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Dáil Éireann díospóireacht -
Thursday, 31 Mar 2011

Vol. 729 No. 1

Banks Recapitalisation and Restructuring: Statements

Before calling on the Minister for Finance, on behalf of the Members of the House I welcome the practice that the Minister has come to the House to make an announcement.

Deputies

Hear, hear.

A Deputy

It was a long time.

I regret delaying the House momentarily. Copies of my statement are on the way and will be distributed to everyone shortly.

The date of Tuesday, 30 September 2008, will go down in history as the blackest day in Ireland since the Civil War broke out. This was the date on which the then Government extended the infamous guarantee to the Irish banks and decided that Anglo Irish Bank should be supported and maintained. It quickly became apparent that Anglo Irish Bank was insolvent in the absence of State support, that the other banks were illiquid and that the banking system was not fit for purpose. The banks were too big for the economy. The JCB and the swinging crane had become the logos of the banks and Irish bankers were as likely to be funding apartment blocks on the Black Sea or dabbling in property schemes in Singapore as they were to be investing in the Irish economy.

We are now in the third year of the banking crisis. The previous Government failed to act. They ducked and dived and procrastinated as they lurched from one crisis to the next. They went through periods of denial and periods of self-justification and they paved the road to disaster with good intentions. They never fixed the broken banks, however. The country has been left with an appalling legacy of debt, unemployment, emigration, falling living standards and of low morale.

The new Government has received a very strong mandate for change, renewal and doing things differently. It is a mandate to act, and we will act. Today, we set about that task in earnest. The Government is announcing decisions that will lead to a radical restructuring of the domestic banking system, return the banking system to long-term viability and profitability; and finally break the vicious cycle of the massive dependence of the banks on the State. The banking system must be the enabler of economic recovery by restoring public and market confidence in its financial health, management competence and ethical integrity.

To accomplish this, we will reduce the number of domestic banks by creating two new strong universal pillar banks. We will also ensure they are fully recapitalised in order that the world looks at these core banks with confidence and they, in turn, help instil confidence in our economy. In just two years, the State has contributed €46.3 billion of capital to the domestic banks. Despite this huge commitment of resources, the banking system remains distressed, with each institution continuing to rely on the lifeline of State and Central Bank support. Confidence in the banking system can be restored, albeit gradually, by now taking the right steps to restructure our banking system. Strong capitalisation of the banks is only part of that process and I will discuss that process later. The banking system itself first needs to be restructured to build a new core banking system that is fit for purpose for the economy, businesses and households by providing substantial new lending into the economy.

Both Government parties have consistently stated that the Irish banking system needs to be reduced to a size appropriate to our economy. The capital injections will be provided to create a banking system that has two universal full-service banks as its core pillars and a restructured Irish Life & Permanent. The first pillar bank will be created from the already strong franchise of Bank of Ireland and it is our intention to combine the businesses and strengthen the franchises of Allied Irish Banks and the Educational Building Society to form the second pillar bank. Overseas banks operating in Ireland will help maintain the competitive fabric of the market. Although backstopping the Central Bank requirements, we will provide the management with time to raise additional private capital and limit the State's need to invest in the banks.

Allied Irish Banks and the EBS will be the second pillar. We have announced that the recent bid for the EBS did not represent good value for the State as shareholder. We intend to combine the operations of AIB and the EBS to build a second pillar bank from the strengths of both institutions. Again, this will be a largely domestically focused bank, retaining its Northern Ireland operations and certain deposit funded operations in the UK. During the transition, customers should continue to do business with either bank as before and over time, the fuller services of AIB will become available to the customers of the EBS who will obviously retain the protection of the State guarantee for their deposits. The non-core division of the combined entity will see deleveraging of €23 billion of assets by 2013.

To satisfy the Central Bank's capital requirements, Irish Life & Permanent must raise very substantial additional equity capital. This will require a significant restructuring of its business and its shareholding, involving in all likelihood a majority stake held by the Government. The management of Irish Life & Permanent has agreed to produce a detailed capital plan to me very shortly. The basic elements of this plan are already clear and are reflected in the deleveraging plans agreed with the Central Bank. Irish Life & Permanent will immediately commence a process to sell its life insurance subsidiary, Irish Life Assurance, as well as other non-banking assets, such as its life and pensions business, which is strong, well capitalised and will continue to operate normally. In line with the other institutions, banking assets will be divided between core and non-core assets.

To attract foreign investment and funding, these new banks must realign themselves with the best international norms. The Central Bank announcement today is based on strong minimum core tier one capital ratios of 10.5%, more acceptable loan to deposit ratios compared with international norms, stress testing to 6% over three years and beyond, and a realignment of their balance sheet capital and funding to meet the upcoming new regulatory requirements under Basel III. In essence, our banks will need to be smaller, more focused on core operations, better funded and better capitalised.

Each of these banks will reorganise its operations into core and non-core functions. With a carefully managed programme of deleveraging by 2013 as the non-core assets which do not serve growth on the island of Ireland disappear, the pillar banks should then start to better serve the economy as functioning banks rather than the oversized, over-leveraged banks they are now. The core parts will be designed, from the outset, to provide the economy with the services and credit it needs. Non-core businesses and assets of the banks will be sold or run off over time, avoiding fire sales. This will allow for a significant reduction of the level of assets relative to deposits over time. With these sales, recapitalisations and other measures, the banks will repay their ECB and Central Bank funding and in time will be better able to raise their own finances.

The future banking landscape will look thus. The first pillar bank will be designed from Bank of Ireland. Splitting into separately managed non-core and core divisions, the bank will begin to shed €30 billion of assets by 2013. It will become a significantly more domestically focused bank and retain its businesses in Northern Ireland, its post office deposit venture in the United Kingdom and limited capital markets business.

The sale of valuable insurance and other assets from Irish Life & Permanent should raise significant capital for the ILP group. It is the intention of the State to provide the remaining PCAR capital to the group.

Throughout the period of restructuring, the group will operate as normal. Customers and policyholders will carry on their business as usual and the guarantee will apply. The new restructuring plans for the banks will be submitted to the European Commission for approval under state aid rules in respect of all of the above issues.

The PCAR bank stress tests carried out by the Central Bank are certainly among the most thorough and demanding such tests ever performed in Ireland, or indeed anywhere. The detailed results methodology and assumptions underlying these stress tests are being published, emphasising Ireland's firm commitment to this critical exercise being fully open and transparent. The tests assume higher base levels of capital, a more stressed underlying banking environment, conservative loan loss and recovery assumptions and substantial buffers over and above the results modelled by the Central Bank and advisers. The capital levels are well above the 10.5% internationally accepted target rate and would withstand very significant economic and financial shocks. The stress scenarios while not implausible are highly unlikely and are not meant to be, nor should they be, interpreted as being forecasts. This is not "business as usual" here — these are demanding stresses against demanding capital targets. As the Governor of the Central Bank, Professor Patrick Honohan, has made abundantly clear, this is a very conservative assessment of our banks' capital assessment.

