Dáil Éireann díospóireacht -
Thursday, 11 Feb 1993

Vol. 425 No. 8

Ceisteanna— Questions. Oral Answers. - Currency Crisis.

Michael Noonan

Ceist:

1 Mr. Noonan (Limerick East) asked the Minister for Finance if, in view of the refusal of the Bundesbank to cut interest rates during the months when the Irish pound was under pressure, in view of its immediate decision to cut interest rates when the Danish krone came under pressure and in view of the fact that the central banks of EMS countries intervened in accordance with their ERM obligations in support of the Punt, but acted beyond their obligations in supporting the Danish krone, he is still of the view that continuance in the narrow ERM band is in the national interest; and if he will make a statement on the matter.

Máirín Quill

Ceist:

27 Miss Quill asked the Minister for Finance whether the Government pressed the German authorities to reduce German interest rates; his views on the fact that the Bundesbank has done so too late to make any difference to the Irish currency crisis; and if he will make a statement on the matter.

Pat Rabbitte

Ceist:

37 Mr. Rabbitte asked the Minister for Finance whether each member of the ERM fulfilled its formal commitments to intervene bilaterally in support of the Irish pound during the period since 16 September 1992; and if he will make a statement on the matter.

Peadar Clohessy

Ceist:

39 Mr. Clohessy asked the Minister for Finance the view the Government takes of the decision of several European central banks to intervene in favour of the Danish krone prior to that currency reaching the required intervention limits under the ERM, in contrast to the attitude and practice adopted with regard to the Irish pound.

Minister for Finance (Mr. B. Ahern)

I propose to take Questions Nos. 1, 27, 37 and 39 together.

During the currency crisis which began in September 1992 all members of the Exchange Rate Mechanism fulfilled their formal commitments to support the Irish pound in accordance with the rules of the mechanism. During this period we, like other member states, pressed the German authorities on several occasions to reduce their interest rates. German interest rates were high for domestic German reasons. In our view their high levels were preventing a reduction in interest rates in other EC states. They were also militating against a relaxation of tensions in the EMS, both because of their effect on the value of the Deutsche Mark and because the markets perceived high interest rates to be inappropriate for certain economies.

The Government noted last week the intervention by central banks of other members of the ERM in support of the Danish currency, even though in some cases they were not obliged to do so under the ERM rules. This intra-marginal intervention is helpful in managing a currency when it is under speculative attack. It is allowed under the ERM rules but is at the discretion of the Central Banks concerned.

Both intra-marginal support and the reduction in German interest rates would almost certainly have eased foreign exchange market tensions and would have been helpful to the Irish pound if they had occurred much earlier. I am not convinced that they would have been adequate to avoid devaluation of the Irish pound if they had just occurred in the days immediately preceding the devaluation.

However, Ireland does not control German monetary policy, and that pressure from many EC states as well as Ireland had failed to produce a reduction in German interest rates until last week. As regards intra-marginal intervention, this is one of the areas Ireland has explored in discussions on reform of the ERM.

I do not consider that the recent use of intra-marginal intervention and the reduction of German interest rates should change my view that maintaining the Irish pound in the narrow band of the ERM is in the national interest. Whatever our feelings about the past, it is a fact that both developments have contributed to an easing of foreign exchange market tensions in recent days and their appearance should also actually make it easier to maintain the Irish pound in the narrow band of the ERM. Furthermore, the new spirit of co-operation in defending ERM currencies evidenced by intra-marginal intervention is to be welcomed and I hope that, even in advance of any formal changes in the ERM rules, this type of co-operation will continue to be a feature if it is needed. Finally, the events last week have not in my view eliminated the advantage to Ireland of keeping our currency in the ERM's narrow band. This policy has conferred significant benefits on us in the past and it offers the best prospects of monetary stability now also.

Mr. Noonan

(Limerick East): Would the Minister consider that the preferential treatment by the Bundesbank and central banks of other EMS countries towards the Danish krone was a comment on the ineligibility of our currency to remain within the ERM? Is he aware that there is a widespread belief now that, even though he has succeeded in maintaining our position within the narrow band, participation in the ERM in the wider band might be more appropriate; and if he would outline the policy considerations which cause the Government to reject this option?

