the Central Bank of Ireland, it can be wound down and the notes can be cancelled at that point. The interest rate on the ELA is much lower than the interest rate the bank is getting on the promissory notes. Effectively, it is accumulating money inside it. I give an example in the paper.

I reckon that by approximately 2022, on the current schedule, the IBRC can be wound up. The total amount of payments that would have gone to it would never have been €48 billion but €37 billion. In fact, most of the difference between that €37 billion and the €31 billion that was originally borrowed from the Central Bank of Ireland would remain as profits inside the Central Bank which could go back to the Exchequer.

While over the long run there is very little benefit in reducing the interest rate, there is a shorter-term issue, which is that EUROSTAT will count the interest on the notes, starting in 2014, at a much higher rate than it has been counting it over the past couple of years. That €1.8 billion will be counted on our deficit. When I refer to the long run I mean that at some point in the future when the Irish Bank Resolution Corporation, IBRC, is wound up much of the interest that was supposed to be paid later will be cancelled. All of this comes out in the wash, so to speak, but that does not change the fact that in 2014 there will be a charge of €1.8 billion against the deficit as measured by EUROSTAT and focused on by the troika. This is something that should be reworked.

It is not 100% clear why the notes carry such a high interest rate, and we could talk about that in more detail, but effectively it means that when the notes were issued they were given an accounting treatment. That means they were what was called "mark to market" and treated like Irish Government bonds that were being sold on the open market. In fact, these bonds are not being held on the open market. They are not being held in what banks would call their trading book. Effectively, they are being held to maturity.

I do not see any problem with the technical solvency of the IBRC in terms of reworking the notes with a lower interest rate and valuing them at their face value. That can be dealt with but that does not reduce the longer term cost. The most effective way to restructure the notes is to simply defer the payments on the notes for a number of years. For instance, the payments could be delayed until some quantitative benchmark is reached such as when the level of GDP returns to its pre-crisis peak level. At a minimum the payments could be suspended until the point where the IBRC has already used the assets it has, namely, the loans and the income it is getting in, to pay off all of its debts, which would include some payment of ELA. Even if we put no more money in it over the next few years it can pay back some ELA.

It is likely that members of the European Central Bank governing council have already discussed this issue - it is considered on a regular basis - and it is likely that many of them object to a plan to delay promissory note payments. It is most likely that some of them see it as a bad precedent in that other countries will then want to use ELA for their banks and not pay it back or pay it back very slowly. They may also see a slow repayment of the ELA money that was created as a weakening of their commitment to low inflation.

The truth is that there is no slippery slope in regard to ELA. All ELA operations must be approved by the members of the European Central Bank governing council. It is up to them. They approved this programme because they wanted to see the senior bondholders and depositors in the IBRC institutions paid back. As far as they were concerned that was beneficial for European financial stability. Any future ELA decisions they make are up to them. The way this money is paid back does not lead to any sort of slippery slope or moral hazard problems.

Regarding money growth, the rate of money growth in the euro area is extremely low. There is no inflationary genie about to get out of the bottle. That should not be at the top of anybody's list of European policy concerns.

Any step that can be taken to hasten Ireland's departure from the EU-IMF programme are in the interests of the eurozone member states and the Irish people. A reduction in the funding burden associated with the promissory notes represents the most simple way to enable Ireland's debt burden to be lowered and a return to borrowing from sovereign bonds.

Some hope has been given that there may be some progress on this issue in terms of various comments from politicians. My suspicion is that any progress we will see will be incremental, and that this is likely to be a long-term campaign. It is very important for Irish politicians to understand the issues, know what we want and to make the case to European politicians and the European public at large.

Chairman

Does Professor Lucey wish to add any remarks at this stage?

Professor Brian Lucey

Yes. I thank the Chairman and the committee for the opportunity. As in Professor Whelan's case the members should have received a briefing note. I will amplify and extend on some issues that Professor Whelan has raised.

First, we should remember what ELA is. It is money. It is not a bond. It is the same as the fivers and the tenners in our pockets. It is real money that was created by the Central Bank of Ireland under a different arrangement and for different reasons to the normal creation of money but it is money nonetheless which is now circulating. The creation of fiat money is one of the functions of central banks, and it was created on foot of the approach used to recapitalise Anglo Irish Bank and Irish Nationwide Building Society but let us not be in any doubt that it was created. It is not a bond. It is not a sovereign bond, therefore, defaulting on it entirely, delaying payments, arranging different repayment schedules and doing whatever is deemed appropriate to deal with ELA and the promissory note - because the two of them go together - cannot be seen as defaulting on a sovereign bond. How do we know it is not a sovereign bond? If it was a sovereign bond the Central Bank of Ireland would not have to deal with it. It would have been used in the normal course of events and "repoed" at the appropriate hair cut through the ECB which, let us not forget, is holding large quantities of Greek bonds which by any measure are somewhat less valuable than Irish Government bonds, even at the height of our crisis. ELA is money. It is not a sovereign bond. It is a different beast. It is a sovereign obligation to some extent but it is not a sovereign bond. On that we must be clear from here on.

The second issue, and Dr. Kinsella will speak on this in more detail, concerns the real economic effects of the €3.1 billion the State will effectively destroy, in collaboration with the Central Bank. That is real money and as Dr. Whelan pointed out, the real interest rate question on ELA promissory notes is not so much what part 1 of the Government pays to part 2 of the Government or what one's left hand pocket pays to one's right hand pocket. It is the money we borrowed, and that carries a real interest rate. The ELA that was created was used in large part to pay off Anglo Irish Bank bond holders. A decision was made by the European centre that senior bond holders and depositors would be protected but we were not let our banks fail. We are all aware how we got here but the consequence of that in the Irish context was the requirement to borrow large sums of money and to use that as part of this entire nexus.

The question then is what can we do. We know what it is and how much it will cost us, and we are aware that this money is in the system. Effectively, we can do what we like with ELA as long as two thirds of the governing council of the ECB do not say we cannot do it. There is a series of double or possibly treble negatives involved. In other words, in principle a blocking minority could allow ELA to continue for an indefinite period under whatever conditions were deemed appropriate. One might say there is a weakness, therefore, in the strength the ECB, as a central bank, must have in terms of the way it deals with the control of the money supply but that is the current system.

I want to focus on the reason the ECB is being so strong on that. We are looking at approximately €40 billion and that €40 billion is about 0.4% or 0.5% of total euro area money defined as the aggregate M3. It is not a lot, therefore. If the ELA was to be allowed to sit indefinitely and not written down, and the money not destroyed, we would have a permanent increase in the European money supply of whatever amount was left outstanding.

Central banks should always be very vigilant about inflation. The ECB, for its mandate, is an inflation fighting bank and it is heavily influenced by the extremely anti-inflationary stance the Bundesbank took and still takes. That was an enormous boon to the Federal Republic of Germany and then to Germany, and arose out of the experience Germany had with hyper-inflation in the 1920s. There are good cultural reasons and very good economic reasons central banks do not want to have willy-nilly monetary creation. I note that within our lifetimes we have seen the break up of a currency zone, namely, the ruble zone. That was effectively due to the regional central banks. The ruble zone continued as a currency union for a number of years after the Soviet Union had disappeared, but eventually it broke up, due to unrestrained monetary creation and other things. The spectre exists of ELA driven monetisation of debt, where we could stuff promissory notes into banks which would take them to national central banks to buy back large quantities of government debt at low interest rates. The spectre exists and the ECB will properly not countenance that in the long run. That is why the ECB is so strong on it.

As Professor Whelan has said, we are currently very far from hyperinflation. As members know, when we get any number of economists greater than one in a room, they will not agree, so it will not surprise them that there is definite agreement as to what countenances hyperinflation. It is generally seen as about 50% per month. We are on 3% per annum, so we are an order of magnitude away from hyperinflation. In fact, I would say that the ECB is looking at the wrong decade. In its concerns about hyperinflation through monetary creation, it is focusing on the experience of Europe in the 1920s, when we have experience from the 1930s of what happens when central banks adopt too tight a monetary policy. We might want to reconsider that approach.

What can we do, therefore, with the ELA and the promissory notes? There are several options and I am sure we can think of more. We could extend the notes out. To make a meaningful impact on the budget deficit and on what the taxpayer is paying, we would have to extend this out for a very long time. If we extend it out for 100 or 150 years, we are still paying hundreds of millions of euro per annum, while looking for those savings on an ongoing basis. It is not clear to me that this would be looked on favourably. I suspect that the ECB already sees the repayment schedule as being long enough.

We could forget about it. We could wipe it off both sides of both balance sheets. Professor Whelan's note has explained why we need to be careful about imputing standard accounting techniques to central bank balance sheets. They are slightly different beasts and can do things that other normal corporations cannot do. However, in that case, we would still have a smaller but perhaps more focused and maybe even more sustainable IBRC. It would have some performing loans. It would be able to work those loans out and would be able to end up in a better situation. There might still be a writing off of central bank debts, or there might be a writing down of ELA, but that could be done.

We could excel at the national sport of can kicking, which is what Europe in general and Ireland in particular did between 2007 and 2009. We can kick that can down the road. We have had a number of holidays and breaks on the repayment of ELA. There is no reason that cannot be done. From one perspective there is a significant value in the option to wait a while and see what happens. If we are in a position to deal with this in five or ten years, then we can do that. If we are not, then we should revisit it.

