Dáil Éireann díospóireacht -
Tuesday, 16 Dec 2008

Vol. 670 No. 4

Leaders’ Questions.

Deputy Enda Kenny

I was surprised to see the Minister for Finance announce at the weekend that the Government was not aware of the extent of the economic tsunami coming to our shores until July, after which its members went away on their holidays. I had thought the budget being brought forward by a number of weeks was the economic plan for survival for the country's economy and the road to the future for economic recovery and the protection and creation of jobs. The fact of the matter is that since then the Government has demonstrated it is rudderless and leaderless, and has neither coherence nor competence. In fact, the Minister's declaration was nothing other than a declaration of unfitness for office and unfitness to serve, and it particularly pointed at the Taoiseach himself in that he was Minister for Finance for a number of years before taking up his present position.

For 11 weeks since the Dáil passed the deposit guarantee legislation, we have waited for a decision in regard to recapitalisation of the banks and we have simply pointed out that businesses are in serious difficulty, there is no access to credit, overdrafts are being squeezed and 35,000 people have lost their jobs since that legislation was put through. At 8.45 p.m. on Sunday, an announcement was made not of action but of inaction with regard to the provision of €10 billion for recapitalisation of banks. The statement was vague, unconvincing and had neither specifics nor a strategic plan attached to it. It has failed to reassure anyone that the Government has a coherent plan to stabilise the banking system so that credit can continue to be provided for small businesses throughout the country.

As the Minister was unable to answer any question comprehensively on Sunday night about the Government decision taken on Sunday, will the Taoiseach clear up the confusion by answering a number of questions in this regard? First, when will the Government provide this €10 billion fund for recapitalisation of the banks? Second, what amount of money is to be provided by the Government from the National Pensions Reserve Fund either as preference shares or ordinary shares, or is any to be provided from that source? If that is the case, when does the Government propose to introduce the change in the legislation which will be required to get authorisation from the House to provide money from that source?

Is it the Taoiseach's intention to force or pressurise the banks so that, for example, by the end of January they will demonstrate they have internationally accepted levels of capital adequacy ratios available? Is it his intention to tell the banks it is not just the case that if the banks want to recapitalise, it is at their own discretion? If we are serious about protecting jobs that are now under serious threat, and about maintaining the economy throughout the country then, given that the Government is deep into the banking sector, as the Minister for Finance has said, it is in a position to exert leverage on the banks in a way that will guarantee that if the Government allocates money from the National Pensions Reserve Fund, it will actually flow as credit when required, particularly to small businesses to keep them alive. Is it the Taoiseach's intention to seek an assurance from the banks by the end of January that there will be an adequate, internationally accepted capital ratio in place? How does the Taoiseach intend to proceed following the vague announcement made on Sunday night?

The Taoiseach

It is important to point out that the covered institutions meet the capital adequacy ratios set out under regulatory requirements. In a statement on 28 November last, the Minister for Finance indicated his position and that he was prepared to supplement and encourage private investment in the recapitalisation of credit institutions in Ireland with State participation. On Sunday in a further positive signal to the market, the Government decided either through the National Pensions Reserve Fund or otherwise, and subject to terms and conditions, to support existing shareholders and private investors where appropriate with a recapitalisation programme for credit institutions in Ireland of up to €10 billion. We released a statement on Sunday evening setting out the main principles that would guide us in our approach to recapitalisation of the banking system.

The statement also made clear that the next step was for the Minister for Finance to initiate detailed engagement with the credit institutions in respect of specific proposals. Institutions have been asked to submit their proposals by early January. In the context of a commercial transaction, it would not be appropriate or sensible for the Government to pre-empt the detailed and technical issues that might arise in respect of the design and execution of any recapitalisation of any particular institution. It would certainly not be consistent with ensuring the Government secured the best possible outcome for the State from such a deal. Based on the statements of last Sunday we will move this dossier along as we have indicated. We sent a positive signal to the markets concerning the level of contribution and supplementation that the Government is prepared to make in respect of this issue.

I emphasise that covered institutions meet capital adequacy ratios. There is a perception in the markets internationally of the need for banking institutions to further recapitalise in addition to meeting capital adequacy ratios. It was in that context that we wanted to send a positive signal to the markets. This matter must be taken in the way we have set out.

