Minister Burton Welcomes Landmark Promissory Note Deal

Minister for Social Protection (Deputy Joan Burton):

I welcome this motion and the landmark deal that the Government has secured to ease the debt burden we inherited from Fianna Fáil. In March 2010, when the chaotic Fianna Fáil-led Government cooked up the promissory note to recapitalise Anglo and Irish Nationwide, I warned of the consequences. Fianna Fáil still seemed to think at that time that Mr. Fingleton and Mr. Fitzpatrick were some kind of economic whiz kids who had reinvented banking so that it only produced profits and never caused any issues around debt or sustainability. Following the disastrous bank guarantee, Fianna Fáil announced it was immediately pumping €8.3 billion into Anglo by way of a promissory note, with a further €10 billion to come, and a separate €2.6 billion for Irish Nationwide. I remember the gasps in this Chamber when those figures were announced. Fianna Fáil then compounded this dodgy deal by taking a two-year repayment holiday, thereby passing its poison pill on to this Government, in what I suppose was considered a neat piece of political footwork.

At that time, I was clear about what such a toxic arrangement would mean – a €2.1 billion payment a year by taxpayers to cover the costs of crony capitalism. As we all know now, thanks to Fianna Fail’s breathtaking incompetence and Anglo’s rogue banking, the bill grew even higher. When all was done and dusted, taxpayers were left on the hook for €31 billion in promissory notes – and a €3.1 billion annual payment before a cent was spent on health, education or welfare. Anyone who has ever been involved in running a household budget or a business knows that cashflow is vital. The annual payment of €3.1 billion was a crippling amount of cash for any Government to pony up each year. The fact we do not now need to borrow and pay the interest on that annual cashflow requirement of €3.1 billion is an enormous improvement in Ireland’s debt sustainability and is critical to getting us out of our difficulties.

As the Labour Party spokesperson on finance in 2008, I opposed the bank guarantee because I knew it was a reckless gamble through which Fianna Fáil essentially bet the public purse on Mr. Fitzpatrick and Mr. Fingleton and their like. At the time, I warned that the Exchequer, or some specially created public agency, might become an owner of vast amounts of dodgy debts and the property associated with them, which is exactly what happened with NAMA. Once the disastrous promissory note was put in place, I consistently argued that it needed to be renegotiated so that Ireland could repay over a longer term in a way that did not inhibit recovery or debt sustainability.

I have never been an advocate of default. As the former IMF director, Donal Donovan, pointed out last week, the effects of a default would have been catastrophic – fatal to the Government’s efforts to re-enter the bond markets and disastrous to our reputation as a stable location for foreign investment and as an open trading economy. We are incredibly dependent on trading to make our living. It is a fiction perpetrated by certain commentators and Opposition Members that a default would make all our problems disappear in a puff of smoke. One should ask the Argentinians about that. More than a decade after Argentina defaulted, hedge fund creditors are still chasing it through the international courts and the country is indefinitely shut out of international financial markets. Recently, the Argentinian President was concerned that if she left the country on the government jet, it would be seized by creditors. Do the same commentators and Members of the Opposition wish to reduce Ireland to such pariah status? These are inconvenient truths that the default vigilantes on the Opposition benches are never prepared to address.

Rather than default, I often cited the example of the Marshall plan and the follow-on 1953 London debt agreement, which allowed Germany repay its legacy debts over a much longer period and rebuild after the war. Such a deal, I argued, would be crucial to Ireland’s recovery and would be a demonstration of European solidarity. I am very happy to say that the Government has now secured precisely such a deal, through careful negotiation, persistence and determination. The deal will ensure that Anglo has been wiped off the map and the promissory note torn up. It will ensure that the IBRC-related debt is tucked into a long-term bond which will allow the State to pay over a much longer period at a lower rate of interest. This will mean a cashflow benefit of €20 billion over the next decade and deficit reduction of up to €1 billion per year over the coming years. This is a key milestone on Ireland’s road to recovery, significantly enhancing our debt sustainability along the lines I advocated. We will not have to pay the first principal payment until 2038, and the last in 2053, by which time inflation will have ensured that the real value of these payments has lowered significantly.

Members on the opposite side of the House will understand the mathematical facts around the time value of money. In 1973, 40 years ago, Irish GDP was €3.76 billion. Today it stands at €168 billion. In other words, over that 40 year span, we had an average 10% annual increase in our GDP. Therefore, the debt which seems so sizeable now will eventually be dwarfed by economic growth and inflation. This assumes we will have to pay the principal from 2038 onwards. Once the country is sustainable, there will be a strong market for our bonds. Therefore, it is more than likely that if future governments wish at that time, the debt will be rolled over, the normal course of action for many countries.

There is further to go. We must continue to negotiate on the rest of our bank-related debt and must seek solutions that will further improve our debt sustainability, in particular the extension of our bailout loans. As Members know, the Government has work in progress on that.

All of this effort will be in vain if we cannot use the improvements in our debt position to ease the burden on our hard-pressed citizens. The people of this country have stayed the course throughout the financial collapse, the economic upheaval that followed and the austerity budgets that were an unfortunate and inevitable consequence.

There is a limit beyond which additional austerity becomes counterproductive. After five years of a European response centred on austerity, we are close to that point now. The IMF has admitted in its staff reports and other reports that it underestimated the effects of austerity on economies throughout the financial crisis. As someone who has argued for a long time that deficit reduction is sensible but should not be implemented too quickly, I welcome that admission. It is inescapable that Ireland has to get its deficit down. We are spending more than we are taking in and borrowing to plug the gap. This Government is committed to tackling that issue and putting the public finances in order.

The proponents of austerity seem to think deficit reduction can only be done by cutting endlessly. I suggest that the best way to reduce the deficit is to get more people back into work, thereby boosting consumer spending, increasing the State’s tax take and reducing the borrowing requirement. That is why, in my capacity as Minister for Social Protection, I have sought to protect the welfare budget and core weekly rates, reform employment supports and significantly increase the number of activation places to help people get back into work, training or education. Data published by the CSO today underline the crucial importance of welfare payments in reducing poverty. They show that in 2011, welfare payments reduced this country’s at-risk-of-poverty rate from 51% to 16%, which was the best outcome in the EU.

The welfare budget is not just to protect the most vulnerable people in society. The €20 billion that is spent on welfare acts as a Keynesian automatic stabiliser; it supports the economy by putting money into the hands of consumers who need it. That money goes through their hands and into the tills of businesses, shops, pubs and enterprises throughout the country on a regional and island-wide basis. The role of the welfare system in stabilising economic demand is acknowledged internationally. The US Congressional Budget Office has noted the impact of expenditure on welfare in stabilising European economies. We have to use the proceeds from the promissory note deal to invest in our people and our economy. We need to start that process this year. We have a very good base from which to ensure the Irish economy grows again, get people back to work and invest in the country.