My personal feeling is that we should seek to get rid of the promissory note and the ELA as much as possible, and force a clarity on what remains of IBRC. If it turns out that it cannot pay its way with the senior bondholders and the depositors paid off, then it should be treated as a normal business operation and wound down. The time for worrying about burning bondholders is gone. We may decry that, but it is a fact.

It is in the troika's best interest that if we are to be in its embrace, then we want to get out of it as quickly as possible. The best way of getting out of it, absent discovering a mine of unobtainium that we can then sell at vast amounts of money, is to work through the programme quickly. If that is the case, then it makes sense that we get rid of the albatross that is this repayment. At the moment, there is still concern that the Greek situation has spiralled out of control. It was in control last night, but now they are talking about deferring the second bailout, so the whole thing is a horrible warning. If the troika wants a good example in Ireland, rather than a horrible warning, it would make political sense for the Government and the Parliament to be able to take this as a win. It would also make economic sense. I also think it makes moral sense, having put a very significant burden on the shoulders of Irish taxpayers - perhaps justifiably, given our pretty poor record of regulatory implementation - that it is now time to turn the burden over to our European partners.

Chairman

Thank you Professor Lucey. I call on Dr. Kinsella to add some observations.

Dr. Stephen Kinsella

Thank you for the invitation to speak. Members will be happy to hear that I only have some brief comments to make. I would like to take committee members through the basic figures to underscore the importance of this, especially where these promissory note repayments are important. I only want to focus briefly on three areas so that we can get to questions. Members must understand the scale of these promissory payments. I would like to underscore the need to separate the discussion about bondholder repayments from promissory notes. Finally, I would like to talk about what success would look like for Ireland were these things to be deferred, deleted or however we reach a solution.

The most important thing to note, as Professor Whelan pointed out, is when these things will be paid off. It is not important to understand the interest costs from one part of the State to the other, but it is important to understand that these notes will be paid for with sovereign borrowing, at least into the medium term. The green line in the first chart of the presentation shows the repayment schedule, and the most important thing to look at is that green line. It represents €3.75 billion per year heading out of this State. I stress that it becomes sovereign debt in the purest sense of the term as we pay this off, because we can either pay for it with taxes, or we can pay for it with borrowed money. We have no taxation revenue with which to pay this, so it must be paid with borrowed money.

The second thing to which I will draw members' attention is the nature of debt sustainability. While it is disputed like all macroeconomic quantities, there is a magic macroeconomic number of 120% of debt to GDP. Some people say that we are in trouble once we pass 90% of debt to GDP, but many people are talking about 120% in terms of Greece and Italy and that if we go beyond this, we are in really deep trouble. As luck might have it, the projections of the NTMA by 2013 have us at 119%. This is the type of clarity I like from State organisations. It is great. I am merely stating the NTMA's forecast.

Deputy Kieran O’Donnell

But 119 and one equals 120.

Dr. Stephen Kinsella

The next thing on which I would like to focus is the scale of this. The second figure shows that the promissory notes represented 21% of our overall national debt in 2010. We had to book all of the debt in one year, but at the same time, we can all see just how monstrous this amount of debt is and why it is well worth everybody across the political spectrum being conversant with what they are and how they work. That is why Professor Whelan's note is so valuable in that respect.

It is important to understand why these things exist. They exist because two banks became insolvent and could not access their funds in the normal way. These are created, in a certain sense, to salve the banking debts of a particular type of lending and through a particularly irrational period in Irish banking history. They need to be understood in that context. However, we are going to pay these things off with our own borrowing. Figure 3 on the second page shows the difference between what we would have to borrow with the promissory notes - shown by the blue line - and without the promissory notes - shown by the green line. Deputy O'Donnell will notice that 15 minus three equals 12 - just to score the point.

Deputy Kieran O’Donnell

I am grateful.

Dr. Stephen Kinsella

We can see that by 2016 the amount of borrowing, on 2012 projections, is relatively minimal if we could remove this amount. This is really what is to play for. It is a return to debt sustainability, to a sustainable borrowing position, faster. This is vital. Any movement or deferral of the payments of these notes helps us recover quicker. That is the most important point I want to make today.

The second point I want to make is in regard to promissory notes and bondholders. Table 1 on page 2 is the table Professor Whelan has imputed from the estimated balance sheet of the IBRC. In the assets column are IBRC's promissory notes of €28.1 billion. In the liabilities column is the ELA to the Central Bank of €42.2 billion. It is clearly the case, if we subtract one from the other, or just cancel them out, that IBRC can still pay its way and pay its bondholders. In this case, the promissory note debate and the bondholder debate are quite separate and should be understood as being so.

The next point I want to make is about burden sharing and the ECB. Much of the debate in the ECB is now largely around how one allows burden sharing in the most credible way possible. We must be conscious that there is not a correlation of one between the ECB's statements and its actions. For example, on 6 May 2010 the ECB thumped the boards and said it was not intervening in any markets. Then, on 10 May, it was in the markets buying Greek bonds. It is the case that it will say one thing and perhaps do something else slightly later. We should not interpret its statements of intent as being synonymous with how it will act in the future. This is vital.

It may be the case that some day in the near future a Minister or Minister of State will roll off one of the aeroplanes from Brussels and say, "Success. We have made it. Happy days. Everyone to the pub", because the interest rate has been renegotiated or the promissory note and the ELA repayment has been moved into the EFSF. I would argue that this does not constitute success and this is not what success looks like because, effectively, this turns it instantly into sovereign debt of a very particular type. The nature of the repayment schedule is vital. The interest payment on such a manoeuvre would have to be understood exactly.

It is important to understand we have a relative freedom of repayment. While it does not feel like it, we own these notes on one side of the balance sheet and the other. There is freedom to move - in concert with our European partners, of course.

Chairman

Thank you. The three speakers made a pretty unanswerable case that addressing this issue of the promissory notes is probably the difference between our being in a position to progress out of the post-crisis situation we are in and not being able to do so. They have put it as high as that. I thank the speakers for the clarity of the presentations, both on paper and by way of their remarks here.

Before I call Deputy McGrath, I wish to clarify a number of points. I am close to clarity on them but need just a little more assistance, as might others. Professor Lucey is careful to always say it is money which is involved here, not something notional, and has to be dealt with in that way. Given that, what will be the interest payments? The speakers characterised them in terms of their quality. Are they the same? For example, to put it at its bluntest, when we get to the point where the principal is burned - we use the terms "we will burn it", "we will write it off" and make it not be there any more - are we saying the same in regard to the interest payments? The modelling done by the witnesses brought the figure up to €37 billion from €31 billion but they all made the point that the interest is almost not that important. I am not sure what they mean by that. Is this money or is it for some reason less crucial?

Second, on a related point which shows why I need further clarification, if we were to achieve the option of extending the period, which is one of the options canvassed, would that necessarily come at a higher cost? Generally, if we make the term longer, it will cost us more. That would be the general, everyday notion of extending out the period of a loan. If that option were taken at today's prices, as matters stand, is it likely to cost us more? Similarly, if we were to achieve the option of deferring the payments for a number of years, does it follow we are also talking about deferring interest payments for a similar period? Professor Whelan's suggestion was that, at a certain point, say, three to five years down the road when things are easier for us in overall macro terms, we could then pick up the payments.

I do not ask the following question to underestimate the value of doing this, but the speakers have made the point and it is a huge, multi-billion euro sum of money. Given the legacy debt issue from the banking collapse, and given there have been all of the debates in regard to the bondholders being burned or not and all of the various exposures the State has arising from the guarantee, is this the high water mark of what we can do? In other words, if this were addressed, is it the best we are going to be able to achieve in the sense that we know most of the bondholders, not having been burned, cannot be burned now? We think of the debt arising from the banking crisis as being somewhere between €60 billion and €70 billion, with different figures often being canvassed. This is €31 billion. Is there anything else we could look at, although I accept that if we manage to achieve this, we will have achieved a huge amount? For the information of the public, is that it?

Professor Karl Whelan

I will talk about the interest rates and the two tables describing the interest rate schedules. We will leave the other questions until last although, while it is in my mind, I will point to some other things that could be done. One is that some version of the European Financial Stability Fund could, for example, be willing to purchase the State's shares in Allied Irish Banks and Bank of Ireland, given very large amounts of money went into recapitalising those banks. The banks have been declared to be solvent by the various stress tests that have been undertaken and approved of by the troika but it is an extremely difficult market in which to get a return on those assets, so that is one source where a lot of money has gone. I do not believe there is room left, if we want the Irish banking system to operate efficiently, to go back now and start to talk about burning bondholders in AIB or Bank of Ireland. Short of an official restructuring of sovereign debt - one can debate why one may or may not want to do that - the best opportunity is to turn the State's investments in the banking system into cash that can be used to reduce debt.

In regard to the interest rates, the promissory note interest rate effectively works the same way as the interest payments work if one has a fixed rate mortgage. The bank does a calculation and comes up with a particular sum that will be paid every year. It then calculates an interest rate and specifies that some of the payment will go towards paying off the interest and some will involve paying down the principal. Table 6 shows how the accounting treatment works for the promissory notes. Some years we will be paying down more in terms of the capital rather than the interest. That is how the interest works.

However, the €3.1 billion we are handing over every year is going to pay the Irish Bank Resolution Corporation. The latter has a debt, namely, the exceptional liquidity assistance debt, on which the interest rate is lower. The Central Bank does not publish that rate but it appears to be approximately 2.5%, which is much lower than the 8% that will be applied from 2014 on. The IBRC is engaged in the same servicing of its debts, with some payments serving only the interest and the remainder paying down the principal. The IBRC will be paying down the principal on its ELA debt faster than the Government pays down the principal on its debt to the IBRC.

