JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM díospóireacht

European Council Meeting: Discussion

Vice Chairman

This meeting will be presented with a briefing from the Minister for Finance, Deputy Noonan, on the European Council meeting, 21 July 2011. The Minister's opening remarks will be followed by a questions-and-answers session from the spokespersons from Fianna Fáil, Sinn Féin, the Technical Group and then committee members, respectively. Members are reminded to keep it to questions rather than statements as the Minister is stuck for time and the meeting must conclude by 5.30 p.m.

Members are reminded of the long-standing parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

Minister for Finance (Deputy Michael Noonan)

The programme for Government states that the Government would seek to improve the terms of the EU-IMF programme. We did so during the first programme reviews by the troika. Last week, we were also successful in achieving a reduction in the interest rate on the funds we borrow under the programme and in getting more flexibility in the instruments available to the European Financial Stability Facility, EFSF.

This was against a backdrop of financial market confidence in the euro area which has deteriorated significantly over the past 18 months. I made the point to my colleagues in the eurozone at recent meetings that the solution to the crisis required was not only for the member states, including those in programmes, to pursue and deliver appropriate policies to safeguard sustainability but that we also needed a solution to the systemic problems affecting the euro area. While the sovereign debt crisis began in Greece, it quickly morphed into a euro area-wide crisis with both Ireland and Portugal losing access to market-based funding over the past year. The crisis moved into a new phase earlier in the summer when it became apparent that a new financial assistance programme was necessary for Greece and that the participation of the private sector would have to form part of such a programme. One of the main credit rating agencies subsequently downgraded the creditworthiness of Portugal and Ireland on the basis that such private sector involvement operations in Greece would provide a template for similar operations in other programme countries. The spread between interest rates on Spanish and Italian government paper and their German equivalent rose to their highest levels since the introduction of the single currency, threatening the financial stability of the euro area.

Against this background, euro area Heads of State and Government met in Brussels last week to formulate a credible, comprehensive, area-wide policy response to address the growing threat to financial stability in the eurozone. Specifically, Heads of State and Government agreed important policy-measures designed to improve the sustainability of Greece's public debt, to reduce the risk of contagion within the eurozone and to improve the eurozone's crisis management framework.

A new financial assistance programme for Greece will be put in place covering the period to the middle of 2014. This successor programme will address not only liquidity or cash flow issues but also Greece's high burden of public debt. The official sector, comprising the euro area member states and the IMF, will contribute an estimated €109 billion. The gross contribution from the private sector, which is on a voluntary basis, will be approximately €54 billion over the period of the Greek programme to 2014 or approximately €135 billion over the period to 2020. It involves a range of options including debt rollover and debt exchange.

On the basis of discussions with participating financial institutions, the net present value loss for the bondholders over the period to 2020 is around 21%. Crucially, the agreement makes it abundantly clear that private sector involvement is limited to Greece, given its unique and exceptional circumstances. In addition, the pricing of future loans to Greece will be reduced significantly while the maturity of loans will be extended. The Greek authorities have agreed to implement an ambitious fiscal consolidation programme including a privatisation programme amounting to approximately €50 billion, the proceeds of which will be used to retire debt.

The Heads of State and Government also agreed to implement several important structural improvements to the euro area's financial architecture. In particular, the revised pricing and maturity of loans to Greece will apply to all programme countries. In addition, the toolbox of the EFSF is to be expanded to facilitate precautionary assistance, recapitalisation of banks, including in non-programme countries, and secondary market operations in certain circumstances.

This greater flexibility and improved loan terms will help to ring-fence the crisis and limit contagion. The clear and unambiguous text in the communiqué to the effect that burden-sharing with the private sector is confined to Greece is also designed to contain spillover effects.

Agreement was reached to enhance the euro area's economic governance framework. Member states will work with the EU Presidency and the Parliament so that the legislative package on strengthening the Stability and Growth Pact and the new macroeconomic surveillance process can be finalised. In addition, concrete proposals on how to improve working methods and enhance crisis management are to be presented to euro area Heads of State and Government by October.

What was agreed last week is positive and welcome from an Irish and euro area perspective. Addressing the design flaws in the EFSF will contribute, in no small part, to financial stability in the euro area. It has helped reassure markets, which is evident from the fact that interest rates on peripheral government debt fell noticeably subsequent to the announcement. While interest rate spreads remain elevated, the commitment of member states to continue to reduce their deficits and to put their debt-to-GDP ratios on a declining path will have a positive impact over the medium term.

The pricing of EFSF loans to Ireland will be significantly reduced to a rate close to the cost of funds for the EFSF. The precise details are yet to be settled. For the moment, we are working on the basis that this amounts to a reduction of approximately two percentage points in the rate at which we borrow from this facility. I expect the final rate to be close to this but I cannot be exact at this moment.

Moreover, my understanding is that this will apply not only to moneys yet to be drawn down but to future interest payments on existing loans. For illustrative purposes, on the basis that we were to get a two percentage point reduction, that it applies to all future interest payments for loans with an average maturity of 7.5 years and that it applies to full drawdown not only from the EFSF but to the European financial stabilisation mechanism, EFSM, and to all the bilateral loans which have yet to be agreed, the savings could be approximately €900 million per annum in due course. Obviously, if these assumptions change, the savings figure would change too.

This interest rate reduction is in line with our long-held view that the terms and conditions of external financial support should not penalise a country experiencing short-term difficulties. Instead, the terms should be consistent with supporting a country regaining market access. As the troika recently confirmed, Ireland is delivering on its programme and it is important that we get the recognition in terms of reduced interest costs.

Last week's outcome is a positive one in that it reduces the cost of our debt, thereby, lightening the burden on the taxpayer. This will further underpin the sustainability of our debt and boost investor confidence. Ireland also borrows under the EFSM. While it is a matter for all 27 member states to agree, I expect the reduced rate will apply to borrowings from this source also in due course.

Regarding the bilateral loan from the UK, when I spoke with the UK Chancellor of the Exchequer, George Osborne, last Friday, he confirmed a rate reduction on its loan. The chancellor has also offered me much support on the interest rate issue during our various meetings in Brussels. He has consistently argued that the interest rates charged for euro area loans were excessive.

The final part of the interest rate jigsaw relates to the bilateral loans being provided by Sweden and Denmark and the Government will also seek a reduction in these rates.

The Government made no concessions on corporation tax. However, we have indicated our willingness to participate constructively in the ongoing discussions on the common consolidation corporate tax base draft directive. The Government is not opposed to greater co-operation within the European Union on tax policy matters but we favour focusing on targeted solutions to clearly identified barriers to the workings of the internal market. While we are sceptical about many aspects of the CCCTB we are willing to work constructively with the Commission and other member states on the issue, so long as the principle of unanimity is fully respected.

The European Commission has the right of initiation in terms of bringing forward legislative proposals for member states to consider and there is nothing to be gained from refusing to actively engage on the issue. In fact, the opposite is the case. It would be a gross diminution of our responsibilities not to actively and constructively engage on the issue of the CCCTB. Only in that way can we absolutely ensure that all of the arguments that favour our position are brought to the table.

I also believe that Ireland will benefit substantially from the greater flexibility of the EFSF. In particular, the new precautionary arrangements mean that once we continue to meet our requirements, we can continue to borrow from EU official sources if market access is still restricted.

