I welcome the Minister for Finance, Deputy Michael Noonan, and his officials. The European Stability Mechanism (Amendment) Bill 2014 was referred to the sub-committee by Dáil Éireann on 1 October. I remind members and persons in the Visitors Gallery that all mobile phones must be switched off to avoid interference with the recording of the meeting.
European Stability Mechanism (Amendment) Bill 2014: Committee Stage
Section 1 agreed to.
NEW SECTION
Amendments Nos. 1 and 2 are related and will be discussed together.
I move amendment No. 1:
In page 3, between lines 18 and 19, to insert the following:
"2. The Minister for Finance shall lay before the Houses of the Oireachtas a report outlining how an application for retroactive recapitalisation of a financial institution would be processed by the Direct Recapitalisation Instrument.".
These amendments had to be altered in the light of a direction from the Ceann Comhairle's office. Amendment No. 1 proposes that the legislation not be given effect until such time as a report is laid before the House outlining how the application for retroactive recapitalisation of the financial institutions will be processed by the direct recapitalisation instrument. Much of what is in the legislation - or, at least, the spirit of the legislation - reflects a change for which Sinn Féin has been calling for a long time, namely, a system whereby the burning of bondholders at senior and junior level will take place before member state or EU moneys are injected into any bank. We are not satisfied with the way the European Union has dealt with this issue in terms of the European Stability Mechanism, ESM, and would have preferred to have seen the European Central Bank, ECB, act as a genuine backstop.
We recognise that there has been progress but it is a case of too little too late for the citizens of this State who endured huge pressure from austerity, unemployment, disruption of families, emigration and so on. There is genuine concern that the issue of retroactive recapitalisation is slipping away and I hope my fears and the fears of many are unwarranted. Many political commentators and economists say retroactive recapitalisation is off the table for Ireland at this point but I hope that is not true. We must listen to other European leaders when they say it is not a realistic opportunity.
The Minister addressed the issue of different options that must be considered when it comes to the money injected by the Irish State into financial institutions. All options should be laid on the table and the most beneficial to Ireland chosen. In June 2012 a commitment was made but is it enshrined in the law of this State in this legislation? There is detail on how the recapitalisation instrument will work for future problems in financial institutions here and in other member states but I am dissatisfied by the fact there is no meat on the bones regarding how a retroactive recapitalisation instrument would work in Ireland on a case-by-case basis. It is mentioned that the board of governors of the European Stability Mechanism, ESM, will draw up the rules in due course and I am concerned by this. Over the past two years there has been a failure to develop the retroactive recapitalisation instrument and there are questions as to how it can be applied to Ireland. What are the rules? Is it a blank canvas? There will be a transfer of assets to the ESM if retroactive recapitalisation is to apply but how will this be costed? Will we apply retroactively the direct instrument rules that will apply in the future? Will we try to forecast the effect on AIB, Bank of Ireland and other financial institutions of a scenario similar to 2008 when they went bust? Will we examine the rules on creditor bail-in, the involvement of the Irish State and so on? We are in limbo on this issue and it is a crucial area.
On their return from the relevant European meeting in June 2012, members of the Government tripped over one another to explain to the media how the instrument was a game-changer and a seismic shift and how it would apply. I am sure the Government now regrets this. I listened back to the Minister's interview - I think it was with Seán O'Rourke on RTE radio - and he spoke of his expectation that this process would be concluded by October 2012. October 2012 has long passed and there is still no meat on the bones of this issue. I understand that events have evolved but I am concerned that it is still unclear how the direct recapitalisation instrument will apply.
On amendment No. 1, it was originally intended that the legislation would not come into effect until it was clarified how the direct recapitalisation instrument will apply to Ireland and whether it could be used as a negotiating tool to ensure the commitment of 2012 is honoured. It is now October 2014. On 22 October 2013 the Taoiseach wrote to President Van Rompuy and mentioned that EU partners rely on the stability of the Union and eurozone to anchor fragile recovery. He said the recent stabilisation of sovereign borrowing rates in the Union is the product of hard-earned trust and confidence - trust that the banking union will be completed on time and confidence that momentum will be maintained on our shared jobs and growth agenda. The Taoiseach said these political commitments must be implemented and no time should be lost in building on the decisions reached in 2012 and early in 2013. He found it necessary to write this letter and call on the leaders of Europe to implement the decision but we are still some way from implementation. It may be implemented in future but the fact that it has not yet been fleshed out in detail is of concern.
This amendment calls on the Minister for Finance to lay before the Houses of the Oireachtas a report outlining how an application for retroactive recapitalisation of the financial institutions would be processed by the direct recapitalisation instrument. It is not time specific as this can only be done when information is available. This is a crucially important amendment. The Minister for Finance is entrusted to act in the interests of the Irish people and I think this question must be discussed with Opposition parties. We must thrash out this issue as the costs to the Irish State have been immense. There should be a thoughtful process on how this instrument will work and what its value will be if we apply for it. What is its scope and are we better examining other options for the banks? I believe we should apply all pressure possible to ensure the full direct recapitalisation is achieved for our pillar banks.