I have gone through this and calculated what will happen. I have not assumed that the ELA interest rate will stay at 2.5%. Being linked to the European Central Bank rate, it will probably go up. Allowing for some increase in this regard, I have calculated that by 2022 the IBRC will be out of business, having paid off its debts to the Central Bank. The next table, showing the regular promissory note schedule that was released by the Department of Finance, indicates that at this point, there will still be €7.6 billion outstanding on the promissory notes. What happens then is that the chairman of Anglo Irish Bank will tell the Minister for Finance that it does not need the €7.6 billion. The State could go to EUROSTAT and explain that this amount should be subtracted from our debt. That is what I mean when I say that when a large amount of interest gets charged against the deficit in 2014 and in the long run ends up cancelling out, we are essentially salting money away inside the IBRC that will eventually end up back with us. That is not what we want. We do not want €1.8 billion of spending cuts and tax increases in 2014 in order to put money aside so that in better times this can be reversed.

That is the best way I can explain the interest. The other way of looking at this is that ultimately the ELA money is low interest rate money. The combined State sector is paying an interest rate of 1% on ELA in that the Central Bank pays an interest rate of 1% on its various liabilities, whether they are reserve liabilities or - I almost hate to use this term but it will come up at some point - the dreaded intra-eurosystem liabilities. We can discuss that later if members wish. Either way, the Central Bank pays 1% on its liabilities. If we decide to pay off those liabilities by providing the IBRC with a bond with a much higher interest rate, all of the margin will ultimately end up staying inside the State.

We do not need to have all of this profit accumulating at either the IBRC or the Central Bank. Even if nothing happens in terms of restructuring the notes and if we keep making payments every year, I suggest that, at a minimum, the notes be swapped for a new set of notes with a lower coupon rate, just enough so that the Central Bank can pay off the IBRC. That would avoid the scenario I have outlined.

Professor Brian Lucey

We have, in effect, a sum of money which we can pay off faster or slower, pay off more or less, interest rate versus actual capital outstanding, depending on two issues, namely, how quickly we are paying it off and the interest rate we are charged. If we want to keep the same nominal sum of money - we have the promissory notes with that fixed amount - then we can pay it off over a longer period or a shorter period. In either case, however, we will have to vary the interest rate chargeable if we have a faster or slower schedule. The interest rate is therefore an entirely moveable feast and does not have to be fixed in stone. We assume it is not given in the form of instruction. Rather, it seems to be chosen by reference to what the Government would have had to pay on a loan - assuming it could get a loan - of some €30 billion back in December 2010. We can vary that entirely among ourselves, left pocket and right pocket, depending on how quick or slow the chosen repayment schedule is and whether or not the sum of money must be repaid in nominal terms or in nominal terms plus an interest rate plus a time penalty.

There was a question as to whether this is the high watermark or the low tide of the Irish banking crisis. There are several things we could do with the other money that we borrowed to re-finance the banks. I mentioned in my commentary that one might be of the view that Ireland Inc should pay something for the poor regulatory environment that was allowed to grow up and which resulted in the gargantuan, world-class banking fiasco we have seen. However, it is self-evidently the case that in taking the types of actions we did in 2008 we at the very least put a brake on the contagion, as it is technically described in the literature. Other European banks were under scrutiny for fear that they were as bad as the Irish banks, and there was the possibility that bonds would be sold off and deposits withdrawn. All of this was happening even to the strongest banks. There is no doubt that had we allowed a disorderly collapse of Anglo Irish Bank in 2008, that process would have accelerated.

The alternative to a disorderly collapse of Anglo Irish Bank is not necessarily the guaranteeing of everything that ever moved in the bank. An orderly collapse could have been considered, but for some reason it did not happen. There are other actions we could take. We could pick a quantum of money, say, €15 billion, which we designate as Europe's problem. That could be dealt with, as I have outlined in my note, through monetisation or some other form of ELA. We could decide, under the European Financial Stability Mechanism or by some other means, to punt this out by creating a very long-dated bond with a very low interest rate and pushing it away.

Deputy Michael McGrath

I thank the delegates for their contributions and for the work they put into them. They are motivated by the national interest and are seeking to contribute in a positive way to the debate on the promissory notes and how the burden on the State can be relieved. The delegates have clarified several key points which have been misrepresented in the media in recent months, perhaps through a misunderstanding in some respects of the structure and impact of the notes. They have clarified the irrelevance over the long term of the coupon rate attached to the notes, although, as Professor Whelan pointed out, the impact on the deficit from 2014 onwards, when the interest kicks in, will be significant. They clearly established the relationship between the promissory notes and the exceptional liquidity assistance in the repayment of those notes.

Two weeks ago during parliamentary questions in the Dáil, I sought clarification from the Minister for Finance on exactly what the Government's objective is in seeking to relieve the burden on the State. The reply I received was that the core objective is to replace the promissory notes by an "alternative financial instrument of lower coupon and longer duration". I suspect this would not satisfy Dr. Kinsella's requirements, but it appears to be the official Government line. Are any of the delegates advocating that the Government should take any action in regard to the promissory notes, whether tearing them up or unilaterally changing their terms, without the support of the European Central Bank? Are they at one in their view that any changes can only be made with the agreement of the bank? That is the key question, the answer to which would be helpful. Professor Lucey, in setting out the options, referred to writing off the debt and effectively ignoring the promissory note. What impact would this have on, say, Anglo Irish Bank, which we all know is a dead bank? Reference was made to doing that, which would make the bank technically insolvent unless a corresponding amount of the ELA which is owing to the Irish Central Bank was written off. What would be the impact of our reneging on the promissory note but not writing off a corresponding amount of ELA? Also, what would be the impact of this on the Irish Central Bank, which I know has open to it tools which no other entity has, in terms of the conventional solvency test for a central bank?

On the issue of restructuring the note or re-financing the burden, if we accept it has to be paid, what potential exists in terms of the EFSF mandate, which will be inherited by the ESM, to provide funds for recapitalisation of financial institutions across Europe? The EFSF fund was not in place when the promissory note structure was put in place. What potential exists for having the promissory note re-financed through that mechanism or, alternatively, issuance by the fund of an Irish Government bond to cover the liability? Who are our key allies in trying to get these changes made? What is the role of Professor Honohan as Governor of the Irish Central Bank and as a constituent member of the governing council in promoting the Irish Government's objective to relieve this burden? Also, from who else do we need to get support to try to get some amelioration?

Dr. Stephen Kinsella

We have a strong ally in the Governor, Professor Honohan. He has the requisite gravitas and technical capacity to impress upon his colleagues that Ireland needs to be seen to be working. It is important that people understand that Ireland is seen as the poster child for austerity. There are arguments as to whether or not that is a good label. If this is to work, and a key element of our sustainability is a break of some type on the repayments on the promissory notes, then Professor Honohan is important in terms of impressing upon people just how important that is.

On the EFSF, much depends on how one characterises it. It appears to be seen as a wondrous pot of cash which everyone can access. It is not. I would argue that we have a certain degree of freedom - Professor Whelan spoke about this - in terms of a minority vote of the ECB governing council allowing us to reschedule. Once the promissory note is exchanged for an alternative instrument within the EFSF or other mechanism, we lose that degree of freedom. It is important to note that that carries a price, and loss of it carries a particular cost.

I will leave the question on the technical solvency aspect to Professor Whelan.

Professor Karl Whelan

My paper addresses the concept of solvency or lack thereof in the context of central banks. When this issue comes up in discussion, there is usually an analogy with private sector banks that is not really appropriate. Private sector banks have liabilities, which is money they owe people. A bank cannot simply call up the bank in Sandyford to have money printed when a person goes into it asking to withdraw deposits or for payment on a bond purchased from the bank. That money needs to be sourced elsewhere. Central banks, however, can do that. The central banks have what are known as a balance sheet, on the assets side of which is a bunch of assets. As regards where they get those assets from, they make the money up out of nowhere. That is what central banks can do. On the other side of the balance sheet are so-called liabilities. Central banks cannot go bankrupt. There is an entry on central banks' balance sheets that indicates a gap between the value of their assets and what is termed liabilities, namely, all the money they have created. That could go negative. For example, the Governor of the Central Bank, Professor Honohan, could wake up in the morning and decide he is going to print off a load of money and buy gold with it. However, the value of gold could collapse, which means the value of the Central Bank assets would be lower than that of its liabilities and no one would notice. This would not mean that if a person turned up at the bank looking for money, the bank would not be able to pay him or her.

Why would anyone not want Central Bank insolvency? The latter type of irrational investment is an example because there is an opportunity cost involved. The printing of money can cause inflation. The rules of the euro system call for money issuance to be done in a responsible manner. The standard interpretation of the European treaty is that the Central Bank should have its books assessed and be solvent and so on. To be honest, that is not the first legal problem that one meets in terms of cancelling the ELA. It is third or fourth down the line. The first legal problem one meets if one proposes not to pay back the ELA is a vote by the governing council, the result of which will be that one cannot do that. That is provided for in Article 14.4 of the statute governing the eurosystem. One might ask what can it do? It could stop lending to Allied Irish Banks and Bank of Ireland tomorrow. It could certainly do that. There is no room for unilateral action.

