Impact of Covid-19: Overall Fiscal and Monetary Position

I welcome our witnesses for this session on the overall fiscal and monetary position. We are joined from committee room 1 by the Governor of the Central Bank, Mr. Gabriel Makhlouf, and by Mr. Mark Cassidy, director of economics and statistics at the Central Bank. We are also joined by Mr. Frank O'Connor, director of funding and debt management at the National Treasury Management Agency, NTMA. I thank them all for joining us.

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

I call on Mr. Makhlouf to make his opening statement and ask him to limit himself to five minutes as his statement has been circulated in advance.

Mr. Gabriel Makhlouf

I welcome the opportunity to appear before the committee today to discuss the macroeconomic impacts of Covid-19 and the monetary and fiscal policy response. Since our written submission of 9 June, we have published both our half-yearly financial stability review and, last Friday, our latest quarterly bulletin. Both have focused extensively on the impact of Covid-19 on the Irish economy and the macrofinancial environment, as well as the risks to the outlook.

The pandemic has caused a very sudden and severe contraction in economic activity across the world. The speed and scale with which this unfolded has been unprecedented and has posed an unparalleled challenge to the community and to governments and policymakers everywhere.

In most countries, including Ireland, the policy response has been twofold. It has involved, firstly, public health measures which have, by necessity, interrupted economic activity and, secondly, a range of fiscal, monetary, macroprudential and microprudential policy actions to cushion the impact on the economy and the wider community.

The Central Bank’s mandate includes monetary and financial stability and ensuring the financial system operates in the interests of consumers and the economy as a whole. Our primary focus since March was on ensuring the financial system absorbed the shock, supported households and firms through the crisis and was ready to support the recovery. The actions we have taken, including those taken with our colleagues at the European Central Bank, ECB, have been designed to ensure supportive financing conditions, enabling credit institutions to absorb losses and to support lending to businesses and households.

Real-time data for the Irish economy point to a trough reached in April and an increase in activity as the economy reopens. In recent weeks, we have seen the beginning of a return to work in some sectors and a decline in the numbers in receipt of income supports. Payments data also point to some rebound in spending. However, overall economic output has declined substantially in recent months and remains significantly below pre-Covid levels. Our latest projections imply a fall of approximately 20% in underlying domestic demand in the second quarter of this year.

The outlook is very uncertain. The path ahead for the economy will depend on the future path of the virus, the degree to which containment measures need to remain in place or be reintroduced, and the immediate and longer-lasting effects on behaviour and economic activity.

Given the scale of uncertainty surrounding the economic outlook, last week we set out two scenarios. One – our baseline – assumes that the phased easing of the containment measures takes effect as planned. The other – a more severe scenario – assumes the current containment measures remain in place for longer because of a resurgence of the virus. Under our baseline, consumer spending is projected to rebound in the second half of this year but to decline by 10% for the year as a whole.

Overall, the recovery is expected to be gradual, reflecting a lingering effect of the shock on consumers and businesses. Contact-intensive sectors, which also tend to be labour-intensive sectors, are likely to be the slowest to recover. The unemployment rate is set to decline from its second quarter peak of about 25% as the year progresses and it is projected to be around half that level by the end of this year. GDP is projected to fall by 9% in 2020 with output recovering to its pre-crisis level by 2022. Under the severe scenario, GDP will fall by over 13% this year and output would not recover to its pre-crisis level until 2024. Both scenarios assume that a free trade agreement between the EU and the UK with no tariffs and no quotas on goods takes effect in January 2021. If that does not happen it is likely that growth in the Irish economy will be weaker.

The unprecedented challenges posed by Covid-19 have been met by exceptional policy action. The Government's response to the pandemic is estimated to cost around €9 billion, with a further €7 billion being made available through indirect supports such as credit guarantees and rate deferrals. Our own immediate macroprudential policy response was the reduction in the countercyclical capital buffer, which made an additional €940 million available to absorb losses or to be leveraged to maintain and extend lending.

As for monetary policy, the Eurosystem has put in place a series of measures aimed at supporting the smooth provision of credit. Overall, the policy actions in the area of fiscal policy by the Government, monetary policy by the Eurosystem, of which the Central Bank is a part, and macro and microprudential policy by the Central Bank and other authorities have helped to mitigate the amplification of the immediate shock and enabled the financial system to provide support through the crisis.

Households, businesses and the financial system have entered the current crisis in a more resilient position than when compared to the onset of the financial crisis a decade ago. Looking at future policy, there are three areas I believe deserve careful consideration. First, policy should continue to focus on supporting the productive capacity of the economy and avoiding scarring effects such as long-term unemployment. Second, the rise in the Government deficit and debt ratios is both warranted and necessary and is currently affordable but the high level of debt will leave finances vulnerable to future shocks and it will be important for the Government to provide a clear and credible return to much lower and sustainable deficit and debt positions. Third, the country's ability to withstand the immediate impacts of the shock is partly a result of policy actions over the past decade. There needs to be a continued building of economic resilience to future shocks, including a more sustainable debt position but also the longer-term structural changes that would help to manage the challenges of international tax reform, the longer-term implications of the UK's withdrawal from the EU and climate change, among others. Dr. Cassidy and I are happy to take questions from members.

I thank Mr. Makhlouf. We will now take Mr. O'Connor's opening statement. I also ask him to please limit it to five minutes.

Mr. Frank O'Connor

I thank the committee for inviting me here today. The State is in a strong position to meet its borrowing requirements. The most important fundamentals for investors, in deciding whether to lend to Ireland and on what terms, have not changed: these are the country's growth potential and its fiscal policy over the long term.

In addition, there are a number of other factors that are supporting our ability to borrow. The first of these is the turnaround in the public finances. Ireland has run a primary surplus, that is, excluding interest costs, each year since 2014 and an overall surplus for each of the last two years. This has contributed to a steady pattern of improvements in our credit ratings. This is best illustrated by Standard and Poor's upgrade from A plus to double A minus last November, returning Ireland to the double A category for the first time since the troika programme in 2010. In doing so, this put Ireland closer to core eurozone issuers such as France and Belgium, which are both double A.

To put that in context, just five years ago Ireland was rated sub-investment grade by Moody's, which is seven notches lower than our current rating. The trend of improving credit ratings has increased the pool of potential buyers of Irish Government bonds. This is positive for demand and further enhances our ability to diversify our investor base. We have done this in a number of ways, including being one of the first European sovereigns to issue green bonds.

The second supportive factor is the extent to which Ireland's debt position has improved over the past five years. Ireland's stock of debt is high, a legacy of the financial crisis. However, our debt profile and the cost of servicing the debt are much more favourable than the recent past. By way of example, five years ago the average cost of our debt was 4%, but today it is less than 2%.

Five years ago, our annual interest bill was over €7.5 billion but today it is closer to €4 billion, a saving of €3.5 billion annually. That saving gives options to policymakers that would not have otherwise existed. Five years ago, we were facing into a period of very significant debt refinancing, involving what we called a series of debt chimneys, with a total refinancing requirement of €70 billion for the four-year period from 2017 to 2020. By contrast, having used the favourable interest rate environment to smoothen and lengthen our maturity profile, we have much lower refinancing due in the next four years. Total maturities over the 2021 to 2024 period will be just over €27 billion, or a little over a third of the figure for the previous four-year period. Next year, there will be no bond maturities because we had previously taken a strategic decision to leave 2021 as a so-called gap year. With no borrowing required for the purposes of refinancing, this increases our flexibility and gives us more options. All told, we have a smooth maturity profile ahead and at over ten years we have one of the longest average lives in Europe. Our stock of debt remains high but presents a much lower risk to our economy than was the case in recent years.

The third supportive factor is the current low interest rate environment and the accommodative monetary policy stance being taken by the ECB. The ECB has increased its bond buying programme to well over €1 trillion this year. With the introduction of its pandemic emergency purchase programme, the ECB waived its previously self-imposed 33% limit on the purchase of any euro area member's stock of government bonds. This and other policy actions increase the probability that borrowing rates for sovereigns in the euro area will remain low for the foreseeable future. What gives us additional confidence is the fact that our relative position has improved enormously. Unlike the last crisis, when Ireland was perceived as a peripheral credit by lenders, in today's environment investors consider Ireland as a semi-core borrower, reflecting our credit ratings relative to other eurozone issuers.

Notwithstanding the support that low interest rates provide, we have to remain alert to the risks in the medium to long term posed by possible rising interest rates. As the chief executive of the NTMA, Mr. Conor O'Kelly, said recently at the mid-year review, these conditions are unlikely to last forever and debt taken on at near-zero rates today will eventually need to be refinanced in the future, and potentially at a higher cost.

Covid-19 is undoubtedly today's urgent priority, but the higher debt burden that is necessary to deal with the challenge brings risks. We are comfortable with the outlook for the next four years or so but are mindful of the ten years beyond that and the need to plan for that period well in advance.

I will conclude by updating the committee on how the NTMA has stepped up borrowing activity in recent months in response to the change to the Exchequer's budgetary position. In April, we told the market that we were increasing our guidance for the year from a range of between €10 billion to €14 billion to a range of €20 billion to €24 billion. Following a successful €6 billion syndicated transaction last month, we have now raised €18.5 billion from the bond markets. This represents 84% of the mid-range of the higher range of €20 billion to €24 billion. It gives us significant flexibility and leaves us in a healthy position to meet our remaining requirements over the second half of 2020. I have included four graphs in the opening statement that we circulated to the committee to illustrate some of these points. That concludes my opening remarks and I would welcome any questions.