On amendment No. 2, there has been much discussion in this committee and in the Dáil Chamber in recent times as to whether the Government will apply for retroactive recapitalisation in State banks. This amendment asks the Minister to commit, in deeds and words, to making an application. I assume the Minister will accept this amendment as he informed this committee in recent months that the Government will make an application for retroactive recapitalisation of the capital injected into State banks. This amendment places an onus on the Minister to be true to his word and do what the Irish people expect. He must look at the possibilities presented by an application for retroactive recapitalisation.
I do not propose to accept either of the amendments put forward by Deputy Doherty. The first amendment provides for a report to be laid before the Houses outlining how an application for retroactive recapitalisation of a financial institution will be processed. Article 14(2) of the draft guidelines on financial assistance for the direct recapitalisation of institutions sets out the operational basis for an application. The detailed modalities for any retroactive recapitalisation shall be established in the relevant decision by the ESM board of governors. Article 14(1) states that such decisions shall be made on a case-by-case basis so it will not be possible to provide such a report in advance of an application. Further, the method of processing will be decided by the ESM board of governors and it would not be possible for me, as Minister for Finance, to ascertain that in advance.
The second amendment seeks to oblige me to make an application for retroactive recapitalisation in November 2014 but it will not be possible to make an application while the instrument is not in place. It is not in place yet but we expect it will be in November. The decision on an application subsequent to that is a matter of timing. I do not think it should be rushed and in that context it is not appropriate to tie my hands as this amendment seeks. As I have stated on a number of occasions recently, we will consider all options in respect of the State's holdings in banks and the determining factor will be which option achieves maximum return for the taxpayer.
Go raibh maith agat, Minister, for those disappointing responses. In the context of retroactive recapitalisation, is it the case that it will only be when an application is made to the board of the ESM that the rules will be established?
They are more inclined to call them modalities rather than rules. That is how it is geared up.
Therefore, there will not be established modalities for the making of applications. A member state will be able to make an application and there will be no waiting period similar to that which obtains in the context of the direct recapitalisation instrument. The position is that the ESM board will receive an application and then decide the modalities it wishes to apply. Is that how the system will operate?
Obviously, the ESM has been in operation for some time. This is a new power it is being given to directly recapitalise banks in certain circumstances. The governors will decide the methodology and the conditions that will attach when applications are made. However, it is not set down in primary legislation. As the relevant legal power will only be attached to the ESM treaty in November, we are obliged to wait and see. In general terms, the Deputy's interpretation is correct.
That is quite surprising. There will be no rules, as such, and when a member state makes an application, there will be no indication of how it will be viewed, benchmarked or adjudicated on. It will be a case of making an application and then negotiating on it. This means that different rules will be able to be applied to different states.
If we take the direct as opposed to the retroactive recapitalisation of banks in the first instance - it must be remembered that the processes for both will be somewhat similar - if some unknown bank in an unknown country in the eurozone gets into trouble and if, as the Deputy outlined earlier, the bail-in model is followed, with shareholders being dealt with first, followed by junior and senior bondholders, corporate depositors, people with personal deposits above €100,000 and so on, it will be at that point that the independent resolution funds which are pooled can be drawn on. Beyond this again there will be access to the ESM. In general, the assets will continue to be bailed-in until the hole in the bank's finances is filled. If it is small discrepancy, the bail-in may stop with the junior bondholders. If the discrepancy is bigger, the process will move on down the line. There is a hierarchy in place and it will only be when the end has been reached that the fund will kick in. At that point, the ESM board will set out the modalities and circumstances.
I understand the hierarchy or waterfall system that will obtain when individuals will be bailed in, when money will have to be put up and when the relevant state or the ESM will intervene. However, my question relates to direct recapitalisation. Unless the Minister can provide some information to the contrary as a result of his discussions with his colleagues, there is no suggestion the modalities which would be applied to a retroactive recapitalisation application would be similar to those for the direct recapitalisation instrument. I refer to the waterfall model to which the Minister has referred and which will be applicable to any member state once the system comes into operation. We would have to use it as a basis for the type of retroactive recapitalisation support the State should have received in the case of AIB, for example. When the waterfall model is followed, what will remain is the quantum of money that will be on the table. There is no suggestion this will be the case because, as the Minister indicated, the board of governors will deal with the modalities when making its decision. Will that actually be the case? If it does prove to be the case, let us be honest and say the quantum of money which is likely to come back to the State from that type of procedure is quite small when compared to the actual amount spent in recapitalising the relevant institutions, particularly if we are obliged to go through the process of burning bondholders and creditors, involving the State up to a certain point and then going to the ESM.