The question was asked, who are our allies, which is a good question. It is definitely a question worth discussing at a forum like this. The ECB governing council is a frustrating organisation. Unlike the Federal Reserve Board, Federal Open Market Committee, FOMC, or the Bank of England, it releases no minutes and is extraordinarily secretive. The only form of public communication in relation to its meetings is a press conference once a month at which the ECB President takes questions, 50% of which he does not answer. For instance, during last week's press conference Laura Noonan of the Irish Independent asked President Mario Draghi about the promissory notes, but he did not answer her.

We do not know what debate is going on inside the European governing council. I suspect, in terms of potential allies, there would be quite a number of peripheral countries that would be willing to support us and be part of a deal on this. The problem is that the one third blocking minority view, although technically correct, probably does not get one anywhere for a couple of reasons, including that it is not the institutional culture of the ECB and eurosystem, which generally likes to do everything unanimously, if possible. A new and recent tradition is to have most things done almost unanimously with, perhaps, a couple of objections from Germany, which is simply considered unfortunate. Some things are being done in that way. There is no tradition of bringing in a new plan which, although it will be blocked by slightly less than two thirds or the majority of the council, we will get away with. A plan would be blocked partially because people may believe that, say, a long-term extension of repaying the ELA, would constitute monetary financing. As such, the people who object to it could decide to take a court case against Ireland through the European Court of Justice and so on. What is needed, at a minimum, is convincing ECB President Draghi that this should be done. I suspect that may be enough to get a near unanimous vote.

Deputy Michael McGrath

Are all of the delegates at one in advocating that Ireland not act against the wishes of the ECB on the promissory notes?

Chairman

I ask the delegates to respond briefly.

Professor Brian Lucey

We are at one that it is probably not going to happen. I am not sure we are at one that it is necessarily that which should happen.

Deputy Michael McGrath

What is Professor Lucey's view?

Professor Brian Lucey

I will be as succinct as I can. Why would we not want to do that? The threat always put forward is that they will turn off the taps. I am not sure that the European Central Bank is a monetary suicide cult and were that to happen, the Governor, Professor Honohan then would have no choice other than to simply start printing money in vast quantities to keep open the banks. This would be the equivalent therefore, of the ECB stating that to save the euro, it had to destroy it because this effectively would force Ireland out of the euro. Thereafter, markets would look at a position whereby Greece was still in the euro while Ireland was not. That is a political choice in the absolute sense of the word and is not something I will advocate. I merely state there are many games in this regard and I do not necessarily believe Ireland has played its strongest cards at the right time over the past three years.

Deputy Liam Twomey

This debate is getting interesting. This adds a little more clarity to what members of this committee seek. It is interesting that the witnesses are focusing to a great extent on the issue of burden-sharing and on concerns from a European level, as well as concerns about quantitative easing, inflation, contagion and what is happening in Greece. While there is a sense that perhaps the Government cannot act unilaterally, Professor Lucey obviously thinks differently. He is a little more hawkish on what we should do with regard to this issue. Perhaps he will discuss this a little further because while members have discussed the scope of the problem and have discussed interest rates and debt, sovereign and otherwise, from the perspective the public who might be interested in the focus of this debate, that is akin to shifting the deck chairs on the Titanic. They do not really want all the technical buff but wish to ascertain what these guys would do, were they in charge, and the correct way out of this. While discussing the promissory notes, Dr. Kinsella stated that debt sustainability is possible on getting rid of the promissory notes. Were he to happen to share the company of my colleague, Deputy Mathews, in recent weeks-----

Apologies to Deputy Mathews. Anyway, not much attention was paid to it, by and large. It will be different this year when the March 31 payment is paid, if it is paid. As for whether the Minister, Deputy Noonan, is doing a good or bad job, we do not really know as we do not really know what the discussions involve. However, this discussion may have shed some light on the reality of the notes and what they are there to do. I have not heard the Minister or many Government politicians mention emergency liquidity assistance, ELA. One is told regularly that technical people are having technical discussions about technical stuff with technocrats and it almost is designed to bore people and make them go to sleep. The reality is we could restructure this thing in the morning, were the ECB governing council to agree. I have not heard any blunt language or language intended to explain to the public what exactly this is.

There are different attitudes to how one gets things done with an organisation like the ECB. I suspect that the Minister and the Governor of the Central Bank believe that smoke-filled rooms and technical discussions behind the scenes are the way to influence an organisation like the European Central Bank. Perhaps they are right and we will see. However, I do not know and I suspect we may make much less progress on this front and that there are greater European Central Bank vested interests against a deal on this issue than perhaps we realise. At that point, it might be time to wake up and smell the coffee and do whatever can be done to influence the various members of the ECB's governing council. If that means sending Deputy Mathews to the Bundestag every week, then so be it.

Deputy Pearse Doherty

I welcome the witnesses to this meeting and agree with the previous speaker that there is considerably more focus on the promissory note and what will transpire on 31 March. Much of this is due to the explanations the witnesses have been providing in the public domain and the written presentations given to the joint committee have been invaluable. I hope the committee will be uploading those presentations to its website and making them as freely available as possible.

At meetings of this committee on 1 and 2 September last, I raised with the chairperson of the former Anglo Irish Bank, the Governor of the Central Bank and the Minister for Finance the issue of restructuring the promissory note. At the time I was informed that such a restructuring could cost the State more money. That was the knee-jerk reaction to my question. I pressed the issue further after those meetings, and at the beginning of October the Minister confirmed that he had spoken to the former President of the European Central Bank, Mr. Jean-Claude Trichet, and the European Commissioner for Economic and Monetary Affairs, Mr. Olli Rehn, and indicated that they had agreed on 17 September to technical discussions taking place but on the condition that they would not assent to anything at those discussions. The discussions to which I refer have received a great deal of media attention in recent weeks but agreement to hold them was actually reached on 17 September last. Do our guests believe that these discussions are making progress, particularly as the premise relating them revolves around an extension of the timeframe and a reduction in the interest rate? Is there a need for the Minister to play hardball and up the ante as the second payment date approaches? I accept that, as Professor Lucey observed, we are locked into the schedule. However, as our debt sustainability improves in years to come, it will be more difficult to argue for a restructuring of the note. Have we reached the point where we should argue for a renegotiation?

Professor Whelan indicated that the amount involved would be paid off by 2022. Could there be potential for the losses at the former Anglo Irish Bank to be even greater than what has been suggested? It is indicated that the loan value is approximately €27 billion and the mid-term report showed that the impairment rose from 48% to 52%. Does this indicate that the losses could be greater than has been reported to date and that the promissory was concocted with a high interest rate attached to cover some of those losses? I am not sure whether this is the case but perhaps Professor Whelan could offer us his view on the matter.

Dr. Kinsella referred to the actual cost involved. This is a matter I have been trying to pursue. I have tended to focus on the interest rate relating to borrowing this money. Professor Whelan indicated that by 2022 the cost to the State will be €37 billion and that this figure would be made up of the capital repayments plus the interest paid to the former Anglo Irish Bank at a rate of 2.5%, increasing to 4.5%. However, the cost of borrowing will also have to be taken into account. Even at a low cost of borrowing of approximately 4.7%, we would be obliged to pay an additional €10 billion in interest. This would mean that the actual cost to the State would be €47 billion. The Minister, Deputy Noonan, has continually refuted the argument that there is no other cost to the State. I asked him what would be the saving to the State by 2031 - when the final payment is due to be made - if the promissory note were written off now. He argues that it will only be €47 billion but I am convinced that a further €17 billion will have to be paid. The latter is money we will be obliged to borrow from whomever will be prepared to led money to us at that time in order that we might put the €47 billion into the former Anglo Irish Bank.

I wish to ask a technical question in respect of how our debt is recorded. When the troika issues its reports, once-off payments to banks are not included in terms our deficit. This includes the promissory note. Given that this note is to be repaid over a further 19 years, are our guests of the view that there is an element of cooking the books here? What is involved with regard to the promissory note is not the same as engaging in a once-off recapitalisation of AIB or Bank of Ireland. After all, a set schedule of repayments to be made over a period of 20 years has been laid down.

My final point relates to the fact that repaying the promissory note will cost, at best, €37 billion plus a further €10 billion in interest. A total of €47 billion is, therefore, going to have to be paid during the next ten years in respect of the former Anglo Irish Bank, a financial institution which will have no deposits and which has no purpose. What will we do if the current President of the ECB, Mr. Mario Draghi, says that we will have to suck it up in respect of this bank and that, because the previous Government gave a commitment, we will be obliged to continue to pay the money that is owed on the basis of the schedule that has been set down?

Dr. Stephen Kinsella

On the Deputy's technical question regarding the accounting treatment, we booked the entire €31 billion in 2010. Figure 2 in my presentation lists a figure of 21%. This is because the almost the entire €31 billion was actually recorded in one year. It is the case that we have recorded it but that was all done in one year. The interest payments have obviously not been recorded. These show up on figure 3, under State borrowing, where €3.085 billion has been added. The key aspect on which to focus in the context of interest costs is that which relates to the two interest rates which apply. The first of these is the external rate which we must pay in order to bring the money into these banks and then there is the internal rate where the bank is basically moving funds around within the State. Professor Whelan's chart shows that really well so I will defer to him in the context of the explanation he has provided.

If the ECB informs us that we should suck it up in respect of the promissory note, we should begin to use terms such as "odious debt" and start jumping up and down. There is a very strong case that this is such debt.

Chairman

What was the term Dr. Kinsella used?

Dr. Stephen Kinsella

Odious debt. One does not get to discuss debt until they say "No".

