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Seanad Éireann debate -
Thursday, 5 Mar 2009

Vol. 194 No. 7

Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Bill 2009: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

I thank the House for agreeing to discuss this Bill today at short notice.

The Bill represents an important step in the implementation of the Government's announcement on 11 February regarding the proposed recapitalisation of Allied Irish Banks and Bank of Ireland. It implements the Government's decision that the National Pensions Reserve Fund, NPRF, will play an important role in the recapitalisation programme. Across the world, the past 18 months have seen unprecedented turbulence and pressure on financial institutions, and banks in particular. Banks have had to compete strenuously for deposits and other forms of funding in a weakening economic environment.

The global recession has shown us all the pivotal role the financial system plays in supporting the economy. In turn, it has become clear to all that it is essential for Governments to take appropriate action to maintain the stability of the financial system. Governments across the developed world have intervened to assist banks which are seeking capital in difficult market conditions. Like many other European countries, Ireland moved to ensure the security and stability of its banking system. Throughout this process, our approach has been based on two basic principles. First, that the State will not let any systemically relevant financial institution fail and, second, that any State involvement in financial institutions will protect the interests of the taxpayer and have regard to legal implications and European requirements.

In view of the continuing turmoil in global financial markets, the Government initiated intensive discussions with Allied Irish Banks and Bank of Ireland with a view to securing the position of these two banks. The recapitalisation of Ireland's two main banks is a key element in the Government's overall strategy for addressing the current economic challenges. A banking system that can provide credit to sound businesses and personal borrowers is a fundamental requirement to maintain employment and output in the economy.

The Government has decided to provide €3.5 billion in core tier 1 capital to each of the banks which will boost their capital ratios. In return for the investment, the State will hold preference shares that will pay a fixed dividend of 8%. The banks can redeem the preference shares at par within the first five years, or at 125% thereafter. The Minister for Finance will also have the right to appoint 25% of the directors of each board and will also get 25% of the total ordinary voting rights in decisions on board appointments and change of control.

Warrants attached to the preference shares give the State the option to purchase 25% of the ordinary share capital of each bank in five years' time at predetermined prices. The recapitalisation will ensure the two main banks in Ireland are in a position to provide the necessary commercial credit facilities to their customers and to the economy in general. In line with this, the banks have given a commitment to increase lending capacity to small and medium-sized enterprises by 10% and to provide an additional 30% capacity for lending to first-time buyers this year. If the mortgage lending is not taken up, the extra capacity will be available to small and medium-sized enterprises. Statutory codes of practice on business lending and mortgage arrears have been finalised to ensure credit is extended in an appropriate manner. Of the €7 billion to be provided, €4 billion is to be funded from the current resources of the National Pensions Reserve Fund and €3 billion will come from the frontloading of the Exchequer contributions to the fund for 2009 and 2010. These investments will remain part of the fund and the return earned on them will accrue to the fund. The use of some of the resources of the National Pensions Reserve Fund to fund the bank recapitalisation programme strikes a prudent balance between the need to address an urgent economic priority and the need to continue to take account of long-term budgetary stability and the sustainability of our pensions system.

The current crisis has demonstrated the benefit, for a small open economy like Ireland, of maintaining a sovereign wealth fund such as the National Pensions Reserve Fund. It is vital, in relatively good times, to establish and add to a fund of that nature to prepare for the inevitable rainy day. If the fund had not been available to us, our current position would be even more difficult than it is. The existence of the fund gives the lie to the notion that at the height of the Celtic tiger, we were awash with revenue but it was squandered. The National Pensions Reserve Fund has enabled us to cope with the banking crisis without aggravating further our alarming budget deficit. The total amount of money to be invested — €3.5 billion in each of the two banks — was determined following detailed consultation with financial and property experts, consideration of likely trends in asset values and examination of various related stress scenarios. The State's investment will significantly strengthen the core tier 1 capital of the banks, bringing it in excess of regulatory limits. The State will obtain a direct return on its investment in specified terms. The banks have agreed a customer package containing a number of measures to improve lending in the economy, including statutory codes on business lending and mortgage arrears and a €100 million fund to support environmentally friendly investment in innovations in clean energy. The recapitalisation programme will strengthen Allied Irish Banks and Bank of Ireland as financial institutions central to the economic future of the country. The Government is in discussions with other relevant institutions about their capital positions. It will take whatever measures are judged necessary in that regard at the appropriate time.