Mr. B. Ahern

I do not believe we were the only ones rejected. The Danes were rejected earlier. Italy, the United Kingdom, Spain and Portugal were also rejected at earlier periods. We held the bottom of the band for a long period. We were mainly at the bottom but interspersed with the Danish krone or the French franc. The Danish krone was under severe pressure during Monday, Tuesday and Wednesday of last week. It had been reported widely that they would take some action and it is not for me to speculate on what kind of action they would have taken, but the pressure of that, the fact that the pay policy agreement in Germany was signed last week and the fact that all member states were concerned about the future of the system led all those things to happen, but the intra-marginal relief which was offered to us at the very last moment was far too late. We had been seeking it for several months. I am not sure if the other countries which fell out of the system or devalued sought it, but there were wider band countries; two are still in the system Spain and Portugal. While it was regettable that we did not get it in time — certainly it would have been useful — but on its own it probably would not have been enough. The cut in German rates was also necessary. I would have to say that, even at that, the Deputy will be aware that the Danish rates today are still well in excess of 20 per cent, so it is hard to know what would have happened if these things had occurred earlier. I am not certain that they would have relieved all the problems.

Deputy Noonan (Limerick East) rose.

An Ceann Comhairle

Perhaps a brief question. Let us not forget, the need to expedite matters having regard to the time factor involved which I referred to earlier.

Mr. Noonan

(Limerick East): Thank you. I take it from the Minister's speech yesterday that he would agree that Irish interest rates will be subject to a premium now because of devaluation. Would the Minister indicate how he sees Irish interest rates going for the remainder of the year and what kind of differential does he expect between German rates and Irish rates to be in place, say, by the late autumn?

Mr. B. Ahern

The Deputy is correct in his analysis of what I said yesterday. Last June we were within ¼ per cent on the differential, that is, ¼ per cent as against the 1 per cent that the Bonn market was charging. I always said that when we devalued one of the major disadvantages was that we put a premium on rates.

That premium was, for several years following the 1986 devaluation, 1 per cent. We made a strong effort to hold parity. Sterling was perceived to be the major market difficulty and was seen to be the issue that probably finally broke our will. Naturally, we will continue to review our monetary policy and the position would be to hold it and make the necessary changes and adjustments to hold that line.

On interest rates, the premium rate should be of the order of 1 per cent. We have to get it back to about 1 per cent. I believe that to bring it under 1 per cent would not be possible, certainly in the short term or even in the foreseeable future, taken that the 1986 position lasted seven years. I will not argue for under 1 per cent. We must first try to get back to the position of last September, which is hopefully what the various unwinding of the pre-devaluation period should give us fairly shortly. We are not quite on that yet. It is still over 13¾, but I hope to see it unwind back to the pre-September position between now and the autumn.

Pat Cox

Ceist:

2 Mr. Cox asked the Minister for Finance if, in the light of the names of stockbrokers and financial institutions supplied to him by the Irish Congress of Trade Unions he will give his views on whether those named were abusing their position in the financial markets and acting in a most irresponsible and reckless fashion and whether they placed undue pressure on Government Ministers and Department of Finance officials; if he will outline the action, if any, he took, or proposes to take on this matter.

Michael Noonan

Ceist:

17 Mr. Noonan (Limerick East) asked the Minister for Finance if his attention has been drawn to the statements made by a person (details supplied) that officials of his Department were subjected to pressure by certain financial institutions; and if he will make a statement on the matter.

Bernard Allen

Ceist:

19 Mr. Allen asked the Minister for Finance if he will make a statement on a submission he has received from the Irish Congress of Trade Unions relating to the list of six Irish financial institutions which it is alleged are speculating with the Irish currency at the country's expense.

Mr. B. Ahern

I propose to take Questions Nos. 2, 17 and 19 together.

The submission from the Irish Congress of Trade Unions, to which the Deputy refers, was made in confidence. I am not prepared to give any particulars about this submission or to disclose whether any particular company was named. I do not intend to take any further action on foot of the information provided by Congress.