I thank Mr. O'Connor. I now open the floor to the first speaker who is from Fine Gael. Does Deputy Carroll MacNeill wish to speak for five or ten minutes?

I thank the Deputy.

I thank all of the witnesses for coming in this morning.

Mr. O'Connor's professional day-to-day experience is in finding ways to finance and, indeed, refinance Ireland's debt position so that we can have the liquidity to put into supports like the temporary wage support scheme or the pandemic unemployment payment. I am sorry, but I do not know how long he has been in his position.

Mr. Frank O'Connor

Since 2012.

He has been there throughout the period through which our credit worthiness has been rebuilt. I ask him to comment on that body of work, how it works on a day-to-day basis and how the changing of the fiscal position informs his experience in trying to raise finance and plan for the refinancing of Ireland's debt.

Mr. Frank O'Connor

Obviously, we interact continuously with investors. We do so physically on the road or, in more recent times, virtually. Of course investors are watching our debt metrics and the trend in our debt metrics. Understandably, Ireland had large deficits as it came out of the financial crisis. Our success in restoring our fiscal position - first the primary balance, so excluding interest costs, and then back to budget surplus - has worked well with investors. That can be seen in the demand we are seeing for our transactions and, of course, in the rate at which we can borrow.

To go back more than five years, the amount we were borrowing was closer to that of a country such as Spain but, as Ireland's fiscal position improved, the past five years have very much seen us borrow at rates similar to France and Belgium, what are called in the market semi-core countries. This has been evident this year, when we have been borrowing ten-year money at approximately 30 basis points.

When Mr. O'Connor says "fiscal position", he means the balance of money in and spending out, how much money we have and the deficit the Government is running on a year on year basis.

Mr. Frank O'Connor

Yes, investors are watching and we have been quite fortunate, and it has made our position easier, to have been in budget balance and then gone into a budget surplus. Of course, this year investors understand that just like other sovereigns the onset of the pandemic means we will go into fiscal deficit. Really it is a relative business and investors look at us compared to others. At the stability programme update in April, the scenario for Ireland was to face a deficit of approximately 7.4% of GDP. This would put us in the middle of the pack relative to our eurozone peers. As I alluded to in my opening remarks, Ireland is very much in the middle of the pack and we are not part of the story, whereas in the previous financial crisis, we were very much to the forefront.

When Mr. O'Connor is going out and having these conversations, he has to tell Ireland's story on our behalf and has to explain what the money is for and the credibility of that. The additional money we have to borrow to fund the economy through this public health emergency is a credible use but if we were to try to borrow the same amount for an unwarranted permanent increase in current spending, he would not get the same response.

Mr. Frank O'Connor

Investors are watching and what they have is evidence of Ireland's previous track record and its progress in getting back to budget balance. This stands us in very good stead. Investors understand the need to borrow and have deficits in the face of a crisis, and they realise it will take a period of time to get back to budget balance. However, our credibility stands up very well.

Something else that makes investors comfortable, when we think about it, is that we increased our funding range but we did not have to do so by as much as others. Let us not forget that this year we came into January with €17 billion in cash, so effectively the debt chimneys I spoke about were fully funded. The adjustment we had to make to fund the deficit and deal with the crisis was smaller than others had to make. On top of this, investors look at our debt maturity profile and we are probably one of the few sovereigns that has no bond redemptions next year. This gives great flexibility and confidence to investors that Ireland can deal with the crisis that is unfolding.

I thought it was a very interesting point that the NTMA strategically decided to take a gap year. The fact that it chose to incorporate a gap year some years out is very interesting and shows a measure of enormous confidence and good management. When was that decision made?

Mr. Frank O'Connor

We were fortuitous. No one can predict the future and we are fortuitous to have this gap year land right at this moment. To give some background colour, thinking back to 2014 we were looking ahead to these chimney stacks. We had the IMF repayments that were going to mature in 2017, 2018 and 2019. We could have funded to the same date at a little bit cheaper but we funded longer. Given the elevated debt level, we took the decision to extend when interest rates came down. In 2016, we could have borrowed five-year money, as sometimes the market looks at a five-year benchmark, but we thought that after the Brexit referendum there might be more uncertainty for Ireland at the turn of the decade and that it would be unnecessary to have five-year maturity when investors wanted ten, 20 or 30-year bonds, as the Deputy has seen us issue. These were some of the influences. The last piece was that it was a bit of a back-up strategy. Five or six years ago, 2020 had approximately €27 billion of maturities and we were top slicing that. The concern was that if we faced into a challenging year we could have used 2021 to borrow short some of the money and term it out. There were a few factors coming together but I do not want to overly claim, and we are quite fortuitous that it occurs now on foot of the pandemic.

I want to ask about relative positioning versus other countries from an investor perspective. Mr. O'Connor mentioned in his statement that just five years ago Ireland was rated sub-investment grade by Moody's. I recall back in 2009 and 2010 that the perspective taken by investors on Ireland was something akin to semi-developed South American democracies. Will Mr. O'Connor give us a relative context? He has put out there how we are now comparable to France and Belgium. Where were we five years ago?

Mr. Frank O'Connor

There is a chart that shows our ratings and perhaps it is a good summary of it.

Ireland was a triple A country and debt to GDP was approximately 25% in the early part of the decade. Of course, with the financial crisis, the market called into question Ireland's ability to fund. Our ten-year bond yields went to 14%, and those were unsustainable rates, hence the programme of assistance as Ireland got its fiscal position back under control and then the gradual reduction in the deficit and the return to budget balance. We were very much in that space and locked out of markets but, fortunately, with help from the troika programme, we were able to stabilise the situation. Yes, for a little while, when we went to meet the investors, we were perhaps put down to the end of the corridor, with high-yield debt, but very quickly Ireland re-established its credibility and we are very much back into the semi-core space. It took a while, probably until the middle part of the decade, as we got closer to France and Belgium, but that is exactly where we are. People do not bring up other peripheral countries in the context of Ireland.

Clearly, we now have additional borrowing, perhaps not as much as we would have needed to borrow were it not for the cash position at the beginning of the year. I wish to ask Mr. Makhlouf about the planning for the rest of the year, perhaps not this year but into next year and the year after, in terms of recovering our fiscal position following this period of necessary spending. What is his view as to how and how quickly we need to rebalance that spending and recover that fiscal position and move to a more balanced position?

Mr. Gabriel Makhlouf

I will start by building on what Mr. O'Connor said. When investors look at Ireland, or any country, they think about what the fiscal position is right now, what we are doing right now, but also what we plan to do. The credibility of a forward-looking plan is quite an important factor in investors' judgment as to what they do immediately. The second and a very related thing is that the investors look not only at the State's fiscal position but also what is happening to the fundamentals of the economy and to growth and what our prospects are for growing the economy. Both those things are very important factors that play into the decisions of investors. As I wrote in my statement, and I also wrote to the Minister about this, there is a need for a credible plan to make sure the debt starts to adjust to a more sustainable position. It is sustainable right now and, as in every other country in the world, the current spending, and as a result the necessary borrowing, by Government is absolutely warranted and necessary. How long that can go on for depends very much on how long we think the virus will continue. That is a very big question underlying the need for us to base our projections on scenarios as opposed to forecasts. In both the baseline scenario and even the severe scenario we published on Friday, debt is sustainable. The big question is that we are taking on greater risk in the medium term in responding to shocks. That the financial system and also the State have been able to respond in the way they have done to this crisis is the result of a lot of actions over the past decade or so. We put ourselves in a position where we could respond quickly to the crisis. The challenge now is to start putting ourselves in a position where we can be ready for the next crisis, whether it is a sudden one, such as another pandemic, or whether it involves some of the challenges I talked about in my statement, those longer-term challenges which require economic resilience, such as the need to prepare for climate change and for international tax reform, which could impact our tax base. Those are just two examples.

As to when we need to start doing that, I do not think we need to start reducing our borrowing as that would be the wrong response right now. As the Government plans its proposed package this month, and when it thinks about its budget later in the year, it needs to think about what is that medium to longer term trajectory for debt. The final judgments will depend very much on the path of the virus and what contingencies we need to put in place.

Mr. Makhlouf and Mr. O'Connor are very welcome. I have three questions for Mr. Makhlouf. The Central Bank's quarter 3 bulletin shows the bank's anticipation of a 9% contraction in GDP for 2020 but a return to growth of 5.7% next year. My first question is on whether Mr. Makhlouf, as Governor, considered the impact of a potential second wave on the stability of the financial system. Has stress-testing been done for the banks? Is Mr. Makhlouf satisfied that they have robust capital reserves?

Mr. Gabriel Makhlouf

We have been looking very hard at the banks' balance sheets and asking ourselves those sorts of questions. As I said in my statement, the financial systems entered this crisis in a much stronger position than the previous one and they have shown themselves to be resilient. The big unknowable, and I use that word advisedly, is what a second wave would look like and how deep it would be. We published a particular scenario on Friday. The system is resilient but that resilience is not unlimited.