The outcome of last week's summit is a positive step forward but we all know that we have a difficult journey ahead of us if we are to get back to where we want to be. We must still meet our commitments under the EU-IMF programme and, in particular, put our public finances on a sustainable footing. This will not be easy, but it is vital if we are to get back into the markets and back in full control of our own economic destiny.

Deputy Michael McGrath

I thank the Minister for his attendance today and for his opening remarks.

My party welcomes the improvements to Ireland's EU-IMF programme which were announced on Thursday last following the summit of the eurozone Heads of Government. Any measure that saves taxpayers' money and introduces greater flexibility to the programme is to be welcomed.

It is clear that it took a threat to the very survival of the euro to galvanise European leaders to make major decisions that could have been made many months ago. The risk of contagion affecting Italy and Spain finally meant the tipping point had been reached and decisive action had to be taken. The euro's difficulty had become Ireland's opportunity.

It remains to be seen whether these measures will mark the beginning of the end of the eurozone debt crisis or merely the beginning of another chapter in the crisis. My sense is that the overall outcome of the summit will not draw a line under the eurozone debt crisis. Nonetheless, Ireland has benefited from the Greek fall-out and we must make the most of it.

There are several questions I want to put to the Minister. I will start with the welcome interest rate reduction agreed on the EFSF. Is the application of the rate cut on the stability mechanism funds a mere formality? It has been included in the figures presented by the Minister. Is that something which he fully expects will be forthcoming? Would the Minister clarify the mechanism for that decision being made? As the eurozone Heads of Government did not have the authority to make that decision and it will have to be made among the full 27 member states, when would the Minister expect that decision to be made?

When does the Minister expect that the reduction in the interest rate will take effect on the EFSF, on the EFSM and on the bilateral loans? That is a key question we need to have answered. When will the benefits start accruing to Ireland?

The key question is: how much is the anticipated saving on interest payments in 2012? As the Minister will be aware, in the stability programme update sent to the Commission in April last, the Government anticipated interest payments of €7.2 billion on the national debt in 2012. Given that this interest rate reduction has now been secured, how much of that will be saved? How much less than €7.2 billion does the Minister expect the serving of the national debt will cost in 2012?

I suppose the question that people at home will want to know is: will the Irish people feel any benefit through the anticipated saving of €900 million and will the Minister consider whether it is possible to achieve the deficit target for 2012 and at the same time ease the burden of cuts on the Irish people in December's budget?

On some of the more specific aspects, is the option of using the EFSF to buy bonds on the secondary markets, which appears to be designed for use by Greece, available to Ireland thereby allowing us to reduce the burden of, rather than merely the cost of servicing, the debt? That is an important question on which we need clarity today. Is that option available to Ireland, and if so, is it one the Government intends to use, and how will that work?

On the lengthening of maturity of the loans under the EFSF, there is potential for the maturity to be lengthened by up to 30 years. Is that solely for Greece? Is it capped at 15 years for Ireland or is there the possibility that such additional flexibility can be extended to Ireland as well?

An interesting point is the reference in point ten of the communiqué to the continuation of support to countries under programmes until they have regained market access provided they successfully implement those programmes. The Minister has stated that this reference takes the issue of a second bailout for Ireland off the table. I cannot see a situation where at the end of the programme the troika would tell Ireland that it has fulfilled the terms of the programme and, while, unfortunately, the debt markets will not allow Ireland back in, it will continue to give Ireland money. Perhaps the Minister can clarify if that would represent an extension of the existing programme or whether there would a subsequent programme with additional conditionality. It seems unrealistic that additional funds would be extended to Ireland without any new conditions being imposed.

The Government's commitment to engage constructively on CCCTB implies a willingness on the part of the Government to reach an agreement on the issue of CCCTB. On 18 May last, the Taoiseach told the Dáil that CCCTB was a bad deal for Ireland and for Europe and that the Government would oppose it. In his statement today, the Minister stated, "we are sceptical about many aspects of the CCCTB". That is a world away from what was stated up until a short few weeks ago and people are concerned that there has been a shift in position by the Government.

Surely our case has now strengthened on the issue of imposing losses on unsecured unguaranteed senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society, given that an agreement has been reached in the case of Greece that sovereign bonds can be subject to a voluntary discount by private creditors. In the case of these banks which are being wound down, surely Ireland's case is now all the stronger. I ask the Minister for his views in that regard.

At the launch of the NTMA's annual report last week, the Minister suggested the use of the EFSF to guarantee new Irish debt issuances. Can he clarify if any progress has been made on that issue or even if it was discussed at the eurozone meeting?

While we welcome the additional flexibility in the stability facility fund, no additional money has been put into the fund. There is the following concern among many independent commentators. It is all very fine to give additional flexibility and powers to the fund, but without additional money is it likely to have the desired effect in terms of satisfying the markets that, in the event of contagion taking root, does the fund have the capacity to deal with the wider eurozone problems?

Deputy Michael Noonan

Deputy McGrath has gone through all of the questions that come to mind.

First, on the interest rate, there is a number of different sources of money. The 17 countries in the eurozone are the ones who control the EFSF fund and the primary decision was to reduce the interest rate on that by approximately 2%. It is difficult to be precise. While it refers to a reduction of 2% along the lines of the balance of payments fund, it also states that the rate will never be below the cost of raising the money on the market. If the cost of money decreases, one gets a bigger break. If it increases, there is a different arithmetic, but the difference is marginal and only a question of decimal points.

In looking for a lower pricing on the programme, our argument was that European countries that were not in the eurozone but were in the Community had drawn money on a balance of payment fund in respect of which there was no mark-up. When the European Financial Stability Facility, EFSF, fund sold a bond on the market some months ago and a part of the proceeds of the sale were given to Ireland and Romania, it was ironic that Romania got the money at 3.3% whereas we got it at 6%. The two funds were different, yet the same bond sale raised the money. We were benchmarking against this situation in our arguments and negotiations. It has since been written into the communique.

The level of interest rate applying to the balance of payment fund will apply to the EFSF, giving us the base. The way in which it is formulated is complicated. That it will not be below the cost of funding will probably mean that the 3.5% will add 50 basis points extra on the cost of raising the money. If the EFSF raises money tomorrow, it will do so at 3.5% and give it to us at 4% whereas it is currently charging us 6%.

A formal decision could not be made on the European Financial Stabilisation Mechanism, EFSM, which is a Commission fund supported by the 27 member states as opposed to the 17 eurozone countries. We have been told informally that this provision will apply to the EFSM fund as well. The Commission does not believe this will pose it a difficulty.

Regarding our bilateral support from the UK, Sweden and Denmark, we had negotiated a rate with the UK's Chancellor of the Exchequer that was slightly below the EFSF fund's rate. He rang me on Friday morning - we were not negotiating - and stated that his position was to give us a reduction along the lines of the European reduction and to pitch it at slightly below the EFSF fund's rate, as the UK had done in the previous negotiations. Although we have not drawn down any money from the UK yet, we will do so in the autumn.

We had not fixed a rate with Sweden or Denmark regarding the profile of loans and prospective draw downs, but we assumed their rates would be in line with the UK rate, given their traditional relationship as far back as the European Free Trade Association, EFTA. Our expectation is that they will mark their rates down in line with the UK's, but we have not negotiated the point with them yet. Instead of fixing rates with them initially, we were to do so closer to the point of draw down. We are confident in this regard.

