I welcome Professor Patrick Honohan, Governor of the Central Bank of Ireland. Professor Honohan will make some opening remarks to be followed by a question and answer session I remind members, witnesses and those in the Gallery that all mobile phones must be switched off. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to 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 persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of a long-standing ruling of the Chair to the effect that Members should not comment on, criticise or make charges against a person outside the Houses, or any official by name or in such a way as to make him or her identifiable.
Matters Relating to the Economy: Discussion with Governor of Central Bank
Professor Patrick Honohan
I thank the members of the committee for inviting me to appear. The letter of invitation proposed a wide range for our discussion today and I will not attempt to be comprehensive in my brief opening statement. Perhaps the best way of ordering my introductory comments is by reference to the Central Bank's three-year strategic plan, published in November, which gives a picture of what we are focusing on. Consistent with our governing legislation, the Central Bank Commission has set the following key elements: restore financial stability and support economic recovery in Ireland through the successful exit from the EU-IMF programme and restoring a fully functioning banking system; reform the regulatory and supervisory framework to ensure risks to stability and consumer protection are identified and effectively mitigated; protect consumers by challenging firms, improving firms' compliance and promoting a better culture to help consumers have more confidence in financial services; and influence international policy making in monetary policy, financial stability and regulatory standard setting. Underpinning these activities over the three years ahead will be a focus on improved efficiencies and cost effectiveness, alongside the continuing development of our staff.
Delivering on this extensive mandate has, to say the least, been quite a challenge over recent years, involving many judgment calls, a significant increase in the volume of activity and employment in the Central Bank, and a re-engineering of how we do business. While the condition of the economy and the banking system still leaves much to be desired, I believe things are moving in the right direction.
As far as the economy overall is concerned it is fair to say that, since the level of economic activity collapsed in 2008-09, the elevated level of personal savings, the need to repair the public finances and for balance sheet repair more generally has meant that domestic demand has continued to shrink year on year. Overall employment and incomes would have fallen even further were it not for the offsetting performance of exporting firms despite a much weaker international environment even than was expected two years ago. A reversal of some of the loss of competitiveness that was incurred in earlier years has contributed here, though more is needed if the return to growth in private sector employment is to be accelerated to the point where overall employment is growing again on a sustainable basis - which our forecasters believe could happen during the course of this year.
Against this background, the Government's determination and achievement in making the agreed, necessary overall reduction since 2008 in the gap between taxation and spending - painful though it is for many - has been a vital element in restoring the confidence of official and private international lenders which is a prerequisite for sustained recovery in employment and economic prosperity. The Government has recovered access to the bond markets and, while the cost of borrowing has reduced considerably in the past half year, I am sure that spreads would have fallen even lower were it not for the wider uncertainties in sovereign debt markets.
The reconstruction of a healthy banking system has been hampered by the scale of bank losses, and the fact that such a large fraction of their borrowers, both households and firms, are under stress. During the period from 2009 to 2011, the capacity of the public authorities was stretched to the limit in sourcing the liquidity and the capital needed for the basic functioning of the banking system. While the rest of the public finances also needed urgent adjustment, it was this additional pressure that tipped the country into the need for official assistance in the EU-IMF programme.
Apart from rebuilding their financial buffers, the banks have had to completely overhaul their loan recovery operations and to develop effective methods of loan underwriting in a new environment.
It is no secret that the Central Bank has been concerned at the pace of both dimensions. In going well beyond what has been customary for a regulator, the Central Bank has been closely reviewing the steps being taken by banks to engage with stressed mortgage and other borrowers under what we call the mortgage arrears resolution process. Certainly the banks have ramped-up their activity here, but progress towards ensuring that unsustainable debts are appropriately restructured, while also ensuring - in a manner consistent with the code of conduct on mortgage arrears - that those currently in arrears whose circumstances should enable them to service their debts get back on schedule, is clearly far from adequate so far. There are risks on both sides here. Too lenient an approach to loan recovery would result in an intolerably heavy bill for the Exchequer and hence the taxpayer and the user of public services. On the other hand, too much reluctance to face up to reality about unsustainable debts on the part of the banks will also delay the economic recovery.
The Personal Insolvency Act, PIA, 2012 provides a welcome new route whereby distressed mortgage borrowers - especially those with multiple indebtedness - can find solutions, but it would be better for all if the banks could still get ahead of the curve and resolve the bulk of the cases without them having to go through what is still, of course, an untested process. The Central Bank will continue its intensive step-by-step engagement with the banks on this matter until we are satisfied that they have sufficient policies and procedures in place.
The introduction of the European banking union and single supervisory mechanism, SSM, has been agreed since I appeared last before the committee. The design, development and implementation of the framework for the SSM will be a key task at euro level throughout 2013.
The move towards a systematic approach to supervision, resolution and deposit protection is part of what is needed to place the euro area institutional structure on a more robust basis, building market and public confidence across the Union. We in Ireland recognise, perhaps better than others, the value of filling these institutional gaps, but it must be done well. To be successful, it is important that the new mechanism has a best practice supervisory toolkit, effective and efficient decision-making procedures, a top notch risk-assessment framework and a robust jointly-shared supervisory culture. New resolution rules, and particularly important in Ireland's case the potential use of ESM direct recapitalisation, need to come into full operation and be ready for use by the SSM to ensure the success of the project. To all of this, the Central Bank will continue to contribute, not least during the six months of the Presidency.
As far as supervision is concerned, greater distance between supervisors and the banks they regulate can help improve the capacity for challenge and ensure a broader, more detached perspective on issues. At the same time, local knowledge is equally important. Balancing these two dimensions will be a key part of the new regime.
While many details remain to be determined, it is clear that much of the supervisory work will still be delegated in practice to national supervisors so that the work we have been doing in Ireland to strengthen the national supervisory system will remain equally relevant for the period ahead. In addition, it should not be forgotten that the current proposals only refer to banks, and by far the largest part of the national supervisory and regulatory regime relates to other types of financial firms.
My last attendance at this committee was in March 2012 and was focused on the issue of that month's instalment payment on IBRC's promissory notes. As the committee will recall, an interim solution was applied to that instalment, which was effectively settled with a long-term Government bond rather than cash. While this was not altogether an ideal solution from anyone's point of view, seeking a non-cash solution for that instalment was a sound tactic for the Government, embarking as it was on the larger question of rearranging the duration and terms of the overall Central Bank indebtedness arising out of the failure of Anglo Irish Bank and INBS and the payment of their creditors.
Since then, there has been an intensive process of discussion and negotiation on this matter, which is one of the two main thrusts of the Government's policy to have a euro area review of the overall indebtedness arising out of the banking crisis. There is considerable goodwill from all interlocutors in this process. Nevertheless, it has not been easy to find a generally acceptable solution. Taking into account both the statutory position and wider policy stance of the ECB, an initiative of this type will be novel and, as such, challenging. Using our knowledge of central banking law and practice, we have been working carefully to build understanding and confidence around a set of proposed transactions designed to deliver for Ireland, while not taking other decision makers too far out of their comfort zone. The ECB is an organisation that seeks to proceed as far as possible by consensus, and it is not surprising that this work has been taking quite a while. In fact, what we have designed from our side is, I believe, largely in the interests of the euro system as a whole. On work in progress, I have nothing to add today to what has already been said by the Minister for Finance about the prospects and timing of the conclusion to these discussions. I am happy to take any questions the committee might have.
I thank Professor Honohan. Given there is a fairly packed committee this afternoon, I would propose that we take the first round of questions in batches of ten minutes if that is agreeable and depending on how that is proceeding, in five to six minute batches thereafter.
Before I call on the first speaker, in light of Professor Honohan's comments on the Personal Insolvency Act 2012, his colleague in the Central Bank, Ms Fiona Muldoon, made strong commentary on how the banks themselves were engaging with mortgage debt prior to the passing of the legislation. Now that the insolvency legislation has been passed, one observational difficulty there might be is that with the deferment process that was there prior to the insolvency legislation, the ongoing deferment of problems was making difficulties in some situations even worse where compound debt was merely being added up on top of compound debt. The intention of the insolvency legislation is that it would be seen, for those who are in what might be described as an unrescuable situation or for whom if they were left in their situation it would merely become worse, as an opportunity of getting out of that level of burden. How will the Central Bank set out to monitor how the banks will progressively and positively engage with that legislation?
Professor Patrick Honohan
Our view on the legislation, as I mentioned, is favourable. It is needed. Certainly, in some cases it is definitely too complex for one bank to work on. We think the banks should still be doing the engagement with the customers who are in difficulty to sort them out before they need to have recourse to this elaborate procedure. In fact, as the committee will be aware, the legislation provides, speaking loosely, that there has to have been a six-month engagement period between the bank and the borrower and that is to allow both of them to sort the matter out.
On Saturday morning last I had two constituents in my office who now are aware that the insolvency legislation has passed. Both of them bought apartments approximately five or six years ago for in the region of €300,000 that are probably, at best, worth €125,000. They have not been able to service the mortgages on those premises because they have lost their jobs and because of other circumstances and they are now in a situation where continuing to reside in these properties is making a bad situation worse. The monitoring, evaluation and reporting plan, MERP, for them was only a deferment or a stay of execution. What they want to do is get out of that property in such a way that they do not have legacy debt remaining in it, and that is what people would hope to see as a result of the insolvency legislation. My question to the Governor, which is indirectly with regard to how the banks engage with this, is what will the Central Bank be doing to monitor this and create some level of accountability with the banking sector in this regard.
Professor Patrick Honohan
I would reiterate it is neither our intention nor the design of the current regime to only kick the can down the road and make temporary arrangements. We have not been satisfied with the amount of reliance on temporary arrangements for situations which certainly require permanent loan modifications. This is all within the banks' capacity. We are trying to ensure that the banks have the in-house capacity and the policies to deliver solutions which are as good as the solutions that would be achieved under the PIA.
How will the Central Bank ensure this will happen? Is it setting targets in the area and putting in place monitoring processes?
Professor Patrick Honohan
We have taken monitoring step-by-step over the past 15 months. Until 15 months ago I would have stated we expected the banks to step up to the plate on their own. However at that point we felt there were not that many cures.
The banks have not stepped up to the plate on their own. Late last year Professor Honohan's colleague, Fiona Muldoon, was quite emphatic about this. She stated the banks were still very much in a state of denial and hooked on a position that property prices would recover, or were foreclosing at a rate not at the bank's valuation. We are now in an entirely different place. The insolvency legislation has been passed. I will return to the question I want Professor Honohan to answer. Has the Central Bank put in place monitoring structures for this on foot of the insolvency legislation? If so will Professor Honohan explain them and state whether targets have been set with regard to what he expects the banks to do in this area?
Professor Patrick Honohan
Over the past 15 months we have established a set of deliverables. It is a step-by-step process whereby we ask the banks to convince us they are doing enough on the matter.
Is the Central Bank convinced?
Professor Patrick Honohan
No, we are not. My colleague, Fiona Muldoon, has a colourful way of expressing herself, with which I am very familiar.
