Statement by Minister for Finance, Brian Lenihan T.D. on the EU/IMF Programme
for Ireland and the National Recovery Plan 2011 to 2014
First of all, a Cheann Comairle, I want to inform the House that I am
circulating to members the five documents which set out the policy conditions
for the provision of financial support to Ireland by EU member states and the
International Monetary Fund. These documents underpin the three year Programme
of banking and economic measures on which we have now embarked. The documents
* the Memorandum of Economic and Financial Policies 2010 (MEFP)
* The Memorandum of Understanding on Specific Economic Policy
* the Letters of Intent to the IMF and the EU Authorities
* and the Technical Memorandum of Understanding (TMU) attached to the Letter
of Intent (LoI) to the IMF.
These documents are not yet finalised but they are not expected to change in
substance. The Memorandum on Economic and Fiscal Policies (MEFP) is the
foundation document of the IMF and EU elements of the programme. It sets out
the reasons for the programme along with its principal policy objectives which
- banking reorganisation
- fiscal consolidation
- renewing growth
And it outlines the substantial external financial assistance to support these
The Memorandum of Understanding on Specific Economic Policy conditionality
sets out the conditions for the disbursement of the assistance being provided
under the European Financial Stabilisation Mechanism), the European Financial
Stability Facility and the bilateral loans by the UK, Sweden and Denmark. So
this document relates to the EU element of the Programme although it does refer
to the IMF. The memorandum sets quarterly targets for the achievement of the
specified policy objectives and requires detailed quarterly reporting in
respect of the achievement of these objectives. This document closely reflects
our own National Recovery Plan.
It also requires the Government to consult with the European Commission, the
ECB and the IMF about the adoption of policies that are not consistent with
The Technical Memorandum of Understanding, as its name suggests relates in the
main to the definitions and reporting for fiscal aggregates. It also requires
that foreign debt arrears are not be incurred.
The letters of intent are Ireland’s formal applications for support to the EU
authorities and to the IMF.
The question has been raised as to whether this support programme has the
status of an international agreement. I am advised by the Attorney General
that the Programme, and these supporting documents do not represent
international agreements and do not require the approval of the Dáil. I am
presenting the documents to the Dáil, for information and to inform discussion
of the programme.
A Cheann Comhairle, amid the sometimes hysterical and contradictory reaction to
the external assistance programme, it strikes me that one quintessential point
has been overlooked and it is this: without this Programme, our ability to
fund the payments to social welfare recipients, the salaries of our nurses, our
doctors, our teachers, our Gardai, would have been extraordinarily limited and
Fifty billion of the €67.5 billion we are receiving from our European partners
and from the IMF will go to fund those vital public services over the next
three years. In those circumstances, the only responsible course of action for
any government was to accept the EU/IMF financial assistance fund.
Nonetheless, we enter this Programme not as a delinquent State that has lost
fiscal control. We enter it as a country that is funded until the middle of
next year; as a State whose citizens have shown remarkable resilience and
flexibility over the last two years in facing head on, an economic and
financial crisis the severity of which has few modern parallels.
The team with whom we have negotiated has acknowledged our success in
stabilising our public finances and they have endorsed our banking strategy.
This is borne out in the documents I have just circulated. They have also
accepted our four year Plan for National Recovery and have built their
prescribed Programme around that Plan.
This needs to be emphasised because it shows that we do have the capacity to
get out of our difficulties and that we have already made considerable progress
in that respect. The fact is our economy is showing signs of recovery. As I
have already reminded this house last week
* GDP will record a very small increase this year based on strong export
* Exports are expected to grow by about 6% in real terms this year, driven
by improvements in competitiveness and a strengthening of international
* Conditions in the labour market are also beginning to stabilise.
The outlook for next year is much improved. As forecast in the Plan growth is
expected to be around 1 ¾ per cent next year again driven by a remarkably
robust export performance.
The Fine Gael leader referred to the European Commission’s less optimistic
forecasts in the Dail yesterday which he suggested had undermined our Four Year
Plan. He ignored the substantial upward revision of the Commission’s forecast
on international trade which will benefit a small open economy like ours in
which growth, by common consent, will be export led.
It is also the case that, under the Programme, we have been given an extra year
to reach the deficit target of 3% of GDP precisely to take account of the
Commission’s lower growth forecast. I welcome this step but it does not alter
our budgetary plans as set out in the Plan. In other words the target of €15
billion of adjustments by 2014, remains but there is further room for manoeuvre
in the event that growth is lower than expected.
In the later years, the Commission’s growth forecasts are similar to my
Department's. It is also the case that others - such as the ESRI for example -
believe that the Department of Finance forecast is too pessimistic.