The State's investment in the banks will lead to very high level of capital in the banks. For example, if their PCAR requirements were met today, AIB and Bank of Ireland would have core tier 1 ratios of 22% and 16%, respectively, while Irish Life & Permanent would be in excess of 32%. Should the actual results prove to be better than the highly conservative assumptions used in the Central Bank's stress scenarios, we will redeem any surplus capital from the banks. It is very reassuring that our external partners have signalled their support for, in their own words, this "rigorous capital needs assessment".

I understand that ordinary people, investors and the financial markets as well as our international partners wish to have clarity on the Government's plans for ensuring that the banks meet these demanding capital requirements. A key objective for the Government is to strengthen overall fiscal sustainability by separating bank risk from sovereign risk. Clearly, this can be achieved only by returning the banking system to health. It is acknowledged by all that a large part of the €46.3 billion already invested by the State in the banks will not be recovered, but the State has not borne the full burden of the collapse. Approximately €60 billion of private equity value in Irish banks has also been destroyed since early 2007, much of it held by ordinary Irish citizens. Subordinated bondholders have also already contributed approximately €10 billion to the cost of the bailout.

Based on the Central Bank's work, a further €24 billion, including €3 billion of contingency funds, is now required by the banks for capital purposes. This is a significant sum, although it is within the funding envelope available for this purpose from the EU-IMF programme of support. The Government's view is that there should be no half measures and if it must be done, it will be done without delay. This is not to say that this burden should fall first on the taxpayer without any mitigation. Actions to reduce the cost to the taxpayer significantly will include providing some element of capital up to €3 billion on a contingent basis — if not required, the capital must be returned to the State. We will also seek direct contributions to solving the capital issues of the banking system by requiring further significant contributions from other sources, including from subordinated debt holders, by the sale of assets to generate capital and where possible by seeking private investor funds. It is important that, after going through the reorganisation, these three new banks are able to operate in the marketplace as strong banks with a positive future and ongoing positive relationships with counterparties of all kinds.

Neither Anglo Irish Bank nor Irish Nationwide Building Society was subject to the stress tests announced today. Consequently, there is no immediate need for additional capital for either institution. It is Government policy to work out these institutions in an orderly manner over time and to minimise further injections of taxpayer capital into either institution. A further assessment of the capital requirements of both institutions will be available in May. Should additional capital be required at that point, the Government will then consult with the external partners on the timeframe and means of recapitalising those institutions at minimum cost to the taxpayer, having regard to the financial stability impacts in Ireland and abroad. We will act with due care and in close consultation with all the appropriate partners, having regard to the market situation, and the need to have regard to financial stability impacts in Ireland and abroad.

Throughout the process of addressing the problems in the banking system, including Anglo Irish Bank and Irish Nationwide Building Society, we recognise that confidence in our banks and clarity about our proposed planned actions are necessary. I wish, therefore, to reiterate the commitment of the Government to the protection of those parties who have advanced funds which are guaranteed by the State and those others who continue to support our banks with deposits, interbank lending, derivative contracts and the like. Bank depositors can be assured that their funds remain safe. Actions taken by the Government will, of course, be careful and proportionate, having regard to the principles I have outlined.

The agreement with the external authorities provided that the State would provide €17.5 billion of funding towards the programme of support for Ireland. Given the actions that the Government has decided to adopt to reduce the cost of capitalisation, it will be possible for much of the remainder of the cost to be met from existing resources. This will reduce the additional debt service cost to the State associated with new capital injections as there is no interest charged on funds from the National Pensions Reserve Fund which will provide €10 billion towards the cost of capitalisation. My predecessor put almost €7 billion of the State's resources on deposit in the banks and this can also be used towards capitalisation.

The covered banks continue to attract significant and largely stable deposit funding with the security provided by the State guarantee. The ECB and our Central Bank also continue to demonstrate an extremely high level of commitment to the funding of the Irish banking system. Ensuring the recapitalisation of the banks underpins this solvency and thus their continued access over time to Central Bank liquidity facilities, and also facilitates the task of asset reduction and a return to more normal funding conditions.

We would not be in the position we are today, had banks adhered to best governance practice. It is now vital that the efforts to financially restructure the banking system are supported by real improvements in corporate governance and the management of financial institutions in Ireland. It is crucial that the reputation of Ireland's banking system is restored. In that context, I welcome recent initiatives made by the Central Bank in this area, including the introduction of a new code on corporate governance and the recent issuance of a consultation paper on fitness and probity standards by the head of regulation at the Central Bank, Mr. Matthew Elderfield. Mr Elderfield has made it clear that the track record of those holding senior positions in financial services will be taken into account in assessing their suitability for taking up or indeed retaining a senior role in financial services. It is the intention of the Government to make very significant changes in the boards of directors of banks and in their management structure. I fully anticipate that as a result of this exercise there will be the changes I am talking about.

We intend to implement the commitment in the programme for Government to create a more integrated decision-making structure among all relevant Departments and agencies with banking responsibilities. Therefore, another key plank of our proposed measures is to strengthen and enhance the capacity of the Department of Finance in the area of banking policy. We have seen how a problem in the banking system can significantly damage the economy and put the fiscal sustainability of the State at risk. This cannot be allowed to happen again. It is essential that the Department of Finance has the appropriate policy responsibilities and financial market and banking expertise to be able to advise Government on potential systemic threats and on measures to address and mitigate these. The end-result will be that banks that have received taxpayer support will be far more accountable to Government and Parliament for their performance in responding to the needs of the economy.

For the benefit of our people and of market participants, I want to be clear that we are committed to the EU-IMF programme. We have issues that we wish to raise and changes that we need to make in the context of ensuring growth and recovery in the Irish economy. However, we will respect the overall fiscal parameters of the programme and where adjustments to the programme affect these, we will make appropriate offsetting adjustments. It is clear from contacts to date that there is already a good level of understanding between the Government, the external agencies and the funding parties in this regard. This radical restructuring of the banking system is designed to put it on a firm footing for the future and break the bonds with our toxic banking past. This is essential for our economy and country. From here, let us move forward with purpose.

I wish to share time with Deputy Michael McGrath.

Is that agreed? Agreed.

I welcome the Minister. It is not a precedent or innovation for the Minister to address the House in the wake of stress tests. Last year, on the publication of the stress tests by the Governor and the Regulator I brought the response of the Government directly to the House. The Minister, I am glad to say, as I requested last Thursday, has kept with that precedent and outlined the Government's response to the stress tests.

I do not want to be contentious today. The Minister opened his speech with a rhetorical flourish touching on matters that do not have a direct bearing but he concluded as an orthodox Minister for Finance by saying that he wanted to be clear too for the benefit of our people and of market participants that we are committed to the EU and IMF programme. That is the position of the Government and the Minister for Finance.

