Banking Inquiry Report analysis: Prospect of bailout first raised in September 2008

The notion that Ireland might need a bailout was first raised in the month of the September 2008 bank guarantee and Dublin was in talks with troika bodies from two months before the November 2010 agreement, the inquiry found.

As it set out events leading to the EU/IMF bailout, the inquiry found Ireland’s entry into a programme was “inevitable” from October 2010. However, the timing was determined by factors outside government control.

The inquiry also said a European Central Bank letter to the late Brian Lenihan, then finance minister, on November 19th, 2010, “threatened” the withdrawal of crucial support for Irish banks if the State did enter a bailout. “Jean-Claude Trichet’s letter caused the Irish government position to crystallise.”

A radio intervention one day earlier by then Central Bank governor Patrick Honohan was “ at odds with the official line” that Dublin was not about to seek financial aid, the inquiry said. “The public was now alive to the likelihood that Ireland would need an external assistance programme of some form.”

Citing events the previous month, the report said the “Deauville Declaration” of German chancellor Angela Merkel and then French president Nicolas Sarkozy curtailed the possibility of re-entering bond markets by pushing up Irish sovereign borrowing costs.

The report noted how Kevin Cardiff, then assistant secretary in the Department of Finance, issued a request for “very preliminary and informal work on how a country enters an IMF programme” in September 2008.

“I just asked a colleague to make a discreet inquiry as to how you get into these things, if you do need them, just as a precaution because things were very bad from then,” Mr Cardiff said.

According to the report, it was communicated to the Government that IMF assistance was available in 2009 and again in 2010. “Possibly the most active suggestion on the part of the IMF was that the Irish authorities might consider a programme of assistance came in the second quarter of 2010.”

Brian Cowen

The report noted how Brian Cowen, then taoiseach, told how perceptions of Ireland “were not helped” by the troubles of Greece, which received its first bailout in April 2010.

As euro zone turmoil spread and Irish borrowing costs rose, the report notes that Cardiff had told of a small group working on Ireland’s potential exit from the single currency “if we found ourselves unceremoniously shown the door or if that became the only option.”

The inquiry set the run-up to the bailout in the context of a bank “funding cliff” in September 2010, when the original guarantee was to expire. “Whilst the Irish authorities were aware of and preparing for the funding cliff, it is less clear to what extent the ECB was being kept informed.”

Having alerted the ECB to this matter in July 2010, Mr Honohan noted its “change in attitude” in August and September. “We were absolutely in the centre of attention. And I remember one senior colleague saying, ‘I’m afraid that Greece is Europe’s Bear Stearns but Ireland will be Europe’s Lehman’s.’ That was in September 2010,” Honohan said.

The report cites Mr Cardiff describing a meeting in Brussels on September 22nd at which a team led by Mr Lenihan had confidential talks with EU officials.

Bailout avoided

Afterwards, Mr Cardiff said Mr Lenihan told him that Olli Rehn, then EU economics commissioner, thought it was “still on balance more likely than not that a bailout could be avoided – though it had to be considered a possibility.”

Kevin Cardiff said Marco Buti, Oli Rehn’s top civil servant, separately told him “that it was his personal view that a bailout would probably on balance be required.”

Another rise in borrowing costs followed the Deauville statement that holders of euro zone sovereign debt should take losses.

Again citing Kevin Cardiff, the inquiry notes another Brussels meeting on October 25th at which then ECB official Jürgen Stark sought a bank restructuring plan within an “overarching programme” involving fiscal adjustments.

Brian Lenihan had raised the possibility of “precautionary” aid, which would have stopped short of a full-blown bailout. However, this possibility “receded” after talks on Ireland at a G20 meeting in Soeul, South Korea, on November 11th and 12th.

The inquiry cites Brian Cowen saying the ECB decided on the 12th that could not sustain its large Irish exposure. “On the same day, ECB-EU sources commenced off-the-record media briefings leading to reports that Ireland would need a bailout and the discussions were under way,” Mr Cowen said.

While the report said Dublin was displeased that talks with Europe were made public, it was “unclear” whether anonymous briefings had a material effect on the need for external aid. “However, it would appear that from this point onwards, Ireland was more likely to enter into a troika programme, pending negotiations and a decision by the government.”