The Programme has adopted in its entirety the measures set out in the National
Recovery Plan as a roadmap to return our economy to sustainable growth. The
adjustment of €15 billion by 2014 has been accepted as has the breakdown of €10
billion in spending reductions and €5 billion in revenue raising measures. The
details of the first €6 billion of this adjustment will be contained in the
budget which I will present to the House next Tuesday.
The programme of structural and labour market reform aimed at improving our
competitiveness has also been endorsed by the Programme. It set out a detailed
quarterly schedule for the achievement of the agreed measures.
The negotiations on the Programme which took place over a ten day period were
intense and at times difficult. They were conducted under my direction and that
of the Governor of the Central Bank by the most senior officials from my
Department, the Central Bank and the Financial Regulator, the National Treasury
Management Agency and the Office of the Attorney General.
There has been the usual barrage of criticism of the outcome accompanied by the
personal abuse of those involved that has become common place in our debased
public discourse. But none of the critics explains how we could have secured
the funds we require at less cost to the State.
Indeed the arguments put forward have been patently wrong. For example, it has
been claimed that we are paying a higher interest rate than Greece even though
Greece is now seeking our terms. The interest on Greek loans is 5.2% for 3 year
loans. Ireland’s interest rate will be 5.8% for loans that are on average for
7½ years. A basic fact of sovereign borrowing is that the longer a country
borrows money, the higher the interest rate paid.
Of course, if at any time during the three years of the Programme, it emerges
that we could borrow at a lower rate in the markets, there is nothing to stop
us from doing so.
I want to clarify the position of the €85 billion funding package and its
impact on our debt levels. Of the total, €50 billion is to provide the normal
budget financing: in other words, it is money we would have had to borrow over
the next three years in any event. The Programme provides these funds at a much
lower rate than currently available to us in the market. This level of funding
is already included in the plan. Of the remaining €35 billion - €10 billion is
for immediate additional bank recapitalisation and the remaining €25 billion is
to be used as a contingency fund, only to be drawn down if required based, for
example, on the results of the updated capital assessments.
Furthermore, the State is in the happy position of being able to contribute
€17.5 billion towards the €85 billion from its own resources, including the
National Pension Reserve Fund. It can do this without prejudicing the
commitments in the four year plan to use funds from the NPRF for projects such
as the water metering programme and retrofitting.
This use of the NPRF has provoked the most bewildering criticism of all from
parties who, having for years fundamentally disagreed with the very existence
of the Fund, have now become its most ardent protectors. And on this point the
arguments make absolutely no sense. Why would we borrow expensively to invest
in our banks when we have money in a cash deposit earning a low rate of
interest? And how on earth can we ask tax payers in other countries to
contribute to a financial support package while we hold a sovereign wealth
fund? We have a large problem with our banks which has forced us to seek this
external assistance. In these circumstances, it is surely appropriate that our
cash reserves should be deployed to help solve that problem.
The reason we had to seek external assistance is because the problems in our
banking system simply became too big for this State to handle on its own. Our
public finance problems are serious but we were well on the way to solving
them. The combination of the two sets of difficulties in circumstances where
the entire Eurozone was under pressure was beyond our capacity.
So the primary aim of the Programme agreed last weekend is to support the
recovery and restructuring of our banking system.
It has been clear for some time that our banks were facing serious challenges
in terms of their liquidity position. Lingering concerns in the market
regarding their capital position led to negative market sentiment.
This was despite the substantial transfer of the banks’ riskiest loans to NAMA
and the detailed capital adequacy assessment made by the Financial Regulator in
the summer as well as the significant recapitalisation measures that flowed
But the Programme does not propose any departure from existing policy: its
prescription is an intensification and acceleration of the restructuring
process already being undertaken for the Irish banks. A key objective is to
ensure that the size of the domestic banking system is proportionate to the
size of the economy and is appropriately aligned with the funding capacity of
the banks overall taking into account stable sources of deposit and wholesale
The programme also seeks to demonstrate the capacity of the banks to
accommodate any unexpected significant further deterioration in asset quality
so as to rebuild market confidence in the robustness and financial resilience
of the banking system overall.
The Central Bank is requiring the banks to meet a Core Tier 1 capital ratio of
12% - a key measure of capital strength. If the banks cannot source it
themselves, the State will inject the necessary capital. This can be drawn
from the €10bn which is available immediately from the overall Programme fund.
As I have outlined above, a further remaining €25bn. euro will be available on
a contingency basis.
It is important to point out that a detailed and extensive review of the
financial status of the Irish banks was undertaken by the external authorities
in advance of the agreement on the EU/IMF Programme.
There was a very sharp focus in this work on the results of the Central Bank of
Ireland's assessment of the capital position of banks - the Prudential Capital
Assessment Review (PCAR) - carried out earlier this year and updated in
September last. The Governor of the Central Bank recently confirmed that the
external experts had found no fault with the methodology used for the PCAR
The Central Bank will under ther terms of the Programme carry out an updated
PCAR exercise on the capital position of the banks in early 2011 based on
stringent stress testing and detailed reviews of asset quality and valuation.