As Senators are aware, the National Pensions Reserve Fund was established in 2001 with the aim of meeting as much as possible of the cost to the Exchequer of the social welfare and public service pensions that will be paid between 2025 and 2055. Under the National Pensions Reserve Fund Act 2000, the Minister for Finance is required to pay 1% of GNP into the fund every year. This Bill amends the 2000 Act to facilitate the recapitalisation of financial institutions. It amends the Act so that, in respect of credit institutions listed on a stock exchange, the Minister for Finance may, in the public interest and in particular circumstances specified in the Bill, direct the National Pensions Reserve Fund Commission to make investments in such institutions and to underwrite their share issues. The Minister may also give directions in relation to the holding, management and disposal of such directed investments. An investment in a listed credit institution made by the commission on foot of a direction from the Minister is referred to in the Bill as a "directed investment". That is what is meant when that term is used.

This Bill will enable the Minister to make additional payments into the fund for the purposes of a directed investment in a listed financial institution and to transfer into the fund a shareholding or other interest held by him or her. If the total payments or transfers made in any one year are greater than 1% of GNP, the excess will count towards the requirement to make annual contributions to the fund in future years. For example, the annual contribution from the Exchequer to the fund will amount to approximately €1.6 billion this year. This amount was provided for in the 2009 budget last October. The €3 billion contribution from the Exchequer to the cost of the recapitalisation of Allied Irish Banks and Bank of Ireland will comprise the €1.6 billion I have mentioned and an additional amount of €1.4 billion that will count towards the Exchequer contribution to the fund in 2010.

Perhaps the most notable of the other provisions in the Bill is the proposal to amend the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 to provide for greater transparency in respect of trading in financial instruments. This provision will allow the Minister for Finance to make regulations requiring certain information relating to transactions in financial instruments to be disclosed to the Financial Regulator, the market or both. It is intended that this measure will provide for the introduction of regulations requiring the disclosure of contracts for difference.

I wish to discuss the provisions of the Bill in more detail. Sections 1 and 2 contain the standard provisions that are necessary to explain certain terms used in the Bill. Section 1 links the Act to the National Pensions Reserve Fund Act 2000 by defining the "Principal Act" as the National Pensions Reserve Fund Act 2000. Section 2 amends the principal Act by inserting definitions of a number of technical terms used in the Bill, such as a "Commission investment vehicle", a "directed investment", a "listed credit institution" and a "regulated market".

Section 3 of the Bill extends the functions of the National Pensions Reserve Fund Commission to enable it to manage directed investments. It amends the commission's functions to take account of investments to be made by the commission in accordance with directions from the Minister for Finance. It enables the commission to have regard to directed investments when determining the investment strategy for the National Pensions Reserve Fund. Under the National Pensions Reserve Fund Act 2000, the commission is precluded from investing in Irish Government securities. Section 3 also contains a technical provision to clarify that the reference in the principal Act to "Irish Government securities" means debt instruments issued by the Exchequer. With the exception of donations and bequests, the commission is currently allowed to accept contributions from the Central Fund only. This section amends the functions of the National Pensions Reserve Fund Commission to enable it to accept funds or assets for the benefit of the National Pensions Reserve Fund from sources other than the Central Fund, if so directed by the Minister. This technical provision is the counterpart of a provision in section 6 that will allow the Minister to transfer shareholdings and other assets into the fund.

Section 3 of the Bill also enables the National Pensions Reserve Fund Commission to advise the Minister for Finance at his or her request on a proposed directed investment. This will allow the commission to carry out the necessary due diligence on Allied Irish Banks and Bank of Ireland before the actual recapitalisation, for example. This section will also enable the commission to underwrite issues of securities. This measure is being included in the Bill, as an enabling provision, in case there is a need for the commission to underwrite a capital-raising issuance by a financial institution. This is not something we are proposing to do — we are merely taking the opportunity to include the provision on a contingency basis while we are amending the National Pensions Reserve Fund legislation.

This legislation also allows the National Pensions Reserve Fund Commission to form a company or other body corporate. This will allow the commission to establish special purpose investment vehicles where it is more efficient for the commission to invest through such a structure. The commission is currently precluded from controlling a company. Section 15 of the National Pensions Reserve Fund Act 2000 prohibits the commission from controlling a company or acquiring a shareholding of such size that the commission would be required to seek control of the company. This is appropriate given the purpose of the fund. The role of the commission is to invest for the optimum return, rather than to get involved in managing companies. It is necessary to lift this restriction in two instances, first, where the commission sets up a special purpose investment vehicle, as I have described; and second, where the commission is required to invest in a credit institution on foot of a direction from the Minister, in other words, when the commission is facilitating the State recapitalisation by investing in the banks.