I am not aware that officials of my Department were subjected to the pressure to which the Deputy refers. As the Deputy is aware, there is regular contact between the Department and the financial sector in the interest of good management of our financial affairs. No official of the Department has indicated to me that there were pressures of the type to which the Deputy refers from any financial institution in relation to Government policy on the exchange rate.

Mr. Cox

What the Minister has said is a very comprehensive answer in terms of rejecting charges on the record publicly made by the Irish Congress of Trade Unions and by its secretary-general. Does the Minister believe that we can draw the lesson from the nature of his response to the ICTU contribution to the debate at a crucial stage that perhaps the debate got overheated and highly intolerant and it is not conducive to good public policy making or debate to have that happen?

Mr. B. Ahern

I have nothing further to say about the Congress of Trade Unions involvement, but I suppose it would be the understatement of the year to say that the debate did not get overheated at times and that rumour did not build up on rumour. One of the things I learned from it is that political rumour mongering is nothing when it comes to financial rumour mongering. Anything can be said and it goes as part of the game regardless of how serious it may be. My officials are always dealing with financial institutions. They are not always amicable, particularly over a period like the last few months. The general lessons of the issue are being analysed in the Department and elsewhere and hopefully the experience will lead to stronger policy in the future.

Pat Rabbitte

Ceist:

3 Mr. Rabbitte asked the Minister for Finance the extent to which foreign reserves held by the Central Bank were depleted as a result of efforts to defend the Irish pound; the information available to him regarding the likely impact of the devaluation of the pound on inflation; his views on whether speculation by Irish companies contributed to devaluation; the action, if any, he has taken regarding the list of firms, allegedly involved in speculation, supplied to him by ICTU, if his attention has been drawn to the recent comments made by the Governor of the Central Bank in which he spoke of the damage caused by currency speculation and called for some curb on speculation whether by way of taxation or some other means; the views, if any, he has on these comments; if he intends to initiate any measures in this country or make any proposals for EC action; and if he will make a statement on the matter.

Pat Rabbitte

Ceist:

60 Mr. Rabbitte asked the Minister for Finance the amount of reserves used by the Central Bank in its defence of the pound since the currency crisis began in September, 1992; and if he will make a statement on the matter.

Mr. B. Ahern

I propose to take Questions Nos. 3 and 60 together.

Between the end of August 1992 and the end of December 1992, the last date for which published figures are available, the external reserves fell by nearly £940 million, despite offsetting factors, including an upward valuation change of £71 million in December and net Exchequer foreign borrowing of about £1,070 million in that period. This left the level of official external reserves at £2,113 million at the end of 1992. In addition to this reduction in the level of the external reserves the Central Bank incurred liabilities to the European Monetary Co-operation Fund in respect of certain interventions to support the Irish pound. At the end of December, this liability amounted to £716 million, compared to nil in August. These figures exclude any foreign exchange swaps the Central Bank may have arranged; information on such swaps has not been published.

In relation to inflation, the average increase in the consumer price index will be of the order of 3½ per cent compared with 1992. Exclusive of interest rate developments — the basis used to measure price changes in most countries — the prospect is closer to 3 per cent. I would point out that it will return the annual inflation level to about the level we had anticipated before the turmoil in September.

Undoubtedly, in the period of turmoil there were some Irish firms which took positions which did not support the currency. Some firms acted from the desire to manage their resources prudently and protect themselves from currency fluctuations. This was undoubtedly one factor in the pressure which built up on the Irish pound. The ICTU report referred to by the Deputy was submitted in confidence and I am not prepared to give any particulars about this submission nor do I intend to take any further action.

I have noted the comments about speculation made by the Governor of the Central Bank. My own view is that I would welcome some regulation to prevent excessive speculation internationally. However, given the integration of the markets worldwide, any moves would have to be supported by the major countries and require international agreement. We can only exert a small influence on the markets. I will be raising this issue in the discussion at the Council of Ministers when the report of the Monetary Committee on the EMS and the currency turmoil is presented.