Professor Brian Lucey

They may have said "No", "Yes" or "Maybe", we simply do not know. As Professor Whelan indicated, we have technical discussions with technical people in respect of technicalities. Such discussions are reminiscent of those relating to where the teapot should be placed on the table in Panmunjom in the demilitarised zone between North Korea and South Korea.

Deputy Peter Mathews

Voodoo in Haiti.

Professor Brian Lucey

Perhaps, but we will discuss zombie banks later. The issue that arises for me is that I have a curiously old-fashioned feeling that when it is discussing State money, the Government should do so in public to the greatest possible degree. Obviously, commercial sensitivities apply but the former Anglo Irish Bank is a Haitian construction at this stage. I see no reason, therefore, why it should not be discussed openly, publicly and without fear or favour. Saying that we should not even mention terms such as "odious debt", "default" or "restructuring" because they will somehow scare the markets is not acceptable when one is dealing with figures such as €47 billion and €27 billion. The figures involved are the equivalent of international telephone numbers. If the ECB says "No", then we should be informed of that fact. As parliamentarians, elected representatives and messengers for the people, Members of the Dáil and of the Upper House should be kept informed because it is their job to communicate with the Government on behalf of the people and vice versa. We are all out of that loop at present.

I am interested in discovering whether these technical discussions are actually happening. Do we know that they are taking place? We only have the word of the Minister in respect of this matter. I am sure the technical discussions are taking place but they could, in fact, be null and void. It may be the case that our representatives requested a restructuring, were told "No" and then said: "Grand, we'll see you next week." Is that the extent of these discussions? As Deputy Doherty stated, we are moving towards a situation where, potentially, things are beginning to get better. We have, potentially, reached the trough of this recession and, one hopes, will emerge from it again at some stage. Having played the game, it will become more difficult as time goes on to state that we wish to change the rules. That goes for this as much as anything else. We have a small window of approximately six weeks before the pot goes off the boil and the issue is lost.

Professor Karl Whelan

There is only one technical issue up for discussion. It is a good question because it goes back to the September committee meeting with the Minister. The purely technical issue is if we replace the promissory notes with something new, will the appropriate accountant on whom the European legal people rely for judgment declare the IBRC to be insolvent? In other words, the only issue is whether it is literally not able to pay back its debts. If this is the case, the entire ELA programme would violate the monetary financing element of the treaty. I do not propose we leave the IBRC insolvent in the sense that it will not be able to pay back its ELA assets. I have stated it can pay back everything apart from the ELA and we can work out a schedule of putting money into it whereby it pays back the ELA. I do not think the technical question is that complicated. I think we can make a plan to pay it back.

In addition to this, the Governor of the Central Bank has a letter of comfort with regard to Anglo Irish Bank and Irish Nationwide Building Society loans which makes this quite different from a sovereign bond. An Irish sovereign bond is completely unsecured; it is entirely based on word. This is a step further as a letter was written. There is also a facility deed which is a further Government guarantee that the Central Bank will be paid back. The idea that these notes must carry a 7% or 8% interest rate because at some point in time that is what Irish Government bonds yielded in the market does not seem to be correct to guarantee the technical solvency of the institution nor does it follow the accounting treatment that most of the banks use in their treatment of their own sovereign bond holdings.

In the EBA stress tests last summer the actual losses in terms of sovereign bonds that were considered were very small because most bonds are held to maturity in the banking book. The bond is worth what it says on the tin. This is how most banks are treating this. The reason we have solvency laws for banks is to ensure the people to whom they owe money such as depositors are comfortable. The IBRC has hardly any depositors.

This is the only technicality and I would be absolutely stunned if the Department of Finance does not have a fully worked out proposal for replacing the note with something else that keeps Anglo Irish Bank solvent.

Chairman

Is there any significance to the fact we are told the troika is involved in preparing a paper or in some way party to it?

Professor Karl Whelan

I am disheartened that we even bother bringing the European Commission and the IMF into this and that we are making it seem more complex than it is. Ultimately the ECB governing council can stop restructuring of the ELA and can object to a problem with the promissory notes. I doubt the IMF or the European Commission will object to such a plan. This is the only technical issue. The phrase "technical discussions" has been used for a long time. If we pay €3.1 billion on 31 March, technical discussions will not go down well with people.

Chairman

Hold that thought because we will come back to Professor Whelan.

Deputy Pearse Doherty

I asked a question about other potential losses from the loan book of Anglo Irish Bank.

Professor Karl Whelan

To the extent there are larger losses in Anglo Irish Bank, they do not change its liabilities or the ELA money it owes. With regard to my scenario in which we can stop making payments in 2022, if the other loans on the balance sheet do not come through the way they are supposed to, we will be paying this for longer. This has always been true. We are on the hook for whatever loans are there.

As far as I can see, the stress tests done last year were carried out in a very professional manner involving BlackRock Solutions and very detailed analysis of loan books, and when the Anglo Irish Bank loan book was examined, it did not look any worse. In a way, the original losses booked in 2010 were very large discounts on Anglo Irish Bank's loan book and the worst of it was transferred to NAMA. I have no reason to think there are necessarily larger losses. It could be possible if the economy picks up that the losses could turn out to be less.

Deputy Arthur Spring

I thank the witnesses for attending and giving this issue the notoriety it has achieved recently. Most of us who studied economics will find this quite complex and those who have not will find it exceptionally complex. I can see the smile on the witnesses' faces.

This has been brought to the public domain, but at what stage did the witnesses seek to meet the Department of Finance? What level of accessibility have they had? It is imperative that technical experts come to us with a prescription for what the next steps should be for the Government. As we are talking in medical analogies, from my research I can say the Department of Finance and the NTMA have isolated this and are examining it as something that can be treated in isolation and perhaps there can be a win and they will seek a win. Professor Whelan speaks about smoke-filled rooms and technical discussions and wonders whether they are happening. I wish to associate myself with the belief that the Government will try to do everything it possibly can to achieve some level of debt write-down for the country in order that it becomes sustainable for us in the long term.

Can Professor Whelan name the figure for the cost of NAMA and the recapitalisation of the banks?

Professor Karl Whelan

I think NAMA is fine. The ESRI has gone through and done calculations of the total cost and it is more like €70 billion ex the NAMA debt. The reason people do not count that debt when thinking about the net cost is that NAMA purchased a load of assets that may or may not end up paying off the bonds that NAMA issued but the net figure will not be known for many years. At the moment, it looks like the agency is sitting on losses and they could be large losses but things could turn around. In the other figures, there are some offsetting assets. The State shares in AIB and Bank of Ireland are not worth a whole lot but they are worth something whereas nothing will come ever come back from IRBC. It is purely negative.

The way to look at this, though, is to say that if we had not bailed out the banking sector, AIB included, we could have used the NPRF to finance deficits instead of borrowing. Ultimately, money is fungible. We would not have had to borrow some of the regular government bonds if we had the NPRF and other ways and had not to put that money into AIB and so on. At this point, how does one identify the specific set of holders of Irish sovereign debt? Nobody got the bond earmarked as the money that otherwise went to AIB. It is just Irish sovereign debt and it has the same terms as all Irish sovereign debt. One could try to approach the financial market participants and say between €30 billion and €40 billion of this is bad stuff and odious, the total debt is X and we will chop that amount off X evenly spread across them but if one wanted to adopt such an approach, one could get rid of all our debt in the morning if one wanted to have a total default. The question comes as to the trade off between trying to avoid a sovereign default and managing to keep all the sovereign bonds paid.

This is where the lack of movement on the promissory notes issue that we have had so far is depressing because we had the question before of what happens if even paying off the notes is not enough. Ultimately, Ireland will end up having a sovereign default. The markets today are looking pretty good at Ireland. They are quite happy but that is not because they think that the European leaders have ruled out private sector involvement or ruled out structuring debt beyond Greece. It is clear from looking at Portuguese bond yields that financial market participants think that Portuguese debt will be restructured. If things do not go well in the next couples of years, then the people who will lose their money will be the private bondholders and, ultimately, they are the people who the State will have to go back to the well on year after year. It is fine for the European authorities to say, "You should pay back all your debts" but, unfortunately, the Greek example shows that when push comes to shove, they would prefer to see the IMF, the ECB and other officials organisations paid back and people who lent to the state lose out.

It is against that background that we will be looking to turn up in sovereign bond markets next year, the year after and the year after that looking for them to lend money to us. It would be great if we could find some amount of money and call that the odious debt, repudiate it, and believe there would be no consequences. It is not that easy to do but it is clear that the ELA corresponds directly with such a phenomenon.

Deputy Richard Boyd Barrett

I take that point but I do not quite agree with Professor Whelan in the sense that if we should play tough on the whole debt, what has happened in Greece shows that they will be forced to write down substantial amounts of debt. They now want to do it on their terms and with conditions. Nonetheless, is it not fair to say there is a game of chicken going on in that we do not know what the reaction would be if we played tough?

That brings me to my second question on which I would like clarification. If I understand Professor Whelan correctly he is saying we can make a technical argument on this to the Central Bank of Ireland but does it have the capacity, in terms of deferring, suspending or extending the debt, to do that without getting agreement from the European Central Bank? I think Professor Whelan is saying there must be an agreed negotiation with the European Central Bank.