I am giving the Deputy an example of what I think would happen under direct recapitalisation. Of course, I am speculating, but I am doing so on foot of the rule which states decisions will be made on a case-by-case basis and by mutual agreement. In such circumstances, the case must be presented in the first instance and then the decision can be made. In the case of the unknown bank in an unknown country seeking money from the ESM, the governors might decide that it was not even eligible to apply. That could be one set of circumstances. However, we are speculating about future events at a time when the primary modality is not yet in place. That modality will not be in place until November, but we do know the detail of it because it was discussed at several ECOFIN Council meetings. The Irish side succeeded in keeping the issue of retroactive recapitalisation within the regulations at these meetings. That is as far as matters have progressed. As a result of the fact that decisions will be made on a case-by-case basis, there will be no general set-up of rules in place ab initio.
I am fully aware now that there are no modalities in place and that no rules will be set out until an application is made. It will be at that point that the rules will be established by the board of governors. I do not believe that is the best way to do business.
No, but it seems that different rules will apply to different cases. That is because it will be done on a case-by-case basis.
I understand that. However, there should at least be some benchmark in respect of what we are discussing. There can be flexibility in the rules, but in the absence of any rule whatsoever, it could be viewed as a positive benefit if the relevant authorities could use their negotiating skills to their state's advantage. However, an absence of rules could also prove to be hugely detrimental.
I have a copy of the European Stability Mechanism Guideline on Financial Assistance for the Recapitalisation of Financial Institutions, Article 1 of which deals with scope.
We are well aware of the guideline.
The guideline provides a reasonable indication of how matters will proceed. I draw the Deputy's attention to Article 14 - retroactive application of direct recapitalisation - which states:
1. This guideline is established without prejudice to existing ESM and EFSF programmes in which financial assistance has been provided to ESM Members who recapitalised their institutions, which could be replaced in part or in full with a retroactive application of direct recapitalisation following a decision by the ESM Board of Governors, on a case-by-case basis, by mutual agreement.
2. The detailed modalities for such replacement shall be established in the relevant ESM Board of Governors decision.
This article is clearly designed for programme countries, particularly Ireland and possibly Portugal. I do not believe it is applicable to Greece, which has different arrangements.
The article refers to the "retroactive application of direct recapitalisation". We know what such recapitalisation means or we at least have a very good sense of it in terms of the structure and the point at which people step into the breach. It is very clear that the waterfall system is laid out in the guidelines. My original question was related to whether the retroactive application of direct recapitalisation was related to the retroactive application of that instrument. If the latter is the case, it will be a case of states being obliged to negotiate their way through the waterfall system. While it will be the responsibility of the ESM to decide whether a member state's application should be approved - there will be leeway in this regard - the question which arises is whether we will be bound by the waterfall or tiered structure under discussion. I am interested in its retroactive application. In Ireland's case it would be-----
In the first instance, the word "direct" indicates that the ESM would provide money directly for banks without going through the sovereigns. If funding is channelled through the sovereign, it is indirect in nature. That is the significance of the use of the word "direct". If AIB is the example we are discussing, it must be stated it is a solvent bank which is trading profitably.
For the first half year it made €450 million or €460 million. Therefore, it does not need any more capital because it has sufficient core tier 1 capital and other forms of capital as well. Obviously, there is no suggestion of some kind of waterfall test applying because it is not a bank that is in trouble. The ESM would assess the suitability of direct recapitalisation for a bank like AIB and we will have to decide whether it was in our best interests to pursue it. We know from the initial discussions that it would not be a grant-in-aid but an exchange of AIB shares for money if the application were to succeed. We must decide, first, whether it is worthwhile doing it in monetary terms or can we realise more by a careful sale of AIB shares in tranches into the market over a period of time, and, second, we would have to assess whether we would be at a disadvantage if the major shareholder in one of our main banks was an institution in Luxembourg whose primary function was to raise money on the capital markets and act as a backstop for the euro. It is a Federal Reserve type of operation rather than primary banking. These are all considerations that must be taken into account.
The situation has changed dramatically. The Deputy used the word "game-changer". The statement made by Chancellor Merkel was actually a game-changer because the very statement itself improved our credit position. We can date our re-entry into markets from that statement. It was quite a significant statement and it had quite a significant impact. Now things have moved on. The Deputy quoted what I said on Sean O'Rourke's radio programme. I do not know whether I said that but I assume he is quoting me accurately. By the autumn of that year my primary concern was negotiating directly and remotely a deal on the promissory note. I said a lot of things which made sense in Frankfurt but they were not necessarily clear messages at home, but we succeeded in negotiating the promissory note deal as the year went by. I do not know the context in which I said that comment but if I said it I said it.
Anybody following these proceedings would be of the view that the game-changer would have been experienced in people's lives and not out in the markets. All of us on this committee understand the crucial importance of our being able to be back into the markets at low interest rates, but the game-changer paraded by the Government at the end of June was that there would be a game-changer in people's lives in that we would get back the money we had put into these broken banks. That was the game-changer. It was spelt out by the former Tánaiste, Deputy Eamon Gilmore, and the Taoiseach, Deputy Enda Kenny. It was more cautiously suggested by the Minister when he made the point that it would have to be an asset transfer and when pushed on whether it would be the full quantum of money, that is, the €21 billion in the case of AIB or the current value, he was far more cautious and that is his position as Minister for Finance. However, he even he spoke about the quantum of money that was coming back to this State that would enable us do a number of things in terms of managing our debt interest, reducing our overall debt or freeing up money for investment.