Professor Honohan should have brought her with him this afternoon.
Professor Patrick Honohan
I am a grey-faced bureaucrat. She is spot on in her interpretation. Of course it is a difficult job but the banks are not there. I would point out a difference in interpretation. I do not see the insolvency legislation as opening a new possibility for the Central Bank to do something to the banks. In fact, the personal insolvency legislation will chivvy the banks into making permanent restructuring arrangements because if they do not so they will have to go through a process which they will not control as much as they control the present situation. This is why the legislation is good. It puts pressure on-----
After speaking to the Governor of the Central Bank I still do not know what I can tell the two people if they call back to me.
Professor Patrick Honohan
I am afraid the Chairman will not find out from me what he can do with those two people because we do not know their situations.
Without being too prescriptive, three categories of people are in mortgage arrears at present. There are those in temporary mortgage arrears because they have lost a job but will return to a scheduled repayment structure if they return to work in the coming months; there are those who need a level of forbearance for a longer time because their difficulties are greater; and there are also those who regardless of whether they returned to work, even on a good income, they cannot service the mortgages they have. The third category cannot be rescued and deferring the problem is compounding it. Will I be able to tell the two people that after speaking to the Governor of the Central Bank I know Central Bank is monitoring their bank and has set targets specifically for people like them? Will Professor Honohan answer this question?
Professor Patrick Honohan
The two elements the banks need to sort the triage between the various categories of people are clear operational policies, which allow them to map the information they obtain from the borrower to a decision which sorts them into these categories, and to select from the modification options, which were already set out in the Keane report which have been amplified-----
I will run out of time and I do not want the other members to use their time to ask the same questions as those I am asking. Following the introduction of the insolvency legislation has the Central Bank established monitoring protocols? Does Professor Honohan believe the Central Bank's monitoring protocols must change? Fiona Muldoon-----
Professor Patrick Honohan
They are changing.
They have not been delivering the product.
Professor Patrick Honohan
I apologise for debating with the Chairman but it is important-----
According to Fiona Muldoon the targets are not being reached. Insolvency legislation has been introduced which should create a carrot and a stick for the banks. Does Professor Honohan believe the Central Bank must increase its monitoring and change its engagement methods with the banks to ensure those people in God damn awful situations are not in worse situations in six months time?
Professor Patrick Honohan
We have been increasing the pressure on and engagement with the banks steadily over the past 15 months and we will continue to do so. This will change as the banks build, step-by-step, the elements they need to deliver on this. Is it possible to have a one line target, whereby the banks should have solved 73% of the third category of debtors outlined by the Chairman? We are setting targets for the banks but we do not want to rely solely on one high-level target which could reach the headlines of all the newspapers, because any high-level single target will be simplistic and could end up getting the banks to focus on its delivery in the simplest way and they will not solve the worst problems. It is a complex situation and we want the banks to ensure they are delivering the products required in the quantity needed to the various categories of people. We are absolutely committed to this; it is the most important domestic policy issue at present.
On behalf of the committee I request Professor Honohan to furnish us with a report on the target figure at the end of the first quarter of 2013. If Professor Honohan is telling us this afternoon the Central Bank has not set targets I find it disappointing, but the committee would like to know by the end of the first quarter what level of resolution has been met in light of the insolvency legislation. Will Professor Honohan provide the committee with such a report?
Professor Patrick Honohan
We have not only set targets, we have set deliverables which have been delivered. However, we have not relied on a single number purporting to be an holistic measure of the degree to which the problem has been solved. We will continue to set targets and there will be public targets but we will not solely rely on them.
I welcome Professor Honohan. In his opening paragraphs he referred to the Central Bank's strategic plan and supporting and restoring a fully functioning banking system and ensuring risks to stability and consumer protection are identified. I wish to discuss a particular risk. In March the Government, through the Revenue Commissioners, will give indicative valuations of all homes in the country to home owners. The actual value will be confirmed by the homeowner shortly thereafter and in the normal course this will be accepted by the State. The valuation of all homes in the country will have major significance for all banks with mortgages and other charges on properties. It is clear that in many cases the new process may result in many houses being valued at substantially less than the figure at which the banks valued them and the associated loans. This will have significant implications for the balance sheets of banks. What discussions has Professor Honohan had with the Government, the Department of Finance, the Revenue Commissioners and the banks to prepare for this? This will be the first time we have a crystallisation of the values of the residential property market in Ireland. When property loans were transferred to NAMA the value of these loans was crystallised which resulted in a write-down of 58% of the property loan portfolio. What write-down does Professor Honohan assume will happen? What does he expect will happen to house values and the implications for this on the balance sheets of the banks?
Professor Patrick Honohan
The Deputy has asked a very interesting question with a number of dimensions. We have not allowed the banks to assume - although I do not believe they were minded to do so - that house prices backing mortgaged properties are still worth what they were when the mortgages were issued. We have provided capital and made an allowance for a very substantial fall from peak to trough in residential property prices.
When we conducted the capital adequacy exercise, that required the banks to be recapitalised in 2011, we made provision in the stress case of a peak to trough fall in house prices of 59%. That is not applied loan by loan to an assessment of what can be recovered because many loans for houses that are in negative equity are being and will continue to be fully serviced. When the Revenue Commissioners make an evaluation for property purposes they will not necessarily map across in any direct way to provide new information that would surprise or alter our view as to the amount of capital needed by the banks. I do not see a map across but of course the Revenue Commissioners will no doubt rely in large part on the same information that is already in the public arena from the CSO in producing average property prices. They will map it on an individual basis.
Where is the joined-up thinking between the different Government agencies that are operating independently? The Revenue Commissioners will have a house by house loan value. Will Professor Honohan, as Governor of the Central Bank of Ireland, have access to that? Will the banks have access to that information, given that the largest banks in the country are almost State owned, that is AIB, and Permanent TSB, and some of the main mortgage companies? It seems incongruous that we should go through a major process to value all houses through the Revenue Commissioners while the Central Bank, which is responsible for the stability and the risks of the banks, may not have access directly to that information. Mr. Honohan that he provided for average prices to be written down by 59%. That 59% has not trickled down to home owners. It is still sitting in the bank's balance sheet. When will we see that 59% write-down? When will the provision that the taxpayer put into the banks trickle down to home owners?
Professor Patrick Honohan
It is important to bear in mind that the Government did not provide a sum of money to be parcelled up to borrowers in negative equity. The Government provided a global sum that was based on a number of calculations and which was necessary to satisfy international requirements for bank capital adequacy so that the banks could continue to draw deposits from the public. This money is not available to be handed out one by one to the 59%.
Is Professor Honohan saying that for the first time ever in the history of the State, we will have a value on each house which essentially has no relevance in relation to the banks? That is the message I am getting.
Professor Patrick Honohan
All the information that has been used by the CSO in drawing up its house price list was drawn from the Revenue Commissioners. We currently use that information to inform and guide us in respect of the banks.
That information is in the public arena already.
Professor Patrick Honohan
We use all the information.
Does Professor Honohan not appreciate the significance of the entire population valuing their own homes? What are the implications of this new event? It seems that Professor Honohan will dismiss this new event as irrelevant for the banks.
Professor Patrick Honohan
The answer to the Deputy's question is that in the third quarter of this year we will be conducting the new capital adequacy exercise, updating what was done in the first quarter of 2011. We are preparing for that. We will use all relevant information. We will look at that stage at what method the Revenue Commissioners have come up with to see if it throws additional light on all the information we already have. We will use all that information. We do not need to do it on a week-to-week basis. We see if there is any additional information in that to be used. I am not sure there will be all that much but we will certainly not ignore it.
There is a potential risk, but the role of the Governor is to identify risk in advance and not wait until the third quarter to see what will happen. I think it is the job of the Governor to identify this risk in advance.
Professor Patrick Honohan
It is our job to identify those risks in advance and we do so, but I do not agree that the fact that the Revenue Commissioners are conducting a price exercise alters the risk profile for the banks.
I am not asking the Governor to discuss anything about the negotiations on the promissory note, but will he explain the original intention of such a note? What happens physically or electronically to the repayment that is due to the Central Bank on 31 March each year? What happens to the €3 billion repayment and the cash equivalent that is handed back to the Central Bank at the close of business on 31 March?
Professor Patrick Honohan
Two years ago on 30 March 2011, some €3 billion was handed back to the Central Bank. The Government paid some €3.1 billion in cash to the IBRC. The IBRC is already borrowing and I cannot remember how much it had borrowed at that stage. It would then repay the Central Bank of Ireland, which has drawn on facilities in the ECB. Our drawing on the ECB facilities, in other words the money we owe to the European Central Bank as a whole, will decline by that amount.
The IBRC will transfer in the normal course of events some €3 billion into the Central Bank.
Professor Patrick Honohan
To repay the debt.
At the end of March or 1 April, does Professor Honohan have the additional €3 billion sitting in his balance sheet or does he hand it over immediately to the European Central Bank? On which balance sheet does that €3 billion appear?
Professor Patrick Honohan
It is an automatic reduction in our indebtedness results through the processes.
Does the Central Bank get the €3 billion?
Professor Patrick Honohan
No, we do not have to send the cheque to them. It works automatically.
On 1 April does the European Central Bank have approximately €3 billion more on its balance sheet?
Professor Patrick Honohan
It has been repaid the currency it created to make a special loan.
Will it uncreate the currency, so to speak?
Professor Patrick Honohan
It will uncreate the currency.
This is what I was driving at for the past three minutes. Will Professor Honohan explain in English the meaning of the phrase, to uncreate €3 billion? Will Professor Honohan explain what happens to this €3 billion which will be uncreated on 31 March? Does that mean burning it, shredding it or electronically wiping it out?
Professor Patrick Honohan
I know the Deputy is referring to the expression of shredding money, and the learned professor who described it very graphically in that way would not convince the assembled officials from the Central Banks of Europe that this is a correct way to describe the repayment.
Will that €3 billion exist on 1 April 2013?
The €3 billion goes ultimately from the IBRC to the Central Bank to the European Central Bank?
Professor Patrick Honohan
All of these transactions are balance sheet transactions, the IBRC-----
Is it not real money at all?
Professor Patrick Honohan
Real money is a balance sheet transaction.
I understand the money is uncreated. What does that mean? I understand that to create currency means to make new currency, what does it mean to un-create it?
Extinguish.
Professor Patrick Honohan
It has nothing to do with bank notes. The Deputy asked what is money that has been created or uncreated.
Yes, what is uncreated money?
Professor Patrick Honohan
Money is an entry in accounts. Those accounts can be created by the European Central Bank, which is the monetary authority of Europe. It created it on the basis of making loans on secure collateral. It allows the Central Bank of Ireland to make enormous exceptional loans against securities that the ECB would not normally accept. We have had to go out on a limb to meet that. Therefore when that can be repaid, the currency does not exist.
The Deputy's time is finished.
On a point of order, I asked a question and I got five minutes of waffle. I am not happy to support that.
