16:11 - The House divided: - Ayes: 523 / Noes: 7 - Question accordingly agreed to.
The Chancellor of the Exchequer (Mr George Osborne)
I beg to move, That the Bill be now read a Second time.
Two weeks ago I told the House that it was my intention to ask for authority to make a bilateral loan to Ireland as part of the multinational assistance programme for that country. I said that I judged it to be in our national interest, given our country’s close economic, financial and political connections to the Irish Republic, to be ready to help, and I want to thank all parts of this House for agreeing with that judgment.
Let me directly address the question of why we are taking this legislation through today, and why we are seeking to do it rapidly. The reason is that this week we expect the International Monetary Fund board to meet and agree the assistance package, the eurozone to sign off on its contribution, and the Irish Parliament to accept the international help that is offered. Let me say this to hon. Members in reference to the previous debate. I actually have the authority to make, under common law, a loan to Ireland and to seek at a much later date retrospective authority from Parliament. I decided—[Interruption.] Let me say that I decided that that was a wholly inappropriate thing to do, and that I should come to Parliament to seek its authority before signing the loan agreement. The loan agreement may be signed at any moment.
Mr Peter Bone (Wellingborough) (Con)
I am grateful to the Chancellor for giving way, but has he not let the cat out of the bag? He has just said that there is no urgency, because he had the power to do this anyway. If that had been said in the previous debate, the result of the vote might been different.
Mr Osborne
From what I could tell from what my hon. Friend was saying in the previous debate, he thought it important to have parliamentary scrutiny. It is true that I could have issued the loan under the common-law powers available to me, and come back at a later point to seek parliamentary approval. I thought the House would prefer me to seek parliamentary approval first, before making the loan—but there we go; you can’t please everyone.
Mr Douglas Carswell (Clacton) (Con)
The Chancellor suggested that it is at his discretion that he has brought forward this Bill. Is it not the case that the 1932 convention requires him to do so—and does not that, rather than his discretion, explain why this legislation is before the House?
Mr Speaker
Order. We cannot have an intervention on an intervention. We will hear from the Chancellor.
Nadhim Zahawi
I thank my right hon. Friend for giving way. Setting aside the technicalities of why we are debating this measure and how long we shall do so, and getting down to the substantive issue of the loan, can the Chancellor share with the House what the fees and the interest to the UK Government will be over the period of the loan if the Irish Government draw down the whole of the loan?
Mr Osborne
The second intervention draws me back into the rest of my speech, but in response to my hon. Friend the Member for Clacton (Mr Carswell), I have common-law powers to issue the loan and sign the loan agreement. I then have to seek statutory authority, but that could be done retrospectively. I thought it more appropriate to seek parliamentary approval first, and that was a discretionary choice that I had.
I will answer my hon. Friend the Member for Stratford-on-Avon (Nadhim Zahawi) directly a bit later in my remarks, when I get on to the terms of the loan that we are going to consider.
Mr Christopher Chope (Christchurch) (Con)
Will my right hon. Friend give way on that point?
Mr Osborne
I will give way to my hon. Friend, and then I really must make some progress.
Mr Chope
I am grateful to my right hon. Friend. If the point that he is making is such a good one—it may well be—why did he not include it in paragraph 14 of the explanatory notes, making a virtue of the fact that he was bringing this matter before the House now rather than seeking retrospective approval?
Mr Osborne
I said in an earlier statement to the House that I was seeking to do that, and I had hoped that hon. Members were paying attention to what I said at the time.
The legislation that we shall pass today will allow the UK to be ready in the new year to meet its commitments to one of our closest international partners. As has been noted, the legislation before the House is narrow in scope—it is explicitly a Loans to Ireland Bill—but it is still enabling legislation. It sits alongside the actual loan agreement, which sets out in detail what we will offer Ireland. To ensure that Members have as much information as possible available to them for today’s discussion, a summary of the key terms of the loan agreement, which was agreed with the Irish Government only this morning, has been available in the Vote Office for more than an hour now.
Mr Osborne
If my hon. Friend will allow me, I will make a bit of progress and then of course take some further interventions.
In my remarks today, I intend to address both the substance of the legislation and the loan agreement, but before that let me briefly say something about how we got here. Over the course of this year, it became increasingly clear that the situation in the Irish economy was unsustainable. Their sovereign debt markets had effectively closed and had little prospect of re-opening. Ireland’s market interest rates had risen to record levels, and Irish banks had become almost wholly reliant on central bank funding to maintain their operations, with no obvious prospect that that was going to change. This situation simply could not go on. We had been monitoring the situation for many months and had engaged in confidential discussions with our partners in the G7 and at ECOFIN about possible solutions.
Over the weekend of 20 November, Ireland’s Prime Minister made a formal request for international financial assistance. The UK, alongside the International Monetary Fund, the EU, the eurozone and some other member states—Sweden and Denmark—made an agreement in principle to take part in putting together an assistance package for Ireland. Since then, the various interested parties have been working round the clock with the Irish authorities to put together a package. Officials from the British Treasury have been in Dublin in recent days ensuring that our interests and concerns were represented, and I want to thank them for their hard work. At the end of November, Ireland agreed with the IMF and the EU a three-year financial assistance package worth €85 billion.
Mr Cash
The document to which my right hon. Friend just referred is “for information purposes only” and is clearly not intended to be construed as part and parcel of the Bill. So can he explain why in the document the “conditions precedent” to the arrangements interweave the so-called “bilateral loan” with the European financial stability mechanism, and why an attempt is then made to bypass that by referring to the “Governing law” as “English law”?