That was then and now we are more focused on where we are going in terms of our banks and particularly this instrument. The Minister spoke about AIB not needing additional capital and that may well be the case. Hopefully it is when we see the results of the stress tests. I would not imagine that the idea of this retroactive recapitalisation instrument would be to look at AIB's position today in terms of the waterfall test. My impression is that what the board of governors of the ESM would do is turn back the clock to the point in time where the Irish State stepped in and capitalised the financial institution and then it would focus on that point in time and on the bank, which was in need of capitalisation, and say that if it were to apply the recapitalisation instrument that is available to us now, how would that apply to AIB, and if that is the case, is that the quantum of money that is on the table in and the quid pro quo there is the equivalent shares of the financial institution? Is that type of scenario we are looking at? What we have in terms of the guidelines is very sparse. We have outlined them and probably gone through a few times in terms of the rules and the modalities that will be made up in an application that will be spelt out at the decision of the ESM.
On a case-by-case basis.
On a case-by-case basis. I could be wrong but I would put money on it that the Minister at least asked his colleagues in Europe how they think this would apply to Ireland. We are not talking about millions or hundreds of millions but about tens of billions of euro. I am sure he has asked that question in the 24 or 28 months since that big game-changer, as he mentioned. I am sure as the meetings have progressed there has been at least some conversation and, as he said, he has been successful in keeping this text in. I recognise the text is there but I am sure he did not spend all his time satisfied that the text was there without asking how could this possibly apply to the-----
The Deputy has strayed from the amendments a little and this is a-----
No, it is not. It is about how the retroactive recapitalisation instrument can apply and whether a report can be furnished.
The Deputy should tighten up his questioning.
I am finishing up now.
First, without going back on it, I would not agree with the Deputy's résumé of historic events from June 2012 leading on, but I will let that sit. The Deputy asked how occupied I was. I was occupied in making sure that the commitment made in a press statement was translated into article 14 of the guidelines and I have succeeded in doing that. He will recall that in the middle of that negotiation when the German, Dutch and Finish Finance Ministers got together in Helsinki they put out a statement, a loose translation of which would be "No way, José". We had to get that off the table and we took it step by step to the point where we have article 14 now. That is a mandate for retrospective recapitalisation by the ESM.
We have gone through what will happen when an application is made in terms of a decision on a case-by-case basis, modalities and all the rest of it, but the issues now for me are will it be worthwhile or can I do better in the markets. The Deputy said the game-changer is when the Irish people get their money back. It is my fullest intention that the Irish people will get their money back. We have got back more than what they put into Bank of Ireland already. When this commitment was given I am not sure what AIB was valued at but looking back on it I would have thought it was not worth more than €3 billion or so - that is a checkable figure - but now it has been independently valued at €11.5 billion and that was before it showed the profits it showed on the half year which surprised the markets in a very positive way, and I would suggest we could mark it up again. The total amount now is about €200 million.
I have talked to various colleagues informally. The outgoing Finance Minister in Sweden told me that in respect of its banking crisis that occurred in the early 1990s that it only sold the last tranche of the shares to the market last year and that it recovered two and half times what it had put in. That is in nominal terms, he had not indexed it. I took his advice and he said not be in hurry, to hold on to them, that the our economy is growing, that we have got two banks and that they will be very valuable when they are in a duopoly situation in an economy that will be growing steadily over the next period. I want to be totally and completely frank with the Deputy. That is one consideration.
The other consideration is the difficulty of the negotiation and I will tell the Deputy the reason for that. All the eurozone countries have contributed to the ESM fund, some of it by cash and some of it by guarantee. When the commitment was made our bond prices were way out but yesterday our ten-year bonds were trading at 163 basis points, and that puts us inside Portugal, Spain, Italy, Cyprus, Greece, Slovenia and some of the eastern countries. One has to ask what method of negotiation I can use to convince those countries that Ireland needs additional help to make it more sustainable in the market when we are trading so low and so far inside them.
I am not saying I am resiling from it, but I can see that because our situation has improved so much, it will be more difficult to convince colleagues, and anyway, the market alternative might be better. I am going to pursue this line and I will pursue the market alternative as well. We have brought it to the point at which we have the legal authority under Article 14, and we will see what is spelled out in November and if there is an accompanying statement around the November event. Then it is a question of timing as to when we apply. There may come a point at which it is not worth pursuing it and we may do better by pursuing the alternatives. The point about the game-changer is correct. It is when the taxpayer gets his money back. That is the game-changer.
I wish to give my observations on direct retroactive recapitalisation. In his heart of hearts the Minister knows that the possibility of securing a deal that would be attractive to Ireland is becoming increasingly remote. I do not say that as a political charge.