Part of the programme was to carry out these stress tests. It is worth recalling that they have been carried out on behalf of the Central Bank, as they were last year by a firm. It is also worth noting what was stated last year by the Governor of the Central Bank and the Regulator at the time in regard to the stress tests then conducted. They were conducted at the exact same time last year and a press release was issued on 30 March 2010 by the Governor of the Central Bank. He said:

After a period of great uncertainty, these actions and announcements create a secure platform on which confidence will be built. While the costs that are today revealed are certainly significant, they are manageable and affordable for the Irish State. They are certainly a necessary measure to put the banking crisis behind us and provide for a stronger economy

On the same date the head of regulation said:

It is important that our banks move to a strong capital position as soon as possible and that we draw a line under the Irish banking crisis. Sufficient capital is an essential ingredient to ensure that banks can withstand future losses. We have applied a robust, realistic and prudent capital standard informed by our own detailed analysis and by emerging best practice internationally.

Subsequent stress tests were carried out on Bank of Ireland and AIB during the summer which did not excite much attention. They were more relaxed in character than the original stress tests and apparently were those applied on a Europe wide basis to various banks.

It is worth recalling what the Governor and Regulator said on that occasion because I am not sure the Minister will reply to this debate. I hope for his sake that the stress tests that have been announced today stand up by 30 March 2012. That is very important for the State and its financial stability. The stress test announced today by the Minister, entailing a requirement on the State to put a further €23 billion into the banking system——

The Deputy has some nerve.

——clearly represents a dramatic escalation of what was found by the Central Bank and the Financial Regulator this time last year.

The Deputy appointed the consultants.

It is something that for all our sakes I am anxious to ensure. I wish the Minister——

(Interruptions).

Allow the Deputy to continue, without interruption please.

——well in his job and I draw his attention to a difficulty created by the stress tests. It is worth looking at them and the type involved.

A Deputy

Year zero.

The stress test assumes that house prices will return to 2002 levels by 2040. It also assumes that marking to market should take place on all investment properties, irrespective of the reliability of the tenancies and their payments. I was delighted the Minister outlined that the stressed cases represent definitively a worst case scenario. I hope so because were those stresses to materialise it is not a scenario under which this economy can survive.

I am glad to see in his announcement that some of the capital being provided is contingency capital and not definitively committed to the banking system. It seems to me that with these stress tests it is inevitable that a figure of this size would be found to be necessary for the banks. What is being proposed is that the banks be stuffed with capital as part of an effort to ensure international credibility for them. I hope the strategy succeeds.

Clearly, it has been discussed with the European authorities. However, if I have one area of reservation about the Minister's speech it is the nature of the consultation which has happened with the European authorities. I intend to return to this issue. The clear assumptions of the stress tests are very dangerous for this economy because unless our house purchase market revives and investment takes place in the property sector generally we will not have any economic recovery.

We will continue in a vicious rather than virtuous cycle of decline, in terms of the economy generally and the banking sector. It is very important that we all make it clear that these stress tests are just that, namely, testing an extreme scenario. The response of the Government following international consultation, which it now welcomes and accepts, should ensure that the stresses are provided for even if they do not materialise.

As the Minister said, it is proposed to redeem some of the capital if it is not required for capitalisation purposes in the future or was established to be surplus to requirements. It is important that is clear. The Minister went on to outline the future of the banking landscape. He envisages it being provided by two pillar domestically owned banks, as I understand it, with vigorous competition being provided by banks from overseas.

He signalled today that it is his intention that EBS and AIB be merged to form one of the pillars and the Bank of Ireland will form the other, with the future of Irish Life & Permanent somewhat uncertain, not in financial, funding or reliability terms but in terms of where it fits into the landscape over time. I take it the Minister envisages that it too will be assimilated into a larger bank.

In its manifesto Fine Gael indicated that it proposed to sell EBS to a private party but I gather yesterday the NTMA confirmed that it did not believe that the terms and conditions of the offer were feasible from a State point of view. It is worth noting why and why private investment cannot be attracted into the Irish banking sector. It is because the assumptions in these stress tests are so radical they would have involved an exposure to the State in the underwriting of the private capital that would otherwise have gone into EBS.

In other words, the stress test is so pessimistic compared to any stress test carried out in any other European country that, in effect, was the State to have promoted the private investment in EBS, subject to various backstops or guarantees being sought from the State, the State would immediately expose itself via the stress to a liability. For that reason, the banking system, based on these stress test, cannot attract private investment from overseas.

That has been a persistent problem with the attraction of investment from overseas, apart from the funding of the banking system in recent years. Funding is absolutely fundamental. The fundamental difficulty with the Irish banking system since September 2008 is that funding has dried up. Banks which became unsustainably large in the period leading up to 2008 have seen a persistent withdrawal, not of bond or debt finance but more crucially of deposit finance. That funding has been replaced by support from the European Central Bank, as we all know.

The Minister has to grapple with this and has done his best to date, save with one respect to which I want to return. I am not sure I should fault the Minister, the Taoiseach or whoever decided last weekend to brief our newspapers about an imminent arrangement which was alleged to have been concluded with the European Central Bank. It was reported on Saturday last in The Irish Times that: “The European Central Bank is working on an emergency plan to deepen its support for Ireland’s ailing financial system with a new scheme to provide banks with more than €60 billion in medium-term ‘liquidity’ loans”, and that that initiative was being prepared in anticipation of bank stress results today, and that it would significantly expand the reach of the ECB’s operations in Ireland.

This Government has made a great deal of its commitment to European matters. I can assure the Government I maintained close relationships with both the European Central Bank and the eurogroup at all stages.

They speak highly of the Deputy.

This Government has made a virtue of suggesting that it has some moral superiority in this area but on Saturday last we were informed in The Irish Times, clearly by Government sources, that this emergency €60 billion scheme for Irish banks would be introduced in parallel with today’s announcement. There is no reference to it in today’s announcement.

I wish the Minister well and hope he, the Taoiseach and the other Ministers involved can progress their discussions with the Commission and I am sure the Governor is doing his best with his colleagues on the governing council of the European Central Bank, but it is important to note that, despite the clear flagging of this, and it was flagged subsequently in various Sunday newspapers, it has not happened. According to that article:

The plan would see the ECB replace a short-term funding scheme known as the Exceptional Liquidity Assistance (ELA) programme with a new medium-term liquidity facility tailor-made for the Irish banks. Banks use liquidity to fund their day-to-day operations.

We know that well. However, that has not happened. The Government flagged it would happen; it has not. It has not been announced this afternoon.

In other articles it was suggested that Ireland needs to persuade the EU-IMF to agree a lower pace of bank deleveraging, and I agree with that. That was one of the main objectives of our diplomacy in our final few months as well. From what the Minister stated this afternoon, he has made a little more progress on that front, which is an important front on which to make progress, but I would prefer to see more definitive progress on it. Clearly, we cannot have a fire sale of assets in the Irish banking sector. That would accelerate losses to a degree which we cannot contemplate.

Of course, the burden of the programme for Government was that NAMA had crystalised losses. That was losses in transparently devalued assets in the property sector. What we are looking at here is a crystallisation of losses, not in the land and development category but in the home ownership category and in the category of business lending. That crystallisation will impose a significant additional burden on the taxpayer. Given that we are talking today about stress testing in the banking sector and home purchase, it is extraordinary that the Government has announced no initiative in parallel on the protection of home owners. In fact, the promise to deliver mortgage interest relief within 100 days, which had a decisive impact at the doorsteps when unveiled by Fine Gael, is not being implemented in the first 100 days and has been deferred for consideration to the budget which will be introduced later this year. That, of course, had to be done because the existing incentives for persons to purchase houses and avail of mortgage interest relief must be kept in place to breathe some life into the first-time buyers' market. I made that clear during the election campaign and I am glad the Minister has now accommodated himself to the policy of the previous Government in that regard as well.

