Adjournment Debate

Banks Recapitalisation

Deputy Peter Mathews

Today is an important day for this country, on which it is being represented by its Taoiseach in Brussels. He is one of the Heads of State or Government of 27 nations who convene in Brussels to address the European euro, banking and fiscal crises. The severe symptoms presented themselves in the five countries known as the PIIGS, namely, Portugal, Ireland, Italy, Greece and Spain. Ireland completed its quarterly review under the EU-IMF support programme only last week and received good marks across all the boxes. Ireland has reached the targets of fiscal correction and reform to the extent this now is under way. Earlier today, the Dáil completed the Second Stage debate on the Central Bank and Credit Institutions (Resolution) (No. 2) Bill, which will now proceed to Committee Stage. This shows that discipline is returning to Ireland's fiscal affairs following the change of government.

As part of the support programme, Ireland faces the imminent €19 billion recapitalisation of the banks. Because a critical point has been reached in respect of Europe's addressing European problems with a European solution, it may be timely to pause, reflect and consider the implications of the €19 billion recapitalisation as laid out in the EU-IMF-ECB agreement. When that agreement was signed in November 2010, there was an extremely poor understanding of the amount of losses that had occurred in the Irish banking system. It was only as recently as the end of March, following completion of the prudential capital assessment review, that the enormity and scale of the losses was determined at approximately €70 billion. Some people, including myself when I put on my accountancy and banking and finance hats, consider that figure possibly to be on the short side. The reason this is important in the context of the €19 billion recapitalisation concerns the funding of our banking system and our banks, which are being coalesced into two pillar banks, leaving aside the banks for resolution, namely, Irish Nationwide Building Society and Anglo Irish Bank. It is because the original six banks, now merging into two, owe obligations of approximately €150 billion to the ECB and the Central Bank of Ireland, which is proxy for the ECB. Included in the aforementioned €150 billion is approximately €70 billion that has its provenance from the redemption in full of senior bondholders up the end of last year, during the course of 12 months when there had not been an admission or a recognition of the scale of loan losses in the banking system. Consequently, by default or by a lack of proper understanding or perhaps by design but as a matter of fact, €70 billion within the €150 billion funding the banks through the ECB derived from redemption of senior bondholders.

Capitalisation of a banking system can happen by direct capital injection, of which, within the €19 billion, €10 billion will come from the National Pensions Reserve Fund. However, it may be timely to reconsider whether it might be better to present an insistent and persistent case to the ECB that a write-down of debt owed to the ECB could be negotiated.

This is in addition to what we have all heard about an interest rate reduction on the support funds being advanced by the eurofunds.

Since negotiations with Europe and the ECB are ongoing it would be very important to be able to achieve a change in the capitalisation strategy in order to preserve that €10 billion of cash in the National Pensions Reserve Fund, to be used as a cushion for the fiscal adjustments over the next four years under the relief programme of €50 billion. This would be very important because a creditor write-down of €50 billion from the ECB, €25 billion from the private creditors of bondholders and pro-note holders, could, in turn, be passed on to the customers of banks in the form of households and businesses, which would relieve customers, households and businesses, hugely. This would also create a stimulus to the economy which would get the real economy moving again.

Minister of State at the Department of Arts, Heritage and the Gaeltacht (Deputy Dinny McGinley)

I thank the Deputy for raising this matter. We all recognise his expertise in these matters since he became a Member of the House and before.

In recent months the Department of Finance and the banking unit of the NTMA have been working hard to ensure that our commitments on recapitalising our banks are met by the appropriate deadline which is 31 July 2011. Given that the last day of this month is a Sunday, in practical terms this means having this work completed by Friday next, 29 July 2011.

The House will know that the stress tests announced last March by the Central Bank determined that our banks required another €24 billion of capital to meet their new regulatory requirements. The Government indicated at the time that a significant portion of this amount — at least €5 billion — would come from private sources as result of liability management exercises with junior bondholders.