Mr Osborne
I am going to discuss some of the conditions attached to the loan. The particular condition that my hon. Friend refers to ensures that the UK is protected if other parties to this international agreement change their arrangement with Ireland in some way that materially affects our ability to be repaid. That condition gives us an ability at that point to step in.
Mr Osborne
I know that my hon. Friend is assiduous on these points, but I think that on this occasion he is not correct. This is simply a fall-back mechanism for us to say that if Ireland in some way renegotiates its loan from the eurozone, from the EU or from the IMF, it is a condition of our loan to Ireland that we can step in at that point and examine our situation. That protects the British taxpayer and has absolutely nothing to do with European law or anything else; it is simply there to make sure that other parties to this international agreement must have due regard to what they are doing, and how that might have an impact on the ability of the British taxpayer to be repaid.
Mr Andrew Love (Edmonton) (Lab/Co-op)
Two things are happening in Ireland at the moment. The first is that austerity reigns and the economy is going down on a daily basis. The second is that a whiff of elections is in the air. The right hon. Gentleman talks of renegotiation, but is it not a fact that renegotiation of a new Government in Ireland is very much on the cards?
Mr Osborne
Obviously we are not going to prejudge the outcome of any Irish general election. Of course we—not just us, but the IMF and others—negotiate with the Government of the day. Although the principal Opposition parties in Ireland have concerns about the Irish budget and the like, I understand that they have accepted the principle of international assistance, and the IMF has been in direct contact, and has engaged in discussions with them. The international community, including the UK, is satisfied that we are in a position to make this offer to the Irish Government, which is why I am bringing the Bill to the House today.
As I was saying, Ireland agreed to seek IMF and other support worth €85 billion, and the money will be used as follows: €35 billion will be used to support Ireland’s banking sector, with €10 billion going towards immediate bank recapitalisation; and the remaining €50 billion will be used for sovereign debt support. In terms of contributions to the cost of the package, Ireland itself will provide €17.5 billion towards the total. The remaining €67.5 billion will be split, with one third coming from the IMF, one third from the European financial stability mechanism, and one third from the eurozone facility and bilateral loans from the UK, Sweden and Denmark. I have agreed that our contribution should amount to €3.8 billion, or £3.25 billion at today’s exchange rate.
This significant package will help Ireland to deal decisively with its problems. It will help it to recapitalise its banks and set up a contingency reserve for future problems. It will also help the Irish authorities to cover the shortfall in their budget, which was passed by the Irish Parliament earlier this month. Their budget will see a fiscal consolidation of €15 billion by 2014, of which €6 billion will be implemented next year, as part of their strategy leading to a target budget deficit of 3% of gross domestic product in four years’ time.
Of course people ask why we are extending the loan to Ireland. We are doing so because it is overwhelmingly in our national interest to have a strong Irish economy and a stable banking system. This is not just about the Irish economy and Irish jobs; it is about the British economy and British jobs. A loan does not add to our deficit, and any increase in borrowing is matched, of course, by the commitment of the Irish to repay with interest. The answer to the question asked by my hon. Friend the Member for Stratford-on-Avon earlier is that if Ireland takes out all the loan that is being made available to it and pays it back with the interest that has been forecast, it would pay us £440 million in fees and interest over this period.
Let us remember that Ireland is the fifth largest market for British exporters and accounts for 5% of our total exports abroad. An interesting way for the House to think about it is that every man, woman and child in Ireland spends an average of £3,600 per year on British goods—that is how connected our economies are. Indeed, as has often been pointed out, we export more to Ireland than to Brazil, Russia, India and China put together, although we are trying to increase our exports to those four very large emerging markets. For some of our industrial sectors, such as food and drink or clothing and footwear, Ireland is our top export market. Ireland is also the only country with which we share a land border, and in Northern Ireland our economies are particularly linked, with two-fifths of exports going to the Republic.
I wish to reassure Members representing Northern Ireland that I am very aware of their constituents’ worries and the difficulty they face as a result of the problems in Ireland. That is why my hon. Friend the Financial Secretary recently visited Belfast to discuss these issues directly. I am open to any discussions that Members from Northern Ireland wish to have with me or the Treasury about the economic situation and indeed the banking situation in Northern Ireland. Just as our two economies are linked, our businesses and banking sectors are also interconnected. More Irish companies are listed on London exchanges than companies from any other foreign country. The two main Irish-owned banks have an important presence in the UK, holding between them about £30 billion of customer deposits. In Northern Ireland, two of the four largest high street banks are Irish-owned, accounting for almost a quarter of personal accounts.
Mrs Anne Main (St Albans) (Con)
My right hon. Friend has stressed the importance of the export market and our strong links with Ireland. So why did he find it necessary for paragraph 6(h), under the heading “Events of default”, in the summary document to set out that
“the Borrower not being or ceasing to be a member of the European Union”
would constitute a default? I would hope that we would support Ireland if we chose to do so, and not bind it into necessarily having to stay in the European Union, given the length and operation of the loan.
Mr Osborne
It is merely an observation that the fact that Ireland is a member of the European Union is not why we are making this loan; it has nothing to do with that. It has to do with the fact that Ireland is deeply connected to us. Indeed, we have just made a loan agreement with Iceland, which of course is not a member of the European Union, in order to seek to recover moneys that were spent on savers in Icelandic banks here in the UK.
Mr John Redwood (Wokingham) (Con)
As this crisis was triggered by the withdrawal of European Central Bank support for Irish banks, will the Chancellor give us an assurance that we will not be involved in any further refinancing of ECB liabilities should it do the same to another country?
Mr Osborne
I had a very specific choice. I had the opportunity—of course, I would have had to seek the authority of the House—to introduce a general Bill to allow me to make bilateral loans to any number of countries. That legislation would have been very easy to draw up, and it would have been easy to ask the House for its support. I have explicitly restricted this to a Loans to Ireland Bill because of the specific connections between our two economies.
