Two recent revelations have added massively to the cost and the uncertainty surrounding Fianna Fáil’s bank plan:
1) The bailout IOUs, or promissory notes, give rise to super-sized interest payments, adding at least €1.7bn to the deficit in 2011, meaning higher taxes and harsher cuts will be needed to meet deficit targets.
2) Government has agreed to buy all shares in the AIB rights issue at a price of 50 cent, even though the shares are trading on the open market at about 35 cent. Of the total €5.4bn rights issue, upwards of €1.6bn will be a straight gift to existing AIB shareholders.
Bankers have treated taxpayers like doormats – all take and no give.
It is time that this balance is redressed and the banking sector be made to contribute to the cost of cleaning up its own mess and preventing a similar mess in the future.
Options should be explored like:
1) moving from 50% to 100% industry cost coverage of financial regulation, bringing, bringing savings of about €30m, or €150m over 5 years.
2) campaigning for an EU-level Financial Transactions Tax on speculative transactions. This could raise €1-2bn for Irish exchequer per annum.
Promissory Notes
Brian Cowen shed some light on how Ireland is to pay down the IOUs incurred in bailing out Anglo Irish Bank, Irish Nationwide and EBS when he described the promissory notes as being akin to paying a mortgage.
To date, the Minister for Finance has issued €18.88bn in promissory notes to Anglo Irish Bank, with the issue of a further €6.4bn imminent. A promissory note has been issued to Irish Nationwide for €2.6bn, but the Minister has indicated that this will very soon increase by a further €2.7bn. A smaller promissory note, amounting to €0.25bn, has been issued to EBS.
These IOUs will total nearly €31bn by end 2010, but that’s not the end of the story.
If the interest rate on the promissory notes averaged 5%, and repayments totalled €3bn per annum, then the total interest charge could add €10-14bn to the final bill for bailing out the banks.
The Minister for Finance must come clean on the interest rate, the term, the annual cost and the total overall cost of paying off these IOUs.
We need to see the small print in the ‘mortgage agreement’ he has signed the country up to.
The use of the term ‘mortgage’ by the Taoiseach in the Dáil confirms Labour’s view that these IOUs will generate large annual interest payments in the budget every year. This just makes it more challenging to meet the 3% deficit target by 2014 and will result in more tax hikes and spending cuts in the government’s four year plan.
AIB Rights Issue
On the 8th of October, I tabled a parliamentary question in relation to the proposed rights issue to recapitalise AIB. I was concerned that this €5.4bn transaction which is to be underwritten by the National Pension Reserve Fund could involve an immediate and significant write-down on taxpayers’ investment.
In his reply to me on 14th October, Brian Lenihan confirmed to me that he intends for the rights issue to go ahead at a price of 50 cent, even though its market price has ranged between 30-40 cent in recent weeks.
It is customary for shares to be offered at a discount to the prevailing market price to encourage investors to participate in a capital raising rights issue. No investor will pay 50 cent for shares that they can acquire at a massive discount on the open market. This will leave the government having to acquire all 10.8bn shares using €5.4bn from the National Pension Reserve Fund. If this investment was ‘marked to market’, to reflect a market price of 35 cent, this would involve an immediate write down of over €1.6bn, or nearly 7% of the total value of the fund.
The net beneficiary of Fianna Fáil’s largesse will be existing AIB shareholders whose investments will not now be diluted as much as if the shares were being bought on behalf of taxpayers at or below the cheaper market price.
A further €1.6bn gift to punters on bank shares may not sound like a huge amount in the context of an overall bailout cost of well over €50bn, but to put this in context, it is approximately a third of the total budget cuts and tax rises that Fianna Fáil has in store for us in the December budget.
But, it could have been so different.
If the Fianna Fáil, Fine Gael, the Green Party and even Sinn Fein had not conspired to force through the disastrous blanket bank guarantee, then we could have avoided putting maybe tens of billions of losses on the backs of Irish taxpayers.
Given the scale of the problem, there was no cost-free option but, as Central Bank Governor Patrick Honohan has pointed out, introducing the most generous bank guarantee in the world ensured that losses would be enormous. Ireland’s cost of borrowing soared as a result, just like Merrill Lynch warned the government it would.
The original sin of the bank guarantee was compounded by the nationalisation of Anglo Irish Bank, diluting the credibility of the sovereign with that of our broken banks. Irish bond yields soared again. The cost of borrowing kept ratcheting up as the drip feed of bad news emanated from Anglo in the two years that followed.
And that, Minister, is why we are where we are.
Making Bankers Pay for their Crisis
What people simply cannot understand is that fat cat bankers and developers continue to live in the lap of luxury while ordinary people are struggling to make ends meet, while their children go to school in ever-bigger classes, and while their parents wait on trolleys for life-saving treatment.
Our casino bankers bet the house on a gravity defying property market.
They privatised the profits while socialising losses.
They creamed easy profits and big bonuses in the good times, but when things went sour, they washed their hands of their losses and dumped them on unsuspecting taxpayers, many of whom are still left with jumbo mortgages on houses worth far less.
The time has come for the day of reckoning.
Certainly, we need to get our banking system working again, and to get credit flowing to the families and businesses that need it. But we also need to learn from the financial crisis and put in place a framework that ensures such an epic crisis can never be repeated.
We also need to make sure that the very institutions that did so much to create the economic mess we are in, and which were such gratuitous recipients of taxpayers’ largesse, make their contribution to getting our public finances in order.
Reform Programme
We need to see an ethical revolution in Ireland.
For too long, low standards in high places have been tolerated, even venerated.
Labour is committed to reforming public life, so that the interests of a golden circle are never again put before the interests of Ireland, her citizens and future generations.
This is Labour’s agenda for a merit society, where those in public life take responsibility for their actions; where transparency is the norm, not the exception; and where the public interest is at the heart of decision-making.
In government, Labour will:
- Clean out the boards of the banks, and radically reform the banking sector including the introduction of a Special Resolution Regime for banks.
- Make good corporate governance the law, not a luxury
- Control land and property speculation
- End the link between big money and politics
- Legislate to regulate the practice of political lobbying
- Introduce Whistleblowers Protection legislation
- Extend Oireachtas powers of oversight and investigation
- Restore the Freedom of Information Act.