I refer to the question of the lending criteria of banks. The whole purpose of recapitalisation in the banking sector is to ensure that the real economy is provided with the maximum amount of lending possible in current circumstances. The banks appeared before a committee of the House this morning and outlined their position in detail on this matter. We continue to seek the provision of business plans from the banks as a means of ensuring transparently that they will maximise lending to the small and medium enterprise sector and the Minister for Finance maintains this view. Should recapitalisation take place we will see further confirmation of that fact.

Deputy Enda Kenny

The reply does not deal with many of the questions asked. The Taoiseach previously said that moneys would only be provided as a last resort, but now says money may be made available from the National Pensions Reserve Fund, or otherwise. What does that mean? Do the plans involve venture capitalists from abroad or other sources of private equity? My understanding was that business plans should have been provided to the Government following the detailed discussions with the banks. The statement on Sunday merely buys time for the Government to the extent of several weeks. We do not yet know of the specific date when the Government intends to implement this plan. Credit is going down the tubes and 35,000 jobs have been lost. I can see from travelling throughout the country that the keys of business premises will be thrown back at banks by the end of January and February.

My call for a recapitalisation of the banks several weeks ago was based on genuine concern. If it was genuine concern then it is a good deal more serious now. The Government requires the authorisation of the House to take money from the National Pension Reserve Fund for recapitalisation. When does the Government propose to introduce that legislation? Will it be this week or when the Dáil resumes following Christmas?

The Minister for Finance said one could not expect the people who led us into this mess to lead us back out of it. The same applies to the Government, because it was the Minister for Finance who said the reason we are in this mess is that this is where the people wanted us to go and that the housing boom was based on low interest rates from the European Central Bank. Will the Taoiseach comment on this and on whether the Government intends to set new capital ratios for the banks?

Another essential element of economic recovery is managing the national pay awards. I am at a loss to understand the Government position on this matter. Although other Ministers said this agreement would be paid, the Minister for Health and Children said on Sunday night that money would not be provided for the Health Service Executive next year. Do I take it from the Minister for Health and Children's statement to the nation that the revised health programme, approved by her, is predicated on the basis that there is no money for that revised programme in the HSE budget? I remind the Taoiseach of his comments to the effect that money was not provided for the national pay awards for the HSE next year. Will the Taoiseach confirm who is telling the truth? Is it the Minister for Health and Children or the other Ministers? What is the position regarding her statement on Sunday night? Will the national pay deal proceed or not? I have publicly given my view on this matter. The Taoiseach said he issued a statement saying the matter would be discussed with the unions, but later the same night another statement was issued stating something else. What is the position?

The Taoiseach

Let me say with respect to the public pay situation that the Government indicated in the budget the need for savings of 4% in payroll costs in all Departments. That is Government policy. The public pay deal contains an 11 month pay pause. In respect of a payment to be made in October of next year of 3.5%, annualised that is about a 1.1% pay increase next year. Regarding the social partnership process, taking into account all expenditure programmes and all Government expenditure to see how we can deal with the deteriorating public finance position is a matter in which the social partners will be involved in the coming weeks. I have refused to isolate the pay issue from all other issues. All expenditure must be examined in that context. We have already made provision through proposed expenditure savings of 4% in respect of pay costs for 2009 as part of the budgetary strategy. There is no change in that position and the Minister for Health and Children's comments in no way change that position.

I refer to the question on the recapitalisation of the banks. The capital adequacy ratios are set by regulators and by reference to international practice. The issue which has arisen for financial institutions is the need to examine recapitalisation not as a means of providing more working capital, but more capital for banks. That is the perception of the markets. Therefore, in an effort to assist the Irish banking system and maintain its stability, we have specifically indicated how we see recapitalisation taking place. It will be on the basis of further engagement between the Minister for Finance and the covered institutions. The response of the markets to this was helpful in that it indicated the direction in which the Government was thinking and this will continue to be its position in the coming weeks.

Part of Deputy Kenny's question related to the present state of the Irish economy, which, being one of the most open economies in the world, is affected by what is going on globally. A global recovery will be needed to effect an Irish recovery. Having listened to the European Union Heads of State and Government, all have seen a serious deterioration in their public finance positions. Ireland's has been particularly acute because an international recession has concurred with a downturn in the construction sector and other sectors of the economy to the point where it is in recession. While Ireland is not unique in this regard, we have a particular situation to resolve.