This exercise will take into account updated assessments of the macroeconomic
environment. It will ensure that over the coming years, the banks’ capital
ratio do not fall below 10.5%. This is a high standard in international terms
and it should give confidence to the market that our banks will be in a strong
financial position. This in turn will provide the necessary reassurance to
allow the banks to attract greater market funding in due course.
The Government will also undertake a process of significant restructuring and
right-sizing of the banks to reduce their balance sheets. In this context, all
land and development loans below €20m in Bank of Ireland and AIB will be
transferred to NAMA.
Further work will be undertaken in the short-term with the banks to identify
how the sector can be reorganised to ensure that we have a viable and
financially strong banking system which meets the needs of the real economy and
has the confidence of international markets. This strategy, developed in
collaboration with the various international organisations and endorsed by
them, builds on the measures adopted by the Government over the past two years
to resolve our serious banking difficulties.
The Programme allows for an integrated approach to the restructuring of Anglo
Irish bank and Irish Nationwide Building Society, building on the proposed
Asset Recovery Bank structure to seek to maximise value from their loan books.
Revised restructuring plans for the two institutions will be submitted to the
European Commission in early 2011 detailing the resolution of the institutions,
in particular the arrangements for working out of assets over an extended
period of time
I would like to reiterate that all deposits held with the domestic banking
system are safe and covered by the Deposit Protection Scheme for sums up to
€100,000. In addition, deposits in participating institutions under the
Eligible Liabilities Guarantee Scheme are guaranteed in line with the terms of
the Scheme for sums over €100,000. The Scheme has been extended in national
law to the end of 2011.
There has been much commentary about the need for senior bondholders to accept
their share of the burden of this crisis. I certainly raised this matter in the
course of the negotiations and the unanimous view of the ECB and the Commission
was and is that no Programme would be possible if it were intended by us to
dishonour senior debt. The strongly held belief among our European partners is
that any move to impose burden sharing on this group of investors would have
the potential to create a huge wave of further negative market sentiment
towards the eurozone and its banks system. That apprehension was confirmed by
Professor Honohan in an interview last Monday when he said there was no
enthusiasm in Europe for this course of action.
There is simply no way that this country, whose banks are so dependent on
international investors, can unilaterally renege on senior bondholders against
the wishes of the ECB. Those who think we could do so are living in fantasy
land. Worse still, those who know we cannot do so but who nonetheless persist
with the line are damaging this country and its financial system: and all for
the sake of a cheap headline. It is a case of politics as usual even at this
most difficult time.
The idea which is now commonplace, that some how there are no costs associated
with default is entirely incorrect. Ireland is hugely dependent on Foreign
Direct Investment. These companies have large funds and investments in
Ireland and directly and indirectly employ a quarter of million people in this
economy. Any default on senior debt and the uncertainty that would cause would
undoubtedly impact on the future investment decisions of these companies.
Subordinated debt holders are in a different position. As I said in my
statement on the 30th of September last, there will be significant burden
sharing by junior debt holders in Irish Nationwide and Anglo Irish Bank. These
two institutions had received very substantial amounts of State assistance and
it was only right that this should be done.
My Department has been working with the Office of the Attorney General to draft
appropriate legislation to achieve this and this is near finalisation.
Parallel to this Anglo Irish Bank has run a buyback operation which will offer
these bondholders an exchange of new debt for old but at a discount of at least
80%. This process is still underway and will be concluded shortly.
Obviously this approach will also have to be considered in other situations
where an institution receives substantial and significant State assistance in
terms of capital provided to maintain their solvency ratios. I hope to be in a
position soon to announce this legislation.
We need a properly functioning banking system for this country. As I have
indicated in the past we need to shift to a banking system commensurate with
the economy but one that is strong and capable of meeting our needs. That has
been the overriding objective of all our efforts since this crisis began two
years ago. I believe the considerable funds provided by this Programme, will
enable us to bring this crisis to an end and to secure the future of the Irish
banking system so that it can play its full role in supporting the development
of this country.
We have been through a traumatic two years. Of course, we would have preferred
to avoid resort to external assistance. But we can emerge from it a stronger
and fitter economy. The attributes that brought us the boom: the quality of our
workers, our entrepreneurship, our pro-business environment; all of these
remain in tact. During the boom we built a top class transport infrastructure,
sport and cultural facilities and educational sector. Over the last two
years, we have won back much of the competitiveness we lost during the boom.
This 3 year EU/IMF Programme will provide the basis for funding us through our
current difficulties. It provides the funding to restructure and recapitalise
our banking system. And it will guide us through the implementation of the
necessary budgetary and reform strategies set out in the National Recovery
Plan. A Cheann Comhairle, we have every reason to be confident about the
future of this economy.
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