Michael Noonan Rte Interview

Station: RTE Radio One Programme: Morning Ireland Presenter: Aine Lawlor and Cathal Mac Coille Date: Friday 1st April 2011 Time: 08:15 Duration: 17:40 Cost of Rescuing Ireland's Banks' Now a Staggering €70 Billion / Interview Minister for Finance, Michael Noonan So now we know that the cost of rescuing the Banks' is a staggering €70 billion. The new Government intends putting in another €24 billion of the State's money and shrinking the Banks' from six to two. And Central Bank Governor, Patrick Honohan insisted yesterday, the savings Ireland could make by not repaying senior bank bond holders in full, that saving would not be worth the long term cost to us of default. Aine Lawlor discusses all the issues with the Minister for Finance, Michael Noonan.

Aine Lawlor: So now we know that the cost of rescuing the Banks' is a staggering €70 billion. The new Government intends putting in another €24 billion of the State's money and shrinking the Banks' from six to two. And Central Bank Governor, Patrick Honohan insisted yesterday, the savings Ireland could make by not repaying senior bank bond holders in full, that saving would not be worth the long term cost to us of default. That's a question we'll be putting to Finance Minister, Michael Noonan who's with us in studio in a moment. The other big question is simply can Ireland afford this bank rescue? Many outside commentators think now. Here's what Mohamed El-Erian, Chief Executive of Pimco had to say on Bloomberg Television yesterday. Now Pimco is the world's biggest bond fund. It manages investments worth $1.2 trillion. And Mr El-Erian says the strategy of paying back all your creditors in a debt crisis, he says that hasn't worked down through history, and it won't work this time.

Mohamed El-Erian (Chief Executive, Pimco): The only people doing their fair share right now, in fact I would say they're doing more than their fair share, are the Taxpayers of Ireland, who are having to go through tremendous austerity, and the IMF and the EU that are putting in money. The creditors' most of the creditors' so far, have not gone through any burden sharing.

Interviewer: Why? Mohamed El-Erian (Chief Executive, Pimco): And it's absolutely remarkable, it is remarkable, is it is inadvisable, but it is a political decision that has been taken. It surprises me. I don't think you can sustain that political decision.

Interviewer: But you know all these guys. You're jetting around the world. You're going around the world. You're talking to these elites, what are they hoping for?

Mohamed El-Erian (Chief Executive, Pimco): What they're hoping for, is by maintaining the creditors' intact, that the creditors' are going to rush back in with new money. What they haven't read is the

history of debt crisis, and the history of debt crisis is very simple, whenever you have a debt overhang, whenever you have this big cloud of debt, no new creditor will come in a big way.

Aine Lawlor: And that was Mohamed El-Erian the Chief Executive of the world's biggest bond fund Pimco speaking on Bloomberg TV yesterday. Finance Michael Noonan thank you for joining us in studio. you know that outside commentators are saying that. You know they're saying it's remarkable that the bond holders aren't sharing the pain. You know that Michael McGrath, Fianna Fáil are accusing you of a U-Turn, that you're having to eat your election promises on burden sharing. What's your answer?

Michael Noonan (Minister for Finance): Well some commentators are saying what the gentleman on your tape just said. I suppose the general division is that the American way of doing things is to have burden sharing and to make creditors share in the pain. The European way is different.

Since the crisis started, Fine Gael has been in favour of burden sharing, if you think back to two and a half years ago, even subordinate debt was sacrosanct, and the Europeans wouldn't agree to burden share on subordinate debt. They have now moved, but as a general principal our policy has been and continues to be that there are three parties to this who will be paying, the Irish Taxpayer, the European Taxpayer and the Creditors'. And we have moved it to a point where significant savings on the twenty four about between €5 and €6 billion would be got from subordinate debt holders. But the Central Bank in Frankfurt, are holding out solidly that the Senior Debt, Senior Unguaranteed Bond Holders wouldn't be touched. Now it's a majority view in Frankfurt. There are Governors in the Central Bank in Frankfurt who hold our view. But on the basis of the advice, and on the basis that the bank in Frankfurt is supplying almost €200 billion of liquidity to the Irish Bank System, we said we wanted burden sharing, but we would not do it unilaterally. We would only do it, with the agreement of Frankfurt, and we didn't get the agreement. But we will re-enter you know, Anglo Irish Bank wasn't subject to stress testing. So there's no call on additional capital there. But there are senior unguaranteed bonds there. So if it ever comes to the point where we need additional capital there, we will re-enter the debate. So we're holding our position. Now what did we get out of it.

