 completely overblown in introduction and to yourself and to die for arranging such an interesting event, first instance and for inviting me to speak at it. It's actually, it's almost 18 months since I spoke at an institute event last and that was an immediate aftermath of the bailout deal with the Troika. The Troika, that combination of the European Commission and the IMF in liaison with the ECB. The engagement with the Troika has certainly generated a lot more Europe in the financial affairs of Ireland. And that's my topic today. I want to talk about more Europe in the financial arena and ask whether it's good for Ireland. And there's a dimension which is Europe as a whole and it's a dimension of more European involvement in Irish financial affairs. So I'll come back to the Troika and the program but first of all I want to harken back to earlier days. One of the two inaugural publications of the Institute back in 1991, a study entitled Economic and Monetary Union explored the implications of the freshly minted draft Maastricht Treaty which laid the foundations, the constitutional foundations for EMU. The study, dig out an old copy, goes into the question of whether bank supervision should remain at the national level in the new Monetary Union. And concludes that, and I quote, an opportunity may be missed arguably a centralized bank supervision authority whether a department of the ECB or a separate entity with wide powers would be more able to operate above national political pressures in acting decisively to prevent a failing bank from continuing to operate in an unsound manner. There would, the study astutely goes on to observe, of course be a need to retain a local based inspection system for supplying the local field which is essential for detecting the early warning signs of distress. But so far as action to restrain unsound banking practices is concerned here again as in the case of monetary management it may be worthwhile for national governments to cede power to the center in order to save them from themselves. End of quote. Well, it seems from the banking part of what I'll call the Four Presidents report this week's report Van Rompuy and the other presidents of three presidents of the European institutions, a report which is remarkably entitled towards a genuine economic and monetary union. Very remarkable title given what's been happening in Europe for the last 20 years. I think we can see from that and from this morning's summit statement that this two-decade-old idea's time has finally come. At last there is a clear push towards integrated banking supervision with ultimate authority at the European level and forcing a common rule book. Of course a significant national component of supervisory activity would continue and probably extensive cross-border use of national supervisory capacity for Ireland both outward and inward. Our inspectors going there, their inspectors coming here. That would likely be a conspicuous part of the supervision of banks in the years ahead. The other two banking elements of the Four Presidents proposed integrated financial framework, formerly known as the Banking Union, namely the establishment of a European Bank Resolution Scheme and a European Deposit Insurance Scheme could help break for the future the damaging link between bank failure in smaller countries and the taxpayer burden in those countries. In particular centralized resolution combined with the European Commission's recent proposals on bailing in uninsured bank creditors would clearly ensure that what happened in Ireland would not be repeated elsewhere in the future. So it may not be popular these days in some circles here to speak favorably of more Europe but in this arena of financial integration at least I therefore believe there is very little by way of threat to Ireland in moving forward and rather there's quite a lot to gain. Indeed the Irish experience points rather clearly to the need for measures along these lines. An opportunity for coherence in system design was missed in 1991 by the architects of the Euro area it should be seized now. Of course there will be practical and political difficulties and the Four Presidents Report leaves many critical decisions unanswered but the broad direction is established. Well it remains to be seen whether the initiatives in this direction, banking supervision deposit insurance and resolution will be enough in themselves to reassure markets sufficiently narrowing again the spreads on government debt to the tight range that was observed throughout almost all of the first decade of the Euro. There is of course much more in the Four Presidents Report than just the proposals on financial integration specifically that report also covers the large areas of integration for budgetary and economic policy frameworks and a strengthening of democratic legitimacy and accountability. I'll not go into those matters here but all in all it is to be expected that while designing and adhering to such a roadmap is surely necessary to rebuild both market and especially intergovernmental confidence it may take time for market yields to converge to the extent desired. There has been already some market movement in the last few hours. Recall in thinking about this issue of yields on government bonds, recall that one of the mass strict criteria for admission to the Euro area is that a country's long-term bond yields should be not more than 200 basis points, 2 percentage points above the average for the three countries with the lowest