I call the meeting to order. Deputy Fleming should not be abusing the Chair about the time he has been afforded. I call Deputy O'Donnell.
I welcome Professor Honohan. I will approach the promissory note from a slightly different angle. In his presentation to us, Professor Honohan said: "What we have designed is [..] largely in the interests of the euro system as a whole." Will he elaborate on that? Does Professor Honohan believe that what is being constructed here will be unique to Ireland?
What is the net cost of the current promissory note construct that was put in place back in 2010? The Central Bank receives interest on the ELA funding it provides to the IBRC. It obviously pays a certain rate to the ECB itself. It is a figure that is often overlooked, however, so can Professor Honohan indicate the net cost of the current setup, because the Central Bank pays an annual dividend back to the State?
In the context of the State's debt sustainability, what does Professor Honohan have in mind for the negotiations on the promissory note? What is needed to put us in a sustainable situation both for economic growth and employment, given that our debt-to-GDP ratio this year will be of the order of 120%?
Professor Patrick Honohan
The situation that arose because of what happened in IBRC, or Anglo Irish Bank, in 2008, 2009 and 2010 is unique in its scale, the way it arose and why it arose.
Is there no similar construct or financial engineering with any other bank in the eurozone, which is currently linked into the ECB within the European system?
Professor Patrick Honohan
There are some superficial similarities but I have been careful to emphasise the importance of the differences that arise in the case of Anglo Irish Bank, or IBRC. That is very important.
Nothing on the same scale.
Professor Patrick Honohan
Nothing on the scale, duration or arising in the same way. Exploiting those features allows us to design a measure that would not leak, in any damaging way, into other situations that were not comparable and did not require similar solutions.
Does Professor Honohan expect that a deal will be forthcoming?
Professor Patrick Honohan
I do not want to say anything that will be parsed and analysed, different to what the Minister for Finance has said. He has exactly the same information as I do, so I do not want to qualify whatever he has said on it. Obviously, however, this is something which we clearly intend to resolve by the next payment date.
To put it another way, how important is it for Ireland that we have a satisfactory outcome in terms of the negotiations on the promissory note?
Professor Patrick Honohan
I regard it as very important and it has been a very high priority. I have already mentioned that the mortgage arrears issue is the primary domestic priority, but this has been the primary international priority for us.
The Deputy asked about interest rates and so forth. It is true that a significant part of the large profits reported by the Central Bank is attributable to the money that IBRC has been paying in interest.
We have an interest charge in the State's current account for the promissory note on an accrued basis of just short of €1.9 billion.
Professor Patrick Honohan
Yes.
How much of that comes back?
Professor Patrick Honohan
Not as much as that. The profits of the Central Bank last year were something like €1.5 billion.
It is a reasonable question to ask concerning a loan of that scale.
Professor Patrick Honohan
Yes. If the Deputy wants to know the numbers, they can be provided.
What interest rate would they be paying to the Central Bank?
Professor Patrick Honohan
I am afraid of getting this wrong but as far as I recall, the IBRC currently pays 2.25%.
So, at a minimum, that would be €500 million or €600 million a year coming back from the promissory note.
Professor Patrick Honohan
In this whole area it is crucial to take account of everything, all the moving parts.
I accept that.
Professor Patrick Honohan
If we look at one element, it may be offset by another. It is quite complicated therefore and we must be careful to ensure that the proposed arrangement does not only look at one element.
What are the features that Professor Honohan feels are unique to the promissory note? He mentioned unique features, so which ones have given scope to find a solution with the ECB, which will bring down the cost of borrowing? Does he see a reduction in the size of the debt in any way? Is he looking at a reduction in the cost of borrowing over a period of time?
Professor Patrick Honohan
On the last occasion, I mentioned to the committee that central banks, including the ECB, are not in the business of giving grants. What they can do is change time periods and envisage different rates. Therefore, there will be no grant element to this.
So Professor Honohan would see a reduction in the interest rate and an extension of the time period?
Professor Patrick Honohan
I would rather not go into any further detail.
Can I come back to Professor Honohan on the mortgage situation?
Professor Patrick Honohan
Yes.
I would take exception with him on that. I have read Ms Fiona Muldoon's comments and, as Professor Honohan said, she has a flowery way of expressing herself. She was extremely direct. She spoke about the banks' lip-service and said she saw too many loan extensions masquerading as solutions. She said that hope was not a strategy any more than anger.
It is not good enough for the Central Bank to be paying lip-service itself, and that is the problem I have. If the Central Bank is going to have a crack at the banks - and Ms Muldoon has done so - it had better back it up with action.
People around the country are coming to us concerning difficulties with their mortgages. Ms Muldoon's speech made the headlines, but I would like the Central Bank to back up those headlines.
The Deputy's time is up.
Thank you, Chairman. What will Professor Honohan do to ensure that the banks will now come to arrangements with mortgage holders? He has stated repeatedly that the banks are adequately capitalised. What will he do to ensure that when people come to the banks they will hold reasonable discussions and negotiations with them instead of, as Ms Muldoon said, paying lip service? Professor Honohan needs to get off the pot and say what he is going to do, otherwise it is not good enough. As director of credit institutions and insurance supervision, Ms Fiona Muldoon is one of the Central Bank's senior personnel.
Professor Patrick Honohan
Yes and she is doing a lot - we are doing a lot - in a systematic way. If the Deputy talks to the people who are running the banks, they are tearing their hair out at the number of demands. We are having to prioritise our demands carefully but we want to ensure that they have a process. There are almost 100,000 cases across the system as a whole that have to be dealt with. That means that it is a machine, an engine.
In the limited time I have, may I put it in context? I am worried that when the banks come out of this, which they will, they will undertake wholesale repossessions. Effectively, banks will be banks, so what changes are we going to see?
What procedures will be put in place by the Central Bank to ensure that the banks will effectively deal with the mortgage crisis and allow people to remain in their own homes? Can Professor Honohan say, without saying "systematic", that the Central Bank will ensure that the banks, in implementing the insolvency legislation, will look after mortgage holders who are afraid of losing their homes?
Professor Patrick Honohan
I am not sure I can provide a brief answer to that.
The key question is about what the Central Bank is doing to address this issue.
Professor Patrick Honohan
Yes, that is the key question and as Deputy Fleming rightly said, there must be joined-up thinking.
Ms Fiona Muldoon said that lip-service was being paid to this issue and she said that repeatedly.
Deputy O'Donnell, if you persist in interrupting I will just move on to the next question.
I am sorry, Chairman.
Professor Patrick Honohan
My point is that there are roughly 100,000 cases and there needs to be a mechanism for dealing with these cases which takes account of the individual household conditions and maps them into solutions. We cannot sit in the Central Bank and say, for example, that by next week a bank must give debt relief to some people and get other people to pay their debts. We must ensure that the banks are doing that job. They must do the job. The Central Bank cannot take the Chairman's constituents or anyone else's constituents and deal with them, one by one. That is the job of the individual banks. That is why we have banks and we must make sure the banks have the machinery to do that, with or without the Personal Insolvency Act. Now that we have the PIA it should put more pressure on the banks, in addition to the pressure that we are putting on them in the ways available to us.
While I accept that the responsibility for the micro-management of this rest with the banks, the overall framework for monitoring it is the responsibility of the Central Bank. That is what is going to be put to you this afternoon, Professor Honohan, by questioner after questioner.
Go raibh maith agat agus curaim fáilte roimh Professor Honohan. I welcome Professor Honohan to this meeting. I always enjoy his engagement with this committee and listening to his opinions outside of the committee. I have a number of questions but may not have time to get through them all. Regarding the recapitalisation of the banks - which the Government has decided will only apply to the pillar banks - cold water has been poured on it by various commentators in recent days. An editorial in the Financial Times yesterday stated that there had been a row-back in Europe's position regarding the possibility of the ESM recapitalising banks directly. It suggests that the European Union will ask member states to guarantee the losses of the ESM or to put up 50% of the recapitalisation funding for the banks. In today's edition The Wall Street Journal provides details of the meeting that took place last week between eurozone leaders and suggests that there is nearly unanimous agreement that national parliaments would recapitalise up to 4.5% of core, tier 1 ratios. In other words, the first half of the recapitalisation requirement would be provided by national parliaments. The second half is where the issue gets sticky and that is to be discussed next Monday. The suggestion is that there would be a joint investment by the ESM, along with national parliaments, up to 30%. If any of that were to happen it would basically tear into shreds the agreement that was struck last summer regarding separating sovereign and banking debt and breaking that vicious circle. Obviously Professor Honohan is head of the Central Bank here but as a board member of the ECB, has he seen the Commission's latest report, which is very short, stating this? Is he aware of the discussions that have taken place and is cold water being poured on this? Are attempts being made to water down what was agreed in June?
Professor Patrick Honohan
In general terms I am aware of the discussions but I am not part of them because they do not involve the ECB. This is an intergovernmental matter. Certainly, the announcement after the euro area summit last June was a statement from which we took a lot of comfort. Ever since then we have been trying to find out how it will pan out. There have been fluctuations in the statements and drafts on different elements. To some extent, one of the benefits of the creation of the single supervisory mechanism is that it provides confidence to people in creditor countries who fear that they might have to pick up the pieces in the event of a future banking failure. The assurance that banks in other countries are being well supervised is a step towards providing the confidence that the ESM's involvement in capitalisation of banks could be more generous. On the question of the 4.5% and whether that winds back to what was put into the banks in 2011, who knows? What negotiators are talking about now is primarily the future regime. The discussion in June and the eurozone summit really referred to the previous position of the Irish banks. I do not know and am not going to suggest that we are clear on the previous activity. That is a discussion that will be had.
I appreciate that and acknowledge the fact that Professor Honohan is not at the heart of these discussions. However, it seems clear that they are trying to row back. If member states in the future have to guarantee the losses of the ESM for the ESM to invest in banks, it makes it more difficult for our Government to recoup the money that was transferred from the Irish taxpayer to the banks here.
The promissory note is a key issue and I listened to what Professor Honohan said earlier about extending the duration, changing the terms and so on and that this is all the ECB can really do in this regard. What people really want is their money back. They do not want the €28.1 billion that is promised to be injected into the IBRC, formerly Anglo Irish Bank, for the next 15 years to be paid. They do not want it to be paid by a long-term bond, by a cash payment or the way it was paid last year, through the five-hand trick whereby the Government issues a bond to the IBRC, the IBRC gets €3.1 billion from NAMA, which is owned by the State, IBRC sells the bond to Bank of Ireland, of which we own approximately one third, and then Bank of Ireland gives the money back to NAMA. That is a five card trick but at the end of the day, the Central Bank got its money, its liability to the ECB was paid off and Ireland's debt has not decreased as a result of the trick. Is there any situation that Professor Honohan could see where this debt of €28.1 billion would not be payable by Irish taxpayers?
Professor Patrick Honohan
Not within the central banking system, no. That is the reality of it. I am the chief executive officer of the Central Bank and I owe that money. I am personally responsible for making sure that debt is repaid. If there were to be any relief on it, that would have to come through another route involving governments-----
Why not?
