Kill Long Term Economic Value and transfer NAMA loans at market value- VaradkarMadam Chairperson, Mr Fielding, Mr Slattery, Mr Cody, distinguished guests, ladies and gentlemen.
Before I begin, I would thank the organisers for inviting me to speak at the MacGill Summer School. I have followed debates earlier in the week with great interest. I am going to take advantage of the summer recess to spend a few more days in this beautiful part of the country to hear some of the other speakers and also to do a little canvassing with our by-election candidate, Barry O’Neill who I hope will soon become a Fine Gael TD.
Last week, while preparing for this session I took some time to read over the Dáil debate on the Bank Guarantee from the night of September 30th 2008. I am ashamed to say that it does not read well and historians will not be kind to the 30th Dail. It is remarkable to how much revisionism has taken place since then both on the part of those who proposed the Guarantee and indeed those who opposed it.
At the time, the Government claimed that the Irish banks were solvent and well capitalised. They claimed that Irish banks were like orphans in the storm who had been afflicted by a temporary liquidity crisis caused by the collapse of banks in the United States. To quote the Minister for Finance speaking in the Dail on the night of the Guarantee
‘The total assets of the six financial institutions concerned exceed their guaranteed liabilities by approximately €80 billion. By any measure there is, therefore, a very significant buffer before there is any question of the State being called upon.’
Since then, the value of many of these assets has been written down dramatically. The truth was that our banks were not well capitalised and some were bust. What faced us was not a temporary liquidity crisis but an unfolding collapse of our financial system.
The Government narrative did not go unchallenged on the floor of the Dáil. On the night of debate and, over the following days, speakers including Richard Bruton, Michael Noonan, Joan Burton, Beverly Flynn, Michael D’Arcy, Tom Kitt and I queried the Government’s €80 billion claim. But we were all brushed off by the Minister. We now know that the Secretary General of the Department of Finance has expressed similar concerns before we did.
In his speech proposing the Guarantee, the Minister for Finance went on to say:
‘I stress that the provisions we are asking the House to approve are in no way a bail-out for the financial system.’
Brian Cowen said:
‘The Irish taxpayer will not be held liable in any way for any deficit that might occur in the event of there being a problem in the future.’
We now know that that is untrue. The Bank Guarantee and subsequent recapitalisation has cost us dearly and will probably cost us over €30 billion before it is over making it the most expensive bank bailout in the world.
We were told by Brian Lenihan that the decision was:
‘..informed by the advice and guidance of the Governor of the Central Bank and chief executive officer of the Financial Regulator.’
We were not told, however, that contrary advice was given by Merill Lynch or that verbal warnings we given by David Doyle, Secretary General of the Department of Finance.
Brian Cowen has kept up the deception. As recently as May this year, the Taoiseach speaking in DCU said:
‘We now know grave mistakes were made in the judgement of the capital adequacy of the Irish banks and the assessment of future loan losses. It is, however, important to note that no one in the independent authorities ever advised the Government that the capital adequacy was not sufficient.’
Clearly Merill Lynch and the Department of Finance do not fall into the definition of ‘independent authorities’ in Brian Cowen’s book. If the Taoiseach had not become a solicitor, he would have made a good Jesuit.
During the debate on NAMA, the Government and its supporters claimed that it was the only show in town, that there was no alternative. I think it is high time that the Government published the advice that it received on NAMA in the same way as it has published the advice they were given on the Guarantee. They should publish the entirety of the Bacon Report which proposed the establishment of NAMA and all of the independent and other advice that they received at the time. We have a right to know what other options were considered and why they were rejected.
What is most interesting about the debate, which ran late into the night, was not what was said but more what was not said. There was mention of bankers pay, a call for a new regulatory regime from Fine Gael and there was a demand for an equity stake in banks from the Labour Party. There was plenty of discussion about Ulster Bank which was excluded from the Guarantee. However there was almost no mention of Anglo Irish Bank or Irish Nationwide at all. I could not find the word ‘bondholder’ once in record of debate nor could I find any reference to sub-ordinated debt. It is remarkable how much things have moved on since then.