inflation rates. So that's the way the architects envisaged. You can't get in until you've at least got your long-term yields to that sort of level. Well yesterday Spanish long-term yields reached about 550 basis points above those of Germany. The figure for Italy was more than 450 basis points. Clearly these market conditions relating to three of the four largest countries are not what was envisaged by the committee way back then and are not consistent with the integrated monetary transmission called for in the treaty. This has to be corrected and quickly. What has been going on to generate these high spreads? Well here's one oversimplified take on it but one that I think conveys some of the reality. Even very high national debt ratios in the Euro area can be seen by the markets as tolerable as long as interest rates are low and interest rates were indeed low throughout the Euro area before the crisis. The low interest rate environment owed much to the effective and credible control over inflation rates that had come into effect and represented such a welcome relief for many countries relative to what had been experienced in the high inflation of the 70s and 80s. Introduction of the Euro ensured low interest rates in the low debt countries but low yields also prevailed in the high debt countries as long as markets thought that the debt levels were tolerable and that the debt would be repaid without any doubt. Even for countries to which the rating agencies did not attach a high credit rating, sovereign debt traded for most of the first decade of emu as if it was triple A or close. But the same very high debt ratios do not appear so tolerable if interest rates are high and alas markets will demand higher interest rates if the debt does not appear tolerable. This vicious circle has gripped half a dozen Euro area countries with a vengeance. Now the spreads again seem out of line with credit ratings but this time the range of spreads is wider than the ratings would normally imply. A sense that countries in trouble would eventually be bailed out despite treaty prohibitions may also be have been at work in keeping debt levels low in the past but that belief too has been eroded by the markets experience with the Greek PSI debt exchange. Of course by piling up debt in many Euro area countries, some of which were already high, some not so high, the fiscal and banking policy responses to the crash of 2008-09, counter cyclical fiscal policy and the assumption of the obligations of failing banks have contributed to moving countries from safety into the risk zone where the good equilibrium, low interest rates, low perceived default risk could flip and has flipped into the bad equilibrium of high interest rates and less certainty. Getting debt ratios back to moderate levels is the medium term solution but that takes time. Breaking the vicious circle should be possible even in the short run. A number of techniques is available but to do so in a way that is broadly acceptable across Europe and in a way that maintains overall stability in other dimensions requires the steps adumbrated by the four presidents. This morning's summit pushes the process forward until this vicious circle is convincingly broken and a more sustainable configuration of bond yields is restored. Financial market conditions will continue to appear fragile and that's why there's increasing recognition that it is not something to be left on the long finger. Yet it's come back to Ireland. Ireland's financial interactions with Europe also relate of course more specifically to the Troika financing and the programme of adjustment which is now about halfway through. When I spoke to the Institute last in January 2011 it was as I mentioned with an analysis of where the programme at its introduction situated Ireland. I pointed out that Ireland faced a serious problem of excessive indebtedness, public and private, and that the programme would not solve this but would give time for Ireland to deal with the level of debt. I pointed out that tail risk in the banks remained high and that the EU and IMF had not been able to include in the programme any financial instruments that would help insulate Ireland from tail risk. The hope had to be that tail risks would not materialise. Well these two issues, high public debt and the working out of the banks distress loans, remain central. Progress has been made but more is needed. Let me speak first about the public finances and public debt and then about the banks. In both aspects Ireland's interaction with Europe and the rest of the world generally is a crucial part of the story but a lot is home grown also. With regard to the public finances clearly the aftermath of the bank driven boom and bust is the context for everything. Still it's convenient in turn to separate in our minds the sums are rising directly from the recapitalisation of the banks and those related to the rest of the evolution of the public finances. So just a few words about recapitalising the banks. The government has now injected sums equivalent to over 50% of this year's GNP into the Irish controlled banks. About half of this has been a cash injection and the rest is in deferred form, promissory notes and conventional government bonds. Until these deferred amounts are settled in cash and I know that Carl Whelan has been talking a bit about this earlier today, the cash needs of IBRC, the legacy institution from Anglo and INBS are being met with some 42, nearly 42 billion of exceptional liquidity assistance from