Written Answers. - Financial Reserves.
Noel Ahern
Ceist:
384
Mr. N. Ahern
asked the
Minister for Finance
the country's financial reserves currently or the latest date for which the figures are available; the contribution being made or due to be made to the new European Central Bank; the current need for the balance of our traditional external foreign currency reserves; if they are to be retained; if so, the reason; if they will be used to reduce the national debt; and if he will make a statement on the matter.
[17650/99]
In the balance sheet of the Central Bank of Ireland, the bank's total assets have a counterpart in liabilities. The liabilities side includes deposits, by credit institutions and Government, legal tender notes and the bank's capital. However, it also includes the bank's accounting reserves, which have been accumulated by the bank over the years from income earned from its operations. As of the end of July, the latest date for which published figures are available, the accounting reserves stood at EUR1,999 million.
The value of these accounting reserves may fluctuate, depending on changes in the value of the reserve assets held by the Central Bank of Ireland. The bank's accounting reserves consist of the superannuation, currency and general reserves. The appropriate level of the accounting reserves is a prudential matter. The accumulated accounting reserves of a central bank contribute to its credibility. For example, adverse exchange rate movements could, in the absence of a sufficient level of accounting reserves to absorb such movements, have negative consequences for the net asset position of the Central Bank of Ireland.
My Department has sought the advice of the Office of the Attorney General as to the legal position of the accounting reserves of the Central Bank of Ireland. In summary, the advice is that any transfer of the accounting reserves should take place only with the agreement of the Central Bank of Ireland and, as appropriate, the European Central Bank. The Central Bank of Ireland and the ECB are the appropriate bodies to determine the level of the accounting reserves which are required for the purposes of the monetary policy of the euro-area and in order to achieve price stability. It is not my intention to act in a fashion which could undermine either the credibility of independence of the Central Bank of Ireland, and indirectly the European System of Central Banks or the credibility of the Irish Government.
In any case, the Central Bank's assets are in the main matched by counterpart liabilities, which as noted above include deposits by credit institutions and Government and legal tender notes. The contribution which any perceived surplus assets of the Central Bank of Ireland would make to the Exchequer should not be exaggerated. Assets of the bank earn a return which is reflected in the bank's surplus income; the Exchequer is the ultimate beneficiary of the bank's surplus. If the assets, corresponding to the accounting reserves, were used by the Exchequer for other purposes, we would be losing the bene fit of that income. To the extent that the Central Bank of Ireland's accounting reserves would be used to reduce the national debt, the annual benefit to the Exchequer would be the difference between the cost of servicing the repaid debt and the return on the assets in the accounting reserves, i.e. in effect the margin between the interest rates for borrowing and lending.
Corresponding to the bank's total liabilities are its total assts. Until January 1999 these were categorised in terms of foreign currency and Irish pound assets, with the former constituting the official external reserves. As of end-1998, the official external reserve assets held by the Central Bank of Ireland totalled £6,448 million, but from the adoption of the euro, about one-third of these assets were redenominated into euro. I understand from the Central Bank that at 31 July 1999 non-euro reserve assets amounted to EUR5,173 million, while euro reserve assets, i.e. excluding advances, were in the region of EUR2,000 million.
All central banks hold external reserve assets for two principal purposes – to assist in protecting the currency and to ensure that the country does not lack the foreign currency needed to pay for essential imports. With the establishment of the European Central Bank and the adoption of the single currency, it is the euro-area as a whole rather than individual participating member states, such as Ireland, which need such external reserve assets. This derives from the Statute of the European System of Central Banks which states that one of the basic tasks of the system is to hold and manage the official reserves of member states. The ECB is empowered under its Statute to call up, from participating national central banks, up to EUR50,000 million in external reserve assets – that is, assets in currencies other than the euro. In addition, under the EU Treaty further calls of external assets may be effected by the ECB. Each national central bank's contribution is in proportion to its shareholding in the ECB which, in turn, is in proportion to each member state's shares of the euro-area's GDP and population.
On 4 January 1999, the Central Bank of Ireland transferred EUR425 million – £334.7 million – to the external reserve assets of the ECB, which is Ireland's share of the ECB's pooled external reserve assets, in return for a claim on the ECB. This contribution represented about 1 per cent of total ECB external reserve assets. These assets continue to be managed by the Central Bank of Ireland on behalf of the ECB. The amount transferred represented about 5 per cent of the Central Bank's total external reserve assets at end-December 1998. The Central Bank of Ireland also subscribed EUR41.92 million, or £33 million, to the share capital of the ECB in accordance with the Statute of the ESCB. It should be noted that both the claim on the ECB and the capital shareholding will earn income for the Central Bank of Ireland and thus indirectly for the Exchequer, as the participating national central banks will share the profits of the ECB among themselves.
It cannot yet be assessed with certainty what will happen to the balance sheet of the Central Bank of Ireland at this early stage of the single currency. The Central Bank of Ireland will continue to need its own external reserve assets, as well as those provided to the ECB, in order to play its part as a member of the ESCB. The aggregate of the national central banks' non-euro reserve assets plus the pooled assets transferred to the ECB comprises the external reserve assets of the ESCB. The remaining external reserve assets on the Central Bank of Ireland's balance sheet continue as heretofore to be managed by the Central Bank of Ireland in accordance with risk parameters and benchmarks set by the Board of the Central Bank of Ireland.
