Dáil Éireann Debate, Wednesday - 3 February 2010
91 Deputy Olwyn Enright asked the Minister for Finance the extent to which banks are currently depending on European Central Bank liquidity support; his views on whether the terms in which its support is available will be tightened; and the implications of such changes for Ireland. [5212/10]
View answerThe latest Central Bank statistics, released on 1 February, show that Eurosystem borrowing by credit institutions resident in Ireland has fallen significantly from its highs of last summer. Borrowings at end December 2009 stand at €91.9 billion, down from the high of €130 billion in June 2009. These numbers reflect not just Irish headquartered banking groups but include subsidiary operations of international groups operating in Ireland. While the Central Bank publishes figures which cover all credit institutions operating in Ireland, including the IFSC credit institutions, it does not publish figures for individual institutions as these are highly market sensitive. The total aggregate balance sheet of all institutions is €1,306.9 billion, of which €91.9 billion represents ECB lending at end 2009, that is, 7% of aggregate assets.
Funding from the ECB is an important part of funding not just for covered institutions but for all credit institutions and was a common feature even before the recent turmoil in the markets. For example, in December 2006, €27 billion of the aggregate balance sheets of all credit institutions operating in Ireland represented ECB lending. It would be inappropriate for me to speculate upon or pre-empt the decisions of the ECB governing council concerning future funding decisions, but should it bring forward changes to funding policy this might be a good indication that wholesale funding markets are improving and returning to proper functioning.
The ECB has indicated publicly that it is engaging in the progressive, timely and gradual phasing out of the non-conventional measures which had been introduced in response to the financial crisis but that liquidity will remain abundant for months to come. As such, there are no negative implications in the medium term from the announced "phasing out" measures.
While I welcome the reduction in the dependence of financial institutions on ECB funding, that dependence has increased since October. That is, while it is lower than the peak of last summer, it is rising once again. Is the Minister confident we will have enough qualifying collateral as the ECB tightens its lending range, as it has indicated it will in the course of the year? The values applied to many Irish denominated bonds are being downgraded, with the result that some could fall out of qualification. Is the Minister confident that Irish banks have sufficient qualifying paper?
Second, will Irish Government paper as issued through NAMA qualify at the ECB in all circumstances? Could the downgrading of Irish bonds and the ECB's tighter lending categories ever exclude Irish NAMA paper from being brought to the ECB for liquidity? In other words, does the Minister have a guarantee that at all times and forever Irish NAMA paper will be accepted for liquidity purposes at the ECB?
In the course of the financial crisis, credit institutions have made active use of the Eurosystem's re-financing operations and have deposited as collateral some eligible assets for which market liquidity had basically dried up. The eligibility criteria and risk control measures of the Eurosystem's collateral framework are an important tool in the reactivation of the asset-backed securities markets. The risk control measures employed by the ECB include the prohibition of some types of close links, the raising of the rating threshold for asset-backed securities, an increase in valuation haircuts and the phasing out of multi-layer securitisations. It is untrue therefore that the ECB is open to accepting all assets within a class regardless of their quality. On the contrary, the ECB actively grooms assets presented to it and it could be said that it is already seeking higher grade assets than were the norm on the markets that have dried up.
That said, in regard to NAMA bonds specifically, I am not aware of any particular difficulty that has been raised at the ECB.
A downgrading of bond ratings could see them fall out of the qualifying list.
Such a downgrading is highly unlikely given the general improvement of sentiment towards Ireland in the eurozone and on world markets. I draw the Deputy's attention to two articles in the Financial Times today which indicate that Ireland is seen as a very solid risk compared with several other eurozone countries.
Is it the case, however, that we have no guarantee in this regard? Is it dependent on the rating of those bonds from time to time?
I have not conceded that. I said that no difficulties have been drawn to my attention in regard to NAMA bonds. Deputy Bruton raised the question of sovereign risk and I responded to it.
Does the Minister agree that in the longer term, the bond markets are likely to count NAMA bonds as part of Irish debt? While I agree with the Minister that there has been much favourable international comment in regard to wage reductions, for example, and a favourable comparison of Ireland with Greece, that is unlikely to sustain itself as the NAMA process works through because the level of Irish debt is rising dramatically.
What is the status of the NAMA bonds, which mature every six months? The Minister has used a phrase of his adviser, Dr. Aherne, on several occasions, when he observed that for the first six months the NAMA bonds would "wash their face". What happens after the first six months? Will the Minister confirm that the receiving banks can cash the bonds as opposed to holding them or using them with the ECB in terms of the capital structure? Is that not a legal condition within the NAMA legislation?
There is nothing unusual about NAMA bonds. In the case of the phrase to which the Deputy referred, I am not sure whether Dr. Aherne borrowed language from me or vice versa. NAMA bonds can be presented like any other bonds at the ECB. No difficulty has ever presented in that regard.
The broader question raised by Deputy Burton which needs to be addressed is the question of whether NAMA bonds will in some way affect our status as sovereign. As is clear from all international reports, views of rating agencies and commentary about the Irish economy and the Irish sovereign, the greatest obstacle to putting ourselves beyond any risk as a sovereign is the uncertainty surrounding bank debt and bank exposure. That is why it is of fundamental importance that we resolve in the coming months the issues relating to NAMA and the capitalisation of the banks.
The nationalisation of the banks.
The markets have already discounted into their calculations substantial losses in the Irish banks. What we are required to do is to quantify precisely what that exposure is. In doing that, we will give further certainty to our fiscal position and reassure investors that Ireland is a good place to do business.
The former chief executive officer of Allied Irish Banks, Mr. Eugene Sheehy, indicated at a meeting of the Oireachtas Committee on Finance and the Public Service before Christmas that AIB may not use NAMA bonds to obtain credit from the ECB. In light of this, is the Minister confident that NAMA will facilitate a flow of credit to small business? Does he expect that the banks will use NAMA bonds to secure credit from the ECB?
Yes, I do. I am confident as a result of good work done in this House on Committee Stage of the legislation that the Minister for Finance has ample powers to ensure credit can be secured as a result of the NAMA operation.