As for the question in respect of what Deputy Kenny considers to be the additional resources that came about on foot of the increased employment and activity arising from construction, between two thirds and 70% of that money went towards the reduction of the national debt. Consequently, the idea it was all used for day-to-day expenditure is incorrect. Some of it certainly was used to improve services, in improved capital expenditure and towards improving some of our day-to-day services. Why would the Government not do so? Was this not required given an historic under-investment in a range of such areas?

The level and speed of deterioration in our present position is such that we will be obliged to seek to address all those issues on the basis of a social partnership engagement that now will take place. If one seeks the emergence of a successful strategy, it is important to do so. It is not a question of the Government outsourcing its responsibilities but of the Government working with stakeholders in this society to find the necessary solutions to close the gap that has emerged because of the fall in Ireland's tax revenues in 2008 of up to 15%. This is the position. The level of reduction in tax revenues and the impact it is having on public finances is not unique to Ireland. We have particular issues and must deal with our own problems. While we do not take solace from the problems of others, it is up to us to deal with our problems in our own way through the established processes. I believe social partnership is a problem-solving, not a problem avoidance, process. This has proven to be the case in the past and I believe in it. I believe it is the way to do the job.

As for the recapitalisation of the banks, that is a policy issue with which the Government has continued to deal in a consistent manner since it brought forward the guarantee scheme. Suggestions were made from the Opposition side of the House immediately thereafter to the effect that such a measure would enhance working capital. However, it does not as it simply increases capital adequacy in the bank. When one puts more capital into a bank, it does not come out the other side in the following weeks as working capital to Irish businesses, although that contention appears to have been made. The Government must address the market perception that capital adequacy ratios in banks must be sufficient in present circumstances, which is the reason for the decision it brought forward on Sunday.

Deputy Enda Kenny

The Taoiseach should respond in respect of the required legislation.

The Taoiseach

It will have to be in the new year.

Deputy Enda Kenny

That will be the end of January.

Deputy Eamon Gilmore

I have listened carefully to the Taoiseach's reply to Deputy Kenny and, when taken with his replies to questions on the economic situation in the past couple of weeks, I have come to the conclusion that the Taoiseach and the Government do not know what they are doing regarding the banks. The Government's handling of the economic situation is downright incompetent at this stage. Since the Taoiseach last answered Leaders' Questions in this House last Wednesday, there has been a succession of extraordinary developments in respect of the economy. The Minister for Finance told Deputy Joan Burton in the House last Thursday that the economy would shrink by 4% next year. In an interview with Ursula Halligan last Friday night, the Minister stated that the first the Government knew of the economic downturn was in July. However, people have been losing their jobs and businesses have been closing for the past year. Moreover, at the weekend commentators suggested that unemployment will rise above 300,000, or 10%, next year and that 14,000 householders are three months or more behind with their mortgage repayments at present.

Members have learned in the past couple of days that the Government intends to draw up an economic recovery plan. Two weeks ago, the Taoiseach told me in the House there was no need for such a plan, as the Government already had one, which was called the national development plan. I now hear that proposals are being developed, some of which ring familiar. They are close to what has been proposed by the Labour Party for a number of months and to what Deputy Burton and I were discussing at the Labour Party conference in Kilkenny two weeks ago. While plagiarism is a form of flattery, I wish to see the exact colour of the Government's proposals.

On Sunday night, a €10 billion package to recapitalise the banks was announced. The Taoiseach has told Members that this recapitalisation will not take place until January and that the Government is waiting for the bankers to come in with their proposals. Who is calling the shots? Is it the same bankers who landed the banking system in the problem that manifested itself in September and has continued thereafter, or is it the Government? I had thought that one of the outcomes of the guarantee scheme was to be that it would be the Government, through the Minister for Finance, that would tell the banks what was what and not the other way around.