Professor Brian Lucey

In effect, yes. The practical reality of central banking and the politics of a 17 member organisation is that they will seek agreement and consensus, and that is appropriate from the perspective of the European Central Bank. Its role is to examine the European system as a whole. I may think it is being too precious about monetary creation but I am not on the ECB governing council. In the same way as the Federal Reserve board does not consider, other than as part of the big picture, the effect of an interest rate cut or rise on West Virginia or northern Alabama, so, too, the Irish situation is one small part of a much larger mosaic. That is where we come to the argument of the smoke-filled rooms, and that we are better off to negotiate.

I would say by all means do that but we also need to have clear public pressure across a wide variety of perspectives and media, all peaceful, that show that this is something that is, as Professor Whelan said, a clear, winnable situation. There is no doubt in my mind that when we have an economic policy, whether it emanates from left, right or centre, that requires tear gas and baton charges to implement, it might be a failed policy. We are not in that situation, and we will not get there, but we are in a situation where we can present a clear win to all sides. That clear win is by extending, writing down, delaying or in some way reducing the impact of the ELA-promissory note nexus on the Irish taxpayer. We can get ourselves back to health. We can agree or disagree about the particular economic and political weight we might put on tax versus expenditure cuts but it is important to note that even under the Government's own plans we are not looking at getting into a balance by 2015 or 2016. We will still be borrowing €3 billion to €4 billion per annum.

If we truly want to get out from under the burdens of being, as Morgan Kelly put it so well, at the kindness of strangers we will have to run a budget surplus for decades to pay off the existing debt. We all forget that 1972 or 1973 was the last time a sinking fund was created in the Government to pay down the outstanding debt. Debt just gets rolled over. Hopefully, the economy grows and there might be some inflation but nobody cares about the €25 million issued as a Bord na Móna loan or whatever in 1927. It is small beer now even though at the time it may have been seen as very large. So, too, will the €30 billion of the promissory notes be seen in time as a small element of a much larger Irish economy but we live in the here and now. As Professor Whelan said, in the long run we are all dead.

Chairman

Does Deputy Boyd Barrett have any more questions?

Deputy Richard Boyd Barrett

Yes. Is it not fair to say that the thinking behind the ECB saying "No" is the fear of contagion? If we say it is 0.4% of the European money supply, which is nothing, and it spreads out across the entire eurozone, presumably the ECB's fear is that once we do that everybody will start doing it, and we could potentially have an inflationary problem if it is not matched with growth.

Professor Brian Lucey

That is exactly it.

Chairman

I will allow Deputy Boyd Barrett ask the remainder of his questions and we can then have a response.

Deputy Richard Boyd Barrett

I agree with the witness but I would go further in terms of the entire debt and say that we have to put it up to the ECB. We can negotiate and offer it the technical possibilities but I believe its resistance is deep rooted. That is partly due to the inflation aspect and partly due to the big states in Europe not wanting to recognise that they are part of this problem also. If we do not get relief on this do the witnesses believe it is unsustainable for us at every level, especially given that growth is beginning to decrease? It is unsustainable and we will need a second bailout and the more intense demands for austerity now being visited on Greece will likely begin to visit these shores. They are fairly intense already but do the witnesses believe a second bailout will be required if we do not get relief on these notes or some aspect of the debt? What will be the likely consequences of that in terms of more intense demands for austerity?

Dr. Stephen Kinsella

I alluded to that already. It is a fine question. Even if the memorandum of understanding in the programme of cuts - we will call it austerity - goes through perfectly and everything works tickety-boo, we still have to borrow in 2014, 2015 and probably in 2016. While I cannot say for sure, and no one can, that having a debt to GDP ratio of 119% is unsustainable I can say to the Deputy that if it is €3 billion less it is far more sustainable. That is a much better way to put it.

The argument runs on two levels. One is a technical level. Is IBRC insolvent or is it not? Do we necessarily care that this non-bank, which will never lend again, is not solvent? Another argument is the medium term debt sustainability position of the Irish State, which everyone in the eurozone has an interest in seeing sorted as quickly and effectively as possible. That is the political argument, namely, that we will recover faster if we have to borrow less. It is on those terms the argument should proceed. The technical discussions, whatever their nature might be, will continue but that is figuring out how to bash a nail with a hammer and nothing more.

Deputy Peter Mathews

I thank the three witnesses for their superb presentations. I thank them also for the work they have done in the past few years. The attention has heightened through the good work they have been doing on a daily basis. Their patience has borne fruit.

The concentration here, and I want to pick up on a few points, has been on the residual of Anglo Irish Bank, IBRC, and the losses that piled into that bank that had to be matched by this "makey-uppy" promissory note asset. We have had some debate about the interest on these promissory notes. When the pro-note was devised Anglo had not been declared dead. It was not a run down bank. It was going to be kept alive with two aspects to it, therefore, it had to have an asset on its balance sheet of approximately €22 billion, and then add in the other for Irish Nationwide, but the asset had to produce income to make it a quasi-zombie live bank. That is the provenance of the interest rate and as Professor Whelan said, the interest rate is now almost irrelevant.

We had six banks in the system all of which made massive losses. The loan losses that occurred in them were denied and then not acknowledged and only in late 2010, shortly before the troika arrived, was there an admission that they could be €50 billion. The amount is now €75 billion and rising as we take into account mortgage losses and possible further losses in NAMA which, in my judgment ,would be approximately €5 billion. We could start with the last sentence in the summary page which reads: "The argument needs to be made strongly by Irish politicians to their peers in Europe as without strong lobbying I suspect we are unlikely to make much progress on the issue." That sums up the position. The imperative is there. We have a duty to tell the story to the Europeans openly, full voice, writ large, voice large, the scale of the losses, that the remnants of the banking system now emerge in two banks that have been capitalised after the BlackRock Solutions, Barclays and Boston Consulting group stress tests.

Some would argue that, perhaps, the provisioning is light in the recapitalisation and we will require further provisioning and that the ELA was like the bridging finance to the recognition of those losses. We are now concentrating on the last big blob of the ELA in Anglo Irish Bank. If we negotiate with the creditors in a truthful, robust, no holds barred basis, explaining the providence, pointing out the amount of ELA that has been advanced to this bank, which is really funding the losses represented by the promissory notes, we should seek to get the ELA written off and the promissory notes torn up - which is a shorthand way of describing option 2 under Professor Lucey's suggested solutions. That is it in a nutshell.

We need strong advocacy and a new departure in thinking in the discussions. Technical discussions are not enough, they should be open. These are discussions in principle and the principles of where the banking system has come from and where it is are different from those of Greece. We were the cracks in the dyke of the eurozone financial system that will be stuffed and papered over on the backs of Irish citizens, whether or not we like it. The State guarantee, the blanket guarantee, is a distraction because it would have happened anyway. The cost of the collapse of the financial system would have been too big. The irony is in Professor Whelan's paper where he refers to the small amount relatively of €8.5 billion of Lehman Brothers debt held by the Central Bank which was all recovered because of the underlying security. That is only raindrops compared to what has happened in Ireland and what would happen across the banking system. We have to get it out in the open, writ large, voiced large.

Deputy Richard Boyd Barrett

With a protest backing it.

Deputy Peter Mathews

We are aware that the eurozone, because of the banking system of even the large German banks, which I pointed out at the Bundestag meeting, its Deutsche Bank, has a balance sheet of €1.8 trillion. If 10% of its assets are not collectible, which is arguable, that is a €185 billion problem on one bank. We need to review all the banks and all the sovereign debt in the Eurozone and get a big dustbin for the rubbish. Our rubbish is €75 billion, while that of Greece is probably €0.25 trillion and not just the new bailout of €130 billion plus the write-off of €100 billion but €250,000 billion, and for Portugal it is about €100 billion, for Spain it could be €300 billion or €400 billion. We could be looking at a dustbin of €2 trillion to deal with the structural engineering needed for the financial bolting and stabilisation of the euro and, perhaps, another €1.5 trillion in standby arrangements through institutions to be created and agreed.

There is the issue of going from one fire to another fire and Greece's fire appears to be out and slacked down but it is not and is rising again. If a person receives a minimum industrial wage of €630 per month, after the 20% reduction agreed last weekend, and is in the eurozone earning euro the same as us, he or she has to pay the same amount of money for oil and other essential imports to keep the economy going. Common sense and intuition tells us that will not last no matter what accountants, economists, financiers, bankers say they have made a new arrangement. It will not last, it will snap. That is the challenge for the leaders of Europe and there is no preclusion that our leaders cannot articulate, measure, advocate, suggest and push what is necessary. Ireland may be a small country but we have a golfer who can win majors. We have people who have the brains and the ability to communicate what is needed and prescribe for Europe. We do not have to be caddies and told this is too technical for us. It is not. The principles are simple. Deputy Boyd Barrett said he would play tough. Let us play true, it is not about playing tough and swagger. This is the truth and our counter parties and colleagues need to know it. Is there anything else I should mention?

Deputy Richard Boyd Barrett

They just do not care, they know it.

Deputy Peter Mathews

The ELA was like bridging finance, the AIB and Bank of Ireland got it and it was massive. They have struggled by a mixture of all sorts of sticky plaster and mosaic nonsense to create funny balance sheets and they are still not out of the woods. We need to get a strong grip on it and deal with the creditors. It is a creditor problem. If we were in business as a group of companies, we would say we can get costs under control and make sure the revenues are achievable but we have got to look at the legacy position of debt. That is where we are at with our creditors.