Stewart Hosie (Dundee East) (SNP)
May I confirm what the Chancellor has just said? The UK contribution to the entire package will be about 5% of the non-Irish contribution—about £3.5 billion—and that stands in comparison with some £12 billion of exports to Ireland, and, as he said, the Irish banks holding some quarter of the deposits in Northern Ireland. Is that the broad summary of where we are?
Mr Osborne
It is a reasonable summary. Of course we stand behind the International Monetary Fund as a shareholder of it, as are most countries in the world. I shall come on to the European financial stability mechanism, which I have already talked to the House about on a number of occasions. Like other contributors to the EU budget, we stand behind it. In a sense, the loan that we are proposing today is the direct British taxpayer contribution—or rather, the money that is borrowed on behalf of the British taxpayer. I shall come to the terms of the loan, but of course we expect to be repaid, and repaid with interest. We are doing this because we think it is absolutely in our national interest, for some of the reasons that have been set out.
Charlie Elphicke (Dover) (Con)
On that point, may I welcome the fact that the Bill is before the House today and that approval is being sought before the loan is made? Will my right hon. Friend explain how we came to be part of the European financial stability mechanism, what approval the House gave to it and what level of debates there were about it?
Mr Osborne
As I explained to the House previously—my predecessor, the right hon. Member for Edinburgh South West (Mr Darling) is here, and might at some point want to give his own version of events—my understanding is that in the period between the general election and the formation of the Government, an emergency ECOFIN meeting was held to address the Greek situation and to provide confidence that the European Union and the eurozone stood behind other member states that were potentially in difficulty.
My predecessor ensured that we stayed out of the eurozone facility—I have acknowledged that in the House —but acquiesced in the use of article 122 of the treaty, which allowed the European Union to disburse funds when a natural disaster, such as an extreme weather event, was affecting a member state, to create a mechanism that could stand behind countries that got into difficulties. The decision on the use of that mechanism is taken by qualified majority voting, so although we could vote against its use in this situation, I did not think that that would achieve anything. I am focused, in a way that I shall describe, on trying to extricate the UK from the EU-27 mechanisms that stand behind eurozone countries. If hon. Members will bear with me, I shall talk about that later, and if people want to intervene at that point, that would be more sensible.
Let me move on to the connections between our banking sectors. Our banking sector has a considerable exposure to Ireland, but I should stress that in the opinion of the Financial Services Authority, the UK banks are sufficiently well capitalised to more than manage the impact of the situation in Ireland. For a long time now the devaluation in Irish asset values has been accounted for and priced in.
One thing is clear. It is undoubtedly in Britain’s national interest to have a growing Irish economy and a stable Irish banking system. In the judgment of both the Irish Government and the international community that was not going to come about without the assistance package we debate today. I would now like to explain to Members the principles of the Bill, and then take them through the heads of terms of the loan agreement.
The Bill has two substantive clauses. Clause 1 sets out the parameters under which the Treasury may make payments under UK loans to Ireland. As I explained earlier, the total international assistance package, including our contribution, is denominated in euros. However, we are making a bilateral loan in sterling so that Ireland bears the exchange rate risk over the coming years. Subsection (3) of the clause includes a cap on the total size of our bilateral loan. It is written on the face of the Bill that
“the aggregate amount of payments made by the Treasury by way of Irish loans...must not exceed £3,250 million”.
In other words, the £3.25 billion we originally agreed will be the maximum total size of our bilateral loan to Ireland. A sunset clause is also, in effect, built into the legislation. The period over which the loans may be offered begins on 9 December 2010, when the Bill was published, and ends on 8 December 2015.
Mr Osborne
My hon. Friend is pre-empting my speech. I shall get on and explain exactly what those two subsections mean.
As I said, there is no expectation that we will have to make further loans to Ireland in the future. Subsection (4) is intended to prevent an increase in the size of the loan, unless an order is made by statutory instrument, but because the loan is denominated in sterling, a mechanism is needed to accommodate potential changes in the exchange rate in the period between the publication of the Bill and the signing of the loan agreement—that answers my hon. Friend’s point—which could happen in a matter of days. This is not about the exchange rate risk over the coming years—that risk is borne by Ireland—but merely a mechanism to deal with the fact that we are publishing the Bill before we sign the loan agreement, for the reasons that I set out earlier.
The Bill allows the Treasury, under subsections (5) to (7), to make an order once the Bill is in force to increase the limit, as long as that is done solely to take account of exchange rate fluctuations between now and 30 days after Royal Assent, without further Parliamentary procedure.
Mr Cash
I am sure that my right hon. Friend will understand my saying that it would have been so much simpler if what he has just said had been specified in the Bill, instead of a blanket wording referring to substituting a greater amount. We would have then known that that was only intended to allow a margin of error depending on currency fluctuations. Subsection (4) is absolutely clear that there is no restriction.
Mr Osborne
No, let me explain. There are two separate subsections. Subsection (4) allows the loan to be increased substantively, but only with the authority and vote of this Parliament. If I were ever to seek a larger loan to Ireland, I would have to come here and get the vote of the House of Commons. That is what subsection (4) is about. I am making it clear that I have no intention at the moment of doing that, but subsection (4) provides for it, and would prevent us from having to pass further primary legislation. The protection for Members of Parliament is the same—they can keep a check on the Executive—because I would be required to get that affirmative resolution.
Subsections (5) and (6) refer to something different, which is the gap between the passage of the Bill and the signing of the loan agreement. There might be small movements in the exchange rate. We have signed up to this package of a contribution in euros, but we are making a sterling loan. As I explained earlier, I had the opportunity to sign the loan agreement and come retrospectively to seek parliamentary approval, but I am trying to do it the other way around because it gives Members of Parliament a much greater degree of control. That is why these two subsections are required.