The Taoiseach now has told Members that the recapitalisation of the banks must await some proposals from the same bankers who still are in place. They have changed nothing, it is business as usual and they will tell the Government what to do. Moreover, this will not take place until January. Will all the banks still be around next January? Can this wait until then? My understanding is that legislation will be required if the Government intends to use money from the National Pensions Reserve Fund. However, it is proposed that the Dáil will not reconvene in Leinster House until the end of January. Is the Taoiseach seriously suggesting that Members will close up shop on Thursday and that the issue of bank recapitalisation will not be addressed until the end of January? That is the effect of what he proposes to do, if he intends to use the National Pensions Reserve Fund.

The Taoiseach should answer a couple of simple questions. First, how much, in ballpark figures, of the proposed €10 billion will be drawn from the National Pensions Reserve Fund and how much from private funds? Has the Government identified the source of the private funding that will recapitalise the banks? Will the Government take equity in the banks or is an underwritten arrangement envisaged, as seemed to be implied in the statement? When will legislation to allow money from the National Pensions Reserve Fund to be used be brought before the House? The Taoiseach observed that the statement issued on Sunday night was to provide reassurance to the markets. Given the markets' response since Sunday night, does he seriously suggest this can wait until January or will some action be taken this side of Christmas that will stabilise our banking system and ensure that credit is released for businesses that are uncertain whether they still will be in business by the first week of January?

The Taoiseach

First, I will answer the Deputy on the economy. It is not true to say — nor did the Minister for Finance say despite the Deputy's attempts to portray him as so saying — that people were unaware of the overall state of the international economy until this June. The Minister was referring to the mid-term Exchequer returns. On the emergence of these returns, the Government took action to ensure that expenditure would come in on target this year, as it has in broad measure. The full year effect of the cuts that were outlined will mean a saving of €1 billion in 2009. While the Government brought forward its budget to close the gap again, there has been a deterioration in the public finance position since then. I stated that any programme of Government is subject to the health of the public finances. There always is such a paragraph that must inform any programme for Government as to how one can implement the priorities one identifies. That was simply the point I was making in this regard.

The Government's present position is that in the context of trying to give an impression of what the direction of the economy should be in the years ahead, it will set out a framework about economic renewal, which must involve social partnership participation. That is my response. We must involve social partners in ensuring the gap which has emerged on foot of reduced tax revenues of €8 billion this year will be addressed. If we are to set up a credible timeframe in which it can be addressed, when set against the expenditure items on our books, we must work out together, in a collaborative way, how to bring back health to the public finance position. I speak as someone who believes in social partnership. Others believe it should be done in some other fashion but this is how I believe it should be done. I am sticking by that methodology because I believe this is the way to do it. We will do this in the coming weeks and in the early part of next year with the social partners.

On the question of recapitalisation, the National Pensions Reserve Fund can participate through the significant cash reserves it has to hand. There is also the question of amending the fund in the context of not having a pre-1% payment into the fund next year on account of the financial situation and as we put the fund to work in the Irish economy with the real prospect of getting a return for our money. That is what we intend to do.

Deputy Gilmore asked about the nature of the recapitalisation. That may vary from institution to institution, but he can take it as read that the purpose of any recapitalisation in terms of participation by the State of taxpayers' money will be for the purpose of protecting the taxpayers' money. That, and ensuring that we have recourse to those funds in the future on a convertible basis or whatever. Those details will be worked out with each institution and it will be a matter that would have to be accepted by the regulator and by shareholders in that context.

We are taking this on a case-by-case basis. We are indicating what the total provision should be. It will total €10 billion. The extent of the State provision will depend on what comes forward and we will be making sure that the taxpayers' interests are protected. To elaborate any further at this stage, before the banks submit their proposals, would not protect the taxpayers' interest. That is the course of action we are taking on the question of the recapitalisation of the banks. It is the right approach to take.

With regard to the overall economic situation, we intend bringing forward a pathway on how we deal with the gap in the public finances over a credible timeframe with social partnership collaboration and participation. I make no apologies for that approach.

Deputy Eamon Gilmore

Following the Taoiseach's answer I am none the wiser about what the Government is going to do about recapitalising the banks. The answer is more or less a repetition of the statement on Sunday night.

I ask the Taoiseach to outline the timetable. He spoke about the banks coming back with their proposals in early January. Everybody is aware, at least in general terms, of the current state of individual banks.