Deputy Mathews, you will have to wait your turn.
Can I ask another question? Having read Professor Honohan's statement to the committee, it is clear that an agreement on the promissory note issue is done and dusted and there is just a bit of tidying up to be done. What we have designed is largely in the interests of the eurozone system as a whole. The design is there and I appreciate that Professor Honohan is not going to tell us about it here. However, I ask him to give us some indicators on a few key questions which are of interest to ordinary people because most people do not care about accountancy tricks. Will this design reduce our debt to GDP ratio? Will it reduce the amount of capital we have to pay to the IBRC? Will it reduce the amount of interest to be paid or will an extension of the term actually result in an increased amount of interest? On those three questions, can Professor Honohan give some indication as to the impact of the design being considered?
Professor Patrick Honohan
First, done and dusted is an over-interpretation of my statement, about which I would urge the Deputy to be careful. I must also be careful what I say here. The design definitely would be very advantageous to Ireland.
It definitely would be very advantageous to Ireland. While it will not change the debt on day one, it would allow a slower and better path to the debt going forward. Any transaction that involves a lengthening of maturities could end up adding lots more years of interest but if the interest rates are sufficiently low, then that is also advantageous. One should not worry on that score. I acknowledge that last year’s arrangement was not of great advantage, although it was slightly advantageous to Ireland, but that was because it was part of a wider solution.
I will move on to mortgages as we are running out of time. We have had engagements with public interest directors and we have heard from bank CEOs, some of whom have been on the media speaking about the Personal Insolvency Bill, most notably Mr. Richie Boucher who stated categorically that there would be no write-down of debt. Public interest directors have made the same argument. I expect that there will be only limited engagement with the Personal Insolvency Bill.
To return to what Deputy O'Donnell asked previously, what will the Central Bank do on the issue? I looked at the statement the Governor made before the committee in September 2011. I agree with what he said then that resolving the problem with arrears would require a case-by-case action by the banks and that the banks must ramp up their effort. He also said that the Central Bank must ensure that progress is made.
Since the time when the Governor delivered that statement to the committee 62,000 people were in arrears for more than 90 days. In September 2012 there were 86,000 people in arrears – an increase of 24,000. The number of mortgages that have been restructured has increased from 67,000 to 81,000. I agree with the Central Bank, Fiona Muldoon and what the Governor and Matthew Elderfield have said before the committee. The banks have not done enough. They have not been aggressive enough.
However, the Central Bank has not done enough. Is it powerless in terms of enforcing the banks to do that? It cannot just sit back and say what has been said, which is helpful. An enforcement mechanism is required that would force the banks to deal with the issue, which they have not done to date. We have had evidence provided to committees such as from Bank of Ireland, for example, showing that there have been 13 applications for the buy-to-let scheme. The banks are simply not doing what is needed. I do not know what powers the Central Bank has. Professor Honohan said that the Central Bank has set deliverables and they have been delivered. What were the deliverables that were achieved in the past year? It is clear that the mortgage crisis got out of control. One in four people with private domestic dwellings is now in mortgage distress.
Professor Patrick Honohan
I am glad that Deputy Doherty pointed out that we set deliverables and they have been delivered because that could give a misleading impression. The sorts of deliverable that we set were for the banks to provide us with a report that would explain what they are doing. We would comment on those and the banks in turn would have to make a further report stating what they would do, what number of people they would hire and what protocols would be put in place. Inspectors have gone into banks and listened to the conversations that were taking place to ascertain whether the process was adequate and used international expertise to engage with people to find a solution. I am probably not describing the process adequately. We are quite concerned about this development. I was also concerned to read and hear the evidence that bank directors were trying to avoid the use of some trigger words around debt. If not, if it was the case that they were simply saying they would get all the money back, they are not going to get all the money back and that is why capital was invested. At the same time it is very important that this is not a give-away by the Government because as members are aware, the Government does not have any spare money to give away.
Deputy O’Donnell rightly said that we should not pay lip-service or engage in grandstanding. That is not what we are doing but our tools are ones of engagement with the banks. The Chair wants us to come out with targets. We are working on targets but I do not want there to be too much reliance on targets for the banks to meet because they will meet the targets, but if the target is a simple one, they will meet it in a way that does not deliver the goods. Apart from what we have said about the directors, I do not think it is the case that the banks are reluctant to do this. They are hesitating because they are not sure which way to jump as they do not yet have a good way of sorting the debtors that need a fundamental and permanent restructuring from those that can be brought back on track in a reasonable period.
I thank the Governor for attending the meeting. I will start with the promissory notes. We have all been out and about over Christmas and as Deputy Doherty said, people just do not want to pay them or have them extended. What would happen if the Government did not pay this year’s instalment of the promissory notes, either by cash or bond? What would be the immediate and direct consequence? It is not a market-based debt as it involves private sector investors. What is the likely action to be taken by the Central Bank or the European Central Bank? Would the ECB further revise its risk control framework to block access to further funding?
Professor Patrick Honohan
A unilateral action of the type the Deputy is talking about would be taken very poorly indeed by the ECB, which – without over-egging the case – has provided a lot of finance to this country at a low interest rate. There are a number of ways the European Central Bank, if it chose, could find to make things uncomfortable in a graduated way. It is not in that space but I have to think what it might do. It could do things that would make us uncomfortable. I will not give a list because it might give people ideas. The Deputy said it is indebtedness to the private sector but behind it there is an indebtedness between the Central Bank of Ireland and the ECB. This is quite a serious matter. We cannot just say “Oh sorry, we did not pay” as that would be taken badly, not only by the ECB but by-----
The system.
Professor Patrick Honohan
-----the wider system and the international markets, God bless them. They would ask what on earth we were doing in Ireland and ask if we were not paying our debts. It is not a light thing at all.
That is not the issue. People say that we should not pay but that we should push the payment further down the line and the consequences are not explained. What happened in other countries when the risk control framework was revised is that we saw regime changes, which was not democratic. Professor Honohan said the consequences would be dire but he did not say what the possible consequences would be.
Professor Patrick Honohan
Large sums of money are being lent by the ECB to various Irish institutions and very low interest rates are being applied. All of that could change if the ECB wanted, but I do not say it would. The reaction of the international markets would also be of concern. I am too much of an academic and I take up the question when I should probably have said it is unthinkable and that I could not possibly imagine such a case. If the Deputy wants to go through it blow by blow, the blows would be unpleasant.
A sizeable proportion of elected representatives and citizens say that they will not pay. It might be interesting at some stage to look at what those serious consequences could be of not getting a deal and taking a unilateral decision to not pay.
We do not have-----
I will move on. Perhaps the Chairman will tell me when I have two minutes remaining.
It is-----
If Deputy Mathews makes another interjection I will time it on the clock and he will be out of speaking time before it is even his turn to speak with the way he is interjecting.
That would be a new development.
I hope the Chairman does not take it out of my time. The ECB purchased significant amounts of distressed euro sovereign debt in the secondary bond market in 2010 and 2011 through the security market programme. I understand that approximately €200 billion worth of bonds are being held to maturity. It is estimated that between €15 billion and €20 billion of Irish bonds were bought, mostly at distressed prices well below par.
The Barclays Capital report of January 2012 stated that about €19 billion of Irish Government bonds were being held by the ECB. Is that the correct sum?
We heard a lot about how Franklin Templeton made huge returns by buying Irish bonds at low prices. It is difficult to estimate the profits the ECB will make on the capital proportion of these bonds bought through the SMP but it could be in the range of €3 billion to €5 billion. The problem is, and I asked about this in private session before and was given short shrift, we do not know what the ECB profits may be because the ECB will not tell us. The Governor sits on the board, however, so does he know and will he tell us?
Professor Patrick Honohan
I know how much Irish paper is held by the ECB in the security market programme. I could try to calculate the profits.
Am I far off in my calculations?
Professor Patrick Honohan
I would steer the Deputy away if I thought he was. I think that more information about the SMP holdings will be provided. The SMP has terminated as a programme and the reasons of market sensitivity that caused it not to be disclosed would fade away. At present, however, I am not at liberty to give out those numbers.
Will we have an understanding of the amount the SMP purchased? I take it Barclays Capital's estimate of €19 billion is close to the truth.
Professor Patrick Honohan
It is likely more detail will be published but I do not know when or how much detail will be provided. I do not imagine the ECB will state that it holds one security and not another.
The Governor will not be dragged any further.
Professor Patrick Honohan
I cannot go any further.
If the ECB profits will be given out in proportion to the eurozone's national central banks, there will be a profit. Are there any other options? Could the ECB sell the bonds back to Ireland at the price it bought them? That happened in the Greek system in a roundabout way and it could lead to a saving of €3 billion to €5 billion on our national debt. Are the various mechanisms being explored at the moment?
Professor Patrick Honohan
It is true the ECB's systems of holdings of Greek bonds have been the subject of certain agreements. It has not been as described by the Deputy, however, with their being bought back at a particular rate. Greece is in a special situation where it had to-----
If Greece is special, so are we.
Professor Patrick Honohan
I know but we are not as special as Greece. Some people are more special than others.
The Deputy raises an interesting question but he should bear in mind that this sort of discussion would be appropriate in a situation where a country is in the situation Greece is in, where it is having debt exchanged in the private market with heavy haircuts and a Government that is scrambling to put a package together.
Ireland is in a very difficult position as well and we must consider how we can maximise our savings. Is there a mechanism where using my figure of €20 billion, it could be sold to the EFSF, purchased back and retired through a 20 year bond? Are we using processes to maximise those savings? I do not care if Greece is special or not. We are in a bad position at present and we must maximise our savings. Rather than concentrating on the billions, I would concentrate on the approximately €20 billion in the SMP. There are possible savings of €3 billion to €5 billion. Is this being tackled properly?
Professor Patrick Honohan
We are not leaving any of those euro on the floor but they are not lying there ready to be picked up. They fall into a different category, that is, assistance of a different type.
There is approximately €20 billion cash in the Exchequer accounts and the NTMA fortunately is now raising further money. It is within our grasp to retire that debt with substantial savings to the taxpayer.
Professor Patrick Honohan
Now I understand the question, which is how to use the NTMA's cash balances. That is an important issue but it has nothing to do with Greece. It is true the NTMA has built up sizeable cash balances as part of its re-entry. While we still have sizeable borrowings from the IMF and European funds, this is what has boosted the treasury cash balances way in excess of what would be needed in a steady state. They will be run down pretty quickly once the programme ends so it would be nice if those funds were invested in something that yielded more.
The NTMA will be appearing before the committee on or around 23 January.
Professor Patrick Honohan
I do not want to imply any disagreement with the NTMA strategy.