Mr Laurence Robertson (Tewkesbury) (Con)
I will be supporting my right hon. Friend in the Lobbies tonight, but I am slightly concerned about clause 1(4), which is rather open-ended about the amount that could be paid. Even though a change would have to be passed by the affirmative resolution, I think the Chancellor would confirm that would be agreed by only a very small number of Members and not the entire House.
Mr Osborne
My hon. Friend has a deep knowledge and experience of issues in Northern Ireland, and indeed the Republic, and I know that his Select Committee will be interested in what is happening with those economies. Let me reassure him that there would be a vote by all Members of the House if I, or any successor of mine—should there be one before 8 December 2015—ever sought to increase the loan. A vote in Parliament would be required, so the effect is exactly the same as asking Parliament to pass another piece of primary legislation. It would involve a vote of the House, which means the legislature exercising its control over and acting as a check on the Executive.
Mark Reckless (Rochester and Strood) (Con)
Will my right hon. Friend confirm that, notwithstanding previous assurances, this loan will not rank pari passu with the EU funds extended under the mechanism, but will be subordinated to them?
Mr Osborne
There is a convention that multilateral loans, such as those involving the mechanism and the IMF, rank senior in any loan agreement. Let me reassure my hon. Friend that I have examined this with great care and interest. The convention is pretty clear and long-established in international law that multilateral loans are senior. That means principally the loan from the IMF, but also the loan from the European mechanism, which we stand behind, so it is also in our interest that it is repaid. However, our loan will rank pari passu with the eurozone and the other bilateral loans. That has partly shaped our judgment about the interest rate we will charge and the point at which we will start to disburse our loan. I shall come back to that.
We expect full repayment to be made over the term of the loan. Clause 1(8) sets out that repayments of both the principal and the interest will go into the Consolidated Fund. We want the whole process to be as transparent as possible, so clause 2 creates a requirement for the Treasury to prepare and lay before Parliament every six months a report on any payments made by the Treasury by way of a loan to Ireland, any sums received by the Treasury by way of interest or repayment of such loans, and the amounts outstanding, in the period to which the report refers.
As I have said, I welcome the agreement across many parts of the House about the need to make this loan, which is in our national interest. I thank the Opposition in particular for their support, and to reciprocate their co-operation I thought we should look favourably on their amendments. I therefore propose to accept in principle the Opposition’s amendment 1, which would modify the Government’s reporting requirements in relation to the bilateral loans. We have today tabled a more appropriately worded version of the amendment which achieves exactly the effect that the Opposition intended. May I explain to my hon. Friend the Member for Wellingborough (Mr Bone) that this is why there is a manuscript amendment? I am trying not to tempt him, because I am sure that he could speak for even longer, but I want to explain this point because he has raised his concern about it. The manuscript amendment has been drafted by the Government’s parliamentary draftsmen in relation to an Opposition amendment that we propose to accept and it has exactly the effect that the Opposition sought.
Let me update the House on the terms of the bilateral loan that we have now agreed in principle with the Irish authorities. I apologise that this information was not made available much further in advance, but the terms were agreed only this morning with the Irish Government and I wanted all Members of the House to have this information available to them. The loan will be drawn in eight tranches, each with a 7.5-year term. The length of the loan is in line with the terms of both the European and IMF loans. The first tranche of our loan will be available to be disbursed in September 2011, which is later than for some of the other tranches that are being drawn down from partners such as the IMF and the European Union.
The interest rate charged on each tranche of the loan will be fixed specifically for that tranche. It will be set by adding a fixed margin of 2.29 percentage points to the appropriate market-determined interest rate—the sterling 7.5-year swap rate—at the time of disbursement. For example, at the present time, the estimated—I stress estimated—interest rate on the first tranche of the UK loan would be the sterling 7.5-year swap rate in September 2011, which on Monday stood at 3.65 percentage points, plus 2.29 percentage points. That would mean a hypothetical interest rate of 5.9% for the first tranche of the loan. The rate on our bilateral loan will be slightly higher than the estimated rate of 5.7% for the first tranche of the IMF and European mechanism funds, so we are charging a slightly higher rate of interest, but it is lower than the estimated 6.1% rate that the eurozone facility will charge on its first tranche of lending. That reflects the different costs of funding and is a measure of international confidence in the UK’s public finances.
Mr Philip Hollobone (Kettering) (Con)
Will my right hon. Friend inform the House how that rate of interest compares with the loan he mentioned earlier that the UK Government agreed with Iceland?
Mr Osborne
The interest rate to Iceland is substantially lower because, frankly, needs must: I am seeking to recover money from Iceland. I am dealing with a situation that I have inherited—obviously the Iceland loan relates to events that happened under the previous Government—and I need the support of the Icelandic Parliament. The rate of interest we are charging is slightly higher than the Dutch, who have also entered into an agreement with the Icelandic Government, are seeking. People might remember the circumstances at the relevant time—there was a pretty acrimonious dispute between Iceland and the previous UK Government—and we have sought to repair broken bridges. The terms of the loan that we have come to with Iceland mean that this country will get its money back. My judgment was that other terms might have meant our not getting our money back at all and that would not have been very sensible.
Mark Reckless
It is enormously welcome that this country is working with Iceland and Ireland to support them in these very difficult times. The Chancellor has mentioned the current 7.5-year swap rate; can he tell us how much higher it is than when he first announced our participation in this bail-out?