Deputy Kieran O’Donnell

Professor Karl Whelan

It is not 100% clear that we would have to make €1.8 billion worth of extra cuts to offset this in 2014. Different financial universes are possible. Will we have an EU-IMF plan in 2014? If not, then the world will examine our general Government balance and the Commission may carry out excessive deficit procedure analysis, etc. Everybody could see that the deficit goes up even though underlying cashflows do not change and are neutral in the long run and are just an accounting measure. Then we could go to the Commission and say we will not make €1.8 billion in cuts because this element has appeared and we are on the road to long-term budgetary stability. It is not 100% clear that it must be done and the sum offset.

The adjustments in the current programme are phrased in terms of a certain amount in billions, in discretionary adjustments, that are taken each year. There are targets as a result and this year may be when the rubber hits the road. I have a strong suspicion that we will not make the 8.6% this year in light of the underlying macro background. My understanding is that it is okay because we did what we were supposed to do in the budget. I am starting to hear some interpretation, by European partners, that they would like us to stick to the 8.6% rate. The latter is not the case. It is not clear that if restructuring happened in 2014 we would have to undo it with real spending cuts and tax increases. It may be more of an annoyance.

Deputy Kieran O’Donnell

We do not know that at the moment.

Professor Karl Whelan

We do not know at this point. However, if somebody returns from Frankfurt one day and this is the one thing Frankfurt has done for us, I will not be jumping for joy.

With regard to booking the debt in an alternative way, €3.1 billion at a go, there we run straight into difficulty. EUROSTAT has a way of measuring the general Government balance and as far as it is concerned, there were days in 2010 when we gave somebody - it does not matter who - pieces of paper that promised to pay them certain amounts of money. As far as EUROSTAT is concerned, that all gets booked on the debt. It is done, it is over, it has happened. Even if we went to the financial markets and said that all of the debt we booked in 2010 was gone and that we were going to pay it every year for the next ten years, nobody would be fooled. Therefore, there is no solution there.

With regard to the question of Anglo Irish Bank trading as an insolvent institution, there may be legal issues. However, the key issue is that as far as the lawyers and the central bankers at the ECB are concerned, giving exceptional liquidity assistance, ELA, to a technically insolvent institution violates the monetary financing prohibition in the treaty. Plainly and simply, it is illegal. Therefore, my suggestions have not involved writing off the promissory note or any of these kinds of things. They involve saying yes, we will pay back the ELA, but we will not pay it back as quickly as originally planned and we will certainly not salt €3.1 billion a year inside the Irish Bank Resolution Corporation, IBRC, for the purposes of paying it back at a faster pace.

As to the exact timeline on repayment, how long is a piece of string? Let us see how long we can get. The more people who understand how this can help with stabilising our finances, or allowing us to return to the market, the more open people may be to help. Ultimately, the various kinds of accounting gimmicks do not help that much, whereas the cold hard fact of postponing the payment of €3.1 billion every March does help. That can be done in a way that allows the IBRC remain technically solvent and is not illegal.

Deputy Joe Higgins

Do not all the tricks and the blinding with science that Deputies and Senators have attempted to come up with this afternoon to wave in front of the ECB and the troika, evade the central issue? The central issue is that the troika and the ECB insisted that the Irish people should carry the bad gambling debts of European financial institutions and that this was accepted by an Irish Government. US Secretary Geithner joined them to save the skins of his financial buddies from a previous life and to ensure they did not go down as a result of the Irish people correctly saying these were private debts. That is the nub of the issue. Therefore, the nub of the moral argument for us is to say we can carry this burden no more. We must say "No", full stop.

Dr. Kinsella spoke of the debt to GDP ratio but that did not feature much here. He mentioned the estimate of 119% debt to GDP for 2014. Will he expand on that in terms of the fact that the Taoiseach lectured us yesterday in the Dáil saying there was really no problem with the national debt? He compared it from the mid-1990s up to 2007, when GDP grew and the debt shrank, as if the same could happen again. Is it not the reality that we are in an entirely different period of world capitalism and that when we speak about a 0.5% growth rate in the economy this year, that shows the country will not be able to grow itself out of this debt scenario? With an estimate of €7 billion interest in two years' time, is it not true that this will continue to be a huge drain on society? It is true that the Greek sovereign debt is much higher in GDP terms than ours, but I have seen a chart which shows that when private debt, sovereign debt, corporate and financial debt are included, the Irish situation is much worse than the Greek situation. Does Dr. Kinsella have any thoughts on the sustainability of this situation over the next four or five years?

The witnesses here today see thousands of students pass through their hands. They also write articles that are read throughout this country and further afield. Does it ever occur to them to challenge the basis of the financial market system we are dealing with and does it ever occur to them how degenerate, rotten and undemocratic it is? It is anti-democratic in that it can now, apparently, decide the contents of government. For example, ten years ago, Goldman Sachs, one of the most prestigious banks in the world, helped a right-wing Greek Government to fiddle the books and was paid hundreds of millions of euro for that, probably with the full knowledge of the European bureaucracy. Structural defects, such as big business paying virtually no taxes in Greece, were allowed to continue. Now that the chickens have come home to roost, the super-rich have taken their money away and the poor, the pensioners and the working class of Greece are being crushed in the most ruthless fashion. It is similar here. Our services have been stripped, while it appears to be sacred to bail out the banks.

I am curious as to whether it occurs to the witnesses to debate the idea that, perhaps the system needs to be regenerated from the roots. Perhaps, instead of faceless, unelected, unaccountable individuals in control of hundreds of billions of euro for private profit, we should have a publicly owned, democratically accountable financial system on a European basis that would invest in society, in growth, in development, in services and in people rather than in this rotten system we have currently.

Chairman

I ask the witnesses to take note of the questions asked by Deputy Higgins because I want to call on one or two other members before we seek a response to the questions.

Senator Séan Barrett

I welcome our visitors and thank them for the enlightenment they have provided in word and in print. If we do not do this, when do they think the second bailout will be required? What are we afraid of and why are we not moving forward with this? What is holding us back? I hear the issue of reputational damage mentioned all the time but am not sure there is much in that. However, the opinion is that we would get a bad name if we did any of these things. Perhaps it is that our reputation on Wall Street would suffer. Why not liquidate Anglo Irish Bank?

Senator John Gilroy

I suppose with €10 billion here and €5 billion elsewhere, we will be looking at serious money soon. I have heard the "E" of ELA referred to as "extraordinary", "exceptional" and "emergency". Are these words interchangeable or do they each have a nuance?

Professor Karl Whelan

The Central Bank uses the word "exceptional", but most people use the word "emergency".

Senator John Gilroy

So they are interchangeable. Is the gist of the issue that if we can reduce our restructured liability - the ELA - the asset is no longer required on the balance sheet? We must find some structure or financial instrument to permit us to do that. Is there not another danger on the horizon that might cause us untold difficulty, namely, the change from the ESF to the ESM? Professor Whelan has written about this elsewhere and has flagged some of the dangers.

Chairman

We will take a few more questions, but they must be 30-second ones.

Deputy Richard Boyd Barrett

Deputy Higgins and I have made it clear that we would go much further in challenging the whole basis on which the economic system works and in repudiating the debt.

Professor Karl Whelan

To be fair, that was not the topic of discussion.

Deputy Richard Boyd Barrett

Absolutely, but we think it should be a question that arises from the topic, so we defend the legitimacy of making the point. I ask the witnesses to state clearly something that is more than implicit in what they are saying, that is, that whether we go for a more radical repudiation of the debt or for deferment, write-down or spreading out, the problem is not a technical but a political issue. It is about political choices that are made by our Government and by the European authorities. That is the nub of the question. The witnesses are saying that if there was a will, there could be a technical solution that works within those parameters - or, in our view, a more radical solution - but actually, the problem is a political one. The choice was made by our Government and the European authorities to put the burden on ordinary people when they do not deserve such a burden.

Deputy Pearse Doherty

With regard to whatever negotiations are going on with the ECB, if it was a requirement for the ECB to ensure the other Irish banks reduced their ELA to a certain proportion, what impact would that have on the ELA? Everybody will try to impose their own conditions, and the ECB will want to reduce its exposure. How do the witnesses think that would impact on the other banks as part of a deal?

Professor Whelan, in his paper, called for the coupon rate on the bond to be 2.5%. What would stop the Minister for Finance, Alan Dukes and the Governor of the Central Bank, Patrick Honohan coming together to agree that the promissory note would now have a 2.5% interest rate? I know it does not make any difference in terms of accounting, our national debt or our general Government deficit - we would still have to pay the €3.1 billion every March if that were agreed - but what would be the block to such an agreement? Professor Whelan's arguments earlier mentioned the European Central Bank's ELA, but Anglo Irish Bank would still be getting €3.1 billion every March and the Central Bank would still be able to burn it every 1 April; it would just be a question of a different interest rate, which would have an effect on our national debt.

Deputy Peter Mathews

A national debt that is 120% of GDP is a major burden. Dr. Kinsella alluded in his paper to household debt. It is a little under €200 billion, which is also huge as a proportion of GDP. Lastly, as he mentioned, non-financial corporate debt puts us at the top of the league table. It is in that context that it becomes our duty to get this message across to the European authorities and the ECB. If, as Deputy Doherty says, a the write-down of ELA on the balance sheets of the two pillar banks were negotiated, a combined write-down of creditor debt totalling €70 billion would amount to approximately a third of the total. I want to ask Professor Whelan this.

Chairman

Then the Deputy should stop.

Deputy Peter Mathews

In the context of the €200 billion in household debt, if a successful aggregate write-down of €70 billion was achieved across the balance sheets of the banks, that would be one third of the total amount, which would equate to approximately a 30% devaluation if we owned our own currency. This would enable the economy to start on a path of growth again.