I emphasise that the State does not intend to take control of the recapitalised financial institutions. The recapitalisation of Allied Irish Banks and Bank of Ireland is to be based on the State taking preference shares, rather than ordinary shares, in those institutions. However, if the fund were to underwrite a future share issuance by these institutions, it is possible that the fund's overall holding could constitute a controlling interest. This is not something we propose to do — we are merely providing for it in the Bill on a contingency basis. It is proposed that certain statutory provisions in company and takeover law should not apply where the commission is required to invest in a financial institution, as part of the recapitalisation programme, on foot of a direction in the public interest. The proposed provisions would ensure that investments by the NPRF in the financial institutions on the scale now envisaged would not be impeded by procedural delays.

Accordingly, section 5 of the Bill provides that certain provisions of competition and takeover law and section 7 of the Credit Institutions (Financial Support) Act 2008 do not apply in respect of an acquisition or proposed acquisition by the commission of an interest in a traded credit institution or a transfer into the fund of the Minister's interest in a listed credit institution, if the acquisition or transfer results from a directed investment.

Section 7 of the Credit Institutions (Financial Support) Act 2008 essentially provides that the Minister for Finance is to take over the role of the Competition Authority in relation to the merger or acquisition of a credit institution in the current banking crisis. That section will not apply where the Minister is directing the NPRF Commission to recapitalise the credit institutions, because it is not necessary in these circumstances. The section also provides that nothing done by the Minister, the commission or a commission investment vehicle for the purposes of a directed investment in a traded credit institution will constitute a reorganisation measure for the purposes of certain European Communities regulations. The Bill seeks to ensure that contracts previously entered into between recapitalised banks and third parties are uninterrupted, so as to permit the orderly continuation of the banks' operations, notwithstanding that shares in the bank have transferred to the commission.

Section 6 of the Bill amends section 18 of the principal Act in a number of respects. First, it amends section 18(2) of the principal Act by allowing the Minister to make the annual contribution of 1% of GNP in a lump sum or in instalments at any time during the year, rather than in equal quarterly instalments. The NPRF Act 2000 provides for a contribution from the Exchequer to the fund each year of an amount equal to 1% of GNP, to be paid in equal quarterly instalments. To allow more flexibility, we propose a technical provision so that the annual contribution need no longer be paid in equal quarterly instalments. This change would, for example, allow the Minister to pay the contribution in a single instalment early in the year, if funds were required in the context of bank recapitalisation.

Section 6 of the Bill also amends section 18(5) of the principal Act to include an enabling provision, which would allow the Minister to transfer into the fund a shareholding or other interest held by the Minister or his or her nominee, and to contribute to the fund by paying a sum into the fund. Section 6 provides that these transfers or contributions may be taken as satisfaction or part satisfaction, as the case may be, of the Minister's obligation under section 18(2) of the principal Act to make annual payments into the fund. If the total contribution exceeds the amount required to be paid into the fund in any one year, the excess shall be taken in satisfaction or part satisfaction of the amount required to be paid in any subsequent year.

Section 6 also provides that stamp duty shall not be chargeable on any instrument giving effect to a transfer by the Minister into the fund. Ownership of the fund is vested in the Minister, so there is no basis for stamp duty being payable, when the Minister is transferring a shareholding in his or her name to the commission for it to manage and invest on his or her behalf. Section 6 provides that any commission investment vehicle which may be established is owned by the Minister.

The NPRF Act 2000 provides that the NPRF Commission controls, and is responsible for the investment of the National Pensions Reserve Fund, subject to the level of risk involved being acceptable to the commission. This is effectively a commercial investment mandate. The concentration of significant investment in a particular sector or small number of institutions could be construed as contrary to this strictly commercial mandate. Accordingly, section 7 of the Bill amends section 19(1) of the principal Act to provide that the commission's strictly commercial investment mandate will not apply in the case of directed investments.

In the intervening years, there has been significant debate on the overall parameters, within which institutional and sovereign investors should be expected to invest the funds they manage on behalf of the ultimate owners of those funds. There have been considerable developments in thinking in this area, and the NPRF Commission has taken a number of initiatives to integrate environmental, social and governance considerations into its management of the fund. In light of this ongoing debate, and having regard to the experience of other countries with sovereign investment funds, it is the Minister's view that this matter requires further consideration. This subject is frequently debated in various international fora such as the OECD and ASEAN.

Given the sensitive and urgent nature of the legislation required to facilitate the recapitalisation of the financial institutions and the complexity in drawing up a responsible investment policy that will work in practice, it would not be appropriate at this time to include such a provision in this Bill. However, given the importance of the subject and in order to advance matters, the Minister is establishing an interdepartmental committee to examine the issues further. The group will report to the Minister within three months of its establishment, and will be open to receiving the views of interested parties.