The IMF has a complicated pricing arrangement and has a rate lower than that of the European funds', but there is also a prospect of a reduction in this respect. Approximately two weeks ago, the Government decided to amend the Bretton Woods Agreement, which set up the IMF. Without getting into the complicated formula, the amendment will allow the IMF to recategorise Ireland and give it a larger quota, which will have a consequence for interest rates. Two thirds of participating countries will need to ratify the amendment to trigger the larger quota, but they will have done so by the Washington AGM in September or October 2012. This will reduce the IMF pricing by 1%, approximately 100 basis points.

We will receive reductions across the funds. The €900 million figure to which I referred does not include the prospective IMF reduction, but it assumes reductions on all of the other funds.

The National Treasury Management Agency, NTMA, will price the amount to accrue next year. It is complicated, but the amount could be between €400,000 and €500,000. I cannot be precise, as the NTMA is going through the figures. It is an all-interest rate that we will pay going forward, even on loans already drawn down, thereby increasing the advantage. We are receiving clarifications as the days go by, but every clarification to date has been positive.

Deputy Michael McGrath

What about the impact of those savings on the budget?

Deputy Michael Noonan

We are a long way from the budget, but our position is that we must achieve a deficit of 8.6% of GDP in the 2012 budget, requiring an adjustment of between €3.6 billion and €4 billion. There are many variables and we are unsure as to how the build up will go. The budgetary position remains as I outlined in the Chamber recently.

Regarding the question of whether the rate will apply to the longer loans, my understanding is that we can go up to 15 years, as the 30-year provision is not written in for Ireland. However, there is a prospect of negotiating on this point if it presents a particular advantage.

The Deputy asked about the continuing support in section 10 of the communique. We received this commitment from the IMF verbally approximately two months ago. It has now been written into the communique. It means that, if we fulfil all of our programme's conditions in 2014, for example, but still have not returned to the markets fully, a stream of funding will be available to us from the European authorities to enable us to continue without entering a new programme.

Deputy Michael McGrath

Without additional conditions.

Deputy Michael Noonan

It is difficult to know whether conditions will be placed on us. Everyone who lends money usually applies some conditions. If we complete our programme, are back in the markets for six months and are funded when an isometric shock occurs somewhere in the world, such as an equivalent of Japan's tsunami, which changed the way the nuclear industry is regarded even in Germany, or the democratisation of the Arab world disrupting a major oil producer, we might get knocked back again and not be able to raise money. Thanks to the continuing support, contingency funding can be availed of at the end of the programme.

The clause in paragraph 10 to which the Deputy referred and under which countries that have fulfilled their programmes will have extra funding made available to them was explicitly designed for Ireland - we pressed hard on this issue - but the dedicated credit lines were designed for Spain, which was seeking them. Taken together, if a country finishes a programme and returns to the markets without being fully funded, a dedicated credit line will be available to it. This is the mechanism as I understand it.

The Deputy also asked about Anglo Irish Bank's losses. We mentioned this again during the troika's quarterly review a couple of weeks ago, but we did not press it as a negotiating point. We were signalling that we would raise it in the autumn. I do not know what our prospects are. The great concern across the European authorities, particularly in the ECB in Frankfurt, is the fear of contagion to Italy, Spain and the rest of the Community from Greece, especially given private sector involvement in Greece. The very prospect of contagion was discussed a couple of weeks ago because of Italy and Spain's difficulties. I cannot predict what will happen. From the Irish point of view, it remains a matter on which we are seeking negotiations. We will not act unilaterally; we will try to negotiate it. If we succeed, it will be another bonus for the taxpayer. If we do not, we will not break and do anything unilaterally.

The Deputy pointed out that, at the launch of the NTMA's annual report, I raised the issue of guarantees. I had a fair idea of what was coming through at that time and had been running an agenda in Europe over the months, comprising various elements.

I had been talking about guarantees. I knew guarantees were not coming through, so I wanted to signal that. There were additional policy instruments which I thought would be useful if we could get them but I had a fair idea at the time that it would not be included. However, it is something I will continue to press.

I refer to all this talk about Brady bonds, euro bonds and so on. US Treasury Secretary Brady came up with the idea of Brady bonds for South America. The Brady bonds were for countries in default. Ireland's position is that we do not want to default and we are not going to do so.

Guarantees would work differently. If we could get the EFSF fund, which is a triple A fund, to guarantee the NTMA when it goes into the market to raise money, it would seem we would get access to the market at a price not very far above the price Germany gets money for. The kind of solution I see is that we keep the conditions of our programme, we get into 2014 and if we still need to get money, we go to the market for the money. However, if, in going to the market, we had the triple A guarantee from the EFSF fund, we would be able to access private sector money in the markets and that would fund us going forward. If the fund could give us a guarantee, it would not cost it anything and we would get money at a little above the German rate.

That is what I am pushing and what I was talking about at the NTMA. I knew it was not in the programme but in my head. I was going on to our next series of requests from our colleagues in Europe and the guarantee is well worth pursuing. I have no idea whether it will be conceded but as a policy point, it is certainly well worth pursuing.

Our position on CCCTB is that we have not given up anything. If one checks the record, we stated our position the day before St. Patrick's Day, 16 March. The exact form of words we used are now in the communique. That is all we did.

The Commission is not only entitled but is legally obliged to bring forward policy proposals. In line with its mandate, it brought forward a policy proposal on a common corporation tax base. All countries can, and are expected to, participate in that discussion. There is a kind of offside trap in the procedure. Countries can proceed by banding together on enhanced co-operation, so those which opt out risk being left out completely while a key central group moves on. If one goes back in the history of the euro, it was developed through enhanced co-operation in the first instance. The countries which did not want the common currency were left aside. We cannot take the risk of a core group of countries moving on an enhanced co-operation basis to change the corporation tax base for Europe because once that happens, the dynamic might suck us into a place where we do not want to go. By getting in there and participating, we protect and guard our interests.

There has been quite an amount of debate about the CCCTB in the European parliaments already. The Oireachtas Joint Committee on European Affairs had a discussion on it and came out strongly against it. The same happened in the German Parliament where there is strong opposition to it. That has been reflected across Europe. My information is that every country of the 27 has an objection to the totality of the proposal or to a part of it, and that includes France. I would think the discussions on this will go on for a long time. To bluntly answer the Deputy's question, we conceded nothing. We simply got into the communique what we stated as our position on 16 March which was a long way back in the life of this House.

The whole package is worthwhile for Ireland but I do not want to exaggerate the position either and I will try to give the Deputy the accurate information I have and he can assess what benefit it will have.

Deputy Michael McGrath

I have a question on the use of the fund to buy bonds in the secondary markets. Is that open to Ireland?

Deputy Michael Noonan

My understanding is that it is open to all countries but Ireland would not trigger it. It would be a decision of the fund managers in consultation with the Central Bank. While we could make a case, we would be not the instigators of the policy of intervention. It is meant for Greece in the first instance but it is a policy of general application.

Deputy Pearse Doherty

Some of the conclusions from last week's summit meeting are definitely welcome and as the previous speaker said, any reduction in our debt is welcome. I welcome the reduction in the interest rate, the extension of maturities and the possibility of entry into the secondary markets to buy back bonds, although there are flaws in that and some of the figures about which we have been talking - 40% savings - would not be realised in that instance as the price would go up if we were to use such funding to buy back bonds. It would be welcome but I am concerned about the Minister's most recent comments.