Mr. Rabbitte

Does the fact that information on foreign exchange currency swaps are excluded mean we will not get that information at any time? Does the Minister consider that it is sufficient to say that he does not purport to make any comment on the list of alleged speculators submitted by the ICTU and whether it is good enough to let it lie at that? Thirdly, may I ask him whether he thinks that the experienece of the last few months may not well recur, especially since we have no control over the direction of sterling, and whether he intends to take any initiative concerning the reform of the ERM and, specifically, if he will comment on the suggestion by the Governor of the Central Bank that some form of tax on pure speculation should be instituted at a European level to help deter the experience we have all been through?

Mr. B. Ahern

The swaps are not published. When the annual reports come out they give some data; but the swaps or dealings between the Central Banks are normally, but not exclusively, not published. They would not in the normal course change the figures. The major figures are those that I have given. I do not have the swap figures.

With regard to the Irish Congress of Trade Unions, as I said to Deputy Cox, I have examined this matter and I do not intend to do any more about it. With regard to speculation, there is an ongoing review in the Department of what happened and the various transactions that took place. I take a different view on that. We will shortly be talking to the Central Bank and others about the transactions. There are things that can be put in operation. The Department of Finance, contrary to the perceived view, got considerable outside advice not only from the business, banking and financial community within Ireland but they also brought in experts from the European Community over last autumn. They looked at and suggested many initiatives which I believe would be very helpful in the future. I assure the House and the Deputy that I will leave no stone unturned in analysing the events. I do not think anybody could say at the moment what the policy is in relation to sterling and I will not attempt to do so. We must be very careful. It is obvious that sterling has weakened. There is still uncertainty about whether they are following a policy of reducing interest rates, holding them or increasing them. The volatility in the markets will continue as long as that is the position. We are, on an ongoing basis, looking at our policies and the lessons we can learn from what has happened.

An Ceann Comhairle

Order. The time available to us for dealing with Priority Questions is exhausted and we must now proceed to deal with other questions.

Bernard J. Durkan

Ceist:

6 Mr. Durkan asked the Minister for Finance the measures, if any, he proposes to take at national or international level which might result in a reduction of interest rates and consequently alleviate the financial burden on business and mortgage holders caused by the currency crisis; and if he will make a statement on the matter.

Mr. B. Ahern

The Deputy is, of course, aware of the devaluation of the Irish currency within the European Exchange Rate Mechanism since this question was tabled. This measure has resulted in a sharp fall in interbank interest rates. Larger business borrowers and those businesses whose borrowings are related to interbank interest rates are already benefiting considerably from this trend and the threat of further increases in the general level of mortgage rates has receded. Over the course of the year it is hoped that interbank rates, both at home and elsewhere in Europe, will ease further and this should allow scope for a reduction in retail interest and mortgage rates from present levels. The Government will continue to press the case for further interest rate reductions, in particular in Germany, at every suitable opportunity. It will also seek to advance the development of the Exchange Rate Mechanism of the European Monetary System so as to ensure that it will be in a position to cope effectively in the future with crises of the kind experienced over recent months.

Mr. Durkan

In view of the severity of the crisis in which this country has been plunged over the past number of months, would the Minister not consider it expedient to initiate on emergency meeting with his colleagues in the Council of Ministers with a view to ensuring that there is no recurrence? Would the Minister not agree that it is now timely to put in place measures which will ensure that there is no possibility of a recurrence of this crisis?

Mr. B. Ahern

I wish I could. We have three main opportunities of raising this issue and trying to make further changes in the system. There is an ongoing review. Governments and Central Banks have a report which will be available shortly. I believe the monetary committee almost finalised their work yesterday and the ECOFIN council at the March meeting will discuss the matter again. It is hoped that by May the necessary reforms of the system can be dealt with.

There are other matters which I mentioned yesterday. Though a country may not be in the ERM they are not out of the EMS and countries have obligations within the EMS which it is very important they should fulfil. One of those obligations is to take into account countries that are affected by your policies. There are many issues in that area that should be dealt with which, quite frankly, are being ignored at present. We put all these issues forward in the technical working groups. I put them forward at the last ECOFIN council meeting and at an ECOFIN council meeting that coincided with the Edinburgh Summit. In the drafting of the final report Deputies can be assured that we will continue to push for these reforms. Practically every country within the system, bar one or two, is seeking reform.