the central bank of Ireland. The drawings of the central bank on the Euro system that in effect meet this ELA are subject to remuneration at the ECB policy rate currently 1%. As long as these arrangements continue then they have a sizable impact on the gross and especially the net debt of the state, but the overall running cost to Ireland has been relatively low thanks to the indulgence in this matter at any rate of what is often locally the often aligned ECB. Although this financing arrangement continues for the time being, still from the market's point of view the lack of any explicit commitment to long-term low-cost financing of IBRC's cash needs no doubt has represented one of the obstacles to Ireland regaining market access on the necessary scale in the immediate future. With last night's summit statement it may not be unrealistic to hope that this important loose end can be tied up relatively soon. At the central bank of Ireland our initial approach to the recapitalization of Irish banks back in late 2009 was to imagine putting in not just enough capital but so much capital as to fully dispel any market concerns. If we can look at the just a few slides we're going to look at the first of them there that the rapidly mounting oh I have to do something to him. Yes I actually have to do something. Come on. The rapidly mounting actual and prospective public debt ratios coming from the non-banking deficit and you can see the solid part of that line rising that's the debt ratio rising 2008 2009 2010 even if you don't look at the banking debt which is the white bit at the top. Rapidly mounting actual and prospective public debt ratios coming from the non-banking deficit meant that given the scale of the prospective banking losses that were announced in September 2010 well they put pay to the idea of over capitalizing the banks over the capitalizing the banks under such circumstances would simply have destabilized the state and that's why we were reluctant as I said the last time I was here to endorse further accumulation of indebtedness of the state in order to recapitalize the banks to insulate the financial system and the economy against tail risks even if external insurance was not available and it wasn't direct injection of the capital from an external sources would have been a much better solution however as has been seen again with the case of Spain in the last weeks until very recently and things may have changed now this was simply not on offer limiting the possibility for decoupling the pressures of the banking system from those of the sovereign well I could go on about um there's too much here about bank capital I'll skip down a little bit loan losses as I stressed here 18 months ago loan loss projections following a big bust involved an irreducibly large element of uncertainty at the central bank we continue to research the determinants of loan losses economic conditions including house prices facing the borrowing firms and households are not the only determinants and as we have been stressing in other fora the effectiveness of the bank's engagement with their stressed borrowers as well as the legislative and administrative framework for dealing with insolvency are important factors and details of new legislative framework for insolvency have been announced by the government this morning it should not be thought of paradox that a more engaged and holistic approach by banks and a less rigid and costly insolvency framework can help reduce loan losses over time meanwhile given the final view of the troika lenders that only the holders of subordinated debt and not of senior debt could be required to share in the losses the additional capital requirements brought the total state injection from 47 billion to well by my count 64 billion i think carl disagrees says it's only 63 but i think it's 64 almost all of the unguaranteed senior bonds of ibrc have now been repaid the last big chunk was paid this week by now the irish government has provided about half of the capital requirements generated by the crisis i think this is an interesting slide and it's hard to get this in a completely consistent way but it broken down the costs of the capital injections into banks into what the government spent that's the blue bit on the left almost a half the green bit at the top is it's called liability management exercises these are the losses to subordinated debt holders so their debt holders did suffer some people would have wanted them to suffer more but 14 billion the next one the red one is the losses in accounting terms by the shareholders anybody remember their bank share certificates counted for that large largest chunk of the total losses and the orange bit is the cost to the shareholders of the foreign banks so i think that's quite an interesting picture of where those banking losses fell away from the banks now and and let's talk about him the rest of the government's fiscal accounts very briefly so far i haven't spoken much about the adjustment of spending and taxation what's now being called austerity let's be clear about this when ireland lost access to the markets the availability of borrowed funds depended on the foreign official lenders they have authorized sufficient funds for what has to be described as a rather gradual glide path of the government deficit certainly relative to the alternative of no access but also relative to what is being implemented in other countries such as britain spain and the united states many others but i just chose those three