It may be that some of these questions are difficult to answer. If the witnesses have the answers at their fingertips, that is great, but we cannot burden them too much; we have asked them to do a certain amount.

Defend heterodoxy.

Dr. Stephen Kinsella

On the issue of Deputy Higgins's-----

Professor Karl Whelan

He is clearly not a heterodox economist.

Dr. Stephen Kinsella

Clearly not.

Wearing my pointy-headed academic hat, I certainly do question such things at system level. On the more technical issues about adding up debt, as Deputy Mathews said, there are significant accounting issues with inter-bank loans.

The interesting thing about the debt to GDP ratio is that the denominator can fall, in stock terms - all that has to happen is that the €160 billion we created last year drops to €155 billion, and our debt becomes unsustainable. This is a huge problem, and not something we can address now.

There is an issue with the magic figure of 120%. It is a rough rule of thumb - there is no law of gravity associated with it - but there is a large amount of literature to back up the fact that this number does matter, and it is a threshold that, once passed, is very hard to get back to.

Senator Barrett made some points. Looking around, I can see that all of the witnesses have been students of his.

Deputy Kieran O’Donnell

He did a fine job.

Dr. Stephen Kinsella

What are we afraid of?

Deputy Kieran O’Donnell

Is Senator Barrett proud of them? The committee members are his students now. What has Senator Barrett done lately? It is a case of Frankenstein. What are they afraid of? It is marketing. I think it would be a disaster for the Minister for Finance to state that he intends to re-negotiate the promissory notes and then to say they said "No". It is a question of marketing.

When will we need a second bailout? I believe we will need a second bailout in 2014 or 2015. Everyone should realise this. Ultimately, even if the programme goes according to plan - there is good reason to believe it will not - we will continue to need to borrow. If it is a case of borrowing at 7% or 3%, I would chose 3%.

With regard to the European Financial Stability Facility and the European Stability Mechanism, I will defer to Professor Whelan.

Professor Karl Whelan

I wish to clarify some points. With regard to the second bailout, if Ireland does not get access to financial markets in the next 18 months or two years, then the day we run out of money will occur in January 2014. Any deal involving a second bailout would have to be negotiated quite some time before then. This means it will probably be some time next year when negotiations open. I recall the Minister for Finance saying it was ludicrous to talk about second bailouts. It is not necessary now because there is enough money. However, at some point next year it is quite possible that there will be negotiations over a second bailout.

I echo some of the comments made about the debt to GDP ratio, how fast it will come down and all the hard work being done by the denominator or GDP in the past. My research suggests the Irish economy does not have the potential to repeat the Celtic tiger period. So many exceptional things occurred on the supply side of the economy which simply cannot be repeated. Even in a positive scenario we should expect more modest growth rates. The best case scenario involves a long and slow decline in the debt to GDP ratio which may feature occasional blips back up when normal cyclical recessions occur. It is likely to be a long slog back from here.

I echo what Professor Lucey stated about figures being bandied around relating to the total amount of debt. There are many peculiar issues to do with the IFSC and so on. It is a tricky concept to measure correctly.

It is certainly the case that in addition to our substantial sovereign debt problem we have a serious household debt and mortgage related problem; there is no doubt about that. Whether we can simply deal with this by securing large write-downs on mortgages and then moving on is not straightforward. We should remember that the State owns Allied Irish Bank and it has a large stake in Bank of Ireland as well. A great deal of State equity would be wiped out if this were to materialise.

Deputy Peter Mathews

That means quite a write-down.

Professor Karl Whelan

Yes, but the State equity would get written down first so it is not as simple as if we were to acknowledge a much greater debt problem or suggest other people are available to take the hit. Unfortunately, in such a scenario all the money that we have put inside the banks would be lost. Ultimately, it is not clear what the size of the mortgage debt problem will amount to because it depends on what happens. However, it is a significant problem and I suspect it is a larger problem than what has been written into the various stress tests.

A question was asked about technical versus political discussions. The curious thing about this debate is that there is a little of both. It is political in the sense that it is not about technicalities. The technicalities are not so hard. However, it involves dealing with technocrats. When one seeks for the ECB governing council to do something, is it a matter of politics or simply technical discussions? To a man and woman, those on the council will all maintain that they are fiercely independent and that the ECB protects its independence. Does this mean it is immune to political lobbying and discussion? I hope not.

Senator Barrett asked whether we are being tough enough. My sense at the moment is that we are leaving it to the Governor of the Central Bank to do the best job he can do for us when he goes to the governing council. Will that work out? I hope so but we will wait and see. It is no harm to have wider political involvement in this issue and a broader discussion on it.

There was a question about the exceptional liquidity assistance, ELA, that the other banks have. The good news here is that it appears as though the other banks have paid off almost all of their ELA. In the past year Anglo Irish Bank's deposits have been transferred to AIB and it transferred NAMA bonds to AIB as well. This meant AIB was able to reduce its ELA funding and get more access to ECB funding. This is somewhat tricky. It appears as though the other banks do not have much ELA.

Can the banks change the terms of an agreement? We could do so and Anglo Irish Bank could still be solvent and everything would be fine but, ultimately, the terms of the ELA must be agreed by the governing council. The governing council has set a rule relating to the marginal lending facility plus a margin. It can be done and if it were, nothing would go wrong in the morning. We could do it and have a low interest rate on the promissory notes and there would be no significant bump in 2014. All of this could be done but we need the ECB governing council to agree that all of this means Anglo Irish Bank is not insolvent. Given that we have put hand on heart and promised that we will pay back all the money, only we would rather do so later, there is no reason to say it is insolvent.

Deputy Higgins is correct to say we have taken on the debts of other people. Whether one wishes to call them gambling debts, they loaned money to banks. If a wise investor came to Dublin and met the people running these banks and asked them about their business model, he should have had doubts. That is for certain. However, it is also the case that the losses at Anglo Irish Bank were so large that we are also bailing out depositors to a significant extent. If we simply let the thing fail, not only would the bondholders have lost out but there would have been significant losses for depositors. Anglo Irish Bank's depositors were, by and large, not common or garden depositors. It had no retail base and one could attempt to take the position that-----

Deputy Richard Boyd Barrett

That would be me.

Prof. Karl Whelan

Deputy Boyd Barrett could take the position that no one would have worried about their deposits in AIB or Bank of Ireland and there would not have been vast capital flight from the country if they had lost money, but I disagree with that view.

Most of the classes that most of us teach to our undergraduates are not about the big picture. Most of them are specific issues in specific areas. I teach a class that covers a good deal of material related to banking and the banking sectors. In my teaching and in the various policy papers I submit to the European Parliament, I argue consistently in favour of far stronger financial regulation than what we have had in place or than what we are putting in place. We need to regulate the banking sector far more than we do at present and we should not allow it to work the way it does. That is important. There were various opportunities in early 2009 to introduce a far stricter world financial regulatory framework. By and large, it was an opportunity missed.

Chairman

I thank Professor Whelan. My thanks also to Professor Lucey and Dr. Kinsella. Whatever the views of members about the various aspects, whether technical or political, there is no doubt that the delegation has added immeasurably to the level of understanding that we have, and through us, that the public has, regarding these issues. This has been an immensely important afternoon session and I thank everyone for their contributions and answers.

One thing occurred to me with regard to the question about politics versus technicalities. We should realise that in the case of an issue or prospect that appears obvious to us or that appears to be so naturally right that it should happen tomorrow, when one goes to Europe the view of it is the opposite; it is deemed inconceivable and cannot be countenanced. The politics lies somewhere in between.

That ends the public session of the meeting. We have some correspondence to dispose of but as there is no further business the meeting is adjourned.

The joint committee adjourned at 5.10 p.m. until 4 p.m. on Wednesday, 22 February 2012.

JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM debate - Wednesday, 15 Feb 2012

Exceptional Liquidity Assistance and IBRC Promissory Note: Discussion

Professor Karl Whelan

Professor Brian Lucey

Dr. Stephen Kinsella

Dr. Stephen Kinsella

Dr. Stephen Kinsella

Professor Karl Whelan

Professor Brian Lucey

Dr. Stephen Kinsella

Professor Karl Whelan

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Dr. Stephen Kinsella

Dr. Stephen Kinsella

Professor Brian Lucey

Professor Karl Whelan

Professor Karl Whelan

Professor Karl Whelan

Professor Karl Whelan

Dr. Stephen Kinsella

Dr. Stephen Kinsella

Professor Brian Lucey

Professor Brian Lucey

Professor Karl Whelan

Professor Karl Whelan

Professor Karl Whelan

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Professor Karl Whelan

Professor Karl Whelan

Professor Karl Whelan

Professor Brian Lucey

Professor Brian Lucey

Dr. Stephen Kinsella

Dr. Stephen Kinsella

Dr. Stephen Kinsella

Dr. Stephen Kinsella

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Professor Brian Lucey

Professor Karl Whelan

Professor Karl Whelan

Professor Karl Whelan

Professor Karl Whelan

Senator Séan Barrett

Professor Karl Whelan

Professor Karl Whelan

Professor Brian Lucey

Professor Karl Whelan

Professor Brian Lucey

A Member

Professor Brian Lucey

Dr. Stephen Kinsella

Professor Brian Lucey

Dr. Stephen Kinsella

Professor Karl Whelan

Dr. Stephen Kinsella

Dr. Stephen Kinsella

JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM debate -
Wednesday, 15 Feb 2012