The Minister for Finance confirms that well in excess of €4 billion of such burden-sharing has been achieved with holders of subordinated bonds and we are well on track to reach the aforementioned target of €5 billion. This leaves a sum of up to €19 billion which must be largely met by the taxpayer. I will update the House on where we stand with regard to this investment.

Allied Irish Banks merged with the EBS on Friday, 1 July 2011 and the recapitalisation plan for the combined entity was announced the same day. The combined capital requirements of the two institutions are €14.8 billion. Under the plan, the National Pensions Reserve Fund Commission will inject €5 billion in equity capital at a price of 1 cent per share, bringing its shareholding to 99.8%. The State will also inject €1.6 billion in contingent capital. Following the imminent completion of burden-sharing with subordinated debt-holders, which is expected to generate a total capital gain in the region of €2 billion, the remaining capital requirements will be met by way of a capital contribution. An extraordinary general meeting to approve the capital raising is scheduled for 26 July and the funds are expected to be injected shortly afterwards.

The recapitalisation plan for Irish Life & Permanent was put forward by the board to shareholders of the institution yesterday and was rejected. Under the plan, the Minister for Finance was to subscribe for €2.3 billion of equity at a price of 6.3 cent which was a 10% discount to the market price on 23 June. This would have given the State a shareholding of 99.2%. The Minister was also to contribute contingent capital of €0.4 billion. The balance of the bank's PCAR requirement was to be made up of €200 million from internal resources, and an estimated €1.1 billion from the combined benefits of the bank's liability management exercises and the disposal of Irish Life. Following the rejection of these proposals by shareholders, the Minister for Finance intends to review the options open to him in light of our imminent obligations both to the Central Bank and the external partners.

In the case of Bank of Ireland, of its €4.2 billion capital requirement, just under €2 billion has to date been achieved through a liability management exercise. A rights issue is currently under way to raise circa €1.9 billion and this is fully underwritten by the NPRFC at a price of 10 cent per share. The balance of the PCAR requirement will be made up of contingent capital of €l billion, for which the Minister for Finance will subscribe and further burden-sharing measures linked to the remaining junior debt outstanding. Depending on how the take-up goes in the rights issue and assuming no other third party takes up the shares in the bank, the State's shareholding will end up anywhere between 29.2% and 69.7% in the bank compared to 36% today.

The House will be aware that the state of bank balance sheets is not just a topical subject in this jurisdiction. The issue has been debated extensively across Europe and indeed beyond. The recently announced European stress tests were specifically designed to address concerns that European banks were under-capitalised in light of current economic conditions and market circumstances. In the end, only eight banks were found to have a capital need under the test with the combined shortfall identified as being €2.5 billion. However, it is acknowledged that had it not been for the €50 billion in equity capital that was raised by European banks earlier this year, the tests would have identified a far bigger requirement. Our banks passed the EBA stress test as we had moved early to analyse the banks' books in great detail, using a level of granularity far beyond what was involved in the European tests.

The EBA methodology included a number of differences relative to that applied in the recent PCAR exercise. The PCAR was tailored specifically to the Irish banks' need to reduce their reliance on external funding over the coming three years, while the EU-wide test looks at the resilience of the largest European banks against a set of more widely applicable adverse circumstances.

The EBA stress test set a 5% core tier 1 capital requirement in the stress scenario, while a level of 6% was applied in PCAR. The PCAR was applied on a three year horizon from 2011-2013 compared to the two year 2011-2012 timeline applied by the EBA. There were also significant differences in the application of future changes in the balance sheet; application of funding constraints and treatment of sovereign and bank credit losses. Loan losses independently forecast by BlackRock Solutions as part of the PCAR were also applied to Irish banks participating in the EU-wide stress test.

In summary once our recapitalisation and indeed restructuring commitments are met by amounts which are clearly within the envelope of the external authorities funding programme, Irish banks will be among the best capitalised banks in Europe and in a far stronger position to return to the markets for funding and to meet the needs of the Irish economy.