The Governor knows the population of the State is under 1% of the total population of the European Union and the Irish economy accounts for around 1.2% of European Union GDP. EUROSTAT, which has calculated the cost of the banking crisis in each EU country, has found 42% of the total bailout of the European banking industry was borne by the Irish people, who are paying just under €9,000 per child, woman and man per year, and the next country is Germany with a payment of €491 per capita. A child can see this level of resources being transferred from the Irish people to the European financial system is going to cause massive crisis in the domestic economy, which is the case, and drag it down. We have, however, an insistence that for ten years, the €3 billion promissory notes are honoured. Why is everyone tip-toeing around the promissory note issue when it is money the Irish people never owed the bondholders, the ECB blackmailed an Irish Government into paying those bondholders and then demanded the Irish people should pay the costs back?
I put to the Governor a simple parable from yesterday, where the straight forward sense of morality and justice of ordinary citizens was borne out. If applied in this case, it would show a clear path out of the crisis. I read in the newspapers today that a grandfather walked into a HMV store in Dublin yesterday. He had a voucher he had bought for €40 and given to his grandson as a Christmas present. It was a HMV debt to him. The shop tried to shift the debt back to him when he went in to get goods for the voucher. HMV wanted him to carry the can. He took three DVDs to the value of his voucher and walked out, entirely morally justified according to the vast majority of ordinary people in the State.
Why will the members of the establishment, with all this power in their hands, not take a lesson from that absolutely justified morality and say to their colleagues in the ECB:
You forced the Irish people to pay the bondholders, to whom they had no responsibility. Look at the Irish economy. It is not capable of meeting this and it will not meet it.
That is their pathway out of this.
Professor Patrick Honohan
It is because of consequences. Deputy Higgins should not think such arguments have not been made. We are not trying to find an emotionally satisfying solution to this. I am not trying to be pejorative. I am simply speaking in terms of how one would think of it. We are trying to find something that gives the best outcome for the financing of the Irish economy and, therefore, for its prospects for recovery to employment growth. Deputy Higgins may disagree with that, but I am firmly convinced that the route we are choosing in negotiating as vigorously as possible, but within accepted frameworks, will get us to a better place than any other kind of action that is available to us. It may not be emotionally satisfying but it may give results.
It is not a matter of emotional gratification. It is a matter of hard economic reality. Taking this level of resources from the Irish economy and from the pockets of the Irish people is torpedoing the domestic economy yet the Governor, in his speech, lauds the austerity policy and the Government for continuing to implement it. All the statistics point to an ongoing contraction in the domestic economy which will be even worse in 2013 as a result of the budget. I do not have time to go through the economic indicators, but employment figures, etc., tell their own tale. It is not, as the Governor says, an emotional issue. It is a question of hard economic reality.
Professor Patrick Honohan
I will address that point. Of course there are details and elements we can discuss, but the broad thrust of the policies that are being put in place is enabling Ireland to continue through these years to spend more than it earns, year in year out. We are continuing to add to our borrowings despite these policies. We have been able to do that because Ireland, that is Government policy and the willingness of the people to go along with it, has convinced the lenders that we will pay back, and so they continue to lend and allow us to have a more gradual adjustment than would otherwise be necessary. That is crucial.
The Government, and the previous Government, should have said this was not the debt of the Irish people. The resources that are burning our people to pay off these gambling speculators should go into job creation in the domestic economy. That is a real pathway out of the situation.
Interest payments on the national debt are about €9.2 billion this year, next year they will be €9.6 billion and the following year €10 billion. Against that ongoing contraction in the Irish economy, which is not made up for by the export sector because it is also having problems, does the Governor think that with such a catastrophic economic situation and level of debt, the sharks in the financial markets will have sufficient trust in the Irish Government to allow it to leave the grip of the troika and give it money in the normal fashion in which they operate? What does the Governor think are the realistic possibilities of the Irish Government exiting the troika programme at the end of this year?
Professor Patrick Honohan
It looks as if that is how the participants in the bond market think about it. Deputy Higgins may say this seems like a heavy burden. They, however, are convinced by the adjustment of public spending and taxation that this is a path the Irish Government can sustain. That is how it looks at present. The Government is paying quite high interest rates. The interest rate spreads are above German rates because interest rates generally are low. This, however, is a path that international lenders find convincing.
Does Professor Honohan think the State will exit the bailout at the end of this year?
Professor Patrick Honohan
That is the intention. That is the plan.
I know it is the intention, but does Professor Honohan think it will happen?
Professor Patrick Honohan
One should always take account of a range of possibilities.
What does Professor Honohan think will happen, considering those possibilities?
Professor Patrick Honohan
I think the Government's intention to exit the programme-----
I know it is the Government's intention, but what is his view?
Professor Patrick Honohan
-----is credible.
The Governor has said it is credible.
Professor Patrick Honohan
I think it is credible. I do not want to comment when there is a range of possibilities and-----
With respect, the Governor does not need Deputy Creed's assistance to give the answer.
If Deputy Higgins does not like the answer the Governor is giving we cannot help that.
Professor Patrick Honohan
I do not get into the business of forecasting. I learned that a long time ago. I am often asked if house prices will go up or down or if business will go up or down.
What are the consequences of not paying the debt?
Deputy Higgins is in possession.
The Governor is not prepared to give an answer.
Professor Patrick Honohan
I work on plan A.
My colleagues may take the Governor up on the detail of my final question. He has been asked many questions on the mortgage crisis. In view of the fact that this has taken so many resources from the Irish economy and people are in extreme difficulty trying to meet mortgage repayments on their homes, would he not take the bold step, which the committee put to him previously, of a general write-down of debt on home mortgages and a downward calibration of the monthly payments and, in that way, free up massive resources that could go into the real economy rather than into the black hole of the banks? Is the obvious solution not to have a significant write-down of debt in general?
Professor Patrick Honohan
Most people can afford to pay their debts. That is the reality. A general write-down would be gifting money to some people who are well able to pay their debts. The problem is the sorting of people who can pay and people who cannot.
I think the Governor misses the point. It is not just a question of the huge difficulty and stress of ordinary people that should be taken into account. People who are meeting their repayments are scrimping to do so and the resources they are scrimping to pay the banks could be going into the domestic economy and reviving and creating demand and, therefore, jobs. Is that not logical economic policy?
Professor Patrick Honohan
Thereby sucking more resources out of the government sector so that the Government has to fill the hole. This is the problem of closing that circuit.
I thank the Governor for attending the meeting. Some of the detail I wished to raise has been covered and I do not want to waste time.
The interlocking nature of the financial setup in Ireland is interesting. Three and a half years ago, I suggested there was a €100 billion write-off, or provisioning, problem in the Irish owned banks. I was laughed at. Does the Governor remember a snowy day in the Gresham Hotel, when there was tittering by people who thought I had lost it when I said the problem was of that scale? The Governor said, "Peter has been the scourge of our deliberations" and I said that was not a fair word. Does he remember that?
Professor Patrick Honohan
I do.
Some €65 billion in the traditional commercial mortgage lending into the property and property related market had to be written off, eventually. The first prudential capital assessment review, PCAR, was in 2010. The next was in 2011. On both occasions I suggested it was not enough. Why was that? The problem, or swamp, we are now stuck in, and from which the banks are not extricating themselves, is that they are not getting on with the job they could have got on with, which is to recalibrate loans to the repayable amounts to allow for normalised remainder spending of household budgets.
The banks are not extricating themselves from this. They are not getting on with the job they could have got on with, which is to recalibrate loans to repayable amounts to allow for normalised remainder spending of household budgets, to which Deputy Higgins referred.
Banks need capital to do that. The first donkey-simple way to get capital was from the State but it is not now because the people who invested in the banks and backed them were bond investors, who were totally exonerated. They got all their returns, including their principal. We are offering ourselves up as paschal lambs to the euro system. It is nuts. As Deputy Higgins said, Ireland has only 1% of the EU population and accounts for 1.2% of its GDP but we have taken 40% of the banking losses to date in the euro system. It is the biggest failure, yet we are the people holding the whole structure together.
I do not believe Professor Honohan. As he said on page 2 of his submission, a series of judgments was made. The judgments were not good. I am not patting myself on the back but I said at the time it would cost €100 billion because that is what the facts and figures indicated. When six small banks lend €400 billion in four years, €100 billion will not be collected hail, rain or snow and, therefore, the provisioning should have been immediate and the creditors should have been brought in and sat down. The creditors are the very people the Governor is talking about, including the euro system, his bank and the ECB in turn. He said in reply to Deputy O'Donnell that the ECB is not in the business of giving grants. Of course it is not but if the ECB is a bank, it also has to make provisions if it made bad loans. Professor Honohan said we accepted frameworks but all of them have got us to where we are. Now we have to engage in some fresh thinking. It is again a judgment call but I do not believe the consequences would be hell, brimstone and firewater. The banks would have to start solving the problem from first principles. Deutsche Bank only a month ago had to admit to the Securities and Exchange Commission in the US a potential overstatement accounting fraud of €12 billion on its balance sheet. This is stinky stuff.
We have to get on. Deputy Fleming is correct that the banks need to engage in write-downs to collectible amounts. At the end of his contribution, Professor Honohan said: "In fact, what we have designed from our side is, I believe, largely in the interests of the euro system as a whole." This raises two questions. First, what has he designed? Unless it is a replacement note with zero interest in perpetuity, which is effectively a write-down or write-off, it will be useless. Second, the euro system is an accepted framework that has not served us well or morally fairly, as Deputy Higgins pointed out. Let us get real. I have said ad nauseam to the Governor and to the Minister for Finance that they should speak up and make the case that Deputy Higgins outlined. He was the first man to present the case to President Barroso in the European Parliament two and a half years ago and the President lost his cool. The Deputy, who never uses strong or bad language, gave him the facts. He presented what he outlined earlier and Mr. Barroso went ballistic because it was the truth.
This is an increasingly biblical encounter. We have had the creation and hellfire and brimstone. I would like to pursue the same theme as Deputy Mathews. The phrase that jumped out at me from the Governor's presentation was the desire not to take other decision makers too far out of their comfort zone. That is a revealing comment from his point of view. I have two essential queries to put to him, the first of which relates to the promissory note. He stated at a previous committee hearing that as a central banker, he cannot envisage circumstances in which the promissory note is not paid within the central banking system. He went on to say that if that scenario were to unfold, the initiative would have to come from elsewhere. This is important and I underline that fact because it should not be taken from this meeting that non-payment of the note is simply not an option. He is saying, as a central banker, that within that system he cannot envisage non-payment but he is conceding that there is a political scenario and a broader scenario within the European system where non-payment is possible without the hellfire, brimstone and catastrophe one might envisage. I would like him to set out for us how it is that we do not pay because it is not my strong view that it is not our debt and not another cent should be paid in respect of the promissory note. Will he sketch out the other actors and the other initiatives that need to happen to ensure we do not have to pay the note? That is the first challenge to him.