I really do not wish to be churlish in any way to the Minister, who has had a baptism of fire in this particular area and whom I wish well in his exertions, but it is important in our dealings with the European Central Bank to realise this is an autonomous institution. It is not an institution which is subject to direction or megaphone diplomacy from national governments. It must be dealt with in a certain way if we want to make progress with it, and I do not see much evidence in last weekend's newspapers that it was dealt with in that way. There is an absence of any announcement on ECB support in this statement. That troubles me. It is important that we get that statement as soon as possible because we need that confirmation of the lender-of-last-resort capacity of the central bank and assurance that in this part of the eurozone, where we are expected to make very substantial sacrifices to protect the integrity of the zone, the central bank stands firmly behind us.

We also must note in today's announcement that the only burden sharing envisaged in the Minister's statement is that provided by this House and by the previous Government in the legislation enacted before Christmas, namely, the burden sharing on subordinated bondholders.

Which Deputy Lenihan opposed in 2008 and 2009.

We all agree on that. The question of senior debt, even in Anglo Irish Bank and Irish Nationwide Building Society, is not raised. Perhaps the Minister has decided to be discreet about this and work in private about it. If that is the case, I would respect that because much of the talk about default on senior debt in Ireland has had an adverse effect on deposit taking in the Irish banking system. I had to listen to several years of it on the other side of the House and I sympathise with the Minister in that regard.

I welcome the Minister and his statement. It is significant that he reassured depositors in the first instance that their money is secure because the last thing we want when people see the news tonight is for there to be any further uncertainty on the security of their deposits. I accept that reassurance. That message should be emphasised by all Members of this House.

The main question people watching the news tonight will want answered is whether this is the end of it. Have we finally reached the bottom of the black hole that is the Irish banking system? There have been many attempts to identify the bottom of that black hole and all of us in this House will hope the efforts that have been made by the Central Bank and the Financial Regulator have finally identified the final figure, with the sum total now approaching €70 billion. Given the €46 billion that has already been invested and now a further €24 billion, it brings the overall total for the Irish system to €70 billion, which of course excludes more than €30 billion that NAMA has invested as well in the purchase of the property related loans.

There are a number of significant elements to the Minister's statement this afternoon. There was much grandstanding by the Government parties during the election campaign. We were told, for example, by the Minister, Deputy Varadkar, that not a further cent would go into the Irish banks without burden sharing by all classes of bondholders, and the absence in the Minister's statement of any reference whatsoever to unsecured senior debt is significant. I understand there is in excess of €15 billion of unsecured senior debt across the Irish banks, with a further €6 billion of subordinated debt. There was no mention whatsoever of any effort, which I assume the Minister is making, to reduce the burden through burden sharing in that unsecured senior debt. There was a clear commitment that there would be no further money put in beyond the €10 billion that had been committed without burden sharing among all classes of bondholders. That seems to have evaporated as soon as the parties opposite got into Government.

As Deputy Lenihan stated, there was no reference whatsoever to the promised medium-term funding support from the ECB which is essential if we are to work to a point where we can wean the Irish banks off the lifeline of emergency funding from the Central Bank and the ECB. We need to hear that reassurance. I presume there will be a statement from the ECB shortly in that regard.

The Tánaiste and Minister for Foreign Affairs, Deputy Gilmore, also in a great oratorical flourish during the election campaign, referred to it being Labour's way or Frankfurt's way. Today, we finally have the answer to that. It is certainly the way of the civil servant, Mr. Jean Claude Trichet, and the European Central Bank, who appear to have had the final say on this matter. It seems clear that it is Frankfurt's way, not Labour's way, based on the statement today.

Many working in the Irish financial sector will be concerned tonight about jobs. There has been much reference in the Minister's statement to deleveraging, to shedding assets and to having a smaller Irish banking system with fewer banks, and that can have only one meaning. It can only mean fewer branches in towns and cities throughout this country and fewer jobs in the Irish banking system. The sooner the Government can bring clarity to that situation for those working in the Irish banks, the better. They will be concerned about the future of their own jobs and about the wider issue of the commitment of the State to the Irish banking system. In the early days of the new Government the Minister for Finance, Deputy Noonan, said the debt situation — the sovereign debt and bank debt combined — could become unsustainable. He emphasised the word "could" in response to subsequent questions on finance. In the light of today's announcement that a further €24 billion will be required in capital support for the banks, he should make clear whether the situation has become unsustainable. We need a clear statement on the issue, particularly in the light of some of the emerging economic data, the recent quarterly accounts and the unemployment figures which do not appear to be improving. I look forward to a full exchange with the Minister on the issue next week when I am sure we will have much more time to go into the details.

Today's announcement draws a clear line in the sand and brings to an end the fallacy and pretence that some type of radical or fresh innovative approach would be taken by the Government. It draws a line in the sand with regard to all of the commitments given by Government spokespersons while in opposition and government. Previously Deputy Gilmore, now Minister for Foreign Affairs and Trade, waved the IMF programme and said the Labour Party would not be bound by it, yet today it has been announced that the Government is committed to the EU-IMF programme. On his first day the Taoiseach, buzzing from his election victory, came here and said not one cent extra than what had already been committed would be put into the banks until burden sharing had been achieved. He has repeated that statement on three occasions. Today the Minister for Finance has said there will be no half measures and that if it must be done, it will be done without delay. We heard other Ministers talk about the need for burden sharing by senior bondholders, but there is no mention of this in the announcement. The programme for Government talks about another bank, not one of the two mentioned by the Minister today but the strategic investment bank. The veil has been lifted and the fallacy has been brought to an end. There is little surprise that previous speakers have broadly supported the Minister's strategy because it is a continuation of the reckless strategy of the previous Fianna Fáil-Green Party Government.

The Minister said 30 September 2008 was the worst day in Irish history since the Civil War. It is within his gift to call a ceasefire. It is within his gift to stop this and apply aggressive burden sharing to senior and subordinate bondholders in the banks. However, that is not the gift he has announced today, rather the gift he has announced is that senior bondholders will continue to be paid. The gamblers who gambled recklessly in the banks will be paid by the Government. Is it the Government which will pay? The Minister is making the decision, but it is the taxpayer who is struggling to make ends meet who will have to foot the bill. This is a decision the Minister should not be allowed to take because he has been given the opportunity to make these decisions on false pretences. A commitment was made during the general election which resulted in both parties in government being given a substantial mandate, but that commitment is being reneged on today in the House.

