Germany’s rethink on just where the blame lies for the Irish bank bailout

On a dismal Tuesday night, 600 Berliners have braved the snow and a bitter, Siberian wind to fill the Deutsches Theater. Six bankers prowl the stage, explaining the shadowy world of derivatives, moral hazard and subprime mortgages.

Welcome to "The Raspberry Reich". Based on 20 anonymised interviews with German bankers, playwright Andres Veiel has condensed their testimony into a corrosive portrait of bankers who earn vast profits selling baffling financial products with incalculable risks. And the losses? Someone else' s problem.

Veiel, a prominent German film director and screenwriter, says "The problem is there's no readiness here in Germany to think things through to the end, such as how the link between risk and liability was broken in Ireland 's case so that investors, including German banks and their shareholders, could get away without covering their own losses."

Tomorrow sees an end to Ireland’s bank guarantee in its current form. The expiry of the so-called eligible liabilities guarantee scheme, successor to the original two-year guarantee, provided State backing – valued at €73 billion at the end of 2012 – for everything from senior unsecured bank bonds to deposits over €100,000.

Almost five years on, the debate continues over why it was agreed and whether a full blanket guarantee was required. The full facts of the all-night Merrion Street meeting on September 29th/30th 2008 are still not known. But political participants insist there was no other option if Irish banks were to reopen for business the following day.

"People paint lurid images of what happened," said one former government official, present. "The truth is, Brian Lenihan was scared shitless. Everyone was."

Senior Irish officials in Dublin today who had no part in the events of September 29th, 2008 agree, off the record and through gritted teeth, that there was no legal alternative to the one taken.

One senior Irish official says that what many guarantee critics, particularly in the US, overlook is how, in 2008 Irish law, bank depositors enjoyed no preferential access to their savings over institutional investors. What appears to be a level legal playing field, however, is anything but, with bank investors pulling deposits or selling on bonds through Asian traders while the bank’s depositors are still in bed.

There was no pressure from outside to decide as they did that night, meeting participants add: when the ECB and Europe an governments were informed after 6am on September 30th, the decision had been taken.

It was early in 2009, former government officials say, when the external pressure began to build in earnest. Leading the charge was former ECB president Jean-Claude Trichet, who told then finance minister Brian Lenihan Ireland had to stand by its banks and repay all creditors.

"If the German government was exerting pressure, it would be more effective to do so through the European Central Bank, " said ESRI economist John FitzGerald.

In Berlin, officials deny strenuously any lobbying went on to guarantee repayment of any liabilities to German banks. Only when the guarantee was announced did Germany know Ireland had decided to guarantee all bank liabilities, including bond repayments, at taxpayer expense.

“It was the Irish government that imposed the farthest-reaching guarantee for its banking system at the start of the crisis – on its own initiative,” said German finance minister Wolfgang Schäuble.

By the time Ireland requested external assistance in 2010, a German government spokesman adds, the level of unsecured bonds to which losses could have been applied had dwindled to about €5 billion.

Long before the Celtic Tiger, it was capital from Germany, along with Japan, that funded Ireland's often considerable budget deficit going back decades.

"We liked doing business with the German banks and they liked us," said Michael Somers, the long-serving former head of the National Treasury Management Agency. "We understood each other."

This mutual understanding found a comfortable co-habitation in the IFSC, where Ireland’s light-touch, low tax regulatory regime complemented German banking’s hunt for new, profitable opportunities.

"There are two sides in every transaction," said Richard Bruton, Minister for Jobs, Enterprise and Innovation, while touring Germany last week. "And those who funded the expansion in Ireland's banks did so with their eyes open."

The cycle of reckless borrowing and reckless lending could have been broken, some argue, by adjusting stamp duty or other property-related taxes. But such decisions are the preserve of national government who, in the Irish case, chose not to do so because of, among other things, the likely negative effect from voters.

And what of foreign capital? Central Bank statistics show that euro zone investment to pre-crisis Ireland came in fourth place, behind the UK, the US and other offshore sources. Was there any way to throttle the flow of foreign capital into boom-time Ireland, to stop foreign banks lending so much into the bubble?

“I think it’s fair to say that if anyone in the treasury suggested intervening to limit capital flows to Irish banks in the boom, they would have been taken out and shot,” says Michael Somers.

“The Raspberry Reich” tells of a crisis meeting in the late 1990s when all major German bank directors were summoned to Berlin to meet the financial regulator.

“We were read the riot act,” one banker told Andres Veiel. “Germany was increasingly falling behind London and New York as a financial centre. We should get with it, get into more risk, expand the derivatives and structured finance products, finally get modern.”

To encourage the internationalisation of German banks, allowing them to tap the highly profitable market for securitised products, Germany’s Schröder administration began a process of bank deregulation continued by the first Merkel government.