The second also relates to the comfort zone of decision makers. The Governor referred to delivering his deliverables. His deliverables, with all due respect, sound lame if it is a case of protocols and listening to conversations between bankers and some unfortunate who cannot meet his or her mortgage repayments and is laden down with debt. It strikes me that the Central Bank is not prepared to press banks beyond their comfort zone and into the zone of reality, as set out by other members, where it is not a case of a blanket write-down. However, what is required is bankers facing reality and the reality faced by tens of thousands of families that will never be able to meet their mortgage debt and that cannot be allowed to be left stew in the juices of a pretence that somehow extend and pretend is okay. That is not okay. How will the Governor move the banks out of their comfort zone? Will he set out the alternative scenario where we do not pay the promissory note?
Professor Patrick Honohan
With regard to comfort zone, when one uses an unusual phrase, it gets picked on.
It was in the Governor's script.
Professor Patrick Honohan
I used it and then the Deputy picked up on it. Let me explain why I used it. We are negotiating and asking for something which is not usual for people to agree to. If we want to get them to agree to it, we want to design it in such a way that it is not so far away from their comfort zone that they will just say "No". That is the point. We have to get an agreement and if we ask for this, which is designed in such a way that it absolutely looks completely unacceptable, they will say "No" but maybe we can get the same by designing it in a little bit different way. That is where the comfort zone comes in; it does not come in for the banks. The Central Bank has no interest in leaving banks in any comfort zone. We want results from the banks. We cannot say, "Just do it", because they have not shown the capacity to just do it. That is why we have to try to get them to have systems that will deliver and that is why it becomes apparently banal and mundane but if they do not have the systems, they will not be able to deliver on any numerical targets that we set in any realistic way. We are not in the space of keeping the banks-----
With all due respect, the Governor is fudging
Professor Patrick Honohan
I am not. In what way would it be-----
He said we cannot force the banks because the banks have not yet equipped themselves how many years on-----
Professor Patrick Honohan
We can force them-----
-----to deal with the crisis that is evident, apparent and bearing down on people. That is an unacceptable cop-out by those in the Central Bank.
Professor Patrick Honohan
There are no steps which have seemed to us to be likely to be effective which we have stopped short of taking because we thought that would be going too far. We are doing everything that we can imagine will be effective.
My goodness, if the Central Bank's delivered deliverables is an indication of what the Governor deems possible, I find that alarming and I am sure other members of the committee equally-----
Professor Patrick Honohan
This is why we have expressed concern. We want to communicate not just privately to the banks, but to the public that we are concerned and we are not comfortable with this.
Somebody may complain that somebody uses colourful language. We are not comfortable with this situation and not satisfied with it. We backed the proposed insolvency legislation as one of the tools that would help. Unfortunately, to the extent that the banks are State owned, the consequences of not delivering on this will be that they will have to get more capital if they do not deliver on this because in the end they will lose out on this. For privately owned banks that is a bit of a sanction as they realise that if they do not get their act together they will be required to put more capital in, so there is a pressure point there.
It is from the creditor - the euro system.
On the promissory note, can the Governor sketch out the scenario of non-payment?
We are way over time now.
Professor Patrick Honohan
It is an interesting question and I will try to answer in one sentence. What I meant there is that if somebody else is prepared to pay the promissory note-----
Who, for example?
Professor Patrick Honohan
Other official sector----
The euro system.
Professor Patrick Honohan
Other parts of the official sector. However, I am not proposing that. I am just saying-----
Has the Governor worked out that scenario and sketched it out in his mind?
Professor Patrick Honohan
Our job here is to sort the promissory note issue.
May I ask a question on that?
We might take some supplementary questions at the very end on the basis that people will be disciplined with their time. I call Deputy Ó Ríordáin, who has five minutes.
I wish to ask the Governor about a financial transactions tax. Eleven eurozone countries have recently signed up to proceed with a tax on their financial transactions. The Minister, Deputy Noonan, has said that such a tax would put 33,000 jobs in the IFSC at risk and that he would not do it without the co-operation of the UK. At a recent event in Dublin I spoke to Ed Balls, MP, who said that even as an opposition politician he would not agree with a financial transaction tax in the UK without the co-operation of New York. In June 2010 the Governor said that such a tax would do little for improving the efficiency or safety of the financial system and would not generate as much revenue as some would suppose. At a level of 0.1%, how much would such a tax raise? Does he still hold the view that it would do little for improving the efficiency or safety of the financial system in Ireland?
I would like to get as tight language as we possibly can on the Government's ambition to exit the EU-IMF programme in 2013. Does the Governor believe such a target is achievable and credible?
Professor Patrick Honohan
On the financial transactions tax, this has evolved in Europe. There have been many discussions on different kinds of financial transactions taxes and their scope. There has been a huge swing in what is being proposed. The paper to which the Deputy referred is an old paper about an international system. Many people were saying that a considerable amount of money could be raised through this. The problem is that the financial transactions vanish to other parts of the world or to other instruments that one has decided not to tax. So it does not yield as much revenue as some people believe. That is taken into account in the discussions in Europe and they do not expect huge revenue.
Along with the ESRI, the Central Bank conducted some further research with particular focus on the Irish situation, including the IFSC. Of course, it is not possible to really dig down and see what the effect would be. This is in the past 12 months and it is published and available. From memory we found the effects would be moderate overall. If such a tax was landed on top of us, we felt it would not be the end of the world, but obviously there would be consequences for some financial service providers. All taxes have consequences, but the Government has decided not to go with the group of countries that favour this tax. A tax such as this sounds fantastic and some people regard it as an opportunity to get at the part of the economy that caused the crisis. It is neither one thing nor the other. It is not terrific and does not help to stabilise the system. It does not raise as much revenue, but probably does not do as much damage as some people say it would. It is a different matter for the British Government that relies very heavily on a huge financial sector in London. The British might have more to lose from it.
I believe the Government's efforts to exit the programme are credible and we are backing them.
Do I have any time left?
The Deputy has approximately two minutes left.
The Governor has not answered my question about how much it might raise. I understand those 11 eurozone countries have signed up to a rate of 0.1%. How much would that raise in the Irish context? He has said the consequences for job losses or the impact on the economy would not be as grave as some people suggest. I ask him to flesh out the consequences it might have and how much it might raise in Ireland.
Professor Patrick Honohan
It depends crucially on what instruments are subject to the tax. As this has progressed it has tended to be watered down. At present in the Irish system, some of the transactions, on which there has been focus, are taxed at a higher rate than that. If it was watered down sufficiently, we could end up losing tax revenue from it. I am probably not sufficiently up to speed with the discussions within that group of countries as to what they intend to tax. However, there are certain activities - probably not those of the biggest employers in the IFSC - which would possibly be adversely affected. One could imagine that some firms' business model would vanish and they would go, but it would not be big. There would be more detail in that paper, but I am sorry not to be up to speed exactly on it.
In the ongoing negotiations on the promissory note which we are told will be finalised and signed off by the Government before 31 March, could there be a solution whereby the entire amount - the €28 billion - is completely written off?
Professor Patrick Honohan
No.
Is it therefore the Governor's opinion that the deal, regardless of its structure, will involve the future appropriation of public money?
Professor Patrick Honohan
Yes.
I thank the Governor. I move on to a very serious case of a constituent in Wicklow that came to my attention on Monday. It seems to be a case of quite serious harassment by Permanent TSB. She is on an autodial whereby the bank is calling her mobile phone on average six times a day. When she answers the phone she hears the message to hold for a member of the debt collection team or something like that. Her mortgage is unsustainable and she is on a back-to-work scheme. She has a small business which hopefully will begin to produce revenue within a year. She has dealt with a very serious stress related medical issue. She contacted the money advice and budgeting service, MABS, and asked it to contact Permanent TSB to say that she would be in contact in July but that she needed to be left alone. MABS did so and the bank is aware of the medical situation. From 27 December the bank has had her on autodial. Permanent TSB has been asked by her and by MABS to stop this. I have more details but do not have time to go into them now. Does the Governor believe this practice by Permanent TSB is acceptable? Does he, as Governor of the Central Bank, condone it?
Professor Patrick Honohan
It sounds that is not consistent with the code of conduct on mortgage arrears that we have set out and which we will be reviewing, possibly in the direction of tightening if anything. It sounds on the face of it that that would go well beyond what we would envisage. I would add a rider though. Sometimes people believe that if this would just go away, the problem would be solved. It may very well be that the best thing she possibly could do would be to answer one of those or to get the engagement. Often the biggest step is for people to realise that their problem is one that can be addressed and that somebody else is sharing it even if that other person is the creditor. Engagement is often the solution.
I agree.
Professor Patrick Honohan
That does not mean they can ring up repeatedly.
She is engaging but just asked for time to be left alone on medical grounds. I move to the Personal Insolvency Act. Richie Boucher issued a public statement stating that there would be no debt surrender by Bank of Ireland under the Personal Insolvency Act. The chief executive of Permanent TSB, Jeremy Masding, informed this committee that it is the policy of Permanent TSB that there will be no debt surrender.
We had that backed up by the former Minister, Mr. Ray MacSharry, who, in front of this committee recently as one of the public interest directors, stated that there will be no debt surrender within the context of the Personal Insolvency Act 2012. It is the clear opinion of the Government is that there will be. Is it Professor Honohan's opinion that there will be debt surrender as part of the Personal Insolvency Act?
Professor Patrick Honohan
My view is that there will be many cases in which there will be permanent loan modifications which involve in some cases, reduction in principal, in other cases, a permanent reduction in interest, etc. That may not be what those gentlemen are referring to. They may have some refined view of what is "debt forgiveness", but my plain understanding is that there will be many cases, although not a majority, in which there will be such permanent loan modifications involving a reduction in principal and-or interest, including cases where there are two-tiers where the second tier might come back at some stage. The Central Bank will not be satisfied with a situation where the banks continue to deal with cases that require a permanent modification as if they were cases that could be fully serviced without any loss of interest because there will be many such cases.
I thank the Governor. If Bank of Ireland and Permanent TSB do what they state they will do, which is to absolutely rule out debt surrender, which Professor Honohan stated is part of the Personal Insolvency Act, what can and will the Central Bank do if it sees that these banks are not engaging in what the Government has deemed to be in the public interest within this legislation?
Professor Patrick Honohan
There are three dimensions to it. Our first interest has been to get them to where we all discussed their procedures, processes and policies. We can require them to have policies that deliver, when they are technically able, a certain number of debt modifications. We do not want to rely on that as the sole measure, but we can and will require them to do that. If they are not dealing with their mortgages, we will have to require them to increase their capital because by not being prepared to deal on a permanent basis with those debts that cannot be paid, they are worsening the risk position of the banks and will require more capital.
I have three questions to pursue.
Deputy Creed has five minutes and he can choose three of them or one of them.
I want to ask the Governor about the mortgage issue which, it is fair to say, is the one that concerns the committee most today, and this issue of the delayed economic recovery that those under mortgage arrears are contributing to because of their failure to participate in the real economy. Much has been said previously about Ms Muldoon's comments and the Central Bank has, in the making, a poster girl for those in mortgage arrears. Are her contributions equally possible to be interpreted as an implicit criticism of the Central Bank because she makes reference to words being misplaced for actions, etc? Is she implicitly critical of the Central Bank in so far as it has failed to recognise that banks do not change their spots in the sense that they are resolutely pursuing persons who do not have the capacity to pay? Has the Central Bank done any modelling on the upside for banks of dealing with this issue in the sense of the release into the economy of moneys that are currently not being spent? I refer to those who need to change a car, redecorate a house and, perhaps, even to go out to eat, the spending in the economy that such activity would unleash and the upside in that respect for the banks.