Mr. Noonan

(Limerick-East): In reply to a supplementary question on interest rates, the Minister indicated that he expected a premium of about 1 per cent to apply as a result of devaluation. I also asked him what the differential would be between Irish rates and German rates. I take it it will be far more than 1 per cent and we are talking about 1 per cent on top of a differential. Could the Minister indicate what the differential is now? Am I right in thinking that it is about 8 per cent and that the Minister is predicting a differential of 3 to 3.5 per cent when things settle down as the year goes by?

Mr. B. Ahern

The differential today would not be as high as that. We are talking about a 14.5:9 position. At our best we got back to a quarter. If we got back to normality I believe it would be 1 per cent plus. The Deputy probably noticed today that the National Treasury Management Agency in its first deal since devaluation yesterday got an extraordinarily competitive deal from Deutschebank which would be perceived in the markets as the key bank of the six in Frankfurt. That would give heart, but I would have to be frank and say that a differential of anything under 1 per cent has never been suggested to me as attainable.

Mr. Cox

Would the Minister not agree that as long as monetary instability lasts in the European currency markets the interest rate problem will not go away because, in the absence of exchange controls, resort to their use shows weakness that becomes an immediate signal to the market that is negative and, in the alternative, we really have no other policy instrument? Does the Minister have any view of alternative policy instruments that might take the pressure off the interest rate as being the only response to currency crisis?

Mr. B. Ahern

Domestically we have a problem to stabilise the September position which was 13.5 to 13.75 and then to unfold that. That is a domestic consideration we have to try to handle. After that we are looking at the international position. We must look beyond sterling. The House agreed yesterday that the concept of linking our currency with sterling is all on the down side. Italy's position justifies the Deputy's analysis. Italy is a member of the G7 although it has lost all of its reserves, like the UK and France. It is extraordinary that three of the strongest countries in the world and members of G7 have lost their reserves totally. An examination of interest rates in those countries shows that Italy is still somewhere in the margins of 12 per cent; Spain after two devaluations, is not much less; Belgium is moving away from them, which indicates the pressures in the system. I agree with what Deputy Noonan said yesterday about Belgium. I would like to be able to say today that the pressures are moving away and that we have found corrective action but that is not the reality. The factors still to come are the general election in France in March, on 18 May the vote in Denmark and later in the year, the UK position. All that comes within an 11-month period when we are meant to be moving towards setting up the forerunner of the European Central Bank. Nobody is talking at European meetings about the economic and monetary institute which was to start on 1 January. Deputy Cox has spoken about this many times. All these matters are of great concern on the international front. We have to deal with the problem of getting to the September position on the domestic side.

Mr. Barrett

Would the Minister agree that the problems facing the Community in relation to the exchange rate difficulties and the wide gap between interest rates in different parts of the Community is damaging the principle of European union and makes a total farce of the effort to have competition throughout the Community? Would he agree that countries cannot compete on a fair basis if there is a wide gap between interest rates and exchange rates? Could he tell us what he and his colleagues intend doing to ensure that there is fair competition within Europe, particularly in light of the single European market that came into being on 1 January? Would he also tell us what proposals he and his Government have to deal with the reality that 30 per cent of our trade is with Britain? Despite the fact that we do not want to be linked to sterling, the reality is that Irish business will fail unless something is done in this regard.

Mr. B. Ahern

The Deputy asked several questions. Regarding markets, the French do 40 per cent of their trade with countries that have devalued; the Danes do 16 per cent of their trade with the United Kingdom and, if one adds in the Nordic countries, they would have a far higher percentage than us. As a country we should not over exaggerate the position. Like most other countries we have compiled with the Single Market obligations. This year our budgetary position has worsened considerably because we did away with VAT at the point of entry and the £200 million cash flow that involves and the DIRT retention tax which is a loss of £90 million. That was done in order to follow the criteria laid down to give us economic and monetary union. That is the convergence programme. We put our convergence programme through the full rigours of the European Community last summer and we got a clean bill of health. The clean bill of health lasted for a considerable time but it is not so clean now. I suppose we did not have to do some of the things other countries did but at least we are able to stay within the narrow bands and are in the system. The convergence programme is the mechanism to try to ensure that we move to this position in an orderly way both on exchange rate, interest rate and other economic policies.