Well first of all you know, there may be a downgrade of Irish Bank Paper, as a result of the stress tests.

Aine Lawlor: From the Ratings Agencies?

Michael Noonan (Minister for Finance): From the Ratings Agencies. The consequence of that is that under the rules of the European Central Bank they would stop lending, because they need a certain rating level to continue to lend on the Banks'. Last night's statement has said we'll continue to lend on an ongoing basis, on the back of your bank paper, even if it's marked down.

Aine Lawlor: So that's the liquidity funding, the liquidity funding will continue. Even though we're going to get a ratings downgrade.

Michael Noonan (Minister for Finance): And it's going to be medium term. The word they used, they didn't say medium term, they said ongoing. But everybody picked up the ongoing. But the more important thing is they're going to continue to lend, even if there is a downgrade by the Ratings Agencies, on the banking paper.

Aine Lawlor: We'll come back to that liquidity question in a moment. Just to clarify the position on the bond holders at the moment, because it was such a big issue in the campaign. What you're saying at the moment appears to be that you're looking at Anglo Irish and Irish Nationwide, you're willing to look at making the bond holders take a hit there, without European agreement, you're not going to do anything to the senior bond holders in Bank of Ireland and AIB, is that fair?

Michael Noonan (Minister for Finance): Well first of all there's a standalone argument in Bank of Ireland and AIB. They're going to be the Pillars of a new banking system in Ireland. They're going to be providing between them about â‚Ź12 billion of extra credit each year, for the next three years. They are going to be, you know the lifeblood of a new economy, which we hope to grow to get us out of this difficulty.

Aine Lawlor: So you're buying Europe's argument that they can't renege and keep trading?

Michael Noonan (Minister for Finance): I'm saying that it would inhibit their capacity to get funds on the market in two and a half, three years time, if the people that they're going to be seeking the funds from, have shared in the burden by burning the bond holders, to use the expression. Anglo is different. Anglo is not really a bank anymore, it's kind of a warehouse for depleted assets. All the deposits have been moved out, as you'll recall.

Aine Lawlor: So do you buy that argument or are you going to continue to push Europe, to push the ECB, to try to make the bond holders in those main Banks' take, share the burden?

Michael Noonan (Minister for Finance): No, once yesterday passed, we've made a fresh start now with AIB and Bank of Ireland.

Aine Lawlor: So you're not pushing for any bond holders to take, share the burden there?

Michael Noonan (Minister for Finance): No I mean that debate is over. And Frankfurt would not agree to sharing with the bond holders. But the debate is going on. You see the bigger picture is, is that Europe had a currency crisis. And it didn't have the policy instruments to deal with it. And they're retrofitting a series of policies into a currency zone. But it's not a well developed currency zone like the Dollar zone in United States. And if you look back over the last twelve months, they've done a lot. But they haven't yet, getting over the hurdle of burden sharing, and yet from 2013 they had agreed at the Heads of State meeting last week, that there will be private sector involvement in future crisis if they occur, after 2013. So it's built into their policies now, that there will be burden sharing, even with senior debt, even with sovereign debt. But not until after 2013. So it's ironic in one way, if our crisis had been deferred till 2015, there would be a range of policy instruments to deal with it, including burden sharing. But it's not available at the minute, and we have to make a judgement, do we risk the liquidity flow of â‚Ź200 billion being cut off, especially when we know, or we think that Irish Bank Paper will be downgraded. So those were the choices we made. But we'll always, we haven't broken our word, we always said in the election, that anything we did, was under the umbrella of the European Agencies, and in consultation with the Central Bank in Frankfurt.

Aine Lawlor: Because what a lot of critics of your policy at the moment are saying, what's going to happen by 2013, is that we will, the State by rescuing the Banks', will have paid back all these European Banks' that held Irish bonds. And at that stage, they'll be perfectly happy, they'll have their

money back, at that stage this country will go broke. The sovereign will go broke, will the rest of Europe care then?