The most important thing to come out of the EU summit last week was that it nailed the myth that some of the issues for which we on this side of the House have been arguing could not be achieved. Sometimes the debate is very much that bank ATMs will no longer work, the economy will collapse and so on but last week showed us that solutions can be agreed. Solutions were agreed primarily as a result of the markets and the markets reaction to Spain and Italy. While I do not believe the conclusions of the meeting will go far enough, the markets will again force our European leaders to bring conclusion to this issue. We can see where Spain sits dangling dangerously on the bailout level. Its bond yield is still more than 6%.

Only a couple of weeks ago, I argued that we needed to stop the EU profiting from the loans it extends to Ireland as a result of our extraordinary circumstances. At that time, we were told by the Minister that the best we could achieve was 0.6% to 1% of future lending and that was what was to be expected. It just shows that a cost price can be achieved.

When we talked about the issue of selective default and when we argued that we should look at the promissory note in Anglo Irish Bank and the unsecured and unguaranteed bonds in the other banks, it was not to be contemplated or agreed with Europe. Now Europe has seen that a selective default is not an enemy of trying to restore confidence but a part of the solution. It is now part of the tool box Europe, the Minister and the Taoiseach agreed as part of that meeting last week. There are positives to be seen.

The negatives are that we, as a state, do not have access to the full toolbox. I have always warned about focusing too much on the interest rates. While the reduction in the interest rate is welcomed, the focus on the interest rate was unhealthy. The reason we are locked out of the markets is the level of our national debt. When we look at the expected savings in terms of the interest rate from 2011 to 2013, inclusive, until the time we must get back into the markers, we are talking about in the region of a 1% reduction in our national debt. If that is all we can secure, there is no way we can get back into the international markets. Although bond yields were dropping in recent days, they continue to increase today. Even if they were to drop one percentage or two percentage points, we will not be able to get back into the markets at those rates.

The other thing which is welcome is that the Minister acknowledged in his comments earlier and after the summit that it is likely that we will not get into the markets and this talk about this new extension of funding from the EFSF is an acknowledgement that it is unlikely we will be there. The Government is trying to dress that up as there will not be second bailout. Call it what you will. If we cannot get back into the international markets at appropriate rates, this country is heading for a second bailout. That is the trajectory we are on and unless we deal with a reduction in the overall scale of our national debt, we will not be able to achieve any other conclusion.

Regarding the EFSF interest rate, we are talking about a 2% reduction but a 2% reduction on the previous moneys we have drawn down, which was a five year, six months maturity. If that is to be extended, and I understand it is mandatory to extend that to a minimum of 15 years, what are the projections in terms of the cost of funding for the EFSF fund which would then be applied to Ireland? If we were to get it at five years, six months, we understand it would be 4% but if it is to be extended to a minimum of 15 years what would be the cost?

On the issue of private sector involvement, has the Minister ever put on the table the issue of private sector involvement in the pillar banks, including the promissory note? If the European summit were to agree in the future to private sector involvement in the pillar banks, would the Minister accept that? Would he accept a selective default on our part if it was agreed in Europe that the unguaranteed bond holders, the value of which is €40 billion in both Anglo and the other banks-----

Chairman

Deputy Doherty's time is concluded.

Deputy Pearse Doherty

I will conclude on this point. In terms of the impact on the budget, the Minister stated some weeks ago that the actual target is 8.6% of GDP, in other words, we have to reduce our deficit to 8.6% of GDP. The interest rate is connected with our deficit and therefore if we are to have a reduction in the interest rate the obvious conclusion is that will carry on to the budget. Is the Minister saying we may go further than the 8.6% target or is he saying clearly that 8.6% is as far as we will go this year in terms of the budget and no further?

Deputy Michael Noonan

The Deputy is misinterpreting my position. He will recall that, as far back as the first time I met the Deputy on Pat Kenny's programme during the election campaign, I proposed a series of policy instruments the EFSF should and could use and that we would negotiate in Government. He may recall that on that night I recited most of what is now in the package, and I believe the Deputy supported me on some of it, and we succeeded in negotiating it.

My position never was that we could only get 0.6%. The context of that was that the concession made at the Heads of State or Government meeting in March was 1% of a reduction to Greece, and at the time there was a statement in the communique that this would also apply to Ireland. The French then got involved and made it conditional on an increase in the rate of corporation tax and therefore it did not come through but when the Portuguese went into a programme they repriced the programme for Portugal and instead of giving them a 1% reduction they gave them a 0.6% reduction. In the terms of the 0.6% reduction, I said there was no way we would trade an increase in our corporation tax for a 0.6% reduction in the interest rate. I said in this House and outside it that I would rather pay the higher interest rate than to remove one of the main policy instruments of our industrial policy and create uncertainty in the minds of the people who invest in Ireland, who are driving the economy forward through their excellent record on exports and who are beginning to hire people again. That was the position in that regard.

On a sectoral default, the policy position in Ireland is that we have no intention of defaulting and we have no intention of allowing our banks to default. That is the reason we will put quite an amount of money into the banks at the end of this month to fully recapitalise them in accordance with the stress test carried out under the direction of the European Central Bank last March.

Deputy Pearse Doherty

Does that include Anglo Irish Bank?

Deputy Michael Noonan

I will get to that. I answered Deputy Michael McGrath's question already on the Anglo Irish Bank position. The only outstanding issue in terms of taking any kind of discounts anywhere is the issue of Anglo Irish Bank. There is no question of us looking for discounts on the outstanding loans in either of the two pillar banks. When we capitalise, the arithmetic changes. We have solid banks. The Deputy can see that is being recognised already, contrary to a great deal of opinion expressed in this House and outside it by many learned commentators who said nobody would invest in Bank of Ireland. Private investors are now putting €1.1 billion into Bank of Ireland and those who predicted recently in a committee in the House that this would never happen were wrong, and they should have the grace to admit they were wrong and not move on to a new narrative when they are found out and pretend they have this consistency that goes back ten years when they are changing their arguments every couple of weeks. Anglo Irish Bank is the outstanding one and as I said to Deputy McGrath, we have taken up a negotiating position on it but I cannot predict how that will go and we will not act unilaterally on it.

Deputy Doherty also said the Government had an unhealthy focus on interest rates and that we were not pursuing other issues. We were, and the Deputy knows we were. He knows we were pursuing a catalogue of issues we thought would give greater flexibility to the funds and which would play to Ireland's advantage.

I have not acknowledged that we are not getting back into the markets. The policy is straightforward. We will fulfil all the conditions of our programme and we will meet the deficit targets. We hope to get back to the markets at the end of the programme but we are living in a very strange world where extraordinary things happen suddenly. We only have to look at what happened in Norway or the tsunami in Japan. Did anybody here predict that we would have a type of Arab spring across north Africa and that we would have incipient democratisation of all the Arab states along the lines of what happened in eastern Europe? How many people saw it coming? I did not hear anybody here saying it. Shocks can occur, and in a small country like Ireland we get the backwash of the shock. In those circumstances we now have a credit stream agreed with Europe and at the end of our programme we have a commitment that we can avail of further funding from Europe if we are hit by some asymmetric shock. That is all that is there. We are not predicting that we will not finish our programme satisfactorily but we are making prudent provision for difficulties.