I would not say that. I do not know about the Deputies themselves, but both of their parties told me on several occasions in the Dáil that the promissory note deal was mission impossible and could not be done.
I never said that.
Europe is a difficult place, but there is a negotiating process and I am certainly not giving up. No way.
If the Minister would hear me out, I wish to give my observation. I am not asking the Minister to give up. I do not suggest the Minister has given up. I am giving my observation; looking in from the outside, essentially, it looks increasingly remote because of a number of-----
What the Deputy is saying is not an observation; it is an allegation about what I am going to do.
No, it is an opinion, and I am entitled to an opinion. If I can continue, I will finish it and the Minister can respond. First, I refer to the way the ESM is set up and the quantum of money that is there - €60 billion for direct recapitalisation. The amount involved in Ireland in the case of AIB, Bank of Ireland and Permanent TSB is in the region of €30 billion, and that is just the retroactive element. The ESM direct recapitalisation is set up for all of the eurozone banks, so to suggest that Ireland could get a large share of that seems fanciful to me at this stage. In hindsight, the real game-changer was not the agreement in June 2012; the game-changer came a month later, when Mario Draghi stepped in and said he would do whatever it took to save the euro. That was the real game-changer for Ireland and the eurozone and, largely, that is what has brought stability to the financial markets. It is a major contributory factor in the low cost of borrowing for Ireland and other countries. That, to me, is the game-changer.
There are some basic questions to which we do not have answers - for example, whether the ESM will be willing to pay over the odds for shares it might acquire in any of the Irish banks. That is not written down anywhere, so clearly, if it is only paying what one would get elsewhere on the private markets, then one must ask what would be the benefit of selling to the ESM. There is no evidence of that. It is very clear now that the June 2012 agreement was over-egged by the Government. I think the Ministers all believed, in good faith, that there would be a shift in policy, but that did not happen. The really significant change came the following month, and that was what calmed the markets.
The Minister succeeded in getting the Article 14 provision on retroactive recapitalisation into the guidelines. I assume that was largely done at the behest of Ireland, and that has kept the door open. The Minister is working away at it, but in view of what he said today and what he said before the summer recess, the Tánaiste's comment that there are various ways to skin a cat and what the Minister said about possibly of selling a stake in AIB, before we have any clarity whatsoever on retroactive recapitalisation, if the Minister genuinely believed there was a real prospect of it, he would not be openly talking about selling a stake in AIB - he would get clarity first on whether it would be a real possibility for the country. I do not ask the Minister to give up by any means. He should apply and we should find out where we stand one way or the other in the coming months. If there is a refusal then we should move on, and the Minister can focus on developing a proper banking strategy for the country and examine what he can get from the markets by way of selling a stake. Personally, I would not support selling a stake in AIB for some time, as it is early days in its recovery. That is my observation.
I am not saying the Minister has given up. I do not ask him to give up. He must keep working on the issue. However, there will come a time - relatively soon - when he will have to put it up to our European colleagues by making a formal application. Let us find out where we stand. I can see no prospect that they will give Ireland €20 billion or €25 billion of the €60 billion that is available for a retroactive issue when the banks are currently capitalised. The money for that purpose was paid years ago. As the Minister said, the economy is recovering and the cost of borrowing is low. To me, the real game-changer was what Mario Draghi said in July 2012. That is my opinion. The Minister must bring the situation to a head in the coming months by applying, and at least then we will know where we stand.
Does Deputy Boyd Barrett have a question?
I do. I have a question on direct recapitalisation, not just retroactive recapitalisation. I wish to translate it into simple layman’s terms that people can understand. If the Minister makes an application for recapitalisation, the deal is that the ESM would buy a share in the financial institution, and in the case of retroactive recapitalisation we would get the money back. Is it envisaged that it would retain the shareholding?
The ESM would get the shares and we get the money. If it worked out the way the Deputy describes, then in due course it would sell the shares and get its money back.
Would the ESM sell the shares to the private sector?
Yes, over a period. The question Deputy McGrath asked was whether it would be valued at the present value. Obviously, we would argue that the money provided would be based on future value, with a reasonable estimate of capital gains over a period until the point of sale. Another way to do it might be to say that whatever capital gains one realises, we would have to get 50%, 60% or 70% of it. There are various models once one gets down to the detail. I thank the three Deputies for their observations.
I have not finished yet. I have a few more questions for the Minister, but I just wanted to get clarity in order to fully understand the situation. The ESM would buy shares and sell them on, and we would get the money back. What the Minister seems to be saying, without making allegations, is that he will decide as the situation progresses whether it is better value for us, in terms of getting a better return on what we put into the banks, to sell the shares to private investors, or if we could get a better deal by applying to the ESM and seeing whether that is the best way to maximise our return.
It is not just the amount of money that is in question. It is also a case of who the bank directors would be.
Does the Minister mean it might be a private financial entity?
It could be a big bank in Europe.
Or it could be the ESM.