Michael Noonan (Minister for Finance): Well Europe has been very good to us. I don't think we should run, you know kind of anti-European programmes in Ireland as some politicians do. I mean we'd be in absolute penury if Europe hadn't come to our rescue. And you know they're giving us â‚Ź50 billion tomorrow on the sovereign side that we can't get in the market. They're giving us â‚Ź35 billion on the banking side that we couldn't access in the market, and of course we'll pay interest on that.

But more important than that, they have already paid over â‚Ź200 billion into the Irish Banks', to keep the cash machines going, so that we can cash our pay cheques. So that they are viable Banks'.

Aine Lawlor: But if we're relying on the kindness of strangers, they're going to look after their own interests first?

Michael Noonan (Minister for Finance): No no no, it's not the kindness of strangers, you know, we're all Europeans. The European Central Bank is our Central Bank. But we have to negotiate every step of the way. We don't get everything. But it would be unfair to say that they're treating us badly.

They're actually treating us very well. And the biggest problem that I had going out there was, we have very little credibility. In Brussels and across Europe the policy makers do not believe Irish statistics, they don't believe Irish claims, because there was too many claims in the past, that didn't turn out. And we have to get over the credibility. That's why the stress tests are so severe. I mean if you actually look at the stress tests, and the amount of money that has to be put in now, it's astronomical by any comparison with any other banking crisis. But the strategy is, that our credibility is so low, we actually have to load the Banks' with capital, beyond what would be normal, simply to restore credibility.

Aine Lawlor: You've mentioned the emergency liquidity funding that the Banks' are depending on at the moment to keep their doors open quite a lot, and how important that is.

Michael Noonan (Minister for Finance): Yes. Aine Lawlor: Now it had been widely reported that part of the announcement yesterday was going to be the conversion of that, if you like huge overdraft for the Irish Banks', into a medium term loan.

Why didn't that happen?

Michael Noonan (Minister for Finance): Well it did actually. But what didn't happen was, there isn't a new structure of mechanism for medium term funding. But the statement put out last night by the European Central Bank said there would be ongoing funding. Now ongoing is another word for medium term. They just didn't use that word, ongoing funding. So for the first time, in writing, Ireland has got a commitment from the European Central Bank that there will be ongoing funding, the markets will note that. and you know the Banks' are secure, all our savings are secure, we can restructure them in a way that we can provide new credit lines, and we can start the fight back to build up Ireland again.

Aine Lawlor: And how big a deal was that to secure, because there was a lot of unease within the European Central Bank at having so much exposure to such a small little country?

Michael Noonan (Minister for Finance): Yes and you see the ease we have given them on the exposure is, is the deleveraging programme. Because you know if you have a huge deleveraging up to â‚Ź90 million . . .

Aine Lawlor: That's the shrinking of the Banks', the selling off?

Michael Noonan (Minister for Finance): Yes, selling off assets that are mostly outside the country, which aren't essential to the Irish economy. But when you sell them off, you sell off the assets back in the loans. You get money. Now that money goes to pay back Europe. So you see they can see now for the first time, over the medium and long term, that they're actually getting paid back, so the position has improved dramatically yesterday, from our point of view, but also from their point of view. Like the Banks' are secure. And in the deleverage, the way we planned it is, you know they're saying the equilibrium, the point now to get your, you know the amount you can lend depends on the amount on deposit. The new rule would be that we would lend about 20% more than what's on deposit. But initially we're bringing it down below that point, so that there's headroom for new lending, out into the real economy. And that's where the â‚Ź12 billion a year figure comes from, in additional credit.

Aine Lawlor: And so you're putting all this money into the Banks', and you're going to shrink them, and you're going to change them and all the rest, and you are saying, you know they're going to be able to go back to the markets in two and a half, three years time. There's a lot of market analysts wondering how those two core Banks' are actually going to thrive in the real world, where the investment is going to come from, if their core business is an economy that's broke from rescuing them?

Michael Noonan (Minister for Finance): Yeah, we have to start somewhere. And my analysis of it, and it would be shared by very very many people, that you can't build up Ireland again, without having a proper banking system. That credit is fundamental to the future of the economy. So the first step of the new Government is to fix the Banks', so that there is credit available. And once credit is available, the thing will build, it will build slowly initially, and as we get confidence back into the economy, and as credit lines open up, small business will have credit. And we're going to drive this, there were promises made before, you know, and they weren't delivered at various inputs of money, because the Banks' promised so many millions for small business, and it was never delivered.