Section 8 is the key section in the Bill, as far as recapitalising the credit institutions is concerned. The NPRF Commission will be the principal agent of the State in providing the additional investment needed to capitalise the financial institutions. This will require the NPRF Act 2000 to be amended to give the Minister for Finance the power to direct the commission to make, hold and dispose of investments in the financial institutions as necessary. Accordingly, section 8 of the Bill amends the principal Act so as to provide that the Minister, in the public interest, having consulted the Governor of the Central Bank and the regulatory authority, may, in specified circumstances, direct the commission to invest on specified terms and conditions in certain listed credit institutions and to underwrite or otherwise support the issue of securities in such listed credit institutions.

The section also enables the Minister to give a direction to the commission in relation to the holding, management and disposal of, and any voting rights attaching to, a directed investment on such terms and conditions as are specified in the direction. The exercise of these powers will be subject to the normal EU state aid approval process. This section also provides that the Minister, the commission, a commissioner, the manager of the fund and staff of the manager shall not be taken to be shadow directors within the meaning of section 27(1) of the Companies Act 1990 of a company or its subsidiary, in which the commission has made a directed investment.

Section 9 of the Bill amends the Taxes Consolidation Act 1997, TCA, to provide that the same exemptions from taxation that apply to the NPRF Commission shall apply to any "commission investment vehicle", as defined in section 2 of the Bill. It is logical, that if the commission has tax exemptions when investing in its own right, then it should have the same exemption when investing through an investment vehicle.

Section 10 of the Bill amends the European Communities (Markets in Financial Instruments) Regulations 2007, to clarify that the NPRF Commission and any commission investment vehicle which may be established, are not subject to the regulations. This is a technical provision. For the avoidance of doubt, it provides that the NPRF Commission and any commission investment vehicle are not to be regarded as investment intermediaries in their role of investing the fund on behalf of the Minister.

Section 11 amends the Securitisation (Proceeds of Certain Mortgages) Act 1995 to facilitate the winding-up of Ulysses Securitisation plc. This is a securitisation vehicle, which was established in 1995 to borrow for the Exchequer, using the cash flow from local authority mortgages to guarantee repayment of the bonds issued by Ulysses plc. The bonds issued by the company have been repaid and it is now proposed to wind up the company. The provision proposed in section 11 is a technical change to the legislation to facilitate the winding-up of the company and to provide that any remaining assets of the company on its winding-up will be transferred to the Minister for Finance or to such other body as he may direct. Regrettably, the winding up of Ulysses will not represent a major windfall for the Exchequer. Ulysses holds approximately €127 million in cash, but it is already borrowed by the Exchequer as ways and means borrowing, so that this amendment will not represent a real improvement in the fiscal arithmetic.

The Bill includes a provision amending the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 to enable the Minister for Finance to make regulations requiring that certain information relating to transactions in financial instruments must be disclosed to the Financial Regulator or the market, or both.

Certain financial instruments can be used to acquire an economic interest in the shares of publicly listed companies without acquiring direct control over, or ownership of, such shares. Such financial instruments are increasingly used by investors to avoid disclosure of their economic interest in a company. As Senators will be aware, there has been particular controversy regarding the use of contracts for difference, CFDs, which, unlike share transactions, do not need to be reported to the market unless the contracts explicitly give a right to acquire, or give access to, voting rights.

The provisions in section 12 of the Bill would enable the Minister for Finance to make regulations to require all those who have entered into transactions in financial instruments to disclose certain information relating to those transactions to the Financial Regulator or the market or both. The provision covers all financial instruments to cater for possible future market developments but the intention is to make regulations covering CFDs in the first instance.

Section 13 contains a commencement provision which will apply to the whole Bill other than sections 3(d) and 3(e) which are needed urgently to facilitate the recapitalisation of the financial institutions. The commencement provision has been included as a courtesy to the European Commission which is still examining some of the provisions of the Bill, as is to be expected given that the main purpose of the Bill is to facilitate the recapitalisation of the two main banks.

The decision to recapitalise AIB and Bank of Ireland is a clear indication that the Government is fully prepared to stand behind the Irish banking system. The Government's comprehensive recapitalisation programme for our financial institutions will reinforce the stability of our financial system, increase confidence in the banking system in Ireland, and facilitate the banks involved in lending to the wider economy. I commend the Bill to the House.

It is almost sobering listening to the Minister of State discussing this legislation. When one thinks about Osama bin Laden's claim that he would destroy the world's economy even if it took him 30 years, little did he realise that it would take the international bankers in this country and across the world a much shorter period than that to do the destruction for which he hoped. Here we are today discussing our way of digging ourselves out of this mire in which we have put ourselves.