despite the much lower debt ratios in those countries so is ireland is there a fiscal crunch in ireland that is is faster than countries that are not in programs evidently not and just let's look at that slide briefly on the left hand side on the y-axis the percentage government deficit as a percent of gdp leave out the banking parts of the of the irish deficit and you can see in 2009 there the green curve of course the thick green curve is ireland the the one that starts at 13 percent is the united states the red one is the united kingdom and the blue one is spain and what i want you to get out of this chart is how relatively gradual the irish decline in its in the deficit right through to 2013 is so that although it was well below the us at the start it is above all of them at the end and it's it's a lot above spain which despite not being in a program is adopting a much tougher adjustment and it it the the british program also gives britain a much lower deficit in 2013 it's important then to recognize that the availability of public official financing has protected the irish government accounts and has allowed the the adjustment to be a lot slower indeed the striking fact is that right through to the end of the program there is a resource transfer from the official lenders to support non-interest net spending of the irish government it is only after the end of the program scheduled to term that ireland is expected to be actually reducing the government debt ratio as such it can fairly be said that the higher taxes and cuts in public spending are thus far not being used to pay off the banking debt the scale of the fiscal adjustment needed even then is an indication of how badly skewed our public finances had become in the boom with what proved to be transitory revenues used to increase the level of spending above well above what could be sustained achieving fiscal targets is easier when the economy grows more important there are more jobs and more income to go around when the economy grows in the face of weakening economic activity in many parts of the euro area there has been a tendency for international comment to consider the irish economy's current growth performance as rather good export growth the current account surplus in the balance of payments compliance with budgetary targets and improvements in cost competitiveness are rightly emphasized but emphasis is sometimes also placed on indicators such as aggregate productivity and unit labour costs which in ireland can flatter in fact after the very steep fall during the crash of 2008 9 economic activity aggregate economic activity has been broadly unchanged since early 2009 growth in export oriented sectors has been offset by shrinkage in domestic demand only in 2013 does the central bank expect the domestic demand to stop falling aggregate employment has been falling for five years now bank lending despite all of the policy efforts remains timid despite the fact that exports have held up adverse economic factors have been holding the irish economy back it's one of the most open in the world and so it's important what the external factors are doing for example compared to what was projected at the outset of the program economic activity in ireland GDP is almost 2 percent below what was expected at the outset of the program but this gels with an average underperformance of the rest of the EU economy of about the same percentage pull this out here if we we can probably easiest thing is to forget about the red bars and this shows you revisions to the growth forecast for 2012 the blue lines the revision that happened between early 2011 and recent forecasts so you can see on the right hand side there there's ireland almost 2 percent below but look at all the other countries some of them as highest between three and four percent spain and italy germany also one and a half percent relative to what was expected euro area as a whole rather more than two percent below what was expected at that time so that shows you the link between external the external situation or it suggests I think between the external situation in ireland the continued high rate of personal savings and the fiscal adjustment have also been external have also been adverse factors though as I mentioned the latter factor has been minimized thanks to the availability of troika funding any overall assessment must therefore be highly qualified though there have been several setbacks in the euro area and some missed opportunities step by step actions have been taken to build the conditions needed to ensure a stronger recovery of the ireland economy according to the forecasters a return to output and employment growth is in sight and while there will no doubt be some more setbacks on the way it's not unreasonable to hope that the balance of negative and positive surprises will be better than it was however the high end still growing debt is reflected in the yield spreads even if they've come down today financing conditions do need to be improved as has been acknowledged as has been acknowledged in this latest summit this morning while some may have hope for more from europe in the past couple of years any fair minded assessment must acknowledge that the official financing received has been a lifeline if financial markets and growth conditions in europe can indeed be stabilized and i'm sure they can if financing conditions for ireland can be improved and if restraint remains the policy watchword at home the corner can soon be turned thank you very much