The issue of insurance policies has been to the fore over the past number of weeks, particularly business interruption insurance. We are hearing widespread reports of insurance companies failing to pay out for claims on business interruption insurance. What is Mr. Makhlouf's view on this and what is the insurance supervision directorate of the Central Bank doing to ensure insurance companies act fairly? Will the Central Bank review this policy?

Mr. Gabriel Makhlouf

This is a very important and live issue. It involves a number of different divisions in the Central Bank, not just insurance supervision. The bank and I have been very clear and we wrote to chief executives a while ago setting out our expectations of how the industry and financial service providers as a whole should respond, in particular insurance companies.

The policies on business interruption insurance come broadly in three types. In the first category, there are some policies where there is no entitlement to business interruption insurance. In the second category, there are policies where there is absolutely an entitlement to business interruption insurance. In those circumstances, we have made it very clear that we expect the companies to pay up. We do not expect them to drag things out. There is a third category of policies where it is unclear whether there is an entitlement to cover. There is a difference between entitlement to cover and the quantum that may be payable, if there is entitlement. There is a group of policies where it is unclear and legal action is being taken right now by some entities which are challenging the non-payment of what they claim are valid policies.

We have been closely involved in terms of observing what is going on, looking at the contracts, making our own assessment, taking legal advice and talking to the insurance company that is involved in this case. We have made a number of interventions and those are continuing. The objective of our actions is to ensure clarity for affected businesses as quickly as possible. We are pursuing a multipronged approach, which we believe is the most effective way forward in terms of producing clarity. I cannot talk about the interventions we have made, which are extremely live, because we are in the public domain but I can assure the committee that we are focused on this issue. We want to see a rapid resolution and clarity for all businesses who are looking for greater certainty.

I applaud the Governor's efforts. Hopefully, they will continue. I thank Mr. Makhlouf for that because, as he states, it is a real issue facing many businesses. It has come to the surface more as they start to reopen and go back into operation.

The Governor outlined two scenarios: a return to growth and that of a more pessimistic view. What is the Governor's view about the impact of both on the housing market here for the foreseeable future?

Mr. Gabriel Makhlouf

Mark Cassidy was responsible for preparing the quarterly bulletin. I will invite himto say a few words about the different scenarios and to respond to the Deputy's question on housing.

Dr. Mark Cassidy

I thank the Governor. Certainly, we have already seen a significant impact on the housing market. The Deputy will understand that as the construction sector was temporarily put to sleep as part of the public health guidelines, housing supply came to a standstill. We have seen a gradual return but the slowdown already witnessed will have an impact on housing supply this year. We will also not see the industry return at full capacity. Because of public health protocols on physical distancing, the capacity of the housing sector will be affected for a period of time. The length of that time will depend upon the duration of the virus and whether we see a resurgence and hence our two scenarios are also relevant in terms of what we estimate the impact on the housing market will be.

I will give some numbers. Before the virus, in our first quarterly bulletin of the year we were estimating that approximately 26,000 new housing units would be produced this year, rising to almost 32,000 in 2022. In our baseline scenario, which assumes that the economy continues to open up broadly in line with the schedule announced by the Government, we estimate housing output this year of only 16,000 units, that is, 10,000 fewer units than we were previously expecting. By 2022, the corresponding figure will be 22,000, also 10,000 fewer units. That means 30,000 fewer units in aggregate compared to what we were expecting prior to the outbreak of the virus under our baseline scenario.

The outcome would be considerably worse in the event of a resurgence. Our severe scenario assumes that there is some resurgence or so-called "second wave" at some point over the next year. In that case, housing output would be significantly affected in addition to the capacity constraints. In that case, housing output could be lower by the order of a further 15,000. We think, in fact, housing output in 2022 would only be approximately 15,000. To remind the committee of the previous figures, we were previously expecting 32,000 units in 2022. Under our baseline scenario, that would only be 22,000 units and under our severe scenario, that would only be approximately 15,000 units.

We are already in a situation where there is a material shortage of housing supply. That is the most important issue facing the housing sector. We estimate that we are well short of producing enough housing for medium-term requirements, so this will exacerbate the situation.

That is fine. I will turn to Mr. O'Connor quickly. The recent bond issuance at a low or negative yield is welcome. I acknowledge the work of the NTMA, only made possible with the ECB keeping the interest rates low. Mr. O'Connor mentioned that he expected interest rates to remain low for the foreseeable future, with the risk of rates increasing in the future. What consideration is being given to very long-term bonds, such as 30, 50 or 100 years, to deal with this once-in-100 year event?

Mr. Frank O'Connor

Regarding rate expectations, looking at commentary from the ECB governing council concerning rates being likely to stay at current levels or lower until inflation approaches closer to 2%, the ECB target, and looking at the staff forecasts - and colleagues around the table might confirm this - 2023 is the current estimate for inflation to return to that level. That gives us the current project.

Turning to the longer term, we do give it serious consideration and it also has to match investor appetite and demand. We have been going longer. Just last year, we did our second 30-year bond. It had never been done before. While I would not overplay this, we have had some sales of 100-year notes. Those are reverse inquiries. We did about €400 million already this year in reverse inquiries, and we have done some 59 and 60-year transactions as well.

It is part of the spectrum, therefore. We have investors interested in one-year issuance, to five-year issuance and all the way out. We do, however, have to give consideration to all parts of the spectrum and concerning one of the longest average lives, as I mentioned in my opening remarks, we already have tended to lean to the longer end. It must not be forgotten, however, that if we were to suddenly do all our bonds at one extreme, the price we achieve today would be different because it would be a surprise to the market when there starts to be oversupply of that part of the curve.

I thank Mr. O'Connor.

I welcome our guests. My colleagues will ask more questions later, but I will focus on two issues regarding the impact on consumers of Covid-19. I am sure that Mr. Makhlouf is aware of the response, issued on 22 June, of the deputy governor of the Central Bank to detailed questions from me. In that response, Ms Sharon Donnery, the deputy governor, stated that the EBA guidelines do allow for payment moratoria to be applied where interest does not accrue for the moratorium period without of itself triggering forbearance classification or changes to capital requirement for the duration of the payment break. I am sure Mr. Makhlouf agrees with that assessment. Does that mean that the regulator does not require banks to charge interest during the payment break period?

Mr. Gabriel Makhlouf

That is right. That is what was in Ms Donnery's letter.

That is fine. To clarify, does that mean that interest does not need to be charged to prevent the loan being considered as going into default?

Mr. Gabriel Makhlouf

As long it is within the guidelines, that is correct.

Does that mean that interest is not required to accrue to prevent default or a credit rating impact on the customer?

Mr. Gabriel Makhlouf

I am sorry, could the Deputy repeat the question?

Is it the case that interest is not required to accrue to prevent default or a credit rating impact on the customer?

Mr. Gabriel Makhlouf

As long as the payment break and the terms of that payment break come within the moratoria and the criteria, then it is correct that it would not.

Has the Central Bank ever required lenders to allow for the accrual of interest during that period? Has it advised or required lenders to have interest accruing during the payment break period?

Mr. Gabriel Makhlouf

No, we do not get involved in that sort of thing.

Will Mr. Makhlouf comment on the meeting that took place between the Taoiseach, the Minister for Finance, Deputy Donohoe, and the Minister for Business, Innovation and Enterprise, Deputy Humphreys, and the heads of the five retail banks in this State, and also including Mr. Brian Hayes, who represents the industry through the Banking & Payments Federation Ireland. I will quote some of the official minutes received under freedom of information by The Sunday Business Post. The minutes referred to the CEO of Bank of Ireland, Ms Francesca McDonagh, responding to a question, and noting that there were unavoidable costs associated with extending the loan period. She continued by stating that interest must be charged as required by the regulator. Mr. Makhlouf has just told us that is not the case.

Why does he believe the CEO of Bank of Ireland believed that was the case, and informed the then Taoiseach and the Minister for Finance of that? Maybe he could also give his view as to why Mr. Jeremy Masding, the CEO of Permanent TSB, said the approach being taken, which was required to prevent loans from being considered as going into default, was the right balance. Mr. Makhlouf just told us this was not required for loans to go into default. Maybe Mr. Makhlouf might comment on Mr. Colin Hunt's assertion to the then Taoiseach, the Minister for Finance and the then Minister for Business, Enterprise and Innovation, that the risk was clear that if interest was not charged there would be default and there would be a credit rating impact on the customer? Again, Mr. Makhlouf has just clarified to the committee that is also not true.

Mr. Gabriel Makhlouf

I am afraid I was not at that meeting and it would not be appropriate for me to comment. I have answered the Deputy's questions and if we assume good intentions on the part of everybody it is not entirely impossible that people were talking at cross purposes about different things. It would not be appropriate for me to comment on what was said by whom at a meeting I was not at.

Regarding those minutes, can Mr. Makhlouf clarify that those statements are not accurate, that the regulator never required interest to be accrued, that it would not trigger a default, and that it would not trigger a credit mechanism? Is that the case?

Mr. Gabriel Makhlouf

What I have confirmed is that as long as the criteria required in the moratoria follow the EBA guidelines then it will not trigger a default and it will not trigger all the things the Deputy just said.

Is the Governor familiar with the position taken by a number of other European jurisdictions? I think the Commission's report referred to about 12 European jurisdictions where the cost is borne by the banks as opposed to the consumers, including in Germany, Italy, Spain and Belgium. Very interestingly in Belgium KBC Bank voluntarily has not charged interest to low-income borrowers during the break, whereas KBC Bank has charged interest to customers in Ireland. Is Mr. Makhlouf familiar with the fact that across Europe banks in many jurisdictions have taken a decision either through legislation or voluntarily not to accrue interest?