We distributed a pack of back-up papers to all members which give various estimates of funding, how the funding will be allocated and so on.

On private sector involvement, it is clear in the communique that the private sector involvement was designed for Greece and is unique to Greece. There are no circumstances in which it will apply to any of the other programme countries or any of the countries that got a little rocky in recent weeks. That is the position on that.

On the budget target, if the Deputy goes over the arithmetic again he will see that the decision recorded at the Council of Ministers is that 8.6% of GDP is the target and the estimate of getting there is a correction of €3.6 billion but there are various calculations about what €3.6 billion will do. With the information we have we believe that a correction of €3.6 billion will not get us to 8.6% of GDP. We will just miss that target. The European Commission says we will get to 8.7%. The IMF says we will get to 8.8%. The €3.6 billion figure is not precise now at the end of July because there are many variables and as I said previously, corporation tax in particular comes in unevenly over the year. If we got a large payment of corporation tax in November it would be like getting odds in a race. We would start a little bit in advance. On the other hand, if the tax flow does not come in as expected for the second half of the year it is like being handicapped in a race and instead of the horse having to run the mile it will have to run a mile and a bit. We are too far from the end of the year and there are too many variables to be precise about the figure but what I am saying with absolute certainty is that the budget will have to have a correction of a minimum of €3.6 billion to get us to the deficit target we require.

Yes.

Deputy Pearse Doherty

I return to the question of what has been factored into the 15-year maturity arrangement. We have drawn down at 5.5%. The cost of that to the ESF was calculated at 3.5%. The EFSM has a five-year drawdown. We have drawn down on the basis of ten years. The actual increase in the interest was 1%. We have seen an increase of one percentage point in the cost of borrowing at that level for an additional five years. What is the projected cost to the fund if we extend our term to 15 years, as we are mandated to do for future borrowings?

Deputy Michael Noonan

I have not yet received the costings on that. We are working through them. There is a great deal of detail in the programme. I am not too sure how we will profile things into the future. Obviously, we will profile them to our best advantage. The officials in the Department's banking division and in the NTMA will work out options for us. I will get the information for the Deputy. As soon as I have it, I will send it to him.

Deputy Richard Boyd Barrett

I am disappointed that the Taoiseach is not here. His presence was requested by a number of Deputies in the Dáil last week. Given the importance of this summit and its implications for the future of this country and its economy and people, it is very disappointing that the Taoiseach is not here. In fairness to Members of the Oireachtas from all parties and groups who have turned up today, I ask that this meeting be extended. Time is ticking away towards the end of the meeting. The various spokespeople and I have been given a chance to speak. Many others want to ask questions of the Minister.

Deputy Jerry Buttimer

The Deputy should stop waffling and ask a question.

Deputy Finian McGrath

He has made a sensible proposal.

Deputy Richard Boyd Barrett

I ask the Chair to keep the Deputies opposite quiet.

Vice Chairman

I can ask them to be quiet.

Deputy Richard Boyd Barrett

I have made my request to the Minister. We should consider extending the time for this meeting to allow others to ask questions.

Deputy Bernard J. Durkan

Others have all the time in the world to ask questions. That is what is wrong.

Vice Chairman

Deputy Boyd Barrett should be allowed to make his contribution.

Deputy Richard Boyd Barrett

I was not going to mention the events in Egypt and the Arab Spring until the Minister did so. They are very relevant. Some of us were in Egypt in 2004, 2005 and 2006 with the opposition groups that led the revolt this year. We know the people directly involved. We were quite aware that the revolt was coming in Egypt. We said publicly that it was building. It might be instructive and of interest to the Minister to mention what they revolted against. The narrative favoured by the Minister and other western leaders attempts to separate the fate of this country from events like those in Egypt, Greece and elsewhere. The Minister's analysis is seriously mistaken. One of the major reasons for the Egyptian revolt, if not the major reason, was opposition to an IMF austerity programme implemented by Mubarak. The programme involved privatising State assets, cutting the pay of public sector workers, reducing the number of such workers and attacking the subsidies for food and other basic things that are given to the people of Egypt. Massive unemployment resulted from it.

Will more State assets have to be put up as collateral if we run into problems repaying our unsustainable debt?

I will conclude by speaking about the restructuring of the banks. Mr. Matthew Elderfield suggested yesterday that the cap on bankers' pay could have to be lifted. Will this be allowed? Are we being told by the EU and the IMF that the restructuring of the banks requires every available penny to be sucked out of the pockets of ordinary people and the potential funds that could be invested in jobs and economic recovery in this country and into the banks to recapitalise them? Are we being told it is all right to impoverish the country and destroy its chances of economic growth-----

Vice Chairman

The Deputy has to conclude.

Deputy Richard Boyd Barrett

-----but it is all right to raise the pay of top bankers to attract people into such positions? Is that the case?

Vice Chairman

I ask the Deputy to sit down.

Deputy Richard Boyd Barrett

Where is the conditionality on bankers' pay being cut? Did the Minister raise the question of Ireland being allowed to put a stimulus in place? As a result of the so-called-----

Vice Chairman

Deputy, please conclude. I ask the Minister to reply.

Deputy Michael Noonan

Most of Deputy Boyd Barrett's contribution was a series of rhetorical questions. By definition, rhetorical questions are questions to which one does not reply, as they supply the answer themselves. The issue on collateral----

Deputy Richard Boyd Barrett

Should we all start heckling now?

(Interruptions).

Vice Chairman

Allow the Minister reply.

Deputy Michael Noonan

I have enough to do to answer the questions. I cannot chair the meeting as well. The people who are pushing hardest for collateral are our colleagues in Finland. They had a crisis in the early 1990s and they have worked their way out of it without any programmes. They had a tough time and now they are paying money to help other people and they are doing so willingly. They advanced the policy position of collateral, but this was brought forward as something required of the Greek Government and people. They are putting a kind of special purpose vehicle together into which the Greek Government will put assets. As assets are privatised, they will be replaced by other assets, so that the quantum of value within the special purpose vehicle will remain the same over time. The triple A countries that contribute most of the funds and other contributory states would also have a lien on the special purpose vehicle. It is similar to giving the deeds of the farm or the house as collateral against money being borrowed at home. It is the same principle, except in a very large way.

This does not apply to Ireland because we are not into any of those arrangements. The communique states that collateral arrangements will be put in place where appropriate. However, there is no foreseeable issue where collateral will apply to Ireland and this is particularly designed for Greece.

The regulator, Mr. Matthew Elderfield, is an officer of an independent central bank and he is entitled to his view. He is pointing out that we are very near London, and the City of London pays bankers much more than they would receive in Ireland. He is making out that if we want to ensure that we get the best available, we have to pay more than we are paying now. I do not agree with that view. I want to keep the cap which was announced previously, but he is entitled to express his view. We are lucky to have him. He is a good regulator and he is independent. We do not run a command and control system here. People are entitled to express their view.

Deputy Michael Noonan

We have had no discussion about collateral in the Irish context. I do not envisage that discussion taking place at the moment or at any time in the foreseeable future. The collateral issue arose as I explained, with Finland driving it hard and supported by other countries. They are entitled to do that as a donor country. It was a condition they put on the table. They said that they would not participate in a second bailout for Greece without collateral. Every country has its own policy positions and it is not easy to get unanimity, because that is what is required across the eurozone and across the EU.