This is the fifth attempt to recapitalise the banks. The four previous ones failed, at a cost of €46 billion. At the end of the process this year approximately €70 billion will have been invested in Irish banks. In 2008 we had the €400 billion guarantee scheme, covering the six main institutions. In 2009 some €11 billion was injected into Anglo Irish Bank. Before October 2010, a further €21.8 billion was put into the main banks and after that date some €13.3 billion was put into them. Today, the Minister has announced a capital requirements of €24 billion. That is a far cry from the statement made on the floor of the House a number of years ago by the previous Minister for Finance, Deputy Brian Lenihan, when he said it would be the cheapest bailout in the world.

I did not say that in the House.

Wherever the Deputy said it, he misled the people.

I did not. Let the Deputy check the record.

The Deputy misled the people when he told us this would be the cheapest bailout in the world and that it would only cost €4 billion. The figures presented today show that the real figure, leaving aside NAMA bonds, is closer to €70 billion.

The Government's open-ended commitment to cover bank losses plainly exceeds the fiscal capacity of the State. The losses of the banking sector have become the losses of the taxpayer. Bank debt has become sovereign debt; that is the problem. It is ordinary punters and citizens who are paying the price and suffering because of the failures of the previous Government and the direction the Government is about to take. The simple economic truth the Government does not seem to comprehend is that the more blank cheques we write to shore up the European banking system, the more we are burdening the people with future taxes and the more we increase the State's liabilities. This burden will cause the economy to contract, as we are seeing year on year. It also punishes taxpayers. Writing cheques to bail out European banks will not help anyone, apart from the creditors of the banks who should be the ones to suffer and take the hit.

The Minister is borrowing tomorrow to pay for yesterday and forgetting about today. However, what he and his Government colleagues need to do is to stand up. At the core of their banking strategy should be three simple objectives. The Government needs to reduce the liability to the State and the taxpayer, ensure there is a functioning banking system and restore confidence in the economy. None of these measures will be met by the policy outlined today. The time for sticking-plaster solutions has passed. What we need is real solutions. When we woke up this morning and read the newspapers, we were told and read about radical solutions that would be proposed by the Government, but no such solutions have been presented to us. What the Government is going to do is place a further burden on the taxpayer. Putting a figure in the region of €24 billion into a defunct banking system is beyond belief for ordinary people.

It is the shocking legacy of Fianna Fáil that the very economic survival of the State is now in question. The Minister recognised this earlier this year when he was in Brussels. He said on RTE at the time that we could be approaching a point of economic unsustainability and that the sustainability of the sovereign debt could be in doubt. I share that view in part. It is the belief of Sinn Féin and many Irish people that we have already reached that point. Deputy Noonan is the first Minister for Finance to make that suggestion, for which I commend him. Hundreds of thousands of people are fighting for their survival, as is the State. Almost 500,000 people are unemployed and some 50,000 of our young people are leaving our shores each year. A growing number of people face eviction, while families struggle to feed their children, provide warmth and clothing and send their children to school.

Fine Gael and the Labour Party have told us they have a different view. They believe the point of unsustainability has not yet been reached. As economic sustainability is the most critical issue facing the State, it is important that we tease it out. I tried to do so in questions of the Minister last week. The point of unsustainability is the iceberg that will sink the State. It is the point where the State will have no prospect of ever being able to meet the accumulating debts and where sovereign default will no longer be avoidable. Therefore, it is hugely important that the people know when that point will be reached. It is true that it is governed by myriad moving economic factors and that when it will be reached is difficult to identify. However, the Government has a wealth of economic computational models at its disposal, into which it can input a large number of variables and compute with some certainty the economic outcomes. I am sure the Minister has carried out such an exercise. If he has not done so, it would be like floating blindly into the sovereign debt iceberg. If he has not been able to identify this danger point, it is an act of the most extreme economic negligence.

If the Minister buries billions more of the Irish people's money into these banks, he pushes the country closer to the point of unsustainability. Since it is the people's money and the people's future that the Minister is gambling with, surely the people of Ireland have a right to know what exactly is the point at which Ireland can no longer pay. Will the Minister tell this Chamber and the people of Ireland what exactly is the point of unsustainability for this State? I believe that we have already met it.

After this detail of the latest, and hopefully the final, debt bill has been revealed and it is combined with sums already guaranteed or owed, Irish banking debt will be somewhere in the region of one-and-a-half times the total value of the Irish economy. This €24 billion of debt is unsustainable. We cannot carry this debt and service the interest. It is hard to see how we can begin to pay it off. I know the Minister is playing with figures and allows some of this to come from the National Pensions Reserve Fund, but if we were not doing that, we could use that money for other needs in this State.

The reality is that money for the needs of the State has to be borrowed, and the rate is currently at 5.8%. If we assume that there is now an additional burden on the State of €24 billion, an interest rate of 5.8% would require €1.392 billion just to pay the interest on this part of the bailout alone. Is the €24 billion the final figure or just the starting point? There is no way the State will be able to pay back the EU-IMF loan within five years or even ten years. We will end up refinancing and refinancing, so that the €24 billion turns into €31 billion by the time the Government leaves office, if it has the privilege of staying there for the full five years. That is the real cost of this part of the banking bailout to the people.

However, we must consider what we get for this €53 billion of debt. We get six banks, which the Government will restructure into two banks. All that can be done with Anglo Irish Bank and Irish Nationwide Building Society is to wind them down, because there are no deposits in them at this stage. EBS may have some value, but nothing significant. There is €70 billion going into the banks and we are getting a couple of defunct banks, one with a bit of value and others that are not functioning the way they should be in the economy.

The Government must decide if we want to continue along this road. The opportunity to change direction gets slimmer every day. Every decision we take makes it harder to change track, and every month that goes by before we change direction makes it harder for the State to recover, as more and more bonds are paid off. I ask the Minister to repeat the fine words that his leader echoed in this Chamber to the effect that no more capital will go into Irish banks, other than what has been committed, until burden sharing has been achieved. We know burden sharing has not been achieved on senior bonds because the Government and its Ministers failed to do it. They agreed to take it off the table at the discussions last week.

We should not put the committed money into this, because there are other ways we can do it. We should be looking at aggressive burden sharing, especially for the €21 billion of unguaranteed debt that this State never pledged to pay back to those gamblers. However, the intention seems to be that they will get some money back, or possibly all of it, as we saw with Anglo Irish Bank bonds in January. Today, the Minister must honour his party's commitment that not one red cent is to be put into the banks until burden sharing is enforced.

We can only hope that this is the final figure. We have had many occasions in the past when we thought we drew a line in the sand, only to come back again. We were told last year that AIB passed stress tests only to need further recapitalisation a few months later. Today, the bank needs about €16 billion. We were told Irish Life & Permanent did not have any problem, yet today we know that it needs €4 billion. There is a serious question about the stress tests in respect of the scenarios used in the most adverse criteria, and some commentators have alluded to this. We are already close to meeting some of those scenarios, especially the unemployment rate, which is currently at 14.7%. This means that we are 0.2% off the worst situation the Central Bank has used to deal with the capital ratio that is required within this bank. That is the first crack that scares the living bejesus out of us. We will be back here in a couple of months following the European stress tests in June when they figure out that the criteria used was not stringent enough and underestimated the serious contraction that occurring in the Irish economy, and that therefore the capital requirements are underestimated.