There are two big issues: the National Pensions Reserve Fund and what it is all about, and the banks. There was a problem recognised right back in 2000 that there would be a difficulty with paying public sector pensions from 2025 onwards. When the National Pensions Reserve Fund Act 2000 was enacted so that 1% of gross domestic product would be put into this fund, the first and second benchmarking reports were still to arrive.

I remember speaking in the Dáil on a number of occasions asking that some of the funding from the National Treatment Purchase Fund be used to build hospitals, schools and roads in this country. It was pointed out to me ad nauseam by different Ministers for Finance and the Minister for Health and Children that the National Treatment Purchase Fund was not a slush fund for Government. Neither is it — I would hate to correct the Minister of State, Deputy Mansergh — a rainy day fund for the Government. It was quite clearly pointed out that the National Treatment Purchase Fund was to be used to pay public sector pensions and there was no other purpose for which it could be used.

If we are taking €4 billion out of the National Treatment Purchase Fund to invest in the banks and we are not sure what could happen with the banks yet and therefore this might not be the wisest investment,——

On a point of information, it is not the National Treatment Purchase Fund.

Sorry, the National Pensions Reserve Fund. It is a minor point, to be honest, given what is happening. If the Government is taking €4 billion out of this fund and is not putting any payment into it this year and next year, what due diligence has been carried out on the effects of this on the National Pensions Reserve Fund? The Government is taking out a block of four years' payments to the National Pensions Reserve Fund plus there has been a decrease in the investment return of this fund because of what has happened internationally, and when the Government speaks of starting to get back on track in paying into this fund in 2011, it then will have approximately 14 years before this fund is supposed to start paying out on public sector pensions. Has due diligence been done on the effects of this legislation on the National Pensions Reserve Fund? That is a matter which has not been alluded to. I acknowledge we are in a difficult crisis, but when this fund was set up in 2000 it was quite clearly stated by the then Minister, Charlie McCreevy, that this was a serious issue and we needed to start building up the fund quickly to deal with public sector pensions. That is the first question I want the Minister of State to answer.

The sum of money involved is quite staggering. The Government is handing over to the banks all of the public sector pension levy, the legislation for which was passed last week, plus this money. The next issue we should look at is the banks. There is no confidence that we are being fully informed in the House about what is happening with the banks. In October last, the chief executive of AIB stated that the bank did not need this capital and was quite happy that it had enough capital within its banking system and that it would need no recapitalisation. Then there was the PricewaterhouseCoopers report which raised concerns about the level of indebtedness within all our major banks. That report was not published and therefore we do not know how serious those issues were. Now we are told that the National Pensions Reserve Fund will conduct its own due diligence on the banks to look at how stable they are from the point of view of handing over billions of taxpayers' money to recapitalise them and whether that will have any effect in the long term. Let us not forget the annual reports and how matters have changed from the public utterances coming from those banks.

I am not a bit surprised that international investors have lost confidence. If one was thinking about investing money in either of the two major banks, one would have got sorely burnt and been sorely disappointed with the information one would have been receiving in the public domain from those banks and from the Government in the past six months. Before we go pouring billions of taxpayers' money into this there is a need for more of this information to be made available to Members of this House.

Over recent weeks, as this crisis has got out of control, Government representatives have been desperately trying to tie the Opposition in to the decision-making process of the Government. I do not agree with that. There is a serious need at this stage for constructive opposition to what the Government may be doing because we are not really seeing the clarity and honesty one would expect from a Government which is acting in a financial and political crisis such as this. There is too much changing of the ground rules as matters move on when we know that the information that subsequently becomes public knowledge was already known by the Government, the bankers and the regulators involved.

There is a need for national honesty and confidence to be rebuilt in the Government, the banking system and the regulator. It is the loss of confidence on the part of people in the greater community which is making them angry and resentful towards what is happening here. This comes not only from the individuals paying the public sector pension levy but others who see vast sums of Government money going towards the banks, and yet at the same time they see little or no regret expressed by the banks for what they have done to the banking system.

The Minister of State should put much more stringent sections in this legislation covering bankers' salaries and the reductions that should be made in that regard. The fact that nobody is seen to be paying a price for obliterating our economy in such a short space of time is what is making the public extremely angry.

