Patrick Honohan: ‘Many people thought it was too good to be true – and it was’

There were few options in 2008 'and that was fault of Dame St, not Leinster House'

A month into the job as minister for finance, Brian Lenihan arranged in June 2008 to