The Taoiseach stated that he would be dealing with matters on a case-by-case basis. Is he saying that they will not be fully addressed until the end of January? Will it require legislation? Do I understand from the Taoiseach's reply that the amount which will be taken from the National Pensions Reserve Fund will be approximately €4 billion which, I understand, is what the cash reserves amount to? Can that be done without legislation? If there is to be legislation, when will it be published and considered by this House?

What is the form of the State involvement in this? A menu was set out in the statement on Sunday night which included the possibilities of share options but also referred to some form of underwriting. How will the State involvement be provided? Will it be provided in the same or a different way to all institutions?

Has the Taoiseach identified the source or sources of the private investment in the banks? What we have at present is a general statement of intent from the Government, but it is a case of live bank and get grass. We need to hear some specifics from the Government. I understand why the statement on Sunday night was made but it does not seem to have had the desired impact on the markets.

The Taoiseach

I disagree with Deputy Gilmore in respect of this. The question of the health of a bank is not dictated solely by its price in the equity markets. Every bank in the world has seen its share price reduce considerably, and it has been very considerable in Ireland. I accept that. That is because of some of the exposures that the market perceives.

However, that is not the point. The important issue concerns bank capital and to what extent is it capable of providing an adequate ratio in respect of future impaired loans that may arise. The market perception of a bank or financial institution is that it would like to see it operating above the regulatory standards. It is in that context — to deal with that market perception — that we have brought forward a general policy statement on recapitalisation.

We will deal with each recapitalisation when we see the proposals. Some banks have suggested they do not have any requirement for recapitalisation.

Deputy Emmet Stagg

He might not do it at all.

The Taoiseach

I am not getting into the detail. Some banks have suggested for many months that they have no capital requirements.

Deputy Joe Costello

Does anybody know?

The Taoiseach

Others suggest otherwise.

However, in recent weeks the Minister for Finance has met a number of banks and investment businesses regarding investment matters in Irish banks. All propositions were, of course, referred on to the institutions themselves. The Minister is also aware that some existing shareholders have expressed an interest in subscribing for new capital and the Government has indicated that in principle, existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government. The question of how a recapitalisation will proceed will depend on the proposals that we obtain.

Deputy Seán Sherlock

Is the market perception wrong?

The Taoiseach

The market perception changes from day to day. It is not the issue for us. The issue for us is the health and stability of our financial system, regardless of what the market says. Our job is to maintain the stability in the financial system, and that is our sole concern. I am not in the business of playing or working the markets. The markets will go up and down depending on how they see things from one day to the next, usually fed on rumour, perception and many other issues.

Deputy Seán Sherlock

The banks are undercapitalised because of the market perception.

The Taoiseach

That is not my job. My job is to keep stability in the financial system. In that regard we are making a recapitalisation scheme available that will include existing shareholders, perhaps prospective private investors and the State.

The recapitalisation proposals will come from the boards of those banks. We are prepared to participate in a recapitalisation in the interests of keeping a stable financial system so that the real economy — trying to maintain jobs and investment — can function as a result of having a stable system. It is not for the purpose of dealing with the banks, as banks. It is because, in a modern economy like this one, we need to have access to sufficient lending and commercial credit as is required. We therefore need to ensure, as part of that response, there are properly capitalised institutions.

The market has a view on this but, in terms of regulatory positions — the regulatory issue, which is the legal issue — there is sufficient capital adequacy ratios in our covered institutions. That, in case it is lost somewhere, is an important point to make in the context of this discussion. We are prepared to participate on certain terms and conditions, which will be established by the Government when it sees specific proposals come forward by those banks which wish to have recapitalisation schemes dealt with.

The question of whether there is an underwriting process or preference or ordinary share capital will be decided when we get proposals in early January. With regard to the cash reserves held by the National Pensions Reserve Fund, there is cash under the NTMA general aegis that is available to us.

Deputy Tom Hayes

That man behind the Taoiseach.

The Taoiseach

In order to assess whether that will be the full subscription of the State participation we will have to wait and see the proposals by the banks. People cannot expect us to speculate on what the proposals will be but let us be clear that the statement we put forward has been accepted as the policy position of the Government. We await particular proposals and when they are made we will deal with them on the basis of protecting the taxpayer, not on what the markets speculate.

Deputy Emmet Stagg

Close the door when the horse has bolted.