In the case of a bank, those involved would know how to run a bank. If we had a very successful bank running AIB then it might be a good solution. Alternatively, we could float it on the Irish market and ask Irish people to buy shares. That is another way of doing it.
Or we could hold on to it ourselves.
No. I have always said that we have no long-term interest in having a State banking system. The policy is that when the time is right, the values are right and the economy is going well we will put the banks back into private ownership. That is how we got the private investment into Bank of Ireland originally. We are down to 14% currently but we made it very clear that we wanted a functioning private sector banking system.
I wish to make a point on the application, which is the point I made on Second Stage. I thought I heard the Minister say something on that in response to Deputy Doherty.
While the modalities, to use the Minister's term, or the terms and conditions that might apply to any application for direct recapitalisation will be discussed case by case by the board of governors, did he suggest - that is the way I read it - that in so far as we can have any clue about the modalities that might apply, there may be clues in the rest of this Bill in terms of the various requirements, including the cascade, the threat to eurozone stability, that we have exhausted our own resources and capacity to do it, that we have gone to the senior bondholders and so forth, and that those sort of conditions are likely to be what will be considered by the European Stability Mechanism in deciding on an application for retroactive recapitalisation? Is that what the Minister said?
More or less, yes.
Although it will be discussed case by case, and the details could vary a little, that is broadly the way they are likely to consider any applications.
It is a decision-making forum. They might decide to send an application to a sub-committee and let it come back and advise them. There are different ways of doing things, and we will not know the actual decision-making process until the first case goes before them.
I have a note which might be of benefit. On 10 June 2014 the euro area member states reached a preliminary agreement on the operational framework for the ESM's direct recapitalisation instrument. Their draft guideline on financial assistance for the direct recapitalisation of institutions clearly establishes the scope of eligibility criteria for an operational process of direct recapitalisation. The provision for retrospective recapitalisation provides for a decision on a case-by-case basis. From our point of view that provides a broad degree of flexibility of interpretation. Demanding more detail would most likely have resulted in a more restrictive retrospective instrument, which would not have been in our interests.
On the amount borrowed from the European Union, programme funding was provided for the purpose of stability support. It was not earmarked for particular purposes and it is not valid to say otherwise. The amount of bank recapitalisation under the programme was €17 billion, and that was provided within the overall programme envelope of €85 billion, including our own resources of €17.5 billion.
There is another note which might be of interest. It is important to recognise that the ESM's direct recapitalisation powers are part of a broader EU response to breaking the link between banks and sovereigns. It must be viewed in conjunction with the banking union measures, particularly the bank recovery and resolution directive, the single supervisory mechanism, the single resolution mechanism, and the single resolution fund. The figure of €60 billion was the figure agreed upon in the context of an ESM fund whose principal function is to lend to sovereigns, not banks. As the Deputy knows, the ESM has a maximum lending capacity of €500 billion. Given the way the rating agencies treat these matters, if the €60 billion for DRI was fully used up, the remaining lending capacity would be less than €440 billion and would in fact be closer to €330 billion. It is a relatively small fund if we think of a fund for supporting a currency.
There are at least two more speakers who wish to contribute on these amendments.
With the Chairman's indulgence I will withdraw amendments Nos. 1 and 2. I also must absent myself from the committee at this stage because those were the only amendments we had tabled. Is that procedurally acceptable?
Yes.
I thank the Deputy.
I will not keep the Minister much longer. Does he not think the €60 billion figure suggests it is not envisaged by the ESM that there will be a recapitalisation of our banks that would be any substantial portion of the amount we put in? If the Minister is talking about €60 billion for all of Europe and we put €64 billion into our banks, would that not strongly suggest they do not envisage us getting a substantial amount back, even if we decided to apply, and the Minister is saying he is not sure if we should apply, that he will look at it and so on?
No. I did not say that I did not know whether we should apply. I have committed to applying, but I said I do not want to be tied to a timeframe on applying.
Okay. Given that it is only €60 billion, would it not-----
When we were discussing this, various amounts of money were suggested. A series of countries are involved, with the AAA rated countries saying to keep the figure down. The countries that believed they might need to avail of it were trying to drive it up. It was settled on €60 billion, but with all the other initiatives that were taken, the big game-changer, to use that word, is that the European Central Bank under Mr. Trichet would not allow the bail-in of assets under any circumstances once shareholders and small bondholders were passed. The big game-changer is that there are now new resolution regulations on the basis of the waterfall Deputy Doherty described. The ESM fund is so far down the waterfall it is difficult to envisage circumstances in which money would be used for direct recapitalisation. If one's bank was banjaxed to the point where the shareholders, the junior bondholders, the senior bondholders, corporate depositors and personal depositors of €100,000 are totally burned-----
Listen-----
Hold on a second; I want to finish the point. We would be at the point where sensible people would say that we must liquidate this thing the same way as I liquidated IBRC-Anglo. The only way to get out of this is liquidation. There is no point in bailing in to rescue something because it is dead.