The Minister of State should also do something about senior Ministers who are still under the illusion it is 2003, when Ministers were flying in Air Corps helicopters to open off licences in the west of Ireland while their Garda drivers drove down in ministerial Mercedes to pick them up at their destination. I regret what happened to the Minister in Killarney, but when Ministers are still whizzing about in Air Corps helicopters and Government jets as this crisis unfolds before us, it shows they have no tact or are oblivious to the anger out there. Ministers should be a little more humble when carrying out their duties. The Minister gave a lame excuse for using the helicopter. If he could not make it to Killarney, there would have been another Minister nearby who could have deputised rather than making a round trip in an Air Corps helicopter to make a short speech there. The Government must listen to what is happening because people are getting angry about it.

The figures state that €1.6 billion is the 1% that is expected from the Government this year and allowed for in the budget. There is a figure of €1.4 billion as the 1% for next year. Does that mean the Department of Finance expects a serious regression in GNP next year? A decrease to €1.4 billion would indicate serious economic regression in 2010. Is there an expectation in the Department of Finance that things will get worse next year?

Will the Minister of State comment on the tax take, which will have a huge impact on the economy? In 2007, the tax take was €47 billion and the latest projections from the Department of Finance are that this will drop to €34 billion this year. Government expenditure, however, is not dramatically declining. That indicates that we are heading for massive budget deficits for the next three years. It will be almost impossible for us to make it back within the 3% figure in the European Union stability pact. That should be taken into account when we discuss recapitalisation of the banks. Throughout the legislation the Government acknowledges the possibility that far greater sums of money might need to be put into the banks to keep them afloat over the coming years, that the €7 billion is just the opening gambit rather than the total amount.

This Bill supports the Government action to allow for the investment of €3.5 billion in each of the two main banks, Bank of Ireland and AIB Bank. It also contains provisions to allow the National Pensions Reserve Fund to invest in line with its rules and regulations, while dealing with other transactions that may be undertaken within the State in which the State would have a vested interest. This arises from what happened in financial institutions where contracts for difference were used, which can affect the share price even though they are not share transactions.

In line with market reality worldwide, the Government took appropriate action to capitalise the banks, a necessary move. In light of the fact that banks across the world are having difficulties and governments are going around financial institutions with a cart, asking them to bring out their dead, we had no choice but to ensure the stability of our banks and we did so by nationalising Anglo Irish Bank and committing to ensure no systemic bank be allowed to destabilise the national finances.

It is good for business and the National Pensions Reserve Fund that we have recapitalised the banks. The return on investment, of €16.2 billion, in the National Pensions Reserve Fund from its establishment in April 2001 until the end of 2008 was 0.9%. The average return for managed pension funds in Ireland was -1.5% so not only did we have a low return but we were lucky to get anything at all because it was well managed in the circumstances.

We are getting a guaranteed 8% return from the banks on preferential shares, with an option to take a quarter of the bank and the right to appoint directors and a say in how the bank is run. We could not have made a better investment. What is the point of having a National Pensions Reserve Fund if it does not support the Irish economy? Any investment, equities or otherwise, that is held by the National Pensions Reserve Fund should be brought home. Similarly, companies that trade in Ireland should bring their funds home. We would then have full capitalisation of the banks.

I suggest that instead of borrowing in the home market as a Government, we should borrow abroad, thus ensuring the funding that might otherwise have gone into Government bonds would go into the banks, further enhancing our banking system. Had we not undertaken this investment, providing capital for the banks and putting in place the terms and conditions that ensured money would be released into the economy for business, social and environmental enterprises, it would not have happened and the recession would have become a self-fulfilling prophecy because the banks would have ensured their own stability and cut back on lending.

Banks that are owned abroad, such as Ulster Bank and First Active, which are owned by Royal Bank of Scotland, have debts by virtue of their take-over of ABN Amro. This provides proof of the international nature of economics and shows that we are not operating in a vacuum; a bank that owned a bank that bought a bank got into trouble. Royal Bank of Scotland, which owned Ulster Bank, which bought ABN Amro, could not lend in Ireland because it lost so much money when it bought ABN Amro.

The Government is acting correctly. This is good for the National Treasury Management Agency. The return is more than adequate at 8% and makes good business sense.

There was a suggestion that hedge funds are betting against the Irish economy. If this is true, it is essential. There is no doubt that the Irish economy was being down-played, to say the least, by financial commentators, especially — to be very straight about who it was — the City of London. Some of those financial people were down-playing and bad-mouthing the Irish economy. If anybody is taking a position against the Irish economy in the contracts for difference, we should know about it. We should remind ourselves that we have an undertaking from the European Central Bank, as well as the paymasters of Europe, the Germans, and the head of the Bundesbank that they would support the euro and the Irish economy. This is all positive news in light of the fact that the ECB will lower interest rates by 0.5% this week and possibly by another 0.5%. The reality is that people will be asked to make sacrifices, including paying extra taxation. However, if the cost of mortgages has significantly decreased, with the cost of electricity, heating and other outgoings, bar tax, it will be a softer cushion for when that inevitable increase in taxation takes place. It is also good for the Government. We have a very low debt and continue to have a low debt within the EU. If one includes the National Pensions Reserve Fund and cash balances, we are down at approximately 20%.