Unemployment cannot be looked at in isolation. Unemployment means significant drops in income, fewer bills paid, drops in consumption and spending and mortgages going further into arrears. One figure can spell disaster for this whole model and could potentially mean that the extent of banks liabilities is still unknown. We cannot draw a line in the sand if the wind keeps blowing it away.

As the ordinary people of this State woke up to get on with on their lives, the Government put €3 billion of their money into Anglo Irish Bank and Irish Nationwide Building Society. I accept that it was a promissory note to which the previous Government signed up, but €2.53 billion has been put into the defunct bank that is Anglo Irish Bank and €500 million into Irish Nationwide Building Society. It is apt that the ghosts of bailout past surface on the same day that we create ghosts of the future. It is apt that the €3 billion for Anglo Irish Bank has been put in on the same day, but it should never have happened. This Government should have looked at all options to see how we reduce the liability of that promissory note that was signed by the previous Government. When it did so, members of the current Cabinet jumped up and down in this Chamber about the idea of injecting €30 billion over a ten year period into Anglo Irish Bank and Irish Nationwide Building Society.

The Minister told us today that the stress tests do not cover these two banks, as we already know, but he went further and told us that if capital requirements are needed, the Government will look at options and it will minimise the exposure to the Irish taxpayer. That means that there will be a minimum exposure, but there will still be exposure to the Irish taxpayer for a further capital requirement into these two banks. How the hell do Labour Party Members sit on those benches listening to the Minister tell the Irish people that he is committed to looking at putting more money into Anglo Irish Bank and Irish Nationwide Building Society? It is a ridiculous situation, and he has not even said in this Chamber that he will burn the senior unguaranteed bondholders in those institutions? Why is there no outcry, Joan? What has happened?

Because you signed the guarantee.

Who has gagged you?

Deputy, address your comments through the Chair.

You were——

Minister, refrain from encouraging him.

We in Sinn Féin put down a Private Members' motion yesterday to scrap the universal social charge and replace it with the system that was in existence prior to the December budget. Everybody on that side, including Labour Party Members, voted to keep it there. They voted to keep the tax on the working poor. It would cost €420 million to revert to the old system. That is a great deal of money but it is a pittance compared to the money the Government has announced today that it will inject into these defunct banks.

Those are the priorities of both parties in this Government. They have stolen the clothes of Deputy Micheál Martin and the former Taoiseach, Deputy Brian Cowen, and are wearing them proudly on the Government benches today, along with their smiles. It is sad to see people who so convincingly and eloquently articulated positions in this Chamber, which I believe came from their hearts, smile in this Chamber today as the Minister announced that the bailout for the Irish banking sector will exceed €70 billion.

The Deputy's time is up. I ask him to conclude.

One of the major issues that has arisen, and the figures regarding Permanent TSB amplify this issue, is that the capital requirements of that bank are now €4 billion. The head of that bank told us two years ago that only about 1% of its loans would be bad loans. Permanent TSB did not get involved in the speculative development lending. It was more conservative than that. It dealt with mortgages but it went mad at the end of the property boom and increased its loan book two-fold in the past three years. A huge number of people took out mortgages at the height of the boom and those mortgages are now distressed.

The Minister announced that we will give Permanent TSB €4 billion. It will plug the hole, but what about the mortgage holders? What about the people who cannot make those repayments? We already know that as of last year 44,500 mortgages were in 90 days arrears.

The Deputy has exceeded his time.

We have the figures now for one half of the problem, namely, the banks, but we must now come up with solutions for the problems of the mortgage holders because people with two incomes who were getting two pay cheques every Thursday are now relying on social welfare payments. People who bought property at the height of the boom have to make the decision to put food on the table——

Thank you, Deputy.

——or pay their mortgage, and they are rightly deciding to do the former. We must examine a scheme which deals with debt forgiveness and non-recourse mortgages but one that bails out those people also.

The Minister is going down the wrong track and I appeal to him——

I am appealing to the Deputy to conclude.

——to change direction. In particular, I appeal to the Labour Party members to use their influence and go back to what they said they believed. For God's sake, pumping more money into defunct banks does not make sense. They are about to sink the Irish State and they will be guilty of reckless trading.

Deputies

Hear, hear.

The Technical Group has 20 minutes. There are six Members offering and one does not need to be a mathematician to know that the time is fairly limited. The Deputies have three and a half minutes each. Is that agreed?

If the Deputy does not mind I will remind him when he has half a minute remaining. I do not like to interrupt people when they are speaking but in fairness we have to adhere to the times allocated.

We know how to be brief.

I would like to share my time with Deputies Higgins, Boyd Barrett, Catherine Murphy, Wallace and Pringle.

This is a very sad day for Ireland. The €46 billion that has already been put into the banks, coupled with this €24 billion, gives us a figure of €70 billion, which, conservatively, would eradicate poverty in Ireland forever but, unfortunately, we are putting this money into banks instead.

I say to the Taoiseach that I really hope it works. I am concerned, however, that the proposed approach is not radical enough. The logic is that more money, plus a merger of AIB and EBS, plus some deleveraging, will restore market confidence, get money flowing and lead to a healthy banking system. I hope it works but it is difficult to see how the stress tests will be accepted by the markets. The previous stress tests have eroded market confidence considerably as they were widely perceived to be a political exercise and far off the mark. Similarly, we now know that several of the worst case conditions used for the modelling for the stress tests have already been met, which is a matter for concern.

It is also difficult to see how the proposed restructuring will fix the problem as it does not address the underlying structural issues. They are that the banks have the same managers; they are operating in the same stressed market; they have huge liabilities which this proposed restructuring will not change; they have a diminishing asset base which this will not change; we now have huge moral hazard because the bankers know they can do practically anything and we, the people of Ireland, will bail them out; and we have a diminished ability on the part of the Irish people to continue to bail them out because of our increasing national debt.

I offer two policy approaches to the Taoiseach. The first is to consider a large scale debt for equity swap with the bondholders. This would have several advantages. First, it would clear up the balance sheets of the banks, which would allow them begin lending again, which is the whole point of this exercise. Second, it would ensure that the people who invested in the banks, that is, the bondholders, took responsibility for their own investments and they would now own the banks in which they had invested. Third, it would bring new financial sector expertise and discipline to bear on the Irish banks, which should improve their performance, which the Minister referenced as one of the things he would try to do through the new governance structures.

The second policy approach I suggest is that it is all right for banks to fail. We live in a market economy and in that system businesses which behave recklessly or which are unlucky, which is the case for many failed businesses throughout the country which cannot get capital from the banking system, are allowed to fail. The same principle is meant to apply to the banks. Banks are not above the markets. They are not sacred. They are simply businesses which buy and sell money and if they behave as they did, they should be allowed to fail.

Thank you, Deputy.

In the United States between 2008 and 2010 322 banks failed. I will finish on citing something Mervyn King, Governor of the Bank of England, said only four weeks ago.

The Deputy is taking other Members' time.

I will finish on this point. Mervyn King said:

The objective of supervision is to recognise that banks will fail. Our role is not to stop them failing. Our job is to make sure that if they fail because of management, then they do not contaminate the rest of the financial or economic sector, but they are allowed to fail.