Mr Osborne
I do not think it has materially changed. I have been quite focused on trying to land it at the 5.9% rate, because that sits between the 6.1% and 5.7% rates of the other international parts of the package. That rate reflects some of the circumstances that relate to my hon. Friend’s earlier intervention.
The IMF will charge a floating rate, with a margin above its funding costs, in line with its pre-existing loan terms for an extended fund facility. The European loans, like ours, will charge a fixed rate on each tranche set using a margin above their own cost of funds. We will charge interest every six months and there will be a repayment of the principal at the end of the 7.5-year term of each tranche.
In common with the IMF, we will also charge a commitment fee for making the loan. We will charge half a percentage point on the total amounts that may be drawn on under the loan agreement for the forthcoming 12-month period. If the loan is drawn on, the fee will be waived and effectively replaced with the interest charged on the loan.
There are two conditions, which are set out in terms to which I draw the House’s particular attention. The first is that the IMF, as well as the EU, must be satisfied that Ireland is complying with the agreed restructuring plan. I think that that is a very important safeguard for British taxpayers. The second, crucial, condition is that there must be
“no amendments to the Restructuring Plan that would have a material adverse financial impact on the UK operations of Anglo Irish bank, Allied Irish Banks and Bank of Ireland”.
Given the scale of those banks’ operations in the UK, that second condition is significant, and it shows in a practical way why I believe it was right for us to provide the loan. It allows us to have a say in a restructuring plan that could otherwise have had a major impact on the UK and its banking system, and could potentially have cost the British taxpayer considerable sums of money without our voice even being heard. Making the loan has enabled us to set that condition, and to be part of the discussion about the restructuring plan and its impact on the UK subsidiaries of banks which have significant presences in Northern Ireland. I know that there is concern about the potential impact of the plan on jobs and the availability of credit in Northern Ireland, and, indeed, about its potential impact throughout the UK, given that Bank of Ireland owns the Post Office card account.
Nadhim Zahawi
What the Chancellor is saying is particularly pertinent, given that the Post Office cash machine in Portcullis House was provided by the Irish banks.
May I ask a quick question?
Nadhim Zahawi
Are we the only lender that is lending in a currency other than the euro?
Mr Osborne
Sweden and Denmark are at this moment finalising their loan agreement, and I do not think they have yet made that decision. As I have said, we decided to lend in sterling so that the exchange rate risk would be borne by the Irish rather than the British Government.
The official advice from the Treasury is that the loan agreement represents value for money for the British taxpayer. As I said earlier, it is also in line with the terms offered by both the IMF and the eurozone. I have laid before the House a summary of the key terms of the agreement, and a final written agreement will be forthcoming in the next few days—or, potentially, weeks—once the European and IMF assistance has also been agreed. I will, of course, keep the House informed.
One thing is clear: Ireland is a friend in need, and it is because our economy is currently in a stronger position than Ireland’s that we are able to offer it such reasonable and sensible terms for our bilateral loan.
Mr Mark Field (Cities of London and Westminster) (Con)
I understand all the Chancellor’s concerns about the close relationship between us and Ireland. He said it was important for this country to be at the table in terms of any restructuring. Does he understand the concerns of many of our constituents, who would say that a similar argument could be advanced if there were problems for, say, Santander in Spain, or for other European banks with significant interests in London? Will he make it very plain at this juncture that he considers this to be a case in its own right, rather than one to which we might have to return in the next six to nine months if further problems arose in the eurozone?
Mr Osborne
I have said that I regard this as a case in its own right—a very specific case. As I have explained, quite candidly, my officials offered me two options: a general, enabling piece of legislation allowing us to make bilateral loans to other countries, and the much more narrowly drafted Loans to Ireland Bill. I think that the clue is in the title.
Jim Shannon (Strangford) (DUP)
Over the past few days we have seen substantial growth in the economy of the UK mainland, but that growth has not been reflected in Northern Ireland, as some of its financial institutions—notably Ulster bank—have indicated. What assurance can the Chancellor give the Northern Ireland Assembly, the Minister of Finance and Northern Ireland Members in the House that, at every stage, full consideration will be given to how loans to the Republic of Ireland will affect the economy in Northern Ireland? At this stage, we feel apprehensive about what is being proposed.
Mr Osborne
I completely understand the hon. Gentleman’s apprehension, given the close connections between the economies of Northern Ireland and the Republic of Ireland. Let me make two points. First, as I said earlier, the loan has enabled us to be part of the international discussion about the restructuring of the Irish banks, some of which—as the hon. Gentleman knows even better than I do—are incredibly important operators in Northern Ireland. I appreciate that he will not have had a chance to study the loan agreement, as I have laid it before the House only within the last couple of hours, but one of the conditions is that there should be
“no amendments to the Restructuring Plan that would have a material adverse financial impact on the UK operations of Anglo Irish Bank, Allied Irish Banks and Bank of Ireland”.
That partly addresses the banking situation in Northern Ireland, and, as I have said, it gives us a seat at the table in discussions that affect the UK.
Secondly, as the Secretary of State for Northern Ireland said this morning during Northern Ireland questions, we want to engage with the Executive, with representatives of the Assembly and, indeed, with Members of Parliament about how we can enable the Northern Ireland economy to grow. A draft paper has been put to the Executive. I am very engaged in the process, as is my hon. Friend the Financial Secretary to the Treasury. I repeat the offer that I made earlier to hold a detailed discussion with Northern Ireland representatives, at any point, about some of the broader economic measures that we might be able to take in Northern Ireland to help its economy.
Mr Osborne
I give way to the right hon. Member for Belfast North (Mr Dodds).
Mr Nigel Dodds (Belfast North) (DUP)
I am grateful to the Chancellor, whose comments have clearly provoked a big reaction.