There is a fallacy in the Deputy's other rhetorical question about Greece receiving private sector involvement in writing down its bank debt. He is presenting it as something attractive, or as if something good was happening to Greece. Greece is being allowed to do something to get it out of a frightful fix and which is potentially very bad for the country, yet the Deputy is presenting that as an advantage for which we should all be queuing up. Default is about the worst thing that can happen a sovereign state. This is the first default in Europe since the First World War. This is a very difficult situation for Greece. The only reason it has private sector involvement - described as a technical default - is because the other countries would not give it any more money unless this was put in as a condition. That was driven particularly by the German Government. The Deputy should not think it attractive to present default as a desirable thing. That is a ridiculous position.

Vice Chairman

Before I call any more Members, there are only 20 minutes left so I will call three Deputies at a time. You must keep your questions short and avoid rhetorical questions, so that the Minister can answer them and we can get as many Members as possible to ask questions. I call on Deputy Creed.

Deputy Michael Creed

I congratulate the Government and the Minister. Regardless of what side of the House we are on, there were achievements last week. They are not the panacea to all our ills, but they are a help. I want to concentrate on the budgetary situation we face as we endeavour to bring our debt to GDP ratio down further. In particular, I want to talk about the level of State debt, as added to by bank debt, especially senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society. Page three of the communique from the summit conclusions states:

All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of States or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole.

That seems to blow out of the water the possibility of burning senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society. That is a problem. This House should support the policy outline the Minister enunciated in the USA in early June. In that context, how has he progressed that ambition or how does he intend to progress it between now and early November when €750 million of Anglo Irish debt is due to be repaid?

Will there be bilateral negotiations with Mr. Trichet, the head of the European Central Bank? Has our director on the bank, Professor Patrick Honohan had negotiations? In the context of rescuing the deal which was initially done on the bail out it is possible to argue that his inadvertent and unwise intervention in the early days of that debacle probably resulted in the bad deal we originally got. Is he on side?

What bilateral negotiations are we having to try to progress the issue of burden sharing with senior bondholders in Irish Nationwide and Anglo Irish Bank? As the Minister said, they are no longer functioning banks. He described them as warehousing. How does that tie in with the communiqué which seems to rule out any burden sharing?

Deputy Arthur Spring

I congratulate the Minister on his steps up to now. There is no fixed map or strategy for how to solve this problem but at every crossroads we seem to have made the right decisions over the past three or four months. The Minister referred to the interest rate and the maturity date. What concerns me more is the overall sustainability of the level of debt Ireland and the other countries that are looking to the ECB for help have.

Italy said that GDP as a percentage of debt is 120%. Ireland will end up being over that level. Italian bonds are starting to rise. We now have to question whether it will be able to grow itself out of the problem. The ECB has said it wants to achieve growth in countries as a way of making the debt sustainable.

If we are to have growth will there be a form of debt write-down or is it being negotiated within the ECB? If not are the other agencies who ultimately tell the ECB what to do recognising the need for some form of write-down? Have we considered the possibility of quantitative easing to make the personal debt of people lower relative to the cost of living in order to create a buoyant economy and growth?

Deputy Mary Lou McDonald

I echo Deputy Creed's observation that in signing up to this communiqué not alone does the Irish State commit not to act unilaterally but not to act at all. That is a deeply disappointing result from the meeting. I wish to raise the issue of the CCCTB. The Minister said there is no change in position. I ask him to tell the committee whether any communications, papers or written undertakings passed from this State to any of the EU institutions, the French Government or any other body giving any commitments or comfort in respect of the CCCTB.

A matter which has been overlooked is the commitments the State has entered into in respect of increased economic surveillance, macro-economic policy and the involvement of the EU. Can the Minister set out our commitments in that respect? I note in his speech today he referred to what we might expect in respect of corporation tax but did not rule out a State acquiescence or agreement to increased tax co-operation or harmonisation. I ask him to clarify that matter.

Deputy Michael Noonan

On Deputy Creed's question and his reference in the communiqué to the phrase "the sovereign signature", I am advised that this does not apply to action we might take in the negotiations we might conduct in Anglo Irish Bank. It specifically states "sovereign" and does not refer to bank debt or debt in Anglo Irish Bank.

Deputy Pearse Doherty

A bank debt is not-----

Deputy Michael Noonan

He also asked how we would progress that. We will progress it, as we have up to now, by negotiation. It was not timely or necessary to negotiate it in the middle of the Greek crisis. I have said from the very start it is something I will take up with the ECB in the autumn. I have also said we will not act unilaterally. I do not know whether we will get a deal but we will try to negotiate. That is the position.

Deputy Spring said sustainability was the issue. It is a concept which will point us out of the programme and back to an independent growing economy in the future but it is a function of the size of the debt, the interest rate one pays on it and the growth rates in the economy. There are variables. The interest rate has become a variable. The major variable is the projected growth rate. If one runs a model on sustainability and alters the growth rates slightly one gets different answers. One can also alter the quantum of the debt.

To a certain extent, what happened yesterday with Bank of Ireland means that the Irish taxpayer does not have to find another €1 billion to recapitalise the banks. If it had been included in the programme we would have had a reduction in the overall debt of €1 billion. Privatisation programmes, which are required in the memorandum of understanding, can also be used to reduce the quantum of the debt. The three elements make up sustainability but there are variables built into all of them. We have addressed the first significant variable, the interest rate, downward and we will work on the others.

Our position, as I have said before, is not only manageable but sustainable. There have been papers done on sustainability, not only by our Department but the IMF and the Commission. They did separate assessments and all agreed the Irish position is sustainable. We will get out of trouble more quickly if we have higher growth rates. The latest calculation I have seen is that the debt will peak at 118% at the very end of 2013 and will start to reduce after then. We will have to keep working on it. There is no silver bullet or magic formula.

On quantitative easing, we have a solvency problem because nobody will give us money on the markets and we had to get money from our European colleagues. The Deputy is also aware that there is a major liquidity problem in the banks. The ECB is funding the banks for liquidity purposes and is giving money at 1.25%. That is where the quantitative easing is. Obviously the people in Frankfurt are printing euros. To put it in the simplest way, that is quantitative easing and is providing liquidity for the Irish, Greek and Portuguese banking systems.

Its mission statement is to look after the currency but it has to keep inflation below 2% which is written into its mandate. It is very conscious of the limitations of creating too much liquidity because it will be in breach of its mandate. If one pumps too much liquidity in one causes inflation. That is the constraint on it. I do not think there is much of margin for further quantitative easing. It is not that it did not do it in the same way that the Obama Administration did in the United States when Lehman Brothers went bust. It had to move in subsequently and rescue insolvent banks and provide liquidity to the banking system.

Deputy Arthur Spring

The point is the personal debt aspect rather than the banking debt.

Deputy Michael Noonan

I hope that when we recapitalise in a couple of days time that it will provide the wherewithal to allow the banks to start lending to people again and give credit to individuals and businesses, especially the SME sector. In reply to Deputy McDonald, there are no side deals, no understandings, no side letters, in connection with the CCCTB. What we see is what we get. The agreement is in front of us. While there are technical papers underpinning the agreement they will all be made available. I can give the Deputy an absolute guarantee there are no side deals.