My second question is on the issue of banking supervision and the new regime being introduced. In the context of this change, has the Governor given any consideration to changing the Statute of Limitations in so far as it enables customers and clients of banks who may have been mis-sold products - there is a case which has some currency at present in the Irish banking system - who, because it was unclear that the product that they had purchased was mis-sold to them, are now statute barred from getting involved in a case? There is the ultimate irony where some, with the benefit of good legal advice, have benefited from pursuing that bank but others are locked outside by virtue of the Statute of Limitations.
Reference has been made to the possibility of exiting the bailout agreement, but I wish to ask in respect of the desirability of it from the point of view of the affordable funding at low interest that the troika makes available to us relative to the cost of self-financing on the international markets given current interest rates.
Professor Patrick Honohan
On the last point, the borrowings that have been made most recently were cheaper than the average cost of borrowing through the programme. That is the way the programme is supposed to work. The programme is supposed to generate a positive momentum where everything is coming back and the markets regain confidence. In many cases in other countries, the countries can cancel the programme stating, "We do not need you anymore and we are back in the market fully." The fact that this has been very slow has been due to two matters: first, the ongoing euro area crisis which has hampered the whole matter; and, second, in my view, the lack of a risk-sharing mechanism to do with banking. The latter was never in the programme and we are still talking about it in terms of the ESM coming forward and making it possible. That is not part of our current programme. On what if it had been included, as we discussed at the time, nobody had a mechanism or an agreement to do that. That is why this programme has been really quite slow. We are pleased now the troika looks more likely to get out than it did six months ago. All going well, and on our current trajectory, it would be cheaper to go out of it. We will not want the public funding to be expensive.
I will duck the mis-sold products question. I do not know much about the issue of the impact of the Statute of Limitations on this. In general, my gut instinct is that the Statute of Limitations exists, it has nothing really to do with the financial sector as such, and it is up to legislators to decide whether they want to change the Statute of Limitations and whether there is a specific reason for doing so in a particular case.
I invite the Governor, in consultation with his colleagues,-----
There is a mobile telephone making a terrible racket.
It might be my own, I apologise. I invite the Governor, in consultation with his colleagues, to come back to us, particularly in the context of a settlement which has been made available to some and not to others, and how the Central Bank views that in respect of the fairness of it.
Professor Patrick Honohan
We are not all powerful. We must work in the context of the law which is arranged by the Oireachtas.
I accept that.
Professor Patrick Honohan
I certainly will look at it.
I raise it in the context of whether we are looking at a new legal arrangement for supervision.
There is a warning at the start of every committee meeting with regard to mobile phones. It is damaging to the broadcasting. I am moving on.
My apologies.
If any other member has a mobile phone switched on, I ask him or her to turn it off immediately.
Is it fair to say that there is a strong thread of consistency between how the Governor is approaching the issues of national debt, the mortgage crisis and economic recovery? All of these matters are of interest to the Governor and he outlined in the bank's strategic plan his priorities. In terms of the Governor's approach on the national debt, the common thread is that he is really saying Joe Public must carry the can, fully and completely, there will be no write-down and there may be a little restructuring. When it comes to mortgage debt, the Governor states Joe Public must carry the can 100%, there will be no write-down and there may be a little restructuring, and in terms of the economic crisis that has resulted from all of that, Joe Public must carry the whole can. What unites his policy and perspective is the priority of protecting private financial institutions. That is the thread that runs through it all - Joe Public carries the can and the private financial institutions get protected. The best the Governor was offering is a little bit of tweaking in restructuring where that suffocating burden and price for an economic crisis caused by others will be strung out over a longer period.
This is essentially what Professor Honohan is telling us.
Professor Patrick Honohan
Not at all.
So there will be a write-down.
Professor Patrick Honohan
Let me frame it another way. We work within a system of national and international law. This gives power to various classes of people. Within this, Ireland, the Irish people and the Irish Government must find the optimal solution in regard to the official debt. Far from stating it should just be accepted and paid I have tried to convey the intensity with which we have negotiated what we think will be at the outer limit of what we could possibly get from that particular window.
In the short time available to me I must ask Professor Honohan-----
Professor Patrick Honohan
The Joe Public thing is completely wrong.
It is simple restructuring, is it not?
Professor Patrick Honohan
As I stated it would be something of great advantage to Ireland, and we must be very careful about wording to ensure it is compliant, and seen as compliant, with the legal structures of others because otherwise they will not do it.
It is only restructuring, is it not?
Professor Patrick Honohan
It is only restructuring?
There is no write-down. That is not even being discussed.
The Deputy's presentation is a little like what his colleagues are complaining about, namely, bankers coming in here and stating they will not give any forgiveness.
It is exactly the same. I am making a direct analogy between the two and I am stating it is the problem. Professor Honohan is capitulating to a perspective which is that we carry the can for everything in terms of the national debt and we might get a little restructuring if we are really lucky, and in terms of mortgage distress the mortgage holders will carry the can for the whole lot and if they are really lucky they might get a bit of mortgage restructuring.
Professor Patrick Honohan
Who is Joe Public in this case? Is it the mortgage holder or the beneficiary of public services which are now being squeezed as a result of this situation?
I wish to pick Professor Honohan up on this because I have very little time. He stated if we gain blanket write-down to current market values across the board instead of the failing system of dealing with it individually, which has delivered nothing so far and even Fiona Muldoon accepts it delivers virtually nothing, that the public would have to pick it up. I will put another scenario to Professor Honohan. This year banks in this country will pay out €17.4 billion to senior bondholders. They already have this money because we put it in there and they will pay it out to senior bondholders. I propose they do not do so, and we could use the money to provide the write-down on mortgage debt. It would not require any further cost for the public or any further borrowing to add to our national debt. What is wrong with this?
Professor Patrick Honohan
The reason I have not recommended such a course of action to the Government, and the Government is in no way interested in doing this, is because the Government recognises the end result of such a policy would be immediately to constrain its ability to provide the public services which are desired by all of us, including the Deputy.
This is money in the private banks.
Professor Patrick Honohan
The Deputy is isolating one particular point, stating we do not have to give this and nothing would happen if we did not give it. Something will happen if it is not paid.
This year we will pay €9.1 billion in interest and in addition the private banks, which we bailed out with money we gave them, will pay out €17 billion to senior bondholders. This is €26 billion. Our primary deficit this year is €3 billion. Is it not simply false to claim we will face a huge deficit cliff if we repudiate the debt and refuse to pay off senior bondholders and give a bit of relief to our economy and distressed mortgage holders? We have the money. We put it into the banks.
Professor Patrick Honohan
It is simply false. There would be drastic consequences to such an action-----
Such as?
Professor Patrick Honohan
I will not describe on television some dramatic situation and give a one-liner such as that ATMs would be closed. ATMs would not be closed, but it is not as if one can decide not to give the money and use it oneself. There are consequences. There is a network of international contracts and lenders who will take action against the Government and we have seen it.
Let them get burned instead of us.
Professor Patrick Honohan
I am not in any way stating the course of action taken at the beginning of the crisis was the best one, but the situation we are in now is not just a question of privately guaranteed-----
Against what I have proposed Professor Honohan stated dire consequences would follow. Does it worry him that an EU Commission report stated domestic growth is in deep trouble and if it continues to deteriorate and the unemployment situation does not improve, our debt may become unsustainable?
Professor Patrick Honohan
Yes it does worry me, which is why it is essential to stay on the course of action which seems to have the chance of bringing the situation gradually under control. This is the best we can hope for at present. The alternative course of action described by the Deputy would be disastrous, in these terms and for Joe Public. The unemployed and those who have lost their jobs have suffered most.
It could not be much worse for them.
Half a million people are unemployed. We have a disaster.
I welcome Professor Honohan to the meeting. He stated he is helping to promote a better culture to help consumers have more confidence in financial services. As a member of the committee I must say we do not have much confidence in financial services. It is a landscape of bankrupt banks across the board.
Professor Honohan listed the new design features which are being put in place retrospectively, which include a best practice regulatory supervisory toolkit, effective and efficient decision-making procedures and top-notch risk assessment. However, it is a fact that his predecessors did not do this, which is why we walked into a currency which is so badly designed and which has raised unemployment from 4% to 14.8% and debt to 125% of GDP.
Professor Honohan's predecessors at the Central Bank stand indicted for sleepwalking into the single currency, unlike the Treasury in the UK which applied tests as to whether it was sensibly based. We found out at 42% of the total debt that it was a badly designed system. I know the Central Bank is improving its level of economic expertise but this has an element of the stable door being shut after the horse has bolted. People outside the Central Bank and the Department of Finance stated those consequences could have been predicted from all of the design faults of the single currency which we have now found and which we are trying to address. The Department of Finance and the Central Bank need the level of economic expertise we are retrospectively bringing there but it is a major flaw in how we got into this situation.
With regard to confidence in financial services, the PTSB announced a very large increase in lending. Did it ask the Central Bank about this? This is how it started before. Anglo Irish Bank was not supervised adequately by Professor Honohan's predecessors. If the PTSB goes on a large spending spree do we know whether other banks will cut back so it will be accommodated within a sensible level of lending in the Irish economy?
In response to Deputy Boyd Barrett, Professor Honohan referred to the compliant legal structure. A financial service which is increasingly getting outside people's ability to afford is health insurance. On 29 September 2011 the European Court of Justice stated the VHI continues to carry out its business without having received authorisation from the Financial Regulator, namely, the Central Bank. We have had the Minister for Health owning a health insurance company and regulating the sector, while the European Court of Justice has stated it is the task of the Central Bank and I support this view. A report published by the Commission last week stated the health sector in Ireland is a major source of inefficiencies in the public finances and in the lack of competitiveness.
Should we not be compliant with the European court's instructions and will the witness advise the Minister for Health on the matter? Professor Honohan is the financial regulator.
There is a report due on stockbrokers and there was malpractice in the area. People also lack confidence in pension fund financial services, and pension funds seem to operate by adding extra years and accumulating vast debts, which worries people. It seems strange that the area is regulated by the Department of Social Welfare and not the Central Bank. It is a financial service which has directors trading while insolvent, as there are €700 million or €800 million in debts in some pension funds. As we try to change the financial landscape, including health insurance, stocks, pension funds and accountancy, how can we get a respectable financial landscape?
Accountants have been known to move money between banks at 11.50 p.m. one day, with it recorded as being in the account all year, before moving it out again at 12.10 a.m. the following day. That reflects badly on Ireland's standing. I do not know who is supposed to regulate accountants but we are into our fifth year since such malpractice became evident and nobody has been charged or gone to jail because of them. Tidying our financial landscape requires a dynamism which has not been there in the past, although I know the witness is trying to introduce it. There has been much malpractice and Ireland does not present a very attractive financial landscape; one could say the financial landscape has contributed to mass unemployment and significant debt burden. Much more tidying is required in that field.