Mr. Gabriel Makhlouf

Absolutely. There is a difference of approach across Europe. Some banks have entered into voluntary arrangements as we have here but they have decided not to charge interest under particular circumstances. Others have legislative requirements so they have not actually chosen but have been required to not charge interest so it is quite heterogenous, quite different. They are all, however, within the EBA guidelines.

When the chief executive of the Banking and Payments Federation of Ireland, Mr. Brian Hayes, noted at the meeting that the approach being taken here was the same as across Europe and was in line with the rules the banks were obligated to follow, that was not necessarily true because as Mr. Makhlouf said, there are various approaches across Europe and indeed many jurisdictions did not charge interest during the payment break. Is that correct?

Mr. Gabriel Makhlouf

We are all following the EBA guidelines. The Deputy wants me to comment on what happened at that meeting and what the minutes say, but that would be unfair to me-----

I want Mr. Makhlouf to give me his view of the Central Bank's approach. Is it the case that the approach here is the same as across Europe, because he just said there are varying approaches across Europe, some as a result of legislation and some done voluntarily-----

Mr. Gabriel Makhlouf

Indeed.

-----with many jurisdictions not charging interest?

Mr. Gabriel Makhlouf

No. What is common across Europe is that we are following the EBA guidelines.

Those guidelines allowed for interest to be accrued or interest to not be accrued.

Mr. Gabriel Makhlouf

That is correct.

I refer to business interruption. We have discussed this in detail in our meetings and I appreciated that opportunity. On 27 March 2020 Mr. Makhlouf wrote to the CEOs of the Irish-regulated insurance companies setting out his expectations and those of the Central Bank in light of Covid-19. He stated in that letter: "...where a claim can be made because a business has closed, as a result of a Government direction due to contagious or infectious disease, that the recent Government advice to close a business in the context of COVID-19 should be treated as a direction". I welcome that letter. Is Mr. Makhlouf aware of major insurance companies in this State refusing to accept the direction he issued to them in that letter and are challenging claimants on the basis that it was not a direction to close and are challenging that both in the courts and in refusing claims?

Mr. Gabriel Makhlouf

It is well known that more than one case has been taken to the courts on this.

What is the Central Bank going to do? The insurance companies have just decided to ignore its advice. We are left in the situation where four publicans have taken a case and another thousand publicans are ready to take one. Some 15 restaurants are taking a case with another 160 or so in the wings. I know of hairdressers and community groups that are ready to take cases.

In Britain the FCA, the equivalent of the Central Bank, has said that is not the approach and to not allow the consumers to take on these giants of the insurance industry. It stepped in and looked for clarification with regard to the courts because it was the most speedy and most effective way. Why should it be down to the local hairdresser, community group or the little restaurant to take on the insurance industry when the Central Bank has a consumer protection role here?

I will say clearly that what we are facing into is a tracker scandal, mark 2, because it is exactly the same situation. Seven or eight years ago I challenged Mr. Makhlouf's predecessor because the Central Bank was not standing up. It allowed individuals to take the cases to the courts and the floodgates opened. Some €1 billion had to be paid out by the banks and 40,000 customers were impacted. The Governor is about to see the same thing here, because what is happening in the insurance industry is above scandalous. What it is doing to businesses that could go under as a result of it refusing to pay out on legitimate claims is ridiculous.

Mr. Gabriel Makhlouf

We are, as I said in response the earlier question, actively involved. We have made clear our expectations and I have made clear my expectations. The fact this is an extremely live issue means that, to a certain extent, I will not tell the Deputy exactly what we are doing, but rest assured, we are absolutely focused on getting this issue resolved as quickly as possible.

The fact the FCA is doing what it is doing is interesting. We have talked to it, but it is in a different jurisdiction. It is looking after what needs to happen in the British system. We are looking after what needs to happen in the Irish system. We have lawyers and all sorts of people involved in looking at what is essentially a legal issue, that is, does the contract the insurance company has entered into with a publican, for example, entitle the publican to cover? That then leads to another question if the answer is "Yes", which is how much? What is the quantum of that cover? These are legal questions. We are absolutely determined that insurance companies should pay up where they have to pay up. They should not be obligated to pay up if nothing is required in the contract. It is inevitable that in some cases this will need to be taken to the courts. Whether or not we can intervene in the way the FCA has been doing is precisely the issue we have been taking advice on. At this stage, all I will say is that we want to see this resolved as quickly as Deputy Doherty does. Nobody should underestimate our determination to do that.

I thank the Governor.

Thank you, Governor and Deputy Doherty. I have a couple of brief follow-up questions. You issued a directive or a letter to insurance companies saying they should treat Government guidance to close as a direction to close. Did you ever communicate to the Government that it needed to direct bars to close in order for the bars to be able to recover from insurance companies?

Mr. Gabriel Makhlouf

I am not sure we ever did that, no.

Are you sure that you did not?

Mr. Gabriel Makhlouf

I am not sure that we did not but I cannot see why we would have-----

To avoid this mess.

Mr. Gabriel Makhlouf

Right now I cannot see why we would have felt the need to. The Government issued its direction and we gave our view that direction was sufficient.

Is the Central Bank a notice party to any of the ongoing cases?

Mr. Gabriel Makhlouf

We are not party to any of those cases.

Is it a notice party either? No.

I refer to insurance companies. One letter I saw required publicans to identify cases of Covid-19 within 20 miles of their establishment. At that time, as the HSE and NPHET were not saying where particular cases were occurring, it was impossible for pubs to do that. Since then, the Central Statistics Office, CSO, has published the breakdown of cases per district electoral division, DED. Is that something Mr. Makhlouf welcomed? Did he have any part in it?

Mr. Gabriel Makhlouf

To what in particular is the Chairman referring?

The CSO published the breakdown of incidences per DED, which tend to be quite small. That breakdown would enable publicans, or any businesses, to pinpoint their proximity to an incidence of Covid-19.

Mr. Gabriel Makhlouf

It is always helpful to have more data and information, and not only to help Mr. Cassidy do his economic analysis. To be very clear about that 20 mile or 25 km condition, in our view the Government's direction essentially said that the whole of Ireland was-----

On 7 April. That is correct.

Mr. Gabriel Makhlouf

Right. People may take issue with this, but in our view that effectively meant the 20-mile condition was irrelevant.

In any event, it has been overcome by the CSO data which were subsequently published. I thank Mr. Makhlouf. I call Deputy Hourigan.

I thank Mr. Makhlouf for his opening statement. I appreciate that this session is focused mostly on monetary policy but I would like to go back to what we were just discussing and the point Deputy Doherty made. I have a few questions about the Central Bank's regulatory response to the current financial crisis. During this crisis, as we just heard, many banks have offered mortgage payment breaks to customers. There is a deal of frustration about the availability of these payment breaks and how interest is and was being calculated during the break period. Similarly, we have heard concerns from people who had mortgages refused or offers withdrawn as a result of their employer being on the temporary wage subsidy scheme. Prior to the crisis we had the tracker mortgage scandal, which is still dragging on for some. The Central Bank is currently tasked with regulating nearly 10,000 firms providing financial services, among other responsibilities. With such an array of financial regulations to enforce, consumer protection can sometimes seem quite far down the list of priorities. What is Mr. Makhlouf's view on the establishment, or re-establishment as it may be, of an independent financial consumer protection agency? Would a stand-alone agency better advocate for the interests of consumers, ensure redress and better enforce consequences for financial institutions that act in bad faith towards consumers?

Mr. Gabriel Makhlouf

I will cite two things in response to the Deputy's question. First, I do not agree that consumer protection is way down our list of priorities. Everything we do is ultimately about protecting consumers, and I have written about this on my blog recently. Our founding legislation referred to our focus being the promotion of "the welfare of the people as a whole" and I take that extremely seriously. Everything we do, whether monetary policy and monetary stability, financial stability, mortgage measures, rules for banks and the capital or buffers they need to sustain, or the moneylender rules that we recently amended, is ultimately about protecting the community's interests one way or another. It is about promoting the welfare of the people as a whole. I do not see the tensions that some people see in our role. I absolutely acknowledge that there are different systems operating in different countries.

In Ireland, it makes quite a lot of sense to bring together the regulation of the financial system and the protection of consumers. We spend a lot of our time supervising the financial service providers. These are the same people who provide services to consumers. As I said, separate entities exist in other countries but creating one here would dilute the potential of our mandate, which is to be a single entity looking at the whole of what is going on with a financial service provider. That is my view but I acknowledge there are different regimes around the world. I emphasise, however, that I do not agree that consumer protection is not at the top of our mind. Everything we do is about protecting consumers.

To pick up on the issue of green bonds, €5 billion has been raised by the Irish sovereign green bond to date. I note the framework regarding the placement of the funds raised in green projects and the external validation of the fund's green credentials. Why is that the amount being raised as a total of the fund? The last round was oversubscribed by investors and there is any number of projects, ranging from public transport and renewable energy to retrofitting, on which the funds could be spent. What determines how much of the country's borrowing comes through the Irish sovereign green bond?