This time, I've got permission from the Government, to vamp up the supervisory banking section, in the Department of Finance, and since Ireland is going to be the principal shareholder, we're going to drive the policy from there. So that commitments that are made . . .

Aine Lawlor: We've been hearing those kinds of promises for years now, you known that an awful lot has stayed the same in the Banks'.

Michael Noonan (Minister for Finance): Yeah that's because you know, while the commitments were made, the means were never put in place to deliver.

Aine Lawlor: How soon will we see a difference?

Michael Noonan (Minister for Finance): We're starting pretty well straight away. I think we've seen a difference already and we're only there three weeks. We've got the framework for a new banking system in place this morning. And it's being received very well internationally.

Aine Lawlor: When you go to talk about the terms of the bailout deal with your European Finance Minister colleagues, you won't have many friends around the table will you?

Michael Noonan (Minister for Finance): We have actually, we have friends.

Aine Lawlor: Who? Michael Noonan (Minister for Finance): We've a lot of friends. Well you know we talk privately to them.

Aine Lawlor: Well we know Finland don't want to put any money in. We know that they're you know holding their nose in Germany and Austria and France about us. There's others.

Michael Noonan (Minister for Finance): Finland will be quite friendly in a fortnight's time. Finland have a new phenomenon, they have the true friend party, which has gone from 5% over 20%. And they have an election within days. So you know, they're quite progressive and they're quite friendly towards Ireland. And Germany is quite friendly towards Ireland. As a matter of fact the Head of the Bundesbank, the present Head of the Bundesbank would share our views on burden sharing. But he's one of the Governors who's in a minority in Frankfurt. And you know he was tipped to be the next Governor of the European Central Bank and because of his views on burden sharing and other things, he's not going to get the job now. And it will go in a different direction. But there are friends around the table, and we will use the friendships.

Aine Lawlor: Is the best you can hope for a cut in the interest rate?

Michael Noonan (Minister for Finance): Well I think the best we can hope for has happened already.

The best we can hope for is the commitment last night to continue to lend to Ireland at 1%. I mean €200 million ongoing funding at 1%, that's a serious commitment in writing from the European Central Bank. That's going to keep the Banks' going forward.

Aine Lawlor: Em you mentioned the True Finn Party and a reaction against Europe. I was looking back actually last night at Morgan Kelly the Economist who was one of the first to predict what would happen to the Irish economy, and last November he was saying actually, if you add in mortgages, the true cost of the bank bailout is €70 billion. So it seems he was right on that again. He also warned about political unrest because the burden, the burden on this society of paying this debt would simply be too much to pay?

Michael Noonan (Minister for Finance): Yeah I mean there's always . . .

Aine Lawlor: Do you worry about that as Finance Minister?

Michael Noonan (Minister for Finance): Well you know I think that the Irish Taxpayer has been very patient. And the Irish Taxpayer has had a very big burden placed unfairly on their shoulders. This particular tranche of bailout funds, will not add very much to the imposition on the Taxpayer. It's €24 billion in all, but Brian Lenihan had put €7 billion on deposit already, so we'll switch that across.

Now the interest has to be paid on that €7 billion, but it's not new money, the money is in the banking system already. We'll take about €5 to €6 billion out of subordinate debt, which will be no cost. And then there's €10 billion coming from the Pension Fund, because that's built into the bailout money already. But that comes across as a transfer from the Pension Fund, and there isn't an

interest rate charge on that. So the quantum of debt doesn't increase very much. And the servicing of it will be an interest charge of about you know whatever it is, 5.8% of â‚Ź7 to â‚Ź8 billion. So it doesn't drive us towards, in sustainability . . .

Aine Lawlor: I know the detail of the numbers might look like that to you, but equally there's a lot of people listening to you this morning, who are kind of going, hang on, I went out and I voted for change. I didn't vote for â‚Ź24 billion more into the Banks'?

Michael Noonan (Minister for Finance): No they voted for change, and they're getting change. I mean they're getting a major revamp of the banking system. And we're going to have two main banking groups now, which will trade universally in Ireland, and provide money to households and money to business to build up the economy. That's the change. The restructuring of the banking system is the change.

Aine Lawlor: Michael Noonan, Finance Minister, thank you for talking to us this morning.

Michael Noonan (Minister for Finance): Thank you very much Aine.