I would urge the Taoiseach to consider those two approaches as fundamental radical reforms of the banking sector.

The Minister for Finance made the claim today that what he has announced is a radical restructuring of Irish banking. In fact, fundamentally, nothing has changed. To recap, major European banks speculated widely in Irish property to make massive and quick profits on the backs of a generation of young working people, forced to pay astronomical prices for the basic human right of a home, chained to 30 to 40-year mortgages at horrific levels and as the appetite for private, corporate profit grew, the recklessness grew, leading to the inevitable crash and the disastrous consequences for the Irish economy.

We had a Fine Fáil-Green Party Government that then decided, in association with the economic and political establishment of the European Union, that the Irish working class, in its widest sense, middle income, low income, private and public sector workers, the unemployed and the poor, should pay for this crisis to ensure that the sharks in the financial markets who caused it would not have to pay.

The former Fianna Fáil Minister when he stood up here today should have begun his contribution with an abject apology for the culpability of his party in first blowing up the bubble of greed and then saddling the Irish people with its cost, but the Fine Gael and Labour Parties arrived today with a continuation of the Fianna Fáil policy to the letter, to continue, in other words, to ensure that the economic lifeblood of our people will continue to be transfused to rescue the European gamblers from their bad debts.

The Minister for Finance said a week ago that the debt might be unsustainable as far as this country was concerned. We heard not a word today about what this new massive infusion will do to the national debt. In fact, it will be unsustainable and by savaging the living standards of working people with draconian cuts, it will ensure an economy bouncing along the bottom, thus, making the debt unsustainable but the Government has capitulated utterly to the financial markets.

Where is the fighting talk of the Labour Party today? It is only six weeks ago that it was firing salvo after salvo in the direction of Frankfurt and the European Central Bank.

Today we have an abject and shameful capitulation without an excuse or a word of apology. The giant casinos that are the financial markets in Europe have won again as a supposedly democratic Irish Government bends the knee in submission to the faceless, unelected and unaccountable boardrooms of those markets. We should not pay a cent for the bad gambling debts of the speculators. The financial system in Ireland and Europe needs to be remade because the Greek working class, the Portuguese working class, the Spanish working class and working people throughout Europe are equally being held hostage by the same markets and gambling casinos. Financial institutions across Europe need to be remade in public ownership so that they can make major investments in infrastructure, the recovery of our natural resources and other economic activities that can create tens of thousands of jobs, remake our economy and fund our services.

Last February, the current Minister for Finance rightly stated that it was neither morally right nor economically sustainable for taxpayers to be asked to beggar themselves to make massive profits for speculators. This is the moment in which the Government betrayed the aspirations of the people who voted for it. Precisely that which the Minister said was unsustainable and morally wrong he now intends to do at the behest of the IMF and the EU. He will continue the bailout of bankers and speculators and at the same time beggar ordinary workers, the poor and the vulnerable. We are going to rob the National Pension Reserve Fund of money that could be used for jobs programmes and we are going to sink into an unsustainable morass of debt that will enslave our society for years to come.

We were told these actions, unjust as they may be, would avoid the nationalisation of the banking system and get credit flowing to the economy. It has achieved neither objective, however, and we now own the zombie banks and the economy is starved of credit even though billions of euro are flowing into the coffers of the speculators and bondholders who helped to create this crisis in the first place.

The plan for Irish Life & Permanent just about sums up the affair. We will pay €4.3 billion for the zombie part of that institution while selling off the profitable divisions which made €160 million last year. This is not a bailout; it is collusion between the EU, the IMF, the previous Government and, tragically, the current Government to asset strip the country under cover of the economic crisis. It is a burial rather than a bailout of our economy and society. We have almost gone beyond the point where it is worthwhile to appeal to the Taoiseach to stop the madness but I will make a last appeal to him to stop the bailout of bankers and bondholders and the immiseration of the people.

The people will have to take matters into their own hands. We should do what the people of Iceland did when their Government refused to listen to them and attempted to implement measures such as the Minister has just announced. We need to take to the streets to stop the madness of this bank bailout. I appeal to people who are angry at the thought that further billions of euro will be used to bail out the bankers and bondholders to take to the streets at 6 p.m. next Wednesday to protest outside these Houses when the Technical Group puts down a motion calling for a referendum on the madness of this bank bailout and the IMF deal. People power will be required if we are to stop this insanity.

I acknowledge that the Government inherited this problem but the key issue is finding a way to deal with it. Unfortunately, all I see today is more of the same. We have been told by several Ministers that the country is in receivership but if that is the case we should restructure what we pay out of the public purse. It is immoral that the public should be asked to put another €24 billion into banks that have clearly failed. When added to the €46 billion already put into the banks, the figure comes to €70 billion but that is not even the bottom line because we will be dealing with Irish Nationwide Building Society in May.

This is the fifth time we have been given a figure but the question is not whether this is the final one but why should the taxpayers carry this liability at all. We have been told that allowing banks to fail would be catastrophic, even though banks fail all the time. The shocks were felt around the world when Lehman Brothers failed but the American economy is recovering. We are bailing out the banks at the expense of rebuilding our economy.

The Minister used nice, soft words when he told us a capital injection would be needed. The banks are to be reduced in size, which means the money will not be repaid. It was obvious, even from outside, that we were having a plain vanilla property boom but the German and French banks continued to pour out the money that fuelled it. The only reference to burden sharing in the Minister's statement was on subordinated debt. That is completely unacceptable. We are constantly being told about our EU partners but it does not feel like a partnership. Not only are we paying back the debt that banks offered in the full knowledge that investments fall as well as rise but we are also being criticised for complaining about it.

If 29 September 2008 was a black day, today will be another black day if we insist on pumping a further €24 billion of taxpayers' money into these banks. I join the previous speaker in appealing to the Taoiseach to stop this recipe for this disaster.

There is little more to say. This country is in a bad place. I have been dealing with four banks since September 2007 and it has not been easy. One common characteristic over that three and a half years was that they told lies. At one stage, the director of one of our banks announced he would prefer to die than accept recapitalisation. Every time they were given money, we were told they would start lending. Over the past three years, we have changed from being able to borrow millions of euro to finding it impossible to borrow €10,000. The banks have been closed.

We are rescuing useless, dead banks that have told lies and have been of no benefit to the people of this State. The speculators who invested in them have invested in companies which run their operations in a bad fashion. If anyone invests in a business that is run in a bad fashion, he or she should end up paying the price. If the money men of Europe were dull enough to give so much money to the Irish banks, they should pay the price for it. If the ECB wants us to keep these useless banks afloat so that it can sort out the problems in Europe, it has to foot the bill. We can foot the bill for the money we borrow to run this State, and there will be plenty of that anyway, but we should not foot the bill to satisfy the ECB, the banks of Europe and the money men in the markets. We have had enough of neoliberalism and its doctrine of letting the markets call the shots and hands off for the State. This is crazy. If my business goes down, I do not want anyone to bail me out, and the banks should not be bailed out either. Many Irish companies are going out of business and it is not because they ran their businesses badly, but because they are victims of a banking crisis. The banks will stay in business even though they have been a disaster from an organisational point of view.