Mr. Frank O'Connor

The Deputy is correct that the bond has raised €5 billion to date. We launched the inaugural green bond in October 2018, which raised €3 billion, and we then tapped it for a further €2 billion a year later, in October 2019. In fact, we had only intended to tap for €1 billion but we tapped the extra demand to which the Deputy referred for €2 billion. I would caution that there can sometimes be an element of overbidding in these matters. To look at the recent raising of the vanilla ten-year bond, there was demand for €60 billion. There is an element of overbidding because people know that we will scale back some of the orders. The genuine demand tends to be a little bit lower. The higher level of demand is not always genuine.

We are also conscious of allocations. As the Deputy will know, we have to allocate against eligible expenditure and look at the quantum of expenditure each calendar year. While there might be many projects in the future, we must ensure that investors are comfortable that we have projects against which to allocate. The likely pipeline of projects will allow us to launch more sovereign green bonds in the future. We are trying to strike a balance between investor demand, the pace of projects as they begin to be delivered, and looking ahead. We will do more in this area. I hope this gives the Deputy a little bit of the colour as to how these decisions are made.

I take it that Deputy Nash is substituting for Deputy Duncan Smith.

I am indeed. I only have five minutes allocated for my questions so they will entirely be directed at the officials from the Central Bank. The Central Bank is on record as saying that €6 billion is required to provide liquidity supports for business as part of the response to the pandemic in order to avoid economic meltdown and the mass loss of jobs. A host of very complicated schemes featuring very high interest rates have been proposed by Government. We know from the data that the drawdown of these schemes has been worryingly low. Is the Central Bank concerned about the low level of drawdowns and its impact on business viability? What is the Central Bank's advice as to how to get liquidity to businesses more quickly to save as many jobs as we possibly can?

Mr. Gabriel Makhlouf

I thank the Deputy. He referred to a figure of €6 billion. We published a paper a few weeks ago which said that the amount required to deal with liquidity challenges would potentially range between €2.4 billion and €5.7 billion. It will be a big number. I am concerned about ensuring we protect the liquidity position of businesses. One of the very big challenges we all face, and which underpins what we were saying earlier about the two scenarios we published last week, is the current degree of uncertainty.

With everybody, but in particular with SMEs, making decisions as to what their prospects are and what they need to do to adjust to the Covid-19 environment, requires time, so in my view policies should be focused on giving them time to make some of those decisions. In practice, some SMEs are not going to survive this crisis, but what policy needs to do is to make sure that viable businesses do not become insolvent. So we need to look at how we can provide the facility, whether it is by the State, or by the financial system - by credit institutions - to create time and to enable those judgments and decisions to be made. In my view, we need a suite of offers such as credit guarantees and equity injections. Debt financing has a role to play. One of the interesting issues is that potentially what one could argue was a scarring effect of the last crisis, what economists would call a structural longer term effect, is that many SMEs have no bank debt at all. From the last data I saw, more than half, just over 50%, have no bank debt at all. One could argue that is a good thing, but one could also argue that in the case of a viable business, by deciding not to borrow at all and by restricting one's ability to obtain capital one is limiting one's potential to grow and become more successful. I think that is one of the issues that needs to be thought about as we emerge from this crisis. My main response to the Deputy's question is we need to find a policy that avoids creating structural problems for the economy that is focused on the productive capacity of the economy and looks to support SMEs with the time to make decisions.

I am sorry to interrupt Mr. Makhlouf but we are running out of time in terms of the space allocated. How does he think the July stimulus that is being considered at the moment should be targeted? In terms of the quantum of money that the Government should focus on such an intensive response over the next couple of weeks in the July stimulus, how much does he think should be targeted, onto which sectors and how?

Mr. Gabriel Makhlouf

I will not comment on the quantum because we have given a sense of the range in terms of the liquidity challenge. The Government will have to think about the trade-offs it will be making between the various areas that it will be thinking about. It will obviously have to be sizeable to create the sort of space for the decisions that I have talked about.

I do not think targeting is easy, but I do think targeting matters in that it enables one potentially to allocate more resources to particular sectors, but as I just said, the target needs to be to try and find those viable businesses and avoid them becoming insolvent. For me, that is the main immediate issue. I do not know whether Dr. Cassidy wishes to add anything to that.

Dr. Mark Cassidy

No, I do not think so. In the near term there is still a requirement for supports for health services, incomes, viable businesses and over time there may also be a move to look at issues to support the productive capacity to reduce risks of long-term unemployment. We are moving from one phase to another.

Mr. Gabriel Makhlouf

To pick up on something that Dr. Cassidy said, it is worth reminding the committee that the most important economic policy that can be made right now is to invest in health and ensure that we are ready for any resurgence in the virus because the health of the community, as a whole, is an essential foundation to ensure the economic recovery comes, and comes quickly.

I have two questions for each agency and will start with the NTMA. I will set out my questions at the beginning and I hope both delegations will reply.

My initial questions are for Mr. O'Connor. There is a growing and strong school of thought that believes Ireland should engage in sustained deficit spending. The circumstances are very favourable to that kind of approach at the moment given the underlying strength of the economy, the availability of cheap long-term money, the trend towards deflation and the obvious need for a significant stimulus package for the economy. Does he subscribe to that school of thought? What does he believe to be a sustainable level of borrowing over the next three years? What does he regard to be an ambitious yet prudent target timeframe to meet the objective of balancing the budget?

My next questions are for Governor Makhlouf. We have been conscious for some time of high residential mortgage interest rates and their negative impact on households and the economy. In the present circumstances, does he intend to take action or does he believe it would be advisable to take action to ease the financial burden by reducing residential mortgage interest rates, which are very much out of line with the overall low interest rates that are currently available? Does he intend to take action to reduce the mortgage interest rates as a means of stimulus, not only to ease the burden on mortgagees but to free up money for spending in the economy, which is badly needed at the moment, and to stimulate demand for housing?

My next question is on bank closures. A significant number of bank closures took place March, all of which were in breach of the consumer protection code. Bank of Ireland was clearly the worst offender, as it closed 101 branches without giving the required notice under the code and, in fact, on the basis of a 24-hour notice to the Central Bank. What action has the Central Bank taken in response to the breach of the code engaged in by the banks? What action has he taken or does he intend to take to minimise the risk of further breaches of that code?

Mr. Frank O'Connor

To answer the Deputy's question on the deficit, the first important thing, to reiterate what I said in my opening remarks, is that we enter from a position of strength so that gives policymakers a choice and a flexibility to deal with the crisis. Ultimately, from a debt manager's perspective, like we have seen in the past when growth was strong and we get back to budget balance, that creates that ability if one were to face a shock.

Sorry, Mr. O'Connor, time is very tight and I will ask two specific questions.

Mr. Frank O'Connor

Yes.

What is a sustainable level of borrowing over the next three years? What should the target timeframe be for a balanced budget?

Mr. Frank O'Connor

It will not surprise the Deputy that I would say we would not speculate on any number. As head of funding and debt management, the market would pick up on any particular number as a new funding range or a new target. There are many moving parts in debt dynamics, including the very important interest cost. From our perspective, we take the Government numbers, be it at budget time or at the stability programme update in April, and guide the market accordingly.

In terms of the future, I note that the investors note that the Government has to face, just like other governments, a larger deficit this year and given the quantum of the deficit, it is unlikely to recover in the next year or so. They expect to watch the trajectory and the Government indicating that it will have a medium-term plan to get broadly back to budget balance.

This is what investors will watch. As soon as we have those numbers, we will guide the market.

Mr. Gabriel Makhlouf

I will respond to the Deputy's questions on bank closures. I cannot really speak very specifically about what happened in March but many institutions, and not just banks, had to make many sudden decisions as a result of the pandemic and the need to respond to it. Banks, like the rest of the community, absolutely understand their obligations to their staff and their customers. They understand their obligations under the code, we hold them to account to follow the consumer code and we are in constant dialogue with them. That is all I am going to say about what happened in March.

What does it actually mean that the Central Bank held them to account? They all breached the code. How will the Central Bank prevent this happening again in future?

Mr. Gabriel Makhlouf

I do not know the specific decision-making process but I suggest that if there is another pandemic decisions will be made very quickly. This is what I expect. If this is the cause then I suppose it is a balance of judgment that management needs to make between looking after their staff and looking after the interests of their customers. Sometimes this can be a very difficult decision but sometimes it can be very straightforward. Occasionally, their legal obligations to their staff are absolutely paramount. I do not know exactly what happened in March in the cases the Deputy described but institutions, and not just banks, had to make very sudden decisions because of the pandemic. It was, and is still, an unprecedented shock. I am not surprised that actions were taken in the way the Deputy has described.

I also asked about mortgage interest rates.

Mr. Gabriel Makhlouf

The rate of interest charged on a mortgage is a commercial decision by the lender. The Central Bank does not play a role in setting interest rates. In recent months, we have worked with our colleagues on the governing council of the ECB to ensure the financing conditions for the euro area remained accommodative and liquidity continued to flow. We have done the things we heard Mr O'Connor outline earlier. This is the way to keep interest rates as low as possible.

I thank Mr. Makhlouf.

Mr. Gabriel Makhlouf

In Ireland they are higher than elsewhere-----

I am going to have to move on to the next speaker.

Mr. Gabriel Makhlouf

-----for a bunch of historical reasons.