Local Authority Charges

Deputy Robert Troy

I raise this issue which is very important to ratepayers the length and breadth of the country and not just to those of County Westmeath or County Longford. As recently as a number of weeks ago, a group has formed called, Employers for Affordable Rates. This group is initiating a campaign to lobby the Government to introduce new measures. By the time the House returns in September, the debate will have started at a local level when it comes to the setting of the county council annual rates. There is a misconception that a reduction of 1% to 4% in the county council rates would benefit businesses but this will not benefit small businesses. The only people to benefit will be large multinational companies.

The method of funding for local authorities needs to be examined. The business community requires a more fair and equitable system. We all know that local authorities are obliged by law to levy rates on commercial properties which have been entered in the valuation list by the independent Commissioner of Valuation. At present this system is draconian, inequitable and unfair. The valuation list used for almost all of Ireland is based on the Griffith valuation carried out in the 19th century. Maintaining these lists requires the Valuation Office to determine valuations by reference to the values of comparable properties on the same valuation list. The result is a list of valuations that bears no resemblance to modern valuation levels and contains many anomalies.

The Valuation Office is currently revaluing all commercial properties in Ireland based on the rental value in 2005. We all know that today's economic circumstances are substantially different from those of 2005. The figures are totally out of date and the office has only revalued three rating authorities out of a total of 88. Even if it was revaluing to a realistic figure, how long would it take for it to get through the remaining 85 rating authorities?

We are in an awful situation. Businesses are on the brink and if they are not closing they are laying off staff in order just to pay the rates. Even in 2009 local authorities were only able to collect 80% of the rates. Businesses are reducing staff to pay rates which means more people are going on the live register. For our economic recovery we need more competitive businesses to create jobs. When we return after the summer recess the Government should introduce an amendment to the Valuation Act so that businesses that are struggling can appeal the level of rates they are being charged. At the moment the local authority has no facility to negotiate with the ratepayer so it is all or nothing. If a business goes out of business, it does not need to pay any rates. However, it might just need a helping hand to reduce the rates somewhat in order to stay in business.

I am disappointed the Minister for the Environment, Community and Local Government is not here for this debate. We also need to set up a review group to consider how we fund local authorities. It is unfair that the entire burden is placed on businesses. We need more sustainable businesses with more sustainable jobs and more people paying into the Exchequer and fewer people on the dole. In addition, if the high streets are full of cars even the local authorities are benefiting from car parking charges so it is a win-win situation. This is a very important issue for the business community and everybody benefits when we have job creation.

The Minister for the Environment, Community and Local Government needs to consider how we can amend the present system. I have spoken to a number of businesspeople in my constituency who have suggestions to make. We could charge based on a company's turnover and require the company to submit its VAT returns on a bimonthly basis. People are willing to give their advice and the benefit of their expertise. We know a charge needs to be paid but we need to ensure it is fairer and more equitable.

This is the last Adjournment Debate, so we are entering the history books.

An Leas-Cheann Comhairle

The Deputy can take a bow.

Deputy Robert Troy

I am here along with Deputies Mathews and Durkan — two new Deputies and one long-standing Member.

Deputy Dinny McGinley

We might get a footnote in history yet.

I thank the Deputy for raising this matter, which is of interest to so many businesses and commercial interests in every part of the country. Local authorities are under a statutory obligation to levy rates on any property used for commercial purposes in accordance with the details entered in the valuation lists prepared by the independent Commissioner of Valuation under the Valuation Act 2001. The levying and collection of rates are matters for each individual local authority. The annual rate on valuation which is applied to the valuation of each property, determined by the Valuation Office, to obtain the amount payable in rates, is decided by the elected members of each local authority in the annual budget and its determination is a reserved function of a local authority. Rates income is a very important contribution to the cost of services provided by local authorities such as roads, water, public lighting, development control, parks and open spaces.

