Loans to Ireland Bill

Mark Reckless Excerpts

Wednesday 15th December 2010 Commons Chamber

[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.

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[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.

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[Mr Christopher Chope (Christchurch) (Con)]

I hope that the former Chancellor’s message to Germany is well received by the German people, because the fact that a price of eurozone membership was making transfer payments to sustain the currency in countries that are not so competitive was never sufficiently spelled out to them. This is essentially a eurozone problem and an Irish problem, and I do not think that we should put British taxpayers’ money into it other than to meet our obligations under our membership of the IMF. It is perfectly reasonable to contribute through that mechanism. As the Chancellor has said, in so doing, we get more security for our loan than we would from a bilateral agreement.

The proposed loan to Ireland is relatively soft. Interestingly, the Chancellor says that the proposed interest rate will probably be slightly less than that of the eurozone facility, and that that demonstrates the competitiveness of our economy. I see things differently. If we have such a competitive economy, why not make a profit on the interest rate and charge the same rate as the eurozone and get the benefit for the British taxpayer?

[Mark Reckless]

All we are doing is passing on to Ireland the quarter per cent. or so of benefit that we gain by being a better creditor than the eurozone. Most hon. Members feel that we should help Ireland, but I agree with my hon. Friend that it is not necessarily helpful to Ireland to have a huge amount of extra debt on top of the great debt it already has. On that basis, I understand his point.

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[Mark Reckless (Rochester and Strood) (Con)]

The package is described as a bail-out of Ireland, but it is important that we recognise that Ireland has not asked for the bail-out and that it is not the package that the Irish would have wished. Ireland and the IMF proposed to write down bank senior debt—that is, default on an element of that debt—because they recognised that it would be very difficult, although not impossible, for Ireland to pay back its vast amount of debt. It is not clear to me that adding another €67.5 billion to those debts and subordinating the previous debts to that will help Ireland out of this crisis.

Let us consider why Ireland was pushed into the crisis. The European Central Bank threatened to withdraw finance for the Irish banks. The ECB had extended €130 billion at a 1% interest rate in temporary liquidity support to the Irish banking sector—a courageous and rather risky thing for it to have done. It would prefer that credit to be refinanced on a longer term basis and at a higher interest rate. If the eurozone wishes to do that, that is a matter for it to agree.

What is not clear is what interest we, or indeed Ireland, have in refinancing that eurozone debt into an EU-wide debt. We must consider the funding costs. My right hon. Friend the Chancellor has the proud achievement, for which he deserves significant credit, of reducing the long-term costs of borrowing in the UK. Unfortunately, that has gone into reverse over the last three weeks or so. When he came in, we did not give money to the Greek bail-out. We had a rescue package with €440 billion loans and only €60 billion of the dubious EU facility. Unfortunately, that is now being confused.

My hon. Friend the Member for Clacton (Mr Carswell) recognised back in May that this was the beginning of a European debt union, but it was only when I saw how the package was denominated that I began to share that view. Unfortunately, it is rebounding on our credit. The EU puts in €22.5 billion, the eurozone puts in €17 billion and we put in €3.5 billion or so. Rather than this appearing to be a bilateral arrangement that we have properly agreed, because it is in the interests of these islands, and that has been negotiated between the UK and the Republic, we give the markets the impression that we are being sucked into a wider EU package and those markets worry that we will do the same for Portugal or Spain. We have seen the back-up in interest rates in the past few weeks, but I ask the Treasury Front-Bench team to make it as clear as they can that this is a one-off involving Ireland. By doing that, we could at least potentially protect our credit from some of the assumptions that the market has built up in the past few weeks.

On Europe, I commissioned an opinion poll last month of 1,000 representative people in the Republic, and more than a third of that sample said that they would like to leave the euro and return to sterling. The Chancellor says that “I told you so” is not a policy and of course he is right, but he needs to recognise that there is a policy implication that we should not make the same mistake again. I shared with my right hon. Friends the Chancellor and the Foreign Secretary, back in 1998, analysis of what had been happening in Ireland—how bank lending was out of control and how there was going to be a most extraordinary boom and bust that would serve as a vivid lesson to this country. I also shared that analysis with Bertie Ahern, prior to his becoming Taoiseach. Like the Chancellor, he said he understood the analysis and that we might be right, but he wanted to join the euro for political reasons. We saw the impact of that decision in Donegal three weeks ago, where the successor seat of my grandfather, who was the Fianna Fail Member for that area, has now been taken by Sinn Fein.

This is Ireland’s decision, but I hope, in its interests and ours, that we will work together much more closely than we have been. There have been improvements in relations since the Prime Minister’s comments about the Bloody Sunday inquiry and, given what the right hon. Member for Belfast North (Mr Dodds) has said and given his very positive and supportive attitude, I believe we should work with Ireland on a bilateral basis to try to put things right and get a long-term sustainable solution for it and us that is better than the Carolingian settlement that is being imposed by the eurozone and the European Union on an Ireland that deserves better.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

The hon. Member for Kettering (Mr Hollobone) has three minutes, as we must finish at 4 o’clock.