The 2005 programme for government of the Christian Democrat (CDU)– Social Democrat (SPD) grand coalition says that "product innovations" on financial markets "are to be supported emphatically".

Germany's staid, low-profit banking industry was quietly rewired.

Several crisis post-mortems on both sides of the Atlantic suggest that many German banks took far greater risks than the competition. Viewed as useful idiots by many Wall St veterans, German economist Prof Henrik Enderlein of Berlin's Hertie School of Governance suggests that, to encourage banks to internationalise while staying on as domestic financiers, Germany devised a hybrid regulatory system that retained creditor protection while introducing a new element investor protection. Banks plunged into a spending spree of securitised products.

“For the bankers it was always clear: the German government would never allow big German banks go broke, there was an implicit guarantee for them,” said Prof Enderlein. “It was as if you gave a gambler multimillion loans and sent him into a casino.”

Instead of having to go all the way to Wall Street, German banks soon found a casino in their own euro zone backyard: Dublin. "Ireland, with its tax breaks, became a convenient place to do all of this business," said Michael Endres, who built up Deutsche's London operations in the 1980s and remembers the IFSC regime when it was established. "If you set up a tax haven, however, you have to be clear that people will come who are not necessarily interested in business but simply the tax benefits. It was Ireland that opened a Pandora's box."

Amid the huge cost and pain caused by the financial meltdown in Ireland, the cost of light-touch regulation beyond Irish shores is often overlooked. And yet it played a key role in the near-collapse of many IFSC-based subsidiaries of German banks, including SachsenLB and Depfa/Hypo Real Estate.

In both cases exhaustive probes attribute blame on both the Irish and German sides but the financial cost– €429 million and counting for SachsenLB, €135 million in guarantees for Depfa/HRE – was shouldered largely by the German taxpayer with no Irish contribution.

Many leading German politicians take a more balanced, differentiated view on Ireland’s difficulties. But they’d rather not see their names in the newspaper when they do so.

On a good day, senior government politicians in Berlin admit that bailing out Ireland was crucial to propping up German banks and pension funds. Neither of the main political parties vying for power in September are interested in a public discussion of whether German banks, insurance companies or pensions – with assistance from politicians – played a role in the wider euro zone crisis.

There are few exceptions in Berlin: Sahra Wagenknecht, MP with the opposition Left Party is a staunch critic of the Irish bailout. "To this day many people in Germany believe, wrongly, that rescue plans in assist the populations in each respective country, paid for by German taxpayers," she said. "Things are the other way around: the Irish population will probably have to spend decades bleeding for the speculation of German banks."

Investigative journalist Harald Schumann spent months touring Europe, joining the dots between one countries' debts and another's liabilities, and highlighting the inconsistencies in a German crisis narrative in which blame lies solely with crisis countries.

Mr Schumann suspects Angela Merkel 's selective crisis framing is no coincidence, but a carefully calibrated political message to ensure her continued popularity – even if it is at a risk of undermining long-term European solidarity.

German government officials concede there has been an evolution in Berlin's crisis thinking, away from absolutist no-bailout rhetoric to recalibrating earlier deals and even bailing in private investors in Greece and Cyprus. But Ireland should expect no radical changes in its programme, says finance minister Wolfgang Schäuble.

“We're developing step-by-step as we move forward and every member state case turns out to be different,” he said.

The minister disagrees that Germany's financial industry has been excluded from the German crisis narrative. Germany set up its own bad bank, he points out, and took stakes in leading German lenders such as Commerzbank. "German banks taken over by the German state were hit by the involvement of private creditors in taking on part of the relief for the Greek state," he adds.

Mr Peer Steinbrück, the Social Democrat (SPD) lead candidate in the September election, headed the Berlin finance ministry when Germany deregulated its banks and Ireland announced its bank guarantee. A spokesman said he had “no interest” in an interview.

His former deputy, Jörg Asmussen, also declined to be interviewed. In his current role at the ECB, a bank spokesperson said, he preferred not to be interviews on topics relating to his previous role. Many former colleagues in Berlin are critical of Mr Asmussen’s role in banking deregulation.In a speech last week in Berlin, Mr Asmussen said the euro zone crisis was “no natural disaster, but a consequence of incorrect political decisions and regulatory deficits”.

When question time came, I asked him whether incorrect political decisions taken in Berlin, such as the political decision to deregulate German banks, contributed to the crisis.

“With the knowledge of today there are certain things one did then that we would not repeat,” said Mr Asmussen, sticking carefully to the third person neutral pronoun.

“I believe that, indeed, the wave of deregulation had gone too far and that is now being corrected after painful experience. I believe that many were involved.

”Many involved in the crisis, he adds, have “paid their apprentice dues” for their mistakes.