I have allowed every speaker until now to go over time. I do not want to discriminate against Deputies Michael Collins, Boyd Barrett and Shanahan but I ask them to stay within their time. All of the subsequent speakers will have to remain within their time to ensure everybody gets in.

I did not quite hear Mr. Makhlouf's answer earlier when reference was made to people who had obtained mortgage approval but are not being allowed to draw down their mortgages because they are in receipt of the wage subsidy scheme or the pandemic universal payment. Mr. Makhlouf has said he takes seriously his role as guardian of the consumer. This issue also touches upon his role of ensuring the wider macroeconomic picture and financial well-being of the State. It is not a good idea that banks have this indiscriminate policy of stating that if people are in receipt of the wage subsidy or the pandemic universal payment they will not be able to draw down their mortgage.

At the very least the banks should look at the individual's case rather than having this broad brushstroke policy of discriminating against people who have lost their jobs or income temporarily as a result of the pandemic. Could Mr. Makhlouf comment on that?

Mr. Gabriel Makhlouf

I agree with the Deputy. Banks should not have an indiscriminate policy. They should look at individuals on a case-by-case basis. They are required under European law to assess the creditworthiness of their potential borrowers. The issue of whether they are receiving income support is just one of the factors. I completely agree with the Deputy that it should not be decisive or determinative. Banks should look at the individual potential borrower, the applicant, in making a considered judgment.

What can Mr. Makhlouf do, or what can be done, to address the fact that banks are not doing that?

Mr. Gabriel Makhlouf

I think I saw that last week the one institution that made the news for having adopted an indiscriminate policy, to use the Deputy's word, has abandoned it. We need to encourage the banks to do the job they need to do. Borrowers make probably the most significant financial transaction of their lives when they take out a mortgage. It is a 20 plus year commitment. The lender and the borrower need to take it extremely seriously and need to ask themselves the question: will this loan be repaid? As I said, banks are required to assess the creditworthiness of the potential borrower. Nobody in the community wants to encourage banks to lend recklessly or encourage borrowers to borrow recklessly. It is part of our job to try to make sure that balance is struck, and that is partly what underpins some of the rules we have in place, which I suggest have been quite an important factor in helping the resilience of the financial system as it has gone into this crisis.

On another subject, there is an amazing contrast between the attitude of regulators, financial authorities and so on, and, indeed, Governments, towards the economic crisis this time around and their attitude towards the previous one. We are now talking about things that we were told after the crash in 2008 absolutely should not and could not be done, namely, borrowing to keep people in work and to stimulate the economy. Does Mr. Makhlouf accept there is an inherent critique of the failure of austerity in the policies now being pursued, and indeed in the fiscal and monetary policy being pursued throughout Europe? To some extent, I welcome that, but is there potentially something reckless about it as well? We refer to our debt position. If we look at debt to GNI* rather than debt to GDP, we are in a very precarious debt position. The Minister for Finance talked earlier about the potential for bond market vigilantes to start to take advantage of this situation. If that is so, we could be in very dangerous waters, which the Central Bank and the NTMA seem remarkably calm about, considering the attitudes that were taken ten years ago towards all this.

Mr. Gabriel Makhlouf

I would love to spend probably the next hour and a bit chatting to the Deputy about the history of the past ten years and what we have learned from it and to give him my view of-----

Could Mr. Makhlouf perhaps give it in writing?

Mr. Gabriel Makhlouf

What I will say is this: we certainly learned from the previous crisis. I am talking about the generality of policymakers. Some of them already knew about it during the previous crisis but they were in the minority.

We have learned. One of the big differences between the last crisis and this crisis which is worth bearing in mind is that the last crisis was a financial crisis and part of what needed to be done was to get the financial system-----

I thank Mr. Makhlouf. I ask him to give the reply in writing because I have to allow other speakers in.

Mr. Gabriel Makhlouf

I will just say one thing because it is important. It is in my statement but I wish to emphasise it. We are not saying that debt sustainability and all these things do not matter. They absolutely matter. We are saying that right now the focus needs to be on making sure the productive capacity of the economy is protected and that we start creating a path that will enable us-----

I thank Mr. Makhlouf. I have to cut him off here. I ask him to put any further reply in writing to Deputy Boyd-Barrett. I have to get in other speakers and we have to be out within a certain period of time. I call Deputy Shanahan. He has five minutes.

I thank our guests this morning. I wish to address Mr. Makhlouf first. He has touched on liquidity supports and we know how important it is in the banking sector but it is especially important in the business sector at present. Does he have a comment on one of the early liquidity instruments which basically asked our commercial banks to take on 20% of debt where the State backed 80%? There was a low level of take-up and a high level of refusal from the banks. I think over 50% of those loans were refused despite only a 20% coupon being at risk for the banks. Other countries have implemented the idea of dropping money into SME accounts through, for example, the Revenue Commissioners for liquidity supports. Why are we using the pillar banks? Does Mr. Makhlouf have any thoughts on that?

Mr. Gabriel Makhlouf

The two questions are related. I do not, as a matter of generality, think that 100% Government guarantees are a good thing. It is more important - again as a matter of generality although it could be different in particular circumstances - that the banks have skin in the game because credit institutions such as banks and credit unions have a better understanding and knowledge of their customer. Their business is to assess commercial risk and to understand the viability of a business proposition. If they feel there is no risk in their lending because the Government is covering it by 100%, they are probably less likely to apply the rigour that one would like them to apply. I think one should use the banks as part of a suite of measures to provide liquidity, partly because it gives flexibility and partly because they have that skill set. The Revenue Commissioners have the tools to collect money from a taxpayer or to give money back to a taxpayer. Their skill set is not in assessing the commercial viability of a loan so, in my view, it all depends on what exactly one is trying to achieve. If one is trying to deliver some cash directly to a business, the Revenue Commissioners may be a very good way of doing it. If one is trying to get value for money out of a commitment by the State, then a credit institution has a role to play and one has to think about the incentives one builds around it to make sure it plays that role.

I thank Mr. Makhlouf. I suppose one of the issues about value for money to the State will be the impact to employment, which is not a financial measure as much as an economic and social measure.

I have a question for Mr. O'Connor on the activities of the NTMA. He spoke earlier about how the arbitrage of risk is based on future bond yields, etc. I think everybody would agree that we will see significant reductions in the ongoing capacity within the economy. There are risks to corporation tax, particularly when we are borrowing heavily from the ECB, which has a desire to realign our corporation tax, and there is also the risk of Brexit.

I will ask Mr. O'Connor about our demographics. I refer to the pension reserve fund. I note the row that is going on about the extension of the pension age. Ultimately, where is the pension reserve fund? Is the signal that there will be a benign interest rate environment over the next two, three or four years giving the Government a little too much comfort in terms of increased borrowing and not looking at increased fiscal measures?

Mr. Frank O'Connor

In essence, as the Deputy stated, there are a number of risks. I suppose the message is that we came into the crisis from a position of strength that gave flexibility to policymakers to deal with the crisis. Over the medium to long term, given our elevated level of overall debt, we are conscious of and would talk about the potential risk to higher rates. From our perspective, investors are always talking about the risks, such as the near-term risk of Brexit and the medium-term outlook for changes in international corporate tax to which the Deputy has alluded. Other concerns might be out there. From a debt perspective, we are in what we often refer to as the permanent contingency business, which involves looking at what we can do to allow policymakers choice and flexibility, and then trying to get a phased approach to budget balance and dealing with issues as they arise. That brings us back to the long-term, smoother profile we have. If interest rates were to rise beyond that horizon, one should not forget that not all of the debt will roll in one year. It will take a period of time of extended higher rates to start to see our debt service costs increase because the majority of our debt is locked. It is fixed-rated debt and it has been extended. I think I alluded earlier to the fact that we have one of the longest average lives.

I thank Mr. O'Connor. If he wishes to reply further, I ask that he do so in writing because I have to bring in other speakers.

I thank our guests. Many younger people in this country are struggling. I refer, in particular, to couples who had deposits down on their first homes but, because they are on the temporary wage scheme, are being told their mortgage applications will have to be reapplied for. These are people who have worked through the pandemic. Their employers received help from the Government but, because they are on the temporary wage scheme according to their payslips, their mortgage applications are no longer deemed fit. Can Mr. Makhlouf see any way forward for these people without this pressure being put on them by the banks at this time?

Mr. Gabriel Makhlouf

I cannot add much to what I said earlier. It is important that probably the most significant financial transaction an individual makes is done with care, that the lender makes sure it understands and makes an assessment of the creditworthiness of the borrower and that the borrower understands the commitments he or she is entering into. Those important factors need to continue and will continue. Ultimately, the recovery, survival and success of SMEs and the growth in job prospects are the main ways to help those individuals who are looking at, and obviously addressing, the housing supply challenge which we talked about earlier. That is the best way to support individuals to purchase a house.

Many businesses, especially restaurants, cafés, hotels, pubs and taxis, all over the country are in ruin through no fault of their own. They did what was asked of them by the Government. They closed their doors to protect us. Now they are left with a bleak summer period. While we are all being told to holiday in Ireland to try to make up for the lack of tourists, this will in no way cover their losses from the pandemic.

In the little time available, will the witness tell me what breaks they are being given on loans they already had, aside from the three to six months moratorium? What help are banks capable of giving in future?