The factors that influence the decision on the annual rate on valuation include the level of services to be provided by the local authority and the income available to fund these services. The elected members therefore adopt the annual rate on valuation they consider necessary in order to provide the range of services for the communities, including businesses, in their area. In this regard, all rates collected locally are spent exclusively on providing services within that area. This is local democracy in action.

The Government is acutely aware of the pressures on small and medium-sized businesses and the challenging economic environment in which many property and business owners are operating at the present time. Local authorities have responded positively to requests to them by the Minister for the Environment, Community and Local Government to exercise restraint in setting commercial rates to support competitiveness in the economy and to protect the interests of communities. The annual rates on valuation have been reduced by an average of 0.6% in 2010 and by a similar level in 2011.

It is recognised that these are difficult economic times for many businesses and the Minister for the Environment, Community and Local Government, Deputy Hogan, will continue to keep the approach to rates by local authorities under active review. The Commissioner of Valuation, who has sole responsibility for all valuation matters, is conducting a programme of revaluation of all commercial and industrial properties throughout the State. To date revaluations have been completed in the South Dublin, Fingal and Dún Laoghaire-Rathdown County Council areas. A revaluation is currently under way in the Dublin City Council area. It is intended to roll out the programme to further local authority areas later this year.

Following completion of the revaluation programme, there will be a much closer and uniform relationship between rental values of property and their commercial rates liability and this relationship will thereafter be maintained by means of recurring revaluations provided for in the Valuation Act. In this way, the revaluation process will lead to more consistent and up-to-date valuations for rating purposes and will assist in making the rating system fairer and equitable for ratepayers. I understand that the Commissioner of Valuation is actively reviewing options which might facilitate the delivery of the revaluation programme within a shorter timeframe.

Proposed Legislation

Deputy Bernard J. Durkan

I thank the Ceann Comhairle for allowing me the opportunity to raise this issue. I also thank the Minister of State for his attendance to reply. A firm in my constituency, Simmonstown Stud, Celbridge, County Kildare, owing to a change in operational procedures found it necessary to make a number of employees redundant. These employees were accommodated on site in what are known as tied houses. In other words, on foot of their terms of employment they had a house for the duration of their employment. We fully respect the right of the employer to change his or her operational procedures. There is no dispute as to whether the employees in this situation have to leave; we know they have to leave and find alternative accommodation. The problem lies with the length of time it takes to find alternative accommodation in the present climate.

A group of people comprising approximately half a dozen families who have lived and in some cases given up to 20 years service to their employer now find themselves, having been made redundant, also homeless. In different times it would have been possible to rehouse them through the local authority. However, Kildare County Council has 6,500 families on its housing list and there is no possibility of them being rehoused quickly. It must be done through a process of negotiation between the housing authority and potential tenants. Problematically, the agent for the employer is unwilling to listen to reason and, according to the tenants, is proceeding to hassle and intimidate them into clearing out of the houses and giving the firm vacant possession. While it is undoubtedly entitled to vacant possession, the manner in which this is being achieved leaves a great deal to be desired. In these enlightened times when we are more conscious than ever of the need to be fair to everyone and of the rights and wrongs of events, everyone, including those in a position to do so, should recognise that individuals not in such advantageous positions should be accommodated. We should also recognise the vulnerability of the families concerned and give them reasonable time to find alternative accommodation.

The theory is that, when someone is made redundant, he or she will receive a redundancy payment, as will be the case in this instance. The theory is also that people should be able to use their redundancy payments to house themselves. However, this stretches the imagination quite a bit. As we all know, it is not possible to do so, even with today's lower house prices. If necessary, the law should be changed to ensure that, in circumstances such as the one I have outlined, sufficient time is given to enable negotiations to take place and allow people to acquire alternative housing. Having given up to a quarter of a century of service to a particular employer in many cases, the people concerned should not need to use their redundancy payments to rent accommodation in an emergency.