When we go down the process, in my view the likelihood of direct recapitalisation being drawn down is well down the hierarchy. We will have a better idea when we see how the European banking system comes out of the stress tests, and we should have that information at the end of October when we will have a picture of the strengths of European banks. Since the stress tests were announced, banks throughout Europe have been raising core tier 1 capital on the private market and repairing their balance sheets, so it is likely that the results will be quite positive.
For what it is worth, my interpretation of the game-changer, and various things are being attributed to that term, was Cyprus and the resistance of the Cypriot people which forced the change in policy where countries had a bail-in. I welcome the bail-in, and the Minister's point is well made and reasonable but-----
The point about Cyprus was that it was the first time a bail-in was agreed-----
Absolutely, on the backs of many people.
-----and there was uproar because depositors were being bailed-in. It was the first test of resolution-----
Over €100,000.
-----but what was done in Cyprus on a pilot basis became European law subsequently.
Absolutely, thanks to the Cypriot people. That is my point.
The Deputy's point is the other way around.
No, I do not agree.
It is the other way round, in spite of the Cypriot authorities.
No. I do not agree. There was a big fight over the €100,000 limit and so on. The bail-in is welcome but it is 8% of liabilities, with the state's 5%. Then we have all the conditions about the extent to which it may threaten the stability of the wider eurozone and the debt sustainability of an individual state. After that bail-in, which is welcome but limited, the next port of call is back to Joe Bloggs on the street and, as I read it, and I would welcome the Minister telling me I am wrong, all the conditions are to stop it getting to the ESM and to put the citizens and the state on the hook big time as the next step in the cascade, with a fairly high threshold to move on to the next stage in the cascade.
No. After the 8%, which I understand will become operational from 16 January, the next phase is sovereign resolution funds. The sovereign resolution funds in year 1 are sovereign resolution funds but then there is an agreement to mutualise them over a period of time when one is beginning to get access to one's neighbour's resolution fund.
As they mutualise the funds, the taxpayer goes out of the equation. Until they are fully mutualised, there is a potential taxpayer liability but when they are fully mutualised - after the period of time - then the taxpayers' liability will be very remote. It will only be when the mutualised resolution funds in future are insufficient for the bailing in of a bank that one will move on to the European Stability Mechanism, ESM. It has become very much the final backstop and most sensible people who consider the waterfall and the hierarchy would say there will be a decision point before one gets to the ESM that one would be better off were one to liquidate the institution. While one really will not know until one sees the first case study, I could not now describe for the Deputy the circumstances in which some bank somewhere in the eurozone will end up being directly recapitalised by the ESM even though all the powers are there. However, it is important to have those powers because even if they are never used, their existence steadies the market.
That is enough.
The main relevant article in the Bill is Article 3, which states the purpose of the Bill. It refers to the purpose being "to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States". My question is in the context of retrospective or retroactive recapitalisation, which is the key possibility for Ireland under this legislation. Ireland probably does not meet those criteria at present but at the time when the banks were recapitalised when the crash happened, it certainly would. In a follow-on question, could one have a combination of launching or selling the banks with private investors, as well as ESM investment? Obviously, the objective of the Government is to get back for the taxpayers the money that has been invested. As for IBRC, by the time it was liquidated, €32 billion of taxpayers' money had been fried and the damage was done. Is there a question of the ESM possibly taking a minority shareholding in a bank? In such circumstances, one could have a board that would not be dominated by the ESM. Is the mechanism sufficiently fluid and flexible whereby one could have a suite of options including going to the market, the Irish public buying shares and using the ESM in such a way that the taxpayers could get all their money back as quickly as possible, while also being cognisant of the goal of getting the best return for the taxpayers? I ask within the context of Article 3 and the fact that Ireland met those criteria at that moment in time when the banks were recapitalised.
Obviously, there are various options. The first point raised by the Deputy with which I would like to deal is that €31 billion of taxpayers' money was burned or fried in Anglo Irish Bank. That is not true as Anglo Irish Bank was refinanced through the promissory note, which basically is an IOU. Consequently, money was not put in. What had happened was that the IOU incurred ongoing liabilities for the taxpayer and the Deputy will recall that just after the change of Government, the liability was €3.1 billion every March, stretching out into the middle distance. That was the liability.
There is a saving but there still is a borrowing on behalf of the taxpayer for Anglo Irish Bank.
No, the Deputy is missing the point. which I wish to explain because there is a lot of confusion about it. The Government paid the money in the first year because it fell due when we went into government in February 2011. The first demand came in and we paid it, as we did not know what the market reaction would be if we did not. The Government did not know what pressure would be put on - the usual pressure from Frankfurt - so it paid it in the first year. The Government refused to pay it in the second year and refinanced it through Bank of Ireland. Thereafter, the Government did the promissory note deal and at that time, €25 billion still was underpinned by the promissory note. As we had refinanced just over €3 billion with Bank of Ireland, the overall amount was €28 billion. All of that was refinanced by writing Government paper and lodging it in the Central Bank. The promissory note was a novel instrument but it did not have a market value. However, the Irish paper the Government created and which is in the Central Bank is now what is underpinning the loan and the Government will be obliged to service it for a long time. Nevertheless, the repayment schedule is way out.