On the issues of governance, there is movement towards a greater compatibility between the budgetary policies being pursued by the states within the eurozone. I am an advocate of such compatibility because I do not think it is possible to run a common currency without having fairly close budgetary policies. If Germany is running balanced budgets or running surpluses and if countries along the margin are running huge deficits, they cannot all stay in the one family of currencies or in the one currency zone. One of the significant problems was that we did not have the instruments of policy as in the United States where there can be fiscal transfers from one state to another in order to correct things.

We have already given a high level of commitments. In the final days of May we set up the fiscal council. This is a measure which is preferred to be applied across Europe. We will bring forward legislation in the autumn to set up an independent fiscal council. I refer to the Stability and Growth Pact which confines deficits within certain margins and the commitment to run primary surpluses from 2015 onwards. These are all commitments about how we will manage our budgets and fiscal policies. There is reference in the communiqué to connections with the European Parliament and to debates in the Parliament. It is that kind of package and it contains nothing the Deputy does not know about.

Vice Chairman

I ask members to keep contributions as short as possible to allow all members to speak.

Next Friday, €19 billion will be put into the banks. I suggest that this is a moment in which to open the discussion-----

I am happy to offer that assurance.

Vice Chairman

I will now call Deputy Kieran O'Donnell.

Deputy Kieran O’Donnell

I was almost beaten by the bell. I thank the Minister.

(Interruptions).

Deputy Kieran O’Donnell

I wish to get to the heart of the matter. I seek clarification on the schedule the Minister has given at Table D. The average length of loans is approximately 7.5 years. I note they are of varying terms. Under the new programme that has been negotiated, will the loans be for 15 years and to what rate will the 2% apply? If the Minister would give a view on that, it would provide clarification on the cost to the State.

The Minister referred to the guarantee being provided by the EFSF fund. It is a good suggestion, in terms of Ireland going out on to the international market to borrow and in terms of the bond buy-back. Generally, there is a view that Ireland's level of debt is something we want to address. Does the Minister see that arising as part of a negotiation in terms of the EFSF fund in the future?

Are there discussions ongoing on the issue of medium-term funding being provided by the ECB to Irish banks? It would be critical to the banks in being able to borrow in the market that they would have a stable medium-term source of funding.

Above all, I congratulate the Taoiseach and the Minister for Finance for what has been achieved, which is a start.

Deputy Timmy Dooley

I welcome the Minister's decision to extend his schedule to be with us. I do not intend to detain him.

Mine is a simple question. By his own admission, the Minister is approximately €400 million better off than expected for next year. What is his intention in that regard? Does he intend to pay down the national debt to a greater extent as a result of that €400 million, to relieve to some extent the necessity to cut deeper in terms of public expenditure or to reduce the level of increased taxation that had been earmarked? I ask him to provide an outline in so far as he can. I accept that he will not give us the minute details of next year's budget, but it is a considerable amount of money.

It is coming on a day when the Cabinet decided that it had no choice but to continue with what was identified in the programme with the troika towards the collection of greater tax through a household charge. Some of his Cabinet colleagues have indicated that this was purely as a result of the programme that had been negotiated by the previous Government, notwithstanding that significant changes, as the Minister would say, have been made to that programme, particularly in the interest reduction. It puts the Government in a stronger financial position. It is welcome. Perhaps the Minister would give us some insight as to how he intends to apportion that as part of his ongoing planning.

Deputy Michael Noonan

Deputy Michael Noonan

Vice Chairman

No. I call Deputies Broughan, Jim Daly and Donnelly.

Deputy Thomas P. Broughan

Did we have any input into the document that resulted from the negotiations? Is it not just a case of us trailing on Spain and Italy's coat tails and the predetermined selective Greek default? What was our negotiating position? I admired the stance the Minister took in New York city, in that he seemed determined to have major private sector involvement in the Irish debt situation, but did this form part of our input into the negotiations? We were promised that the Taoiseach would attend this meeting, as he was our lead negotiator. Is the Minister happy with what has been achieved? I welcome the slight easing for our people that the document represents, but we seem to have come in on the back of the selective Greek default. While that situation might ease our own, we could shortly be staring in the face the dire circumstances outlined by Deputy Mathews.

According to the Minister, we will give the banks just under €18 billion from the savings of the National Treasury Management Agency, NTMA, this week and we will take a further €3.6 billion out of the economy next year at a minimum. The cumulative fiscal impact will be a contraction of the budget by nearly €20 billion. After three years of agony, should the people not get some kind of dividend during the coming months? In light of the fact that they have suffered and given so much, particularly those in receipt of pensions, benefits or low pay, should they not receive a dividend from the Government's negotiating position? Barring what the Minister stated in New York city, I see no difference between how this matter is being handled by the Government and how it was handled by Deputy Michael McGrath's colleagues until February. As such, the outlook to 2015 and 2016 seems grim.

Deputy Jim Daly

I thank the Minister for appearing before the committee to explain the memorandum, the detail of which is welcome. It is important to realise that every baby step is a step towards the greater step that we must eventually take. We are all chasing the elusive growth in our economy. This document has helped to breathe a bit of confidence back into the Irish psyche and economy. Coupled with this week's news of the Bank of Ireland investment, it is a welcome step in the right direction. I acknowledge that the reduction in the interest rate is not the one-fix solution we sought, but it is a baby step.

On a matter to which Deputy Michael McGrath alluded in his questions, will the Minister clarify the possibility of Ireland buying back our debt on the secondary market? He referred to the European Financial Stability Facility, EFSF, management being able to trigger a mechanism to allow for this, one that is not currently available. It seems like an attractive option for dealing with the more threatening issue, namely, our debt as opposed to the interest rate.

Deputy Stephen Donnelly

A few moments ago, the Minister stated that default would be the worst outcome for a country and that no country in Europe had defaulted since the Second World War. No country in Europe has been asked to do what we are being asked to do since long before the Second World War. As the main Opposition spokesperson on finance, the Minister described the set up as a downright obscenity.

Staying with economic history, research from Harvard shows that, in at least the last 200 years, no country on Earth has managed to get rid of a major debt overhang without either printing money - quantitative easing - or defaulting except England during the Industrial Revolution, and we are not about to simulate that sort of growth. The US is considering defaulting because of its debts.

I put it to the Minister that defaulting is not the worse outcome for a country-----

Deputies

Hear, hear.

Deputy Stephen Donnelly

-----within the context of a people being asked to repay the debts of others. I accept the Minister's point where it is constrained to our real sovereign debt. As Deputy Mathews suggested in the House some time ago, though, our sovereign debt is a fraction of the total debt we are being asked to repay. Default is not the worst outcome if we let it pertain to banking, the private sector and bondholder debt.

The Minister mentioned quantitative easing as a solution. Were the ECB to engage in quantitative easing, it would increase the money supply. Instead, it is decreasing the money supply by increasing interest rates. The ECB is engaging in the reverse of quantitative easing. Last week, I suggested something to the Taoiseach that I would like him and the Minister to take to Europe, in that we need actual quantitative easing from the ECB. The Minister mentioned that the ECB is constrained to a 2% ceiling inflation and I agree that he can do nothing about it, but he, the Taoiseach and our European colleagues can. If we can temporarily relax the 2% to 4% or 5%, we can achieve the advantages of real quantitative easing. If we increase the money supply, the rate of inflation will increase and we will receive some of the benefits being enjoyed by the UK, including international competitiveness.

