The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, it is the Government’s intention to ask for authority to make a bilateral loan to Ireland as part of the multinational assistance programme for that country. This is the right action to take, given our country’s close economic, financial and political connections to Ireland. By passing this Bill today, the UK will be ready, come the new year, to meet its commitments to one of our closest international partners.
The legislation before the House today is narrow in scope but it is still enabling legislation. It will sit alongside the actual loan agreement, which will set out the details of what we offer Ireland. I intend to address the substance of both the legislation and the loan agreement. Before that, however, I would like to remind the House of how Ireland ended up in its current predicament.
Over this year, it became increasingly clear that the situation in the Irish economy was unsustainable. Irish banks had become almost wholly reliant on central bank funding to maintain their operations. At the same time, Ireland’s market interest rates rose to record levels and its sovereign debt markets have now effectively closed, with little prospect of reopening.
This situation cannot go on. So, on the weekend of 20 November, Ireland’s Prime Minister, Brian Cowen, made a formal request for international financial assistance. The United Kingdom, alongside the IMF, the EU, the euro area and other member states, made an agreement in principle to take part in an assistance package to Ireland. At the end of November, Ireland agreed with the IMF and the EU a three-year financial assistance package worth €85 billion. The money will be used as follows: from that total, €35 billion will be used to support Ireland’s banking sector, with €10 billion going towards immediate bank recapitalisation. 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 euro area facility and bilateral loans from the UK, Sweden and Denmark.
This is a significant package that will help Ireland deal with its problems and restore stability to its economy. It will help it recapitalise its banks and set up a contingency reserve for future problems. It will also help the Irish authorities cover the shortfall in their budget, which was presented to the Irish Parliament earlier this month.
I understand that some noble Lords may have concerns about the size and the timing of the loan. Indeed, some may be asking why we are extending a loan to Ireland in the first instance. We are doing this because it is overwhelmingly in our national interest that we 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; any increase in borrowing is matched by the commitment of Ireland to repay it with interest. Ireland is the fifth-largest market for British exporters, and accounts for 5 per cent of our total exports. Ireland is also the only country with which we share a land border, and in Northern Ireland our economies have particularly close ties.
Just as our two economies are linked, our business and banking sectors are also interconnected. More Irish companies are listed in London than companies from any other foreign country. In Northern Ireland, two of the four largest high-street banks are Irish-owned, accounting for almost a quarter of personal accounts. Our own banking sector has a considerable exposure to Ireland.
I should stress, however, that the UK’s banks are sufficiently well capitalised to more than manage the impact from the situation in Ireland. But one thing is clear: it is undoubtedly in Britain’s national interest that we have a growing Irish economy and a stable Irish banking system. That is the purpose of this Bill.
The Bill has two substantive clauses. Clause 1 sets out the parameters under which the Treasury may make payments under UK loans to Ireland. The total international assistance package, including our contribution, is denominated in euros. However, our bilateral loan will be made in sterling. Subsection (3) includes a cap on the total size of our bilateral loan of £3.25 billion. This will be the total size of our bilateral loan to Ireland, and the period over which these loans may be paid out will end on 8 December 2015, five years after the Bill was first published.
I would like to make it clear that there is no expectation that we will have to make further loans to Ireland in the future. This is reflected in subsection (4), which 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. Therefore, the Bill allows the Treasury, under subsections (4) to (7), to make an order once the Bill is in force to increase the limit, as long as this is done solely to take account of exchange rate fluctuations between now and 30 days after Royal Assent without further parliamentary procedure. Let me be clear: any increase in any other circumstances or for any other reason would require approval in another place. This is something that I and my right honourable friend the Chancellor of the Exchequer do not envisage happening. We also expect full repayment to be made over the term of the loan.
We want the process to be as open and transparent as possible. Clause 2 therefore creates a requirement for the Treasury to prepare and lay before Parliament a report every six months on any payments made by the Treasury by way of a loan to Ireland, the original term of each loan, any sums received by the Treasury by way of interest or repayment of such loans, the amounts outstanding, and the remaining terms of any outstanding loans.
I would like to update the House on the main terms of the bilateral loan, which we have agreed in principle with the Irish authorities and have made available in the Library of the House. The loan will be drawn in eight tranches, each with a seven-and-a-half-year term. This is in line with the terms for both the European and IMF loans. The first tranche of our loan will be available to be disbursed in September 2011 and the interest rate charged on each tranche of the loan will be fixed specifically for that tranche. This will be set by adding a fixed margin of 2.25 percentage points to the appropriate market-determined interest rate, the sterling seven-and-a-half-year swap rate, at the time of disbursement. For example, at present, the estimated interest rate on the first tranche of the UK loan would be the sterling seven-a-and-a-half-year swap rate in September 2011 plus 2.25 percentage points. That margin was set to give an estimated interest rate of 5.9 per cent for the first tranche of the loan.
The rate on our bilateral loan is slightly higher than the estimated rate of 5.7 per cent for the first tranche of IMF and EFSM funds, but it is also slightly lower than the estimated 6.1 per cent rate the EFSF will charge on its first tranche of lending. This reflects the different costs of funding and is a measure of the international confidence in the UK’s public finances. We will charge interest every six months and there will be a repayment of principal at the end of the seven-and-a-half-year term of each tranche. As with the IMF, there will also be a commitment fee for making this loan. We will charge half a percentage point on the total amounts that may be drawn down under the loan agreement for the forthcoming 12-month period. If the loan is drawn the fee will be waived, effectively replaced with the interest charged on the loan.
There are two conditions on the loan set out in the terms, to which I would like to draw the attention of the House. The first condition is that the IMF as well as the EU must be satisfied that Ireland is complying with the agreed restructuring plan. This is a very important safeguard. The second crucial condition is that there are to be no amendments to the restructuring plan that could 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 their operation in the UK, this is vital.
The official advice from the Treasury is that this loan represents value for money for the British taxpayer while being in line with the terms offered by both the IMF and the euro area. A summary of the key terms of the agreement and a final written agreement will be forthcoming shortly.
One thing is clear: Ireland is a friend, and a friend in need. Because of the steps we have taken, our economy is currently in a far stronger position than Ireland’s; that is why we are able to offer such reasonable and sensible terms for our bilateral loan to Ireland.
I should like to talk briefly about a related matter which I know is of interest to this House: the proposed permanent stability mechanism for euro area economies. Both my right honourable friends the Prime Minister and the Chancellor of the Exchequer have been very clear that when it comes to putting in place a permanent mechanism, the UK should not be part of it. The time has come for the euro area to put in place its own mechanism for dealing with the imbalances. It needs to be part of a comprehensive solution that sees countries addressing more decisively their own problems, including in their banking systems. As my right honourable friend the Prime Minister said yesterday, it is clear from the recent Council conclusions that the mechanism will be for:
“Member states whose currency is in the euro”.
Britain therefore will not be part of it.
Since our coalition Government came into office, we have taken action to put our own house in order. We are now in a strong position that enables us to help Ireland, our closest neighbour, in its hour of need. As I have said, this is clearly in our national interest. A strong Ireland—indeed, a strong Europe—is vital to the success of the British economy. Today’s Bill will help to ensure this. I beg to move.