I am not disagreeing with the Minister. The point is-----
No, I want to-----
We are at cross-purposes here.
No, we are not. I want to-----
Actually, we are.
----- nail a point the Deputy and many other people have made, which is that €31 billion of Irish taxpayers' money was fried in Anglo Irish Bank, as there was not. That is mythology. The replacement was Government paper, which is held by the Central Bank. It is holding €28 billion and has the piece from Bank of Ireland that can go on the market straight away. It would be obliged to do some restructuring with the other stuff, were it to sell it. However, that also can be done and the NTMA would do that. However, the point is that netting out, that money now is available at approximately 1%. The charge on it at present is slightly less than 1%. Consequently, it is a myth to state that the way things have worked out at the end is that Anglo Irish Bank cost the Irish taxpayer €30 billion, as it did not.
Let me clarify the point and the Minister can answer it. The point I am making is very simple, namely, it was necessary to borrow taxpayers' money. The promissory note deal arose and there are major savings to the Irish taxpayer but over a long period of time, effectively the Central Bank bonds will be released onto the market and will be held by third parties. I am not taking from this but the point I am trying to make is that had the option existed much earlier with Anglo Irish Bank, it might have been more beneficial to the Irish taxpayer overall. I do not disagree with the Minister but simply am making the overall point that the time at which one liquidates something obviously is critical. The Minister made the point earlier that when one is looking at the cascade, there will be a point whereby the earlier one can liquidate, the better overall. I make the same point in respect of Anglo Irish Bank. Either way, the deal that was negotiated is a major saving to the Irish taxpayer and is a great deal but the point is that over time, in respect of the capital sum that had to be borrowed, it basically is taxpayers' money. Obviously, it will be refinanced and so on and has far less immediate impact on the taxpayer on an annual basis. Over time, however, one would prefer if Ireland was not obliged to borrow the money to put into Anglo Irish Bank.
This is the point of disagreement with me. Money was not borrowed to put into Anglo Irish Bank. The Anglo Irish Bank debt was underpinned by a promissory note, which basically was an IOU.
Yes, but over time it is.
What is happening now-----
However, with the deal it was translated into debt.
It was always debt. The debt was there and even though it was not reckoned within the table of national debt, the markets always added €31 billion onto the Irish debt because they knew this liability was hanging out there. It is only a presentational thing to state it was converted into debt. However, what replaced the promissory note was Irish Government paper and as Deputy O'Donnell rightly observed, the Irish Government paper must be sold back into the market on an agreed schedule or profile. The disadvantage in this regard is that at present, the Exchequer pays a coupon to the Central Bank on the Irish paper it is holding and that coupon then translates into excess profits from the bank, which it then returns to the Exchequer. Consequently, it nets out at less than 1%. As we sell into the markets, the change will be that the coupon must go to the private investor but the bit that has not entered the debate thus far is that because our interest rates have come down so much and because of the way we are positioned now, the nominal value of the €28 billion has increased by approximately 20% and there is a capital gain of approximately €6 billion now.
The Governor and his staff must keep looking at this and asking if we would do better if we sold it more quickly, thereby realising the capital gain. There are statistical issues on capital gains and one could not normally put a windfall like that from the bank into one's Exchequer figures. One would probably have to take it off the top of the debt. On the other hand, the bank commission decided - and there is no law about it - that its protocol is to return 80% of excess profits to the Exchequer while holding a 20% buffer. As that is not in law, the commission could decide next week that it will return 85%. However, I have no involvement in that.
I will take final points on the amendment and wrap up.
The case of Anglo Irish Bank proves the Minister's own point in that the quicker one can liquidate a bank, the better. Can the Minister set out a range of options as to how ESM would work? Could it take a minority stake in a bank where that would work along with a private issue of AIB?
In answering, this is one of the points of disagreement I have with Deputy Michael McGrath. I find in Europe that if one deals technically, one will lose. If one deals strategically, one gets places. One always needs to have a number of options. The idea of settling and saying we will apply now and on their refusal, it is off the table is not the way Europe works. If one has a demand which a lot of people think is credible, one should let it sit there. If one thinks they are going to say "No", one should not push them, but the following year, when something else happens, one can say one has a legitimate concern in place which they have not settled with one. One must keep a number of strategies and plans going in parallel. I do not agree with Deputy Michael McGrath that one tells them if they do not agree to give one money by Christmas Eve-----
That is not what I said.
-----it is all off the table and we will sell the shares. That is not how it works. I know from dealing with them that what is impossible is suddenly not so when they have to help another country or need something else. There are 28 member states and there are now 18 eurozone countries and one has to keep it in play. Therefore, I will keep it in play.
Amendment, by leave, withdrawn.
Amendment No. 2 not moved.
Sections 2 to 6 agreed to.
Schedule agreed to.
Title agreed to.
Bill reported without amendment.