Corporation tax is a big issue in Northern Ireland. It worries people there that the Irish Republic wishes to retain its 12.5% corporation tax rate. We in Northern Ireland are arguing for a cut in our rate, but the Secretary of State for Northern Ireland tells us that that will cost us some £310 million of our block grant. In a way, we will be subsidising the Irish Republic to keep its corporation tax low, and penalising Northern Ireland if it wants to reduce its corporation tax. The Chancellor must take that into account in the context of this package of measures.
Mr Osborne
As I said to the House on a previous occasion, I did not think it right—others may take a different view—for one sovereign nation to try to dictate the tax rates of another sovereign nation. I did not think that that was a precedent that we particularly wanted to set. I entirely understand the competitive pressure that the Irish corporation tax rate puts on Northern Ireland, but ultimately it must be for the Irish Parliament to determine its own tax rates. It is, of course, having to take some very difficult measures to preserve the corporation tax rate in the Republic.
I know that there is a discussion to be had about the corporation tax rate in Northern Ireland, and about other measures that might be taken there. A document has been submitted this week. I hear what the right hon. Gentleman says, but let us have that discussion with the Secretary of State for Northern Ireland and Northern Ireland Members.
Mr Geoffrey Robinson (Coventry North West) (Lab)
I have listened with interest to what the Chancellor has been saying. I appreciate the measured way in which he has presented his proposals and, indeed, the cross-party support for them, and I have no wish to disturb that support. However, will the Chancellor think again about two aspects of what he has said?
First, there is the question of the terms on which the loan will be repaid. Given that the deal is currently quite advantageous to the Irish in terms of interest rate security and, indeed, the standing of the loan, would it not be possible to negotiate the option for the UK to be repaid in sterling should there be an interesting movement in the sterling-euro exchange rate, which is quite likely?
Secondly, given that the right hon. Gentleman rather alarmingly says that this might not be the end of the matter, and that therefore he has left the way open, through just the affirmative procedure, for more substantial loans—I think I understand the situation correctly from what he says—to be made to Ireland, will he look at making such action subject to new legislation in the House, which would attract more attention and scrutiny from this body?
Mr Osborne
We are being repaid in sterling, so that answers the hon. Gentleman’s first point. I have already dealt with the second point on a number of occasions, but I shall just point out that the effect would be exactly the same. Whether I brought to the House legislation or used the affirmative procedure, I would have to get the support of Members, so materially the impact would be exactly the same: the House of Commons would be able to stop such action taking place. I should stress that I have absolutely no intention of doing so at the moment, and there is protection.
David T. C. Davies (Monmouth) (Con)
I do not pretend to be an economist, but does the Chancellor share my concern that, if the European Union forces Ireland to put up its corporation tax, that might hold greater danger for us, as Ireland could be in less of a position to pay us back the money? For that reason alone, we should resist any attempt by outside bodies to impose a tax regime on Ireland.
Mr Osborne
My hon. Friend makes a very good point. A sudden flight of international investment from Ireland is not in anybody’s interest. All countries seek to compete against each other for such inward investment, but, as I say, it would set a poor precedent for the UK if one nation state or a collection of nation states started dictating to another nation state what its tax rate should be.
Mr Osborne
My hon. Friend will be very focused on what I am about to say, so if he does not mind I shall make a little progress, and then I shall be happy to take an intervention.
Let me turn briefly to the arrangements for a permanent stability mechanism for eurozone economies. The European Council this week is expected to discuss the matter. Both the Prime Minister and I are very clear that when it comes to putting in place a permanent mechanism, the UK is not part of the eurozone and so will not be part of that mechanism. The president of the euro group has accepted that the UK will not be part of the permanent stability mechanism, and that the European financial stability mechanism, which the previous Government agreed in May and of which we are part, will cease to exist when that permanent eurozone mechanism is put in place.
We will seek to bring to an end the use of the mechanism established in May for the resolution of sovereign debt problems. It was established under article 122 of the Lisbon treaty and originally intended to provide support for member states following natural disasters. European Finance Ministers, including my predecessor, chose to apply that article in May to deal with the eurozone crisis at that time, but that temporary solution should not become a permanent way of doing things, and the time has now come for the eurozone to put in place its own mechanism for dealing with the imbalances in the eurozone. That needs to be part of a comprehensive solution whereby countries address their own problems more decisively, including in their banking systems. We in Britain have shown the way.
Joseph Johnson (Orpington) (Con)
The Chancellor speaks of a comprehensive solution. Does he recognise that we face not only a crisis of liquidity in Portugal, Greece and Ireland, which we are assisting bilaterally, but a crisis of solvency? The solvency crisis will require us to address not just Irish bank restructuring, but Ireland’s sovereign debt—it is impossible to distinguish the two, given that the Irish state has guaranteed all the Irish banking system’s liabilities—and the solvency of other peripheral eurozone economies. We are helping with financing, but we have not yet addressed the fundamental solvency of those peripheral countries.
Mr Osborne
My hon. Friend makes a very good point. There was a debate—it was pretty widely reported, so I am not betraying anything that was not read by everyone throughout the world—about whether to address the solvency issues, and whether there should be a contribution—or a haircut, to use the jargon—from senior debt holders in the banks or, indeed, sovereign debt holders. The international community’s view, with which we absolutely agree, is that such a contribution risked a very serious contagion that might spread through many different banking systems, not just those of the countries to which my hon. Friend refers. So the decision was taken not to require a private sector bail-in from senior debt holders in the banks or, indeed, sovereign debt holders.
As part of a comprehensive solution, the eurozone needs to come to a rapid conclusion about its mechanism, draw a distinction, as it has sought to, between existing debt and potential future-issued debt, create a credible mechanism and work out how a single currency zone that does not have a single fiscal policy or a political union will deal with its imbalances.