Our small open economy has been one of the first to be hit by the global downturn, but it will also be one of the first to recover. This has been pointed out by Mr. Trichet, the head of the ECB. That is why I am happy to commend this Bill to the House. Funds should be at the service of the people and if there is a national emergency, of course we should use the National Pensions Reserve Fund to assist the nation. That is exactly what has been done. When faced with stark choices the Government has made the tough decisions and will continue to do so. The necessary decisions should also be measured by those who will come on board, such as the social partners. As soon as we take the necessary decisions, the social partners should be regarded as having assisted us in a time of emergency and therefore we should move quickly to reinstate any loss when the international economy turns around.

There are positive signs but it may be too early to tell whether they will affect the Irish economy. Some of the economies in the Far East are growing, such as China's. In addition, the price of oil is very low and the cost of money is coming down, while inflation is very low. There are positive signs, including lower expectations. With that in mind, I hope that not only in the future will this Bill be seen as having been emergency legislation, but also that it will be seen to have had a beneficial and positive effect on the National Pensions Reserve Fund. Between 2001 and 2009 the total return on that fund was 0.9%, which is regarded as a positive return. We are guaranteed 8% on our €7 billion, payable either in cash or ordinary shares. We also got a €30 million arrangement fee. For those reasons the legislation is necessary, positive and timely.

I had not anticipated being the first speaker from the Independent group and I am certainly not the most qualified. I have some observations to make with an unusual degree of humility because I recognise my lack of expertise in this matter. I also recognise the expertise of the Minister of State in this area. However, I have some questions to ask about this legislation. As I entered the Chamber, I think I heard my distinguished colleague, Senator Hanafin, refer to the question of hedge funds. I raised this matter on the Order of Business, as did Senator Hanafin who backed up what I said. The Minister of State might be in a position to give some view on this. On the radio this morning, Mr. Brendan Keenan alleged that one of the difficulties in terms of fiscal policy for the Government was that London-based hedge funds were gambling extensively against the Irish currency. This is a particularly nasty practice so we should examine the operation of hedge funds and their ethical background. I welcome the fact that, within the past year, both archbishops of Dublin spoke on the ethics of international financial dealings. Although I am not in any sense an expert in this area, I asked a friend of mine, who is something of an expert, what was a hedge fund and he said it was basically somebody betting on failure, like betting on a football team to lose. It has been noted scientifically that the establishment of an experiment, including the process of observation and calculation, can have a damaging and detrimental effect.

Putting hedge funds aside, however, I wish to raise another question arising from that radio programme, which a large proportion of people would have heard. Mr. Keenan, who writes on these matters for the Independent Group and is usually fairly balanced, said there was not a single person in the Department of Finance who had any economic qualifications. I wonder if this could possibly be true.

Well, I have some.

What a relief that the Minister of State has some, but he is disposable. That is the thing. He is a mere ephemera in the situation. It is like the old Robert Bridges poem which includes the line, "But I go on forever". We have the permanent Civil Service. I am just wondering what the level of expertise is because apparently the contrast was that there are 100 civil servants in the financial section of the Northern Ireland civil service. I am not somebody who believes that one must stuff every area of life with academics. I believe in hands-on management, but an academic view is sometimes of assistance because it is impartial.

This legislation indicates the severity of the problem whereby we will have to break the piggy-bank to go to the cinema. We are basically smashing the little ceramic pig and taking out all the pennies. There has been a cautious response from Monsieur Trichet at the European Central Bank. He seems to have a number of reservations about this operation, although he is not in a position to annul it completely. A recent ECB opinion document stated that there should be a co-ordinated approach. Perhaps the Minister of State will assure us with regard to the level of co-ordination across Europe with our partner countries. It also refers to the temporary nature of this legislation and matters such as any effect to limit distortions in financial markets. I am putting these matters on the record as they are published in this ECB opinion.

The document states the common principles to be adhered to as follows:

(i) interventions should be timely and the support should in principle be temporary; (ii) the interests of taxpayers should be protected; (iii) existing shareholders should bear the due consequences of the intervention.

The latter one seems a little harsh to me. What are the due consequences? With regard to Allied Irish Banks and Bank of Ireland, the Minister might indicate what the ultimate consequences will be because many people would be interested in hearing about this. I am saying this because I have had a most horrendous time at the hands of Irish builders. I delight in the collapse of the building industry by and large. I think the builders asked for it and behaved like the French aristocrats prior to the arrival of the tumbrels.