We can address the issue of quantitative easing from the ECB by writing down the emergency liquidity assistance. Tens of billions of euros are flowing from the Central Bank and the ECB into our banking system. The conversations I have had in recent days with people involved in briefings by the ECB suggest that the ECB is not entirely confident that it will get all of that money back. That we are about to put the last amount of our cash into the banks is important in light of the negotiations. I understand that the button gets pressed on Friday and our cash gets turned into equity capital in the banks. It will be gone - we will be cashless, and we will be in a situation in which the ECB can turn off the lights if we do not jump to its tune. A write-down of some of the emergency liquidity assistance would achieve a write-down of national debt and allow us to hold on to some of the cash as a cushion.

What is the change in the net present value of our total debt as a result of what has occurred, that is, what is it worth to us? As with everyone else, I welcome the changes in the maturity dates and interest rates. What is the new blended rate? The blended rate on the money drawn down under the troika agreement was 5.8%. Will that percentage move to 3.8%?

Vice Chairman

Before the Minister replies, I invite Senator Ross to make his contribution, as he is the only Member present who has indicated.

Deputy Shane Ross

Thank you, Vice Chairman. I endorse some of Deputy Donnelly's comments and I note that the Minister and the Minister of State have consistently set their faces against default. Some Ministers have stated that discussing default is irresponsible. In reality, default is on the agenda and is being discussed as a possibility by the reputable columnists and editorials of the The Wall Street Journal and the Financial Times. This development has occurred since, rather than before, last Thursday. What happened to Greece on Thursday is being regarded by the markets as a possible template for what will happen to Ireland and Portugal. I understand the Minister's reluctance to discuss default, as he regards it as a humiliation for the nation, but it will be more humiliating if we do not regard it as a reality and if we keep making obstinate criticisms of it as a no-go area.

This morning, the credit default swap markets indicated that Irish default was still a 53% probability. To turn one's back on this and put one's head in the sand in the belief that it cannot and will not happen is unrealistic. The markets expect it will occur. Although the cases are different, let us consider what occurred in the cases of Russia, Argentina and Iceland, each of which defaulted in its own way. Their situations were different and not parallel, but each bounced back quickly. Part of the solution to their problems, in some instances the largest part, was the fact that they defaulted. It was a useful weapon that launched them back into the global markets, which were happy to lend to them after the deed was done.

It is common for those who oppose default to claim it will lead to disaster, the ATMs will not open in the morning and we will not have enough money to pay our schoolteachers and nurses. I am not asking the Minister to plunge into a sudden default. In Greece, where a default will shortly be triggered, the ATMs are working today and the teachers and nurses are still being paid. Let us look upon default as a constructive part of the solution rather than as a no-go area. If we continue to take that attitude, dealing with the default when it occurs will be more difficult.

Deputy Michael Noonan

Deputy Broughan asked a number of questions, the principal one being whether we had an input into the negotiations. All of the policy instruments listed in the communique that are specific to Ireland originated in proposals from the Government and nowhere else. Other proposals, such as that on the guarantee, were not accepted, but we had an input. We did not have a strong input into the second bailout programme for Greece, but we guarded and protected our interests in case a policy applied to Greece was applied adversely to us. All of the policy instruments, from the interest rate to interventions in the secondary market to lengthening loan times, were proposed in the first instance by Ireland during the past three or four months. We proposed them bilaterally, at the main meetings and with the IMF in Washington. We kept pushing the agenda.

It had been clear since the middle of May that there would be a major meeting during the summer to address the Greek situation. One need not have been a prophet to predict it. We knew that Greece's difficulty would provide us with an opportunity to advance our negotiating position, which is how it played out.

Deputy Broughan also mentioned that there was no difference between the Government and Deputy Michael McGrath's party's handling of the situation. There is a difference, as we committed ourselves to a serious renegotiation, which we have done in two tranches. Some of the fruits of the first renegotiation with the troika were seen in the proposals in the jobs initiative. In the second round of renegotiation, we stated that the bailout was incorrectly priced too high, the architecture of the European Financial Stability Facility, EFSF, was flawed and we needed to remediate both situations. While we have made major advances in the negotiation, it has always been our position that we agree with the targets negotiated by our predecessors, although we seek to meet them via different methods. We will need to continue meeting them, given that we are dependent on our European colleagues, the European agencies and the IMF to provide us with funding. Every quarter, they conduct an analysis of whether we have met the conditions of the programme. If we have, we are entitled to extra funding for the subsequent quarter. That we must meet targets every quarter is not an easy position in which to be.

Deputy Jim Daly asked about the possibility of entering the secondary market. As I understand the agreement, this is impossible for individual countries on their own. Instead, the EFSF fund can enter into the market. If one believed entering the market was desirable, one would discuss it with the people in the fund, but we will not know how it will work until we have a practical example. The policy instrument is in place.

Deputy Donnelly always makes interesting contributions and I listened to him carefully. Were it possible to expand the money supply in Europe without the risk of inflation, it would be acceptable in Europe, but there are different aspects to Europe and inflation is rightly regarded as something that should not be risked. Debate on this suggestion is possible, as it could be helpful were the circumstances right.

Deputy Stephen Donnelly

A European rate of inflation higher than 2% is probably right. The ceiling was set at a time when no one foresaw this level of chaos. It would be a valuable policy mechanism for the entire eurozone.

Deputy Michael Noonan

That is a reasonable point and is worth further exploration. We tend not to see the wood for the trees, which affects our view of how Europe is emerging. Given the policy changes of the past 12 months or so, a new European architecture has been created to protect the common currency area. My objection to what is happening is that the initiatives always seem to be slightly behind the curve and that the authorities have not yet got ahead of the problems but there is no doubt there is a major retrofitting of policy to deal with a common currency area in adverse circumstances. The policies are being put in place and when we look back we will see them all together, and I am sure that trend will continue. That is the way it will go because with the position Europe is in now, standing still at any point will not solve anything. There is a new phase in the European developments centring around the protection of the common currency and that will have major policy and political implications as time goes by.

I do not agree with Deputy Ross's position on default. He said things are fine, the markets will come back and so on but I remember when Argentina defaulted and it wiped out the savings of every middle class family in Argentina. They were searching the rubbish bins to try to feed their children. People who never had a poor day in their lives were in penury and got wiped out as a result. People died of hunger in Russia when Russia defaulted. I recall seeing on television lines of people queuing for food, and elderly people died by the hundreds when it defaulted. Default is not some kind of soft option. Default is a frightful thing. It is grand to say that ten years later the markets decided they could afford to lend again but the price paid by ordinary people in Argentina and Russia at the time of default and for some years afterwards was very high.

Vice Chairman

I thank the Minister for the comprehensive replies he gave to all members of the committee and for the additional time to facilitate members which ensured that most members who wanted to contribute got the opportunity to do so. I thank also all members who attended and those who contributed to the debate. I thank all the staff of the Oireachtas and the Minister's Department for their help. I hope everybody enjoys the summer break.

The joint committee adjourned at 6.05 p.m. sine die.

JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM díospóireacht - Tuesday, 26 Jul 2011

European Council Meeting: Discussion

JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM díospóireacht -
Tuesday, 26 Jul 2011