These were the conditions of the time and, as the Leas-Cheann Comhairle and I know well, operating under such guidelines was beneficial to all concerned. There have been many such cases. In most, both sides are willing to accommodate each other. In this case, the tenants, for want of a better description, are willing to accommodate their former employer by vacating the properties as quickly as possible. In such circumstances, there must be recognition of the fact that people need a little extra time, particularly in the current economic climate. If the legislation does not allow for this, it should be changed.

Deputy Dinny McGinley

I am taking this Adjournment matter on behalf of my colleague, the Minister for Jobs, Enterprise and Innovation, and thank the Deputy for raising it. He has asked that the Government consider the need to amend or introduce legislation to ensure employees who have been provided with accommodation by their employers as part of their terms and conditions are given adequate time to secure alternative accommodation on their retirement, dismissal or redundancy, with particular reference to the latter and the need to prevent homelessness. In proposing such a legislative approach he has referred to an individual case in which employees who have resided for up to 20 years in accommodation provided on site by their employer on foot of a caretaker agreement have been unable to find alternative housing accommodation in the time since being made redundant. I am not aware of the specific details of the case, but it is clearly a matter of concern and I can appreciate the difficulties that might be caused for persons who find themselves in such an unfortunate position.

In effect, the Deputy is suggesting there might be a need to amend or introduce legislation to provide for an appropriate adjustment period for such persons. At issue, for example, could be an extension of the current minimum notice period to allow for a period of further adjustment by employees post-employment. The Deputy will be aware that dedicated legislation providing for minimum notice entitlements is in place, namely, the Minimum Notice and Terms of Employment Acts 1973 to 2001. The terms of the legislation specifically provide for a range of minimum notice periods to apply, the length of which relates to the period of employment of the employee concerned. The basic entitlement is a minimum of one week's notice. Persons with more than 15 years employment experience are entitled to eight weeks minimum notice. The Acts do not prevent an employee from waiving his or her right to notice or accepting payment in lieu of notice. On the basis that the employees to whom the Deputy refers were in employment for some 20 years, they would be entitled to this minimum notice period. If their contract of employment provided for longer periods of notice than the statutory minimum period, the longer notice periods would apply under contract law. There is nothing to prevent an employer and an employee from agreeing to include accommodation terms in an employment contract. For statutory entitlements, employees can vindicate their rights through the normal dispute settlement bodies. For other non-statutory contractual terms in general, where disputes arise, they may need to be pursued under contract law through the courts.

If it is the contention of the Deputy that such minimum notice periods provided for in extant legislation should be increased to allow a sufficient adjustment period for persons to secure alternative accommodation, where there is a caretaker agreement, post-employment, I cannot support such an approach. In the first instance, it would not be feasible to apply such additional obligations on employers in these challenging economic times. To do so would not only have a detrimental impact on individual employers, it could also affect sectors of the economy in such a way as to be detrimental to maintaining and growing employment. It would have significant and wide-ranging implications across the economy generally and potentially for a range of employers and employments. In current circumstances where businesses are struggling to remain competitive and contain costs, we must maintain a strong degree of balance and cannot impose on employers additional costs associated with new obligations post-employment where persons are retired, dismissed or redundant and where the normal contracts of employment have been terminated. I note that the Deputy has indicated that the accommodation provided in this specific case was provided by the previous employer on foot of a caretaker agreement for persons who are now redundant and where there is no longer a contract of employment in place.

Matters concerned with landlord and tenant law are ones for my colleague, the Minister for Justice and Equality. I understand there is in train a reform of such law, with proposals being circulated on these matters.

An Leas-Cheann Comhairle

De bhun ordú an Tí don lá inniu, tá an Dáil ar athló go dtí 2.30 p.m. Dé Chéadaoin, 14 Meán Fómhair. On this historic day which marks the end of Adjournment debates in their current form, pursuant to the order of the House of today, the Dáil stands adjourned until 2.30 p.m. on Wednesday, 14 September. Go mbeirimíd go léir beo go dtí Meán Fómhair.

Dáil Éireann díospóireacht - Thursday, 21 Jul 2011