However, there are decent builders and I ultimately came to one of them. He was a young married man who worked hard and behaved with extraordinary integrity. He, unfortunately, invested his savings in Anglo Irish Bank shares which are now wiped out. The due consequences should fall on the directors of the banks and those who took decisions. The investors, by and large, should be afforded some protection.

The ECB's observations continued:

(iv) the government should be in a position to bring about a change of management; (v) management should not retain undue benefits [I say "Yes" to that]; (vi) governments may have, inter alia the power to intervene in remuneration[.]

I am not sure if that power is other than persuasive. I do not believe governments have a direct power to determine exact remuneration. The legislation, taken as a whole, may be somewhat lax in this regard.

The ECB's observations continue, "(vii) legitimate interest of competitors must be protected, in particular through the State aid rules and negative spill-over effects should be avoided". On the Order of Business, I had a fair amount to say on competition issues. It is a cautious view but it does not say we must not pursue this course of action.

Will this Bill be enough? The Government has opened the books to the Opposition parties, which I welcome. I do not agree with my colleague who said this was a cynical move to mire the Opposition in some kind of machiavellian plot. That is far too cynical a view to take of politics. However, it is an informed view for whatever reason. The Government has also opened the books to the social partners. When will the banks' books be opened? We need to know the depth of the problem. Is it a mirage that alters all the time? It reminds me of the film "Flubber" in which a mad scientist discovers a green material which keeps altering its dimensions and shape. Is the indebtedness of the banks a kind of economic flubber that we will never get to end of and will fly around doing all kind of damage?

I must pay a compliment to the Oireachtas Library and Research Service for providing debate packs so that we can have a more informed debate. I notice in one of the articles enclosed in the pack that there was a call from a reporter wanting another prominent political person to call for the resignation of the Minister for Finance, Deputy Brian Lenihan. That is fatuous. I do not envy his job. I commend him as a person of considerable integrity and decency. I would understand if he were to resign voluntarily. How could anyone bear the responsibility of that horrible job at the moment? I welcome the fact that he is taking on board views from other people.

Returning to the breaking of the piggy bank, it suggests to me we are in difficult circumstances. The pension reserve was launched in 2000 by the then Minister for Finance, Charlie McCreevy, because of the changing demographics and age profile which would have an impact on the capacity of the State to pay pensions and social welfare benefits, especially after 2025. The fund set aside 1% of gross national product every year to provide for this perceived problem in the future. It was to remain inviolable and was legislated in such a way that it was ring-fenced so that Governments could not use the moneys for other purposes. I welcomed this provision at the time, as I welcomed any steps any Governments took to pay off the national debt and putting aside moneys for the rainy day. There was an absolute prohibition on drawdowns until 2025. Will the Minister inform the House if the Government has considered the impact from 2025 on its ability to pay pensions now that the fund is being used in this manner? Before the establishment of the fund, we had committed ourselves to a rather lackadaisical system of paying pensions out of day-to-day revenue which was found to be very unsatisfactory.

I knew the fund's initial chairman, the late Mr. Donal J. Geaney, founder of Élan, who engaged my services to talk at Trinity College Dublin. Alas his financial experiences towards the end of his life were not entirely positive.

I hope the Minister of State will be in a position to answer the questions I have raised. I have felt for some time that we need to know the exact scale of the problem. The banks' books need to be opened. We need to know if these will be enough funds because it is taxpayers' money. Can we rely on the assurances of the banks that these funds will be used productively? I note 10% will be put aside by the banks to provide lending capacity to small and medium-sized enterprises and an additional 30% capacity to first-time buyers in 2009. What happens in 2010? I know interest rates are going down but a time will come when they go up again. It is all very well theoretically for the banks to say 30%.

This is taxpayers' money going into the banks to make up for the poor decisions of their executives. Accountability is needed in this action. I am not for the creation of a toxic bank but a bank to extract the dangerous and speculative property-based loans.

I must ask the Senator to conclude.

I just want to come to a full stop. These loans should be put into a national property management agency. At the same time, we could bring all the banks together and have a State bank, a real bank of Ireland. That is where we could don the green jersey, roll the good elements together and put all the nasty stuff — it might be only nasty for a temporary period — into a national property management agency. It might allow the people to benefit by 2025.

I thank the Leas-Chathaoirleach for his indulgence and the Minister of State for his forbearance. Many ordinary people like me will be interested in the Minister of State's answers to the simple questions I have asked.

Debate adjourned.
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