The Minister, Deputy Noonan, said that 30 September 2008 was the blackest day in our country's history since the Civil War. Unfortunately, there have been many days since then to compete with it, and today will probably go down as one of those days. It was with a sense of déjà vu that I listened to his contribution. I see now that Fine Gael and the Labour Party have morphed into Fianna Fáil. We could just swap the sides over and we would hear the same story.

The Minister says he will break the dependence of the banks on the State, but I fear the banks will break the State. This is happening and will take place very quickly. After pumping €70 billion into zombie banks, the best we can hope for is that in two years' time banks will begin lending again. That is a sad reflection of where we are. In two years, countless small businesses will go to the wall because of their inability to obtain finance. In two years, thousands of families will be evicted because they are out of work and cannot pay their mortgages, and the Government will do nothing to assist them. We must wait until 2013 to have a banking system that might work.

The Minister stated that there comes a point at which the debt may become unsustainable. We arrived at that point at 4.45 p.m. today.

I thank all the Deputies for their contributions. It was an interesting debate. I am sorry it had to be so late on a Thursday evening, when people are anxious to get away, but the announcements could not be made by the Central Bank until after the markets had closed.

That is what delayed matters until this hour of the evening.

The gods of the markets.

Deputy Brian Lenihan was correct in saying that the stress tests were based on conservative assumptions. The BlackRock consultancy group, from the United States, which is the lead consultant in this regard, took a conservative approach, assuming, for example, a further 30% drop in property values over the test period, which is beyond what most domestic economists would say. They did so because Ireland has little credibility left across Europe and internationally and the last set of stress tests were blown out of the water so quickly that a more rigorous approach was required on this occasion, because, if a soft approach was taken, nobody would believe the results. These stress tests are credible. They might be overcooked or overdone, but there is provision in law, if a bank is over-capitalised, for access to the High Court to recover the extra funding. In addition, there is a specific provision in the EU-IMF bail-out that if banks turn out over time to be over-capitalised, they must be reduced to their proper capital level.

There is merit in Deputy Lenihan's criticism that the strategy seems to be to stuff the banks with capital so that the markets are calmed again. Some credibility is restored to the Irish banking system, the State and those who represent it abroad. That is one of the big problems we have found as an incoming Government — there is a credibility problem because of what has happened over the past three or four years. I am not blaming Deputy Lenihan for that, but there were other members of the Cabinet in which he sat whom I do blame. It will take a while to fix these credibility issues.

I remind Deputy Lenihan that this Government inherited the stress tests. BlackRock and the associated consultancy firms were not engaged by us but by the Central Bank in consultation with the Deputy and the outgoing Government. All the arrangements were made by them. If the Deputy is critical, he is critical of consultants in whose appointment he participated, at least at an advisory level.

Our approach is to take the situation as we find it. Rather than curse the darkness, we are doing something about it. We are saying that this country cannot work without a proper banking system. At present, the banks are not working because they have debt-to-deposit ratios that are far too large, and the overhang of impaired assets, many of which have nothing to do with the Irish economy, is forcing a situation in which bank managements spend their time, as far as I can see, concentrating on survival and on maintaining the balance sheets. There is very little headroom in the banking system to deliver credit to the economy, and without credit flowing, it is not possible to restore the economy, get it growing or provide jobs.

There is much detail in the plan I outlined this evening. It is hard, but we will provide full briefing documents with detailed explanations to everybody in the House as quickly as possible.

What about the national debt and the interest payments?

However, there is one thing that should be said in the House. We will deleverage down to a point at which there will be headroom for further borrowing. Such a proportion of bank borrowing at present is dedicated to the construction and development industry that it crowds out all other lending. If we can do that, we will create the headroom. What is built into the model is sufficient headroom to provide €12 billion of credit each year for the next three years. This is more than the Central Bank estimates the economy will require on very optimistic projections. As Deputies know — Deputy Wallace and others will know in particular — if credit is available, it creates its own demand. Thus, when one is estimating credit, if one provides a quantum and the business community knows it is available, the demand will be driven up by the very fact of its availability.

The significant message is that the announcements this evening are about reconstructing an Irish banking system built around Bank of Ireland, AIB and EBS.

Why are we selling the profitable parts?

There are not any profitable banks.

In Irish Life & Permanent.

That is the problem. There are no profitable banks.

It has a profit of €160 million.

The most impaired banking unit around is Irish Life & Permanent. If one considers——

Its pensions division is profitable.

Deputy, please.

If one considers the situation in Irish Life & Permanent, one will see its debt-to-deposit ratio is about 280%. How can one lend 2.8 times more than one is taking in on deposits and have a normal banking system? The Deputy is right that the life division is prosperous. The reason we are doing this is that the life division is backing up an impaired banking system, and if that continues even for a short time more, it will be contaminated by the banking system. We want to cut it loose and put it on the market as a good, profitable insurance company that provides pensions. In this way we preserve the pensions and policies that are associated with Irish Life & Permanent. However, it must be severed from the impaired bank, which is dragging it down. That is the position with regard to Irish Life & Permanent.

The Deputies can object and be critical of the Government, but the fact is that the European Central Bank is keeping banking going in this country and there is no profitable bank.

What about the national debt?

About €200 billion in liquidity is being provided by the ECB and the Central Bank of Ireland to keep day-to-day activity going in this country. We have to take this action because we need a banking system. No Opposition Member would thank us if he or she went to his or her local bank machine tomorrow morning and it did not work and no money was available.

That is what the Government parties said.

The liquidity has to keep flowing. The banks are being restructured. I am confident we will drive this restructuring forward and that we will again have a banking system based around the two pillars I suggested with some competition from foreign banks such as Ulster Bank. That side will build up and we can restore credit to the market again. Credit is the lifeblood of business and when we restore credit——

What about the national debt and the interest payments on that?

——there is a possibility that it will grow again. We will get to the national debt. We will have other days to talk about it. Of course there are servicing cost implications if one puts capital into banks. However, the Deputy will recall that of the €24 billion, between €5 billion and €6 billion is available through discounting subordinated debt. He will also recall that €3 billion of the €24 billion is going in by way of contingency and that my predecessor failed to meet a deadline during the election campaign to provide capital to the banks but, as a compromise and at the request of the Central Bank, he put €7 billion of the €10 billion on deposit in the banking system. That €7 billion has gone in already and it merely has to be moved from one side of the accounts to the other, from deposit to recapitalisation.

The contingency money amounting to €35 billion was put into the bailout fund and divided evenly at €17.5 billion and €17.5 billion. One of these tranches is coming from the National Pensions Reserve Fund and one of the aspects of the pension fund paying money to recapitalise the banks, as intended under the bailout, is there is no interest charge on it. When one examines the detail, I do not say we are getting a free run. There is no such thing as a free lunch——

There is if one is a banker.

——but the sum of the figures is not as bad as it appears in the first instance. I am not trying to make a good story out of it. We are in a very dire position, but my perception is that it is sustainable if we can get the economy growing and we can do that if we have a proper banking system. That is the purpose of today.

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