Mr Osborne
I see the speed with which my hon. Friend leaps to his feet at that point, but I shall take his intervention in a moment.
The eurozone needs to address that situation, and we need to ensure that it gets it right, because that is absolutely in our interests. Individual countries also need to address their problems. Portugal has a long-standing problem with its economic productivity, which the Portuguese Government are determined to address. The Irish banking system has caused enormous problems for the Irish Government, who are now addressing that. In a bipartisan debate, this is a slightly partisan point, but I think that the UK has demonstrated over the past six months that, by its own efforts, a country can earn market credibility, improve its credit rating and improve international confidence in its economy. We need the eurozone to sort out its mechanism, but individual countries in Europe also need to take decisive steps to deal with the particular problems that their economies face. Let me give way to my hon. Friend the Member for Stone (Mr Cash), and then I must conclude to allow others to speak.
Mr Cash
I have put a number of questions, as yet unanswered, to my right hon. Friend on that very issue, but I am glad that he has given, at any rate, a partial answer to one of them. The mechanism’s transfer from what appears to be an unlawful basis in article 122 of the Lisbon treaty to the new proposals under article 136 will involve only the eurozone and represent an important step in the right direction. Does my right hon. Friend not accept, however, that much could happen over the next two or three years, between now and 2013, while the mechanism in which my right hon. Friend’s predecessor engaged, and which I believe to be unlawful, continues? We could be locked into a Portuguese or a Spanish black hole. We do not know yet, but there is a danger.
Mr Osborne
First, I am dealing with the situation as I found it, and as I found it we were committed to that mechanism under qualified majority voting, but I am trying to extricate us from that. Secondly, the permanent arrangements might come into play sooner than 2013. That is a subject for discussion at the European Council, and, certainly as far as we are concerned, the sooner we get on with it, the better. I am doing everything I can to ensure that the UK is extricated from the commitment that was entered into, and we are making good progress.
Mr Osborne
If the hon. Gentleman will allow me, I have already taken an intervention from him. Many Members want to speak, and I have spoken for an hour.
Alan Johnson (Kingston upon Hull West and Hessle) (Lab)
Get on with it, George.
Mr Osborne
Well, I took a lot of interventions. I’m sorry about that, but there we go—there’s no gratitude in this place!
Let me conclude. The Government have taken action to put our own house in order. We were once seen as part of the problem; we are now part of the solution. It is in our national interest to help Ireland, and I commend this Bill to the House.
Alan Johnson
I always try to avoid sharing the hon. Gentleman’s pleasure. I shall come to the nature of the deal, because in debating the Bill we are discussing one element that constitutes a little more than half of the money that the UK taxpayer is putting into the deal.
The argument for treating Ireland as a special case is clear. I shall reiterate some of the points that the Chancellor made. Our two countries are intertwined in commerce, in trade, in banking, in culture and in sport. We share a language and a land border. Not only is Ireland one of our five largest export markets but, as the Chancellor said, one part of the United Kingdom—Northern Ireland—sends 40% of its exports across the border to the Republic. The situation in Ireland could cause significant damage to UK financial institutions and create instability in both sovereign and bank debt markets. The UK is Ireland’s largest creditor—we are talking about almost €112 billion—and I understand from a newspaper report last week that the Royal Bank of Scotland and Lloyds have Irish loan books worth 82% and 53% of net assets respectively.
In its report last month, the International Monetary Fund singled out Ireland to demonstrate what it called the “key underlying vulnerability” of UK banks’ exposure to foreign banks. The support programme assures the protection of senior bond holders in Irish banks from any losses, thus affording a greater level of protection to UK banks. For all of those reasons and many more, it is in this country’s interest to support this package.
I want to raise three concerns. The first, which was raised in a couple of interventions—including by the hon. Member for Stone (Mr Cash)—is the open-ended nature of the commitment. There is a distinct possibility of more money being required for Ireland after 2013, given the tendency of Irish banks to downplay the severity of their situation and the tough conditionality being applied alongside concerns about European growth. In those circumstances, should we not make it clear to our European partners that the EFSF must be used for any further financial support, rather than giving the impression that this is a well into which further buckets can be dipped?
That is particularly relevant to my second concern about the balance between the contributions made by the various mechanisms. The €440 billion EFSF—the facility— for eurozone countries only is being tapped for 4% of the total resources that eurozone countries have agreed to make available for Ireland. The smaller EFSM—the mechanism—of which we are part and to which we contribute, was not used at all for the Greek bail-out. The EFSM is offering 37.5% of its available resources for the Irish bail-out. Why was that formulation chosen and why is the total amount we are contributing double the amount that we would have had to pay if we were a eurozone country?
Mr George Osborne
I am not sure that the shadow Chancellor is correct in that assertion. First, our contribution has been calculated on the basis of what we would have paid if we had been part of the facility. That is how the £3.25 billion figure was broadly arrived at. Secondly, the mechanism currently in use was created after the bilateral agreement was put together for the Greek bail-out. It was never available to be used for the Greek bail-out, which took place as a series of bilateral loans across Europe. As I understand it, over the May weekend the facility was put in place to address the crisis and article 122 was drawn upon to create the mechanism, so it could not have been used for Greece at that point.
Alan Johnson
I am grateful to the Chancellor for that intervention. However, it does not explain why the £3.25 billion he has just mentioned is the bilateral loan. That is the equivalent of what we would have put into the Irish bail-out had we been members of the eurozone. However, we are also putting in £2.6 billion through the EFSM and £800 million through the IMF. With the bilateral loan added to the other donations of British taxpayers’ contributions that we are making through the mechanisms, we are putting in double the amount of money that other European Union countries are contributing.