Every political party in this country — and certainly the Government — believes in economic and monetary union. It was going extremely well until last summer. There are now issues that will have to be addressed. President Delors and Vice-President Christophersen and others made that clear this week. I have already answered what we have to achieve in the short term for Irish business.

Mr. Rabbitte

Deputy Durkan's question was designed to see what could be done in terms of alleviating the burden on business and mortgage holders. May I ask the Minister a question about the inflation side of that coin? Did I understand the Minister to say in response to the priority question that he estimated the impact of devaluation on the pound to bring us back to the September situation? What will the impact on inflation be this year and in a full year?

Mr. B. Ahern

Before the currency crisis when we were looking at the 1993 position it was about 3.25 per cent. The Deputy will appreciate we did not have all the factors of outturns last July or August for 1992. This was the model during the year. This was the model during the year for looking at the projected position for 1993. After continuing on from September the decline was, firstly, to about 2.5 per cent, then under 2 per cent and latest indications would be somewhere in the region of 1.5 per cent. Economic commentators and the Government would have agreed with that figure. Following devaluation it is somewhere in the order of 3 per cent. We are still working on that and in the normal tradition for budget day, I would announce the Government's projection for the year, but it is somewhere in the order of 3 per cent.

Mr. R. Bruton

Does the Minister see any scope for an immediate measure to try to bring down our interest rates to raise additional borrowings, particularly in sterling where the rates are exceptionally competitive — 6 per cent rates — and where the currency tends to be at a discount with the expectation of a decline in the value of the currency? Would he see that form of borrowing as offering him scope, through his own borrowing policy, to drive down interest rates in the domestic market?

Mr. B. Ahern

We followed that policy to drive down interest rates by borrowings, as I replied to Deputy Noonan a few moments ago. The NTMA were looking at bond issues and other issues, not in sterling, but it is a moving target and very few people will take that chance at present. There are other currencies, the Swiss franc and the Deutsche Mark, in which we got very attractive rates. In recent months we have not used US dollars, we have borrowed in Deutsche Marks or Swiss francs.

An Ceann Comhairle

May I say, before calling Deputy Cox, that progress at Question Time is particularly sluggish. Four questions disposed of within half an hour is simply not good enough from any standpoint and I would ask Members and the Minister to do all they can to expedite matters.

Mr. B. Ahern

It is not my fault, we are having an economic debate here.

Mr. Rabbitte

It is not my fault that there is an economic crisis.

Mr. Cox

The Minister has put his finger on the problem because we have been through such a trauma in recent days and weeks that it leaves a lot of questions to be answered. On the matter of Deputy Durkan's question relating to interest rates, could I invite the Minister to express an opinion on a suggestion reported to have been made yesterday in Paris by former European Commissioner, Peter Sutherland, to the effect that there should be an acceleration among seven member states in a movement towards monetary union and that Ireland should be part of that? Does the Minister believe that this is a valid suggestion to be pursued in terms of Ireland's domestic policy?

Mr. B. Ahern

Mr. Peter Sutherland's paper was very detailed. To comment on one aspect would be very unfair. There is a lot of work to be done before this can happen. I referred earlier to the Economic Monetary Institute. Is that going to commence on 1 January? I assume it is and I referred to the work that will be involved before we have a European Central Bank. As far as our policy is concerned we wish to be on — that term which I do not like —"the fast track". We wish to be part of the group going forward; we wish to continue to converge our economy in line with the guidelines which are set down. I would not like to speculate on precisely how long it will take the Community to achieve that, or what policy objectives will be set out. I said last summer, before the crisis, that a great amount of work had to be done to reach the 1999 target with which the Deputy is familiar. There are two targets in the Maastricht Treaty, which does not start till next January, if everybody ratifies it. One is if the majority of countries are available in 1997 it will start, or if not a minority will start anyway in 1999. There are not too many speeches made about that timetable these days and we will have to wait to see.