I will support Professor Honohan in anything he can do to bring this about. The financial sector caused this crisis in the Irish economy and it urgently requires tidying. I thank the Chairman and Professor Honohan.
Professor Patrick Honohan
I understand a decision has been taken to transfer the supervision of health insurance to the Central Bank and we have started the process of examining the firm. The pension fund issue is not being transferred, and some people have mentioned this. We are not in an empire building mode; we have quite a bit on our hands and we have expanded simply to deal with the large sector we already have. Nobody is happy, especially ourselves, in what we have been able to achieve so far in banking, which is the heart of the problem that has arisen. I take the points on board and it is certainly true that all the areas listed have problems which are being considered by the responsible authorities. Although I am not queuing up to do so, when everything else is sorted out we may take them on board.
Will the witness speak about the PTSB? Did it seek permission for the action?
Professor Patrick Honohan
I am sure the plans are discussed with people at the coal face who deal with PTSB. I know our overall strategic reviews of the banks in the country will examine its business plan, scale of expansion and whether we are happy with the amount of risk taken. We have systems that cope with such issues. I know the committee does not like systems but prefers results.
We will take processes but we are task-focused. I will take a number of brief supplementary questions together.
What is the cost of the emergency liquidity funding?
Professor Patrick Honohan
It is at 75 basis points.
Professor Honohan indicated that if "others could pay" the promissory note------
Professor Patrick Honohan
I did not want to send out a hare and it has been picked up. In considering if we have to pay it all, the answer is "Yes" unless somebody else comes up. I am not saying I have somebody here. I am talking about the structural position. It is a false hare or a false lead. I am not pointing in a certain direction.
It is a wild hare.
Professor Patrick Honohan
In the view of the Government and in my view, there are two strands in the restructuring of bank debt. One is the issue of the promissory note, which is to do with the ECB, and the other is the issue of the capital injected into the other banks as a going concern. That is where the intergovernmental money from the European Stability Mechanism, ESM, would be relevant. I do not like to cross over as I am not sure one can get as much money.
Where does the witness see the legacy debt in other banks progressing, particularly with regard to negotiations involving the ESM?
Professor Patrick Honohan
I provided an answer to Deputy Doherty on that point. The process is ongoing and there is much talk and formulation regarding how to deal with new problems. It is not exactly clear how that maps into old legacy issues that were mentioned by the end of June summit.
I believe a residual-----
The Deputy is like Lieutenant Columbo, he always has one more question.
I ask Professor Honohan to bear two things in mind, and as he noted, they are related. One is the necessity to get creditor restructuring for the legacy debts in the Irish Bank Resolution Corporation, IBRC, which is a cancellation of the emergency liquidity assistance, or an in perpetuity at zero, with the promissory notes being torn up. Our two surviving banks should not be called going concerns but they are just about surviving. Their capitalisation is still falling short of what is needed, which is an expression of their inability to deal with the existing reality. Insolvency legislation only describes this but will not do anything about it. They need further capitalisation from the euro system rather than us as a people. I ask the witness to bear that in mind.
Professor Patrick Honohan
Absolutely. The Deputy's analysis is very solid on the issue.
I asked the last day if Professor Honohan felt he was being pushed around by the European Central Bank council and he said "No". I ask the question again and I ask that he not be pushed around. I do not believe consequences will be dire. As Deputy Boyd Barrett noted, we are into almost a primary equivalence in our deficit, and we do not need the five card trickery mentioned by the witness posed in our faces. We have the resources to continue and by all moral and financial measurement, we should be exonerated from debts imposed on us that saved the system, although the system still is not safe.
The stress tests will be performed on our financial institutions later this year, having been postponed since last year. Professor Honohan has indicated that he does not like predicting the future but are there signals of a concern as we enter into the process? Those concerns may relate to the requirement for additional capital, however large or small that would be.
The next question is related to the workings of the European banking system. The OECD has released a report on capital ratios for banks across the European system, although I am not sure if the witness has seen it. It has suggested that the core tier 1 capital ratio is not satisfactory as it requires the banks to weight their own products for risks. It also has government bonds from euro member states as non-risk weighted. Essentially, there is a reliance on the banks. The OECD has suggested something similar to the United States, where there is 5% on all assets. The report argues that European banks are under-capitalised to the tune of €400 billion, with France and Germany being the leaders in this under-capitalisation.
There is obviously weight behind this OECD report. The target of the ECB is 9% core tier 1. Is there any concern within the ECB about the targets? Is there a concern that banks across Europe could be under-capitalised?
Obviously, €400 billion is a huge amount of money across the European Union.
Professor Patrick Honohan
As regards the stress test, I will not be drawn into an assessment of what that will be. We are doing a serious exercise and have more information now and more analysis of what type of borrowers are in distress. Some things have not gone as well since the last stress test, while other things have gone a bit better. I will not be drawn into that, however.
There has been a lot of discussion over the capitalisation of banks. It is clear that the American banks have come out of this crisis faster than many people expected. There is a lot of talk about $700 billion being poured into the banking system but most of it poured out again. In most cases, the US government and its agencies cleared out of it.
In the European banks, there have been a number of stress tests using different models and approaches. None of them was as in depth as ours because we obviously had the biggest problem to deal with.
As far as some of those specific points are concerned, including the measurement of risk-weighted capital, the Central Bank does not use very much of the banks' own models for risk weighting on the assets. We have overrides in there and we do not think those models have really been tested over a long enough, stable period. Therefore, we are not vulnerable to that particular critique. We like to see what we have. We only have a small number of banks and we can see right into their balance sheets more easily than happens with large, complex institutions.
There is no movement away from risk-weighted to overall assets?
Professor Patrick Honohan
I see the overall leverage ratio, which is attractive in an American context, as a useful additional measure. The risk-weighting can be gamed, while the simple leverage ratio which cannot be so easily be gamed, is crude. We can require them to have both.
I wish to return briefly to the prospects for economic recovery. In the best case scenario set out by the troika and the Government, we are looking at a situation where at the end of this year there will be zero increase in net employment.
Professor Patrick Honohan
A little growth.
Not according to the medium-term fiscal outlook; it will be zero.
Professor Patrick Honohan
The Cental Bank says there will be a little bit. Okay, about zero but with a little fluctuation.
Their best projection is that by 2015 it might have dropped by about 1% to 2%. In the best case scenario, therefore, we are facing chronic mass unemployment for the next three years. If the European Commission is correct and things turn out worse in the domestic economy, it will be worse than that. Does Professor Honohan honestly think that is a serious perspective that offers any hope to the people of this country over the next three years? Does he really think that is the best we can offer as an economic perspective?
Professor Patrick Honohan
If I could find a policy measure or approach that could guarantee, or could even have a good prospect of doing better than the current policy approach, I would recommend that policy. Indeed, sometimes I make recommendations. The broad, drastic alternative approach which the Deputy outlined earlier is not one that I think would generate more.
Could we not examine it instead of just ridiculing it? Given that we have detailed figures on the Government's perspective and the troika's perspective, and they are not exactly bright and hopeful, would it not be worth examining the alternative scenario rather than just ridiculing it as certain to bring disaster?
Professor Patrick Honohan
I did not intend to convey ridicule, just a criticism of it. I hope I am not closed to thinking of many different courses of action, even ones that are far away from what is going on, and considering them all. We are in a bad position. I think that is absolutely right. Unemployment is shockingly high and the prospects the Deputy describes are weak. It gets us back from the situation of having no access to financing, but it does not get us back to a strong and healthy economy as quickly.
Remember the crisis we were in in the 1980s. We did come back from it and the foundation for coming back was building confidence - the confidence of our creditors and domestic confidence, which is not strong now. It did bounce back quickly. People are saying that the situation is not as favourable now but it is possible to do better than the forecast. As Deputy Mathews is always telling us, forecasts are subject to a wide variation and uncertainties. Sometimes things work out better, but so far they have worked out worse than we expected.
That is the downside.
I am not surprised that Professor Honohan will not entertain the radical alternatives we have outlined. His whole thinking is confined within the rules and laws of European capitalism. In its current workings, capitalism is an utter disaster. Trillions of uninvested profits are sitting in banks around Europe, which the multinationals and the big European companies refuse to invest because they do not think they will get enough profit back. Is it any wonder that we have 25 million people unemployed in the EU? If one confines oneself to that, then we do face an ongoing catastrophe for our people.
The European Central Bank was among the most implacable agents or arms of the establishment, insisting that the Irish people should carry the bondholders' private debts, and that there should not be any getting away from that. Professor Honohan is in Frankfurt every month, so he is talking to his colleagues in the ECB. Does he think that by March this year there will be a long-term agreement in regard to the promissory note, rather than the type of trickery we saw last March?
Professor Patrick Honohan
I promised not to go beyond what the Minister for Finance has said. What we are talking about here is something that will be long term, will settle and will put this to bed. We are not talking about some kind of temporary or inadequate measure. We are talking about something solid. That is what we are aiming for.
Does Professor Honohan think it will happen?
Professor Patrick Honohan
I am not going to go beyond what the Minister for Finance has said. However, the end of March is definitely when this has to happen.
They will simply be stringing it out for our children's children - let alone our children - to carry the debt.
Professor Patrick Honohan
If it happens, it will be advantageous. On the Deputy's main point, however, the system we have - for all its imperfections, and it has stumbled badly - nevertheless, and despite that setback, has delivered great prosperity. We all have views on how to improve that system but overall we cannot forget that point and we cannot think of a better system.
I will end where we began this afternoon with the completed insolvency legislation and the awaited results for mortgage borrowers who were beyond the pale in terms of being rescued. I will repeat the request to Professor Honohan. By the first quarter of this year, I will be asking him for some report on what monitoring has been carried out by the Central Bank in that area and what level of engagement, and if possible enforcement, has gone on between the Central Bank and the banks to ensure that they are engaging with the personal insolvency legislation. I will be formally asking Professor Honohan to give us some indication and update on how mortgage debt is being dealt with in the first quarter.
Professor Patrick Honohan
I am sure one of my colleagues would be better placed than I was today to give the committee more chapter and verse and more colour on what exactly has been going on.
I thank the Governor, Professor Honohan, and his colleagues. I understand we have been joined in the Public Gallery this afternoon by Mr. Neil Whoriskey, Ms Nicola Faulkner and Mr. Ronan Sheridan. The clerk usually writes down what was a lively discussion and this meeting, when Professor Honohan appeared before the joint committee, definitely involved such a discussion. That said, I again thank him for the time he has afforded members this afternoon. I am sure we will be meeting him again in the future. As this has been my first opportunity to meet Professor Honohan in my capacity as Chair, I very much look forward to that and to other engagements with him in the future.
As there is no other business, is as agreed to adjourn the meeting sine die? Agreed.