Alan Johnson
Yes, but that is a matter for the eurozone. If the Chancellor is right in his prediction that perhaps this can ensure that we come out of the €60 billion mechanism, the facility and the other moneys, then fine, but as we are making a big contribution—more than we would have done had we paid the amount that a eurozone country would have paid to rescue Ireland—we must be in a position to influence this debate.
Mr George Osborne
I must correct this point. We are paying pretty much exactly what we would have paid if we had been a member of the euro; that is how the bilateral loan is being calculated. Germany is paying both through the facility and through the mechanism, and so are France and the other members of the euro. Other countries are paying twice. Ours is a bilateral loan like those of Sweden and Denmark, and they too have been calculated in a similar way.
Alan Johnson
I am grateful for that clarification; we will look at that very carefully. What the Chancellor is saying is that France and Germany, through their IMF contribution—[Interruption.] The Financial Secretary says no. The point I am trying to get at—perhaps the hon. Gentleman can clear this up when he replies to the debate—is that if the UK is putting in a bilateral loan that is equal to the amount that we would have paid as a eurozone member, and we are putting in money through the IMF as well as £2.6 billion through the mechanism, how does that relate to the money that France and Germany are contributing? As far as I am aware, they have no bilateral arrangements, so the money is going through the IMF, or through the stability facility which accounts for only 4% of the resources. That is a point that we need to hear about.
The Financial Secretary to the Treasury (Mr Mark Hoban)
This has been a good debate about the principles underlying the Bill, and I welcome the Opposition’s support for it.
I am sorry that the shadow Chancellor is not in his place. He made a typical speech: a couple of jokes, a few quotations and then a shaky grasp of the facts. I shall not match him on jokes, but let me give the House a couple of quotations. He talked about the views on Ireland, but let me quote a former member of Labour’s shadow Cabinet, who said:
“The whole purpose is to bring the Welsh economy up to the standards of those of other countries in Europe, so that we can follow the lead of the Irish economy and become, in a matter of 10 or 20 years, one of the most successful regional economies in Europe.”—[Official Report, 28 February 2002; Vol. 380, c. 868.]
The right hon. Member for East Ham (Stephen Timms), when he was Chief Secretary to the Treasury, said:
“The Irish economy has enjoyed a good deal of success over the past few years. The corporation tax regime has contributed to that, but there have been a number of other factors”.––[Official Report, Finance Public Bill Committee, 8 May 2007; c. 19.]
There we go: a record of Opposition Members’ hymns of praise to the Irish economy.
It struck me as remarkable, however, that the shadow Chancellor did not understand the mechanisms being used to support the Irish economy. He seemed to think that the UK would bear a higher share of the bail-out costs than other European Union members, such as France and Germany, and that they do not contribute to the IMF or to the stability mechanism. Let me make it absolutely clear to the House that the UK is contributing through the IMF, the stability mechanism and a bilateral loan. Other European countries are contributing through the IMF, the stability mechanism and, if they are members of the eurozone, the stabilisation facility.
Owing to their share of the contribution to European Union funds, Germany and France are contributing more than the UK: some 27% of the contribution is through the facility. France contributes 20% through the facility, compared with our 14%. And through the mechanism, the UK’s contribution is 14%, Germany’s 20% and France’s 17%. It is a pity that the shadow Chancellor does not understand how the package actually works. The right hon. Gentleman also seemed to deny that the euro made any contribution to the crisis facing Ireland. However, the right hon. Member for Edinburgh South West (Mr Darling), who made a very thoughtful speech about the challenges facing the European Union, punctured his view that the euro had nothing to do with it.
My hon. Friend the Member for Chichester (Mr Tyrie) asked whether we considered buying bank assets. We have in place an agreement by the Irish Government to repay our loan in full, but that could not have been guaranteed if we had sought to buy individual assets of Irish banks. He also asked whether Ireland could repay early without a penalty, and the answer is yes, but the Irish Government would have to make break payments.
The right hon. Member for Belfast North (Mr Dodds) and the hon. Member for Belfast South (Dr McDonnell) talked about the impact on the Northern Ireland economy of what is happening south of the border, and we recognise that. We recognise also that more work needs to be done to strengthen the Northern Irish economy, which is why we are in discussions with the Northern Ireland Office about the issues to do with enabling the Executive to set their own corporation tax rate. There is another part to that deal, however, because, if they have that power, they will need to bear the risk with the revenue and see a reduction in their block grant.
A number of hon. Members, including my hon. Friends the Members for Wellingborough (Mr Bone) and for Kettering (Mr Hollobone) and the hon. Member for Nottingham East (Chris Leslie), asked how we can afford to do this, given the fiscal position that we are in. Let me make it clear that we are not paying for the loan out of revenue or capital expenditure; we are going to borrow the money. The measure will not lead to a reduction in the money we can spend in my constituency or theirs. In fact, as my right hon. Friend the Chancellor said, we will end up making a small profit on the loan because of interest rate differentials. The loan will not affect how much can be spent in our constituencies, and if that is the only reason hon. Members are opposing the measure, I ask them to think again.
Mr Hoban
The debt is matched by an asset, which is the amount we expect to get from Ireland, and it does not impact on our deficit. We will actually make a return on the interest that will be paid.
Let me deal with three very brief points. First, there is no expectation that we will have to make further loans to Ireland in the future. Secondly, there is no reason to presume that full repayment will not be met over the term of the loan. Thirdly, ensuring Ireland’s stability is overwhelmingly in our national interest. That is why we are making the loan and this exception for Ireland. It is in our economy’s interests to ensure that the Irish economy is stable and we need to do all that we can to deliver that.
Question put, That the Bill be now read a Second time.