Mr. Gabriel Makhlouf

The banks have introduced the payment breaks, as the Deputy stated. More than 250,000 payment breaks have been approved so far. Many of those were for mortgages but some were also for SME lending. The other type of supports in place include those the Government has put in place and they are sizeable. As we mentioned earlier, there is about €9 billion in total, plus €7 billion worth of guarantees etc..

It is really a question for the Government now to decide what other supports it wants to make available. The financial system, the banks and credit unions will be working hard looking at the sustainability of their borrowers and the issues they face. It is in everyone's interest that we continue to work together on responding to this pandemic.

Some people were in trouble with mortgages before the pandemic. Is there any understanding being put in place in banks to help these people, who may have just been getting back on their feet but who, because of Covid-19 have now fallen behind again? I refer to people who have applied for the moratorium. I am being told that it is not a case of pausing their payments but more of a reconfiguration. Either those people's payments will be adjusted to add on the moratorium or else there will be an addition to the duration of the mortgage. Is that the case and is it necessary to apply it to the repayments when times are so tough? I would like the Governor's views on those issues.

Mr. Gabriel Makhlouf

If the Deputy is talking about the interest charging, I spoke about that earlier and have nothing to add to what I said. Where borrowers, however, have got significant arrears that are not going to be resolved by payment breaks or where their circumstances are such that the nature of the payment break is a temporary thing and is not going to help them, then there is nothing to stop the lender from working with borrowers to look to restructure the debt, fundamentally, and to enter into alternative arrangements. In many ways, the most important thing for borrowers, and ultimately for lenders, is that if people think that situation is likely to arise, that they start talking to their lender early and as soon as possible.

More generally, the issue of some of the mortgage arrears that have been around since the previous crisis is a serious one and is one the Central Bank is concerned about. We are about to bring together interested parties to a round table in the next week or so to talk about these issues and look to how we can address them because the likelihood at the end of this crisis, if we do not manage it well, is that we will create another crisis. We need to be on the front foot to try to deal with those sorts of challenges. It is a real issue, the Central Bank is concerned about it and we are looking to work with others to see what the best way is to resolve it.

I thank Mr. Makhlouf and Deputy Michael Collins. I call Deputy Mairéad Farrell next.

Given the time constraints, I am going to put all my questions at the same time and then give the witnesses some time to come back with their answers. These questions are for Mr. O'Connor. In his opening statement, he stated that the cost of servicing debt is much more favourable than in the recent past. He also, however, stated: "Notwithstanding the support that low interest rates provide, we have to remain alert to the risks in the medium to long term posed by possible rising interest rates."

The past decade has demonstrated that interest rates, rather than being a function of debt and deficits, have been largely driven by the ECB and moreover we entered the present crisis with stubbornly low inflation rates. Crises of this kind accelerate pre-existing trends. Considering this, how likely is it that interest rates will rise in the medium term or is Mr. O'Connor warning that international markets could take a turn with the appetite for Irish Government bonds lessening and, as a result, interest rates increasing? Government bonds are considered safe assets to diversify investment portfolios but we have little information on those who buy our bonds. Can Mr. O'Connor give clarity on who holds these and can he give us a breakdown between ECB holdings versus private holdings? In his view are interest repayments now a better marker of debt sustainability than the total stock of debt?

I took a look at the NTMA's June investor presentation and noted slide 23 stated that most foreign-owned multinationals are shielded but that aircraft leasing is exposed and that there will be an estimated €250 billion hit to global passenger revenues due to Covid-19. In 2018 the CSO estimated that the size of total gross assets in the Irish aircraft leasing sector was around €140 billion. Over 50% of global aircraft are leased from Ireland, which in practical terms means that every two seconds an aircraft registered here is estimated to take off somewhere in the world. Despite the size of these assets, the contribution to direct employment is approximately 1,500 people. Given the onset of Covid-19 and the subsequent stay-at-home measures and restrictions on international travel, many of these assets are likely to become impaired. In Mr. O'Connor's view, what exposure does the Irish economy have if one or more of these large lessors were to fail?

I note also that in that presentation in slide 29 the NTMA said that once the Covid-19 stimulus ends, Ireland needs to narrow its deficit again. To me that implies a return to austerity. In Mr. O'Connor's view would a rush to austerity risk undermining the stimulus and jeopardising the recovery?

I have one last question. The programme for Government states that we will use any windfall gains such as the NAMA surplus, the final resolution of the liquidation of the IBRC or the scale of the State shareholdings in the banks to reduce our borrowing requirements. Would it not be better if this money were allocated for investment purposes or even to the temporary national recovery fund? Surely paying down debt at a time of crisis when the fiscal rules have also been suspended is a poor use of badly-needed public funds?

Mr. Frank O'Connor

There are quite a few questions there, I will try to deal with them in sequence.

On the outlook for rates, I commented earlier that based on ECB guidance official rates are not set to rise for a couple of years yet, until the ECB sees the inflation target rise towards 2%. We do caution about future interest rates. It is not a prediction, all it is saying is that given the stock of debt initially, post the legacy of the financial crisis and then with Covid-19, even though we are well placed to borrow, the stock of debt means that if there was to be a rise in interest rates we would see the debt-servicing costs rise. That is the point. I mentioned that not all of our debt will roll in one year because we have elongated it, so it would take quite a period of time. That is the cautionary tale and the Deputy is right, the costs of servicing the debt and interest rates are a huge factor as is the ECB bond-buying programme. Many years ago with debt at this level people would have expected the interest bill to be higher. In fact if one looks at the graph we included, back in 2014 it was expected that Ireland's debt-service costs would reach almost €10 billion and this year they are dropping below €4 billion.

Regarding some of the Deputy's other questions, on the matter of who holds our bonds if one looks at our last five syndications - these are the big transactions of €4 billion to €6 billion in size - one will see that approximately 80% or more is overseas with the remaining 10% to 15% being domestic buyers. It does depend on what bond is being issued at a particular point in time but it is very much that overseas piece. The Deputy is right that the ECB is a large buyer in the secondary market and have been since 2015 with the onset of quantitative easing. The ECB right now holds about 20% of Irish Government bonds and I can take her through any of those numbers in further detail if time allows.

On the question of windfall gains and paying down debt, we face a deficit this year. The projection is a general Government balance of €23 billion and a lower Exchequer borrowing requirement, so we are not paying down debt, we are adding to the debt and effectively this is fungible, to use the jargon, so the NAMA surplus of €2 billion that was paid over in June effectively lowered the amount we had to borrow in the market.

In essence, debt is not being paid down at the present time.

What about aircraft leasing?

Mr. Frank O'Connor

I might pass over to my colleague. Of course, for us they are big balance sheet numbers but what is important - and the Deputy alluded to the 1,500 people employed in the sector - is what impact it would have on the economy, not on the gross balance sheet size. We can come back to the committee a little bit more on that, but seeing as Dr. Cassidy from the Central Bank is here, he might want to comment himself.

Dr. Mark Cassidy

It is an important sector, but the figures it adds to some of our headline national accounts overstates its importance to the real economy. There will be see some hit to this sector, but the impact on the real economy will be much less than perhaps some of the headline figures might suggest.

I thank Deputy Farrell. I call Deputy Burke.

I thank the Chairman and the witnesses for their presentations.

I refer again to the housing issue. There has been much talk about it this morning, but this issue has not been resolved. It is now causing cash flow problems because mortgages cannot be drawn down.

I have a number of examples of applications where one party is being fully paid. Neither the employer or employee is in receipt of a Covid-19 payment, but one of the parties to the borrowing is employed by a company in receipt of Covid-19 support through the Government scheme. Banks are refusing to allow a drawdown to occur even where, in all the cases I have, people are receiving their full salary in the same way they were prior to the introduction of the Covid-19 scheme. I am not satisfied that the banks are behaving properly, and this has caused problems for both builders and builders' suppliers. This is then causing further problems down the line.

What can the Central Bank do on this issue? There is clear evidence in all the cases I have that there has been no reduction in pay to the borrowers yet the banks are refusing to allow a drawdown. In one case, for instance, the mortgage repayment was to be €690 per month and the current rent the applicants are paying is €900 per month. That sale collapsed. The bank would not allow a drawdown because one of the parties borrowing was employed by a company in receipt of Covid-19 support. Can we have clarification on that situation where there is no reduction in the income of the borrowers?

Mr. Gabriel Makhlouf

I am not sure I will be able to help the Deputy any more than through my earlier answer, which is that we expect lenders to make an assessment of the creditworthiness of the borrower. In the specific example he gave, I do not, and would not be expected to, understand what exactly the bank was looking at. However, it needs to make an assessment of the creditworthiness of the borrower, and clearly, in the example given by the Deputy, an assessment was made.

It is in the interest of everybody, and not just the banks and the individual borrower he mentioned, but the community as a whole, that we make sure lending and borrowing are done in a safe way. They should be done with a view to the long-term nature of what is happening here which is, as I said earlier, that these are long-term financial transactions. It is not short-term borrowing. The question that need to be asked, both by borrowers and lenders, is: can I sustain this borrowing?

Does Mr. Makhlouf not accept that the Central Bank has a role in this regard?

All the evidence shows that there is no reduction in salary. There is also clear evidence from the employers that they are stable companies and that there will not be any redundancies or cutbacks in the pay of the employees, but the banks are still not allowing the drawdown. As I said, I have seen sales collapse as a result.