Looking back, I think we can agree with Patrick Honohan’s assessment that an extensive bank guarantee was an appropriate response to the crisis. It was right to guarantee the deposits in the banks, but it was not necessary cover sub-ordinated bonds and I remain unconvinced that it was necessary to cover existing bondholders. Covering new bondholders would have assured liquidity for the banks and would have exposed the taxpayer to much less risk. The Government argues to this day that is was necessary to cover all bondholders as these are the same individuals and institutions who lend money to the State and that any risk of defaulting on them would make it more difficult for the State to borrow money to fund public services in the future.
Two years later, the opposite is the case. The decision of the Government to take the debts of the banks onto our shoulders has raised the cost of borrowing for the State. It now stands at 5.5% up from 2.5% only a few years ago, a rate at which Germany can still sell its debt. It has brought our solvency as a nation into doubt as evidenced by the decision of Moody’s to downgrade our sovereign debt something that, remarkably, was welcomed by the Taoiseach.
In October, the Courts will hear Paddy McKillen’s challenge to NAMA. He argues that his companies’ loans are performing and that he should have to go into NAMA. The same case could be made by the 20% or so of developers whose loans are also performing. In the early years of its business plan NAMA will rely on income from these performing loans to cover much of its running costs. If the McKillen case is successful and performing loans are taken out of NAMA, we have to consider the possibility that the state may even have to bailout NAMA itself sometime next year.
I hope that within a year or two, Ireland will have a new government. Most of the decisions taken by the Government with respect to the banks cannot be undone. We are stuck with NAMA and any new government will have to try to make it work. We cannot denationalise Anglo Irish Bank much as we would like to.
But there are at least eight things that can be done to minimise the cost of bank bailout to the taxpayer, restore public trust and improve credit lines to business
• We can ensure that the Banking Inquiry will look into the behaviour of the banks in weeks after the Guarantee was introduced. There is anecdotal evidence that Anglo Irish Bank used the cover of the Guarantee to engage in reckless derivatives trading and foreign currency speculation in a double or quits gamble aimed at minimising their losses. If these stories are true, the abuse of the Guarantee itself may have considerably increased losses at Anglo Irish. Fine Gael warned about these risks at the time but we were ignored.
• We can introduce proper legislation to provide for a resolution regime for insolvent banks. It is extraordinary that two years into the banking crisis, this has not yet been done. It is not complicated. This would allow for insolvent banks that are not systemic to Irish economy to be wound down legally, efficiently and quickly. In this way creditors and professional investors would take their fair share of the losses as is normal practice in any other failed business and the taxpayer could save billions.
• We do not need to extend the Bank Guarantee beyond September 30th to all assets and liabilities. It should be extended but perhaps it should be limited only to depositors and new bondholders.
• We can still amend the NAMA process to remove the absurd concept of Long Term Economic Value. Only one-quarter of the loans that will be transferred to NAMA have been transferred. The remainder should be bought at their market value and for nothing more.
• We can also increase the risk sharing between NAMA and the banks from its current level of 5% to 10%.
• We can remove, over the course of the next two years, all of the senior bank executives and board members who have not been retired or resigned. That is key restoring public trust in the banking system and answering any concerns about moral hazard.
• We can introduce a loan guarantee system similar to that of the United Kingdom or Chile to tip the balance in favour of lending to small and medium enterprises. This will be more effective than a set of targets.
• We can ensure that the advice of the IMF is heeded and that NAMA does not hold back for long in selling off land and buildings that come into its possession. Confidence in the property market while there is a huge overhang of NAMA properties yet to be put on the market.
We have had a tough couple of years. But all is not lost. Ireland has experienced hard times before. We have experienced economic depression before. We did not let it beat us then and we will not allow it to beat us this time.
But we can only recover if the right decisions are made by those who lead us.
In my view:
• This means taking the action that is necessary to bring the budget deficit under control
• It means adopting a very different approach to banking crisis that recognises that the interests of the Irish economy are not the same as the interests of the banks
• It means supporting enterprise by implementing a programme to restore cost and non-cost competitiveness
• And it means stimulating the economy by using the proceeds of privatisation and money from the National Pension Reserve Fund that is currently invested overseas to drive infrastructural investment through our state enterprises into the new economy - broadband, green energy and clean water
That’s what can be done and it is what Fine Gael, with your support, will do.