I thank the Chair and the committee for the opportunity to meet them to discuss Anglo Irish Bank and the rating agencies. As the committee will be aware, following my statement on the future of Anglo Irish Bank earlier this month, the Government's strategy for the restructuring and resolution of the bank has been confirmed and the implementation of the strategy is now under way.
After the submission of the bank's restructuring plan to the European Commission at the end of May, intensive work was undertaken by the National Treasury Management Agency, the Central Bank, the Financial Regulator, my financial advisers, N. M. Rothschild, and my Department during the summer months on an examination of the bank's plan and the optimal design of a bank split. The national authorities' ongoing analysis was strongly informed and guided by the parallel assessment of the European Commission of the plan submitted by the bank. It is important to make the point that as the summer progressed, the financial market environment deteriorated significantly, especially in regard to market and investor perceptions of the peripheral eurozone members, including Greece, Portugal, Spain and Ireland. That was notwithstanding the positive outcome of the Committee of European Banking Supervisors, CEBS, stress tests on the two main Irish banks and the fact that our budgetary targets remained on course.
A further factor was higher discounts on the Anglo Irish Bank loans transferred to the National Asset Management Agency. These were higher than anticipated in the bank's plan. The higher discounts on the transfers led to a need for a fresh estimate of the capital needs of the bank and an application was made to the European Commission to allow further aid to be given, which was approved in August. The market reaction to this development and, in particular, the sharp spike in Ireland's bond deals highlighted the need for clarity and finality on the future and final cost of solving the problems at the bank.
At the end of last month the authorities recommended to me an approach to splitting the bank which was endorsed by the Government soon afterwards and which I announced on 8 September. The revised plan announced on 8 September retains the concept of splitting the bank into two entities — an asset recovery bank which will take all loans not transferring to NAMA and a funding bank to fund the asset recovery bank. The asset recovery bank will work out these assets over time. It will have a specific focus on maximising the return to the taxpayer from the recovery of the assets in the work-out period. The funding bank will house the deposits of the bank and hold its NAMA bonds. It will have as its focus the raising of funds to help fund the asset recovery bank. The relevant State agencies are in close collaboration with the bank, finalising a revised restructuring plan which it is intended to submit to the European Commission in early October.
In addition, I have asked the Central Bank to determine the appropriate level of capital needed for both entities. I am confident that the results of this work will be announced by early October. This will provide clarity on the potential cost to the State, even in a very stressed future banking scenario, to reassure the public and the markets that, as the Governor of the Central Bank has made clear on a number of occasions, the cost of restructuring the bank, while huge, is very manageable in a budgetary context through the promissory note structure.
Turning to the credit rating agencies, I want to say a few words about the new European Union-wide regulatory framework being put in place for these bodies. The EU Delarosière report and the Regling-Watson reports here in Ireland highlighted the significant failures by international credit review agencies as a major contributory cause of the financial crisis. EU Finance Ministers have responded to the deficiencies identified in such agencies by adopting a legislative proposal to strengthen the rules on credit rating agencies and their supervision at EU level. This is considered a priority to restore confidence and the proper functioning of the financial sector. Under new EU rules which will become fully applicable in December, a common regulatory regime for the issuance of credit ratings is being established. Under these rules, all credit rating agencies such as Moody's, Fitch and Standard & Poor's which would like their credit ratings to be used in the European Union need to apply for registration. They will also need to be more transparent, as they will need to disclose the methodology and internal models and key rating assumptions they use in making their ratings.
I welcome the important steps being taken at EU level to ensure the weaknesses identified in the conduct of credit rating agencies which have such an important role to play in influencing investments decisions are addressed. I understand a number of further proposals to strengthen the regulatory framework for such agencies in the European Union are under consideration by the Commission and I look forward to its further proposals in due course. The very significant measures taken by the Government since 2008 to address the significant imbalances that have emerged in the fiscal position have been influential in maintaining international and investor confidence in Ireland's capacity to continue to meet its obligations. Clearly we are engaged in a challenging budgetary adjustment programme which has to be implemented over several years.
Securing fiscal sustainability remains the Government's key objective to underpin the realisation of the economy's growth potential. I have made it clear that the Government will continue to take the steps required to ensure that Ireland maintains the confidence of international markets.
In this context, yesterday's Irish Government bond auction by the NTMA, in which the agency raised €1.5 billion in its ninth bond auction of the year, confirms Ireland's continued capacity to meet its funding requirements. Notwithstanding difficult market conditions at present, the total bids received for the two bonds issued amounted to almost €5.5 billion or 3.6 times the maximum amount on offer. With this auction Ireland has now achieved its target of raising €20 billion from the bond markets in 2010. In addition, allowing for cash balances, retail debt and the long-term funding carried over from last year, the Exchequer is now fully funded through the first half of 2011.
It is particularly important for the committee to note that the weighted average cost of funds raised in the bond market in 2010, including yesterday's auction, is 4.7%, which is the same as the average funding cost achieved in 2009 overall. This demonstrates that the significant decisions that have been taken in seeking to restore the Government's budget and the Irish banking system to health continue to be regarded as the right ones, notwithstanding the financial turbulence we are continuing to experience. The message is clear: we must hold our nerve; we must stay on the course of the path we have embarked upon. We have the ability and the support of the markets to navigate ourselves out of our current difficulties to restore the economy to a sustainable path for economic growth and job creation.
I thank the Chairman and members of the committee and I welcome any questions or comments committee members may have on these issues.
Chairman: Thank you, Minister. I now call Deputy O’Donnell.