Mr. Gabriel Makhlouf

The banks need to make sure they explain clearly why they have made such decisions. They need to make sure they follow the consumer codes and, especially in this time of crisis during this pandemic, they need to be consumer focused. We have made that clear to them. They need to be thinking about how they are going to support-----

I will touch on one other issue, which is house and apartment completions for 2020 and 2021. Dr. Cassidy cited a figure of 16,000 for this year and 22,000 for 2021. I know there is a gap because there was no building work for four months but surely we can increase that figure well beyond 22,000 in 2021, assuming there is no increase or surge in the outbreak of coronavirus?

Dr. Mark Cassidy

Those figures are an estimate based on previous rates of increase. We think there will be a short-term impact based on adhering to health protocols. Undoubtedly, because of the time taken to build a house, the output this year and next year will be less and the rate after that is dependent on the capacity of the sector to increase its output.

Will it have anything to do with the availability of finance?

Dr. Mark Cassidy

No.

I thank-----

Dr. Mark Cassidy

That is not what is factored in. We are not factoring in any deteriorating financing.

I ask Dr. Cassidy to provide his answer in writing because I have to fit two other speakers into the next ten minutes. I call Deputy O'Reilly, followed by Deputy O'Dowd. I am sorry; I got the order wrong earlier. It was my mistake.

That is all right. I thank the witnesses. Mr. Makhlouf said that 100% guarantees are not a good thing in general. However, I put it to him that we are not in general times. We are, indeed, in unprecedented times so what may not be good in general might be very good in these unprecedented times. I am conscious of another Deputy waiting to get in so I will put my questions and if the witnesses do not have time to respond perhaps we can get their responses in writing. The Central Bank has estimated that SMEs will require between €2.4 billion and €5.7 billion in external supports to cover their non-payroll expenses. Despite this, only €244 million has been disbursed as yet. In comparison, £303.85 million has been disbursed by the Minister in the North. That is obviously a much smaller economy but a significantly higher amount of money. I ask Mr. Makhlouf to comment on the adequacy of the schemes in comparison with the liquidity that is actually needed and estimated by the Central Bank. What potential impact could this have on the broader economy, and specifically on employment? As we hopefully - fingers crossed - exit the height of the pandemic, the unemployment rates are going to have a serious bearing on our capacity to recover. It is not just about the number of jobs but the quality of those jobs, because we certainly will not recover the economy off the back of precarious and low-paid work. In its quarterly economic bulletin, the Central Bank states: "PUP numbers generally exceed TWSS numbers, initially reflecting slow TWSS take-up by firms." What does Mr. Makhlouf think has caused this slow uptake of the wage subsidy scheme? Can he explain it? Perhaps he can offer a view on what potential impact that is going to have, specifically on employment levels.

Mr. Gabriel Makhlouf

I will invite Mr. Cassidy to come in on this point but the general response to the Deputy's question relates to the uncertainty to which I referred earlier, the need for people to make decisions in very uncertain times, and the difficulty in doing so. These factors cloud a lot of what is going on right now. Policy must focus on supporting decision-making in uncertain times in ways that do not damage the productive capacity of the economy.

In these uncertain times, would a 100% guarantee, even on a temporary basis, not remove some of the uncertainty?

Mr. Gabriel Makhlouf

It would remove some of the uncertainty but I do not know whether it would ultimately provide value for the community as a whole. I believe that targeting supports at businesses that are viable but at risk of becoming insolvent is one of the most important things for us to try to do. As I explained earlier, the 100% guarantee has some drawbacks because it would create the wrong incentives for the institutions who know best how to provide commercial lending when assessing borrowers. A targeted 100% guarantee or grant will, however, have its place. Ultimately, what the economy needs is a flexible menu of policy options that enable it to see this crisis through. Would Mr. Cassidy like to add anything?

I am sorry but I will ask Mr. Cassidy to provide his response in writing because I have one more speaker to fit in. I thank the witnesses for their understanding.

I welcome the comments of the Governor with regard to placing consumers at the heart of the Central Bank's policy and giving them top priority. The public does not feel this has been the case in the past. It is hugely important. We will judge the Governor on his actions rather than his words but I am impressed with the commitments he has given so far.

The problem is that Covid overshadows everything we think about and everything we do. We are lucky with regard to our economic position in that we have capacity to borrow whereas, in 2008, we had to borrow at an interest rate of 14%. This is why we needed to make the cuts we did. We must now focus on the younger generation. They are the people who will lose most in the coming years. They will not be able to get the houses they want. They will not be built and will not be available for rent. There will be great pressure in young people's homes. In places in the west, and around the country, that depend on tourism, there will not be as many jobs as there have been in the catering and hotel industries. The retraining and upskilling of our young people will be a massive issue. If we do not focus on these issues in the package to be launched in July, we will create even greater dissatisfaction than currently exists with regard to housing needs.

We are heading into an extremely difficult situation. If we reach the point the NTMA officials mentioned - and I appreciate they were not talking about the short term - and we have to refinance debt taken on today at interest rates of nearly 0%, it could be extremely costly in the future. Will the Governor give his views on all of these issues? He said that we all have to work together and to act in good faith. That is what all of us, particularly those of us in this House, must now do but we need leadership and support. His concerns about the ordinary five eighths, the people who are unemployed and who will face significant difficulties in their family life, represent the crux of the issue.

Mr. Gabriel Makhlouf

Yes, it does. In my opening statement I talked about three particular issues at the end of it. I wrote those in a letter I sent to the Minister for Finance on Friday. I will repeat them now because I think they touch on exactly what the Deputy said. First, the focus of policy right now should be on protecting the productive capacity of the economy and making sure that we do not allow scarring effects of this crisis to happen such as long-term unemployment and viable firms becoming insolvent. The responses of that will vary from sector to sector and from firm to firm, but some of the components will include making sure liquidity is available and thinking very hard about training and skills. It should not necessarily be limited; it will be broad.

The second issue I mentioned in my statement and in my letter to the Minister relates to the Deputy's point about debt. Right now, we are at a time when borrowing at the level the Government has is absolutely essential, necessary and warranted. Currently, it is affordable. The State's debt levels are lower than in 2012 but they are a lot higher than they were in 2005 and we need to think about how we are going to get to a more sustainable position in the long term and not leave ourselves vulnerable to shocks. There is no money tree. At some point we will have to make sure that these measures, which are aimed at dealing with the pandemic, are temporary. They are going to have to be removed. That is again the importance of them being targeted.

The final point in my statement is that at the same time as doing all of that, we need to continue building the economic resilience for the long term. That is not just about debt; it is about making sure workers have got the skills to cope with a different environment in the future. It is also about making sure that we are ready for the challenges of climate change and for whatever changes or impacts the UK's withdrawal from the EU will have. There are some very big challenges out there and we need to plan for them now at the same time as doing everything else.

I have two questions. There are a lot of accounts floating about of loan approval being withdrawn for persons on the pandemic unemployment payment. Does Mr. Makhlouf have any more than anecdotal evidence of that and, if so, is it a concern? Perhaps he would answer that question first.

Does he think that the 2015 regulations on SME lending are adequate, in particular access to an independent appeal quickly? I refer to the period within which one can access that independent appeal and the independence of the appeal process to a refusal of credit.

Mr. Gabriel Makhlouf

I am sorry but I cannot comment on the adequacy of the 2015 regulations because I am not familiar with them, but I am very happy to send the Chairman something in writing.

On the point on mortgages, I will repeat what I said earlier. It is important that lenders do a proper assessment of the creditworthiness of their borrowers. That is absolutely important, not just in the interests of the lender but it is also in the interests of the borrower and of the community as a whole. On the other hand, it is also important that the assessment is done properly, by looking at the creditworthiness of the borrower, so I was a bit uncomfortable when I read the other day that there were blanket approaches whereby if one received a particular type of payment, one would not be entitled to a mortgage.

To me, that implied there was not a proper targeted credit worthiness assessment - that there was some broad brush being applied - so it is important that is done. Unfortunately, that will mean, in some cases, that a very long-term financial commitment cannot be entered into because it is not in the interests of anybody.

Is the Governor similarly concerned that a proper assessment is not being carried out on the reasons SMEs have been unable to make repayments on borrowings and whether they have been particularly affected? Business people have told me that, effectively, they have had no business for the past number of months but they have a very good track record of repaying borrowings and yet are being treated as if there is no particular reason and they are defaulting almost for the sake of it without an analysis being done of the underlying conditions of the market.

Mr. Gabriel Makhlouf

I have heard less of what the Chairman has described. Obviously, again, if there are broad brush rules being applied then I would be uncomfortable about them. On the other hand, it would not be surprising for banks or any credit institution to exercise caution right now. The interesting thing about SMEs is how many of them do not have bank debt, as we talked about earlier. A significant number of them do not even have a relationship with their bank manager. That is quite a different situation from what one normally sees with borrowers in the housing market and, as I said earlier, that is not automatically a good thing.

The banks in small towns across Ireland are doing everything possible to ensure SMEs and individual customers cannot have any relationship with their managers. If the Governor wishes to respond, that is fine but otherwise we can draw the meeting to a close. I thank the witnesses for their time and apologise for having to rush them on many occasions but a number of speakers wished to comment in a short period.

Mr. Gabriel Makhlouf

Thank you.

Sitting suspended at 11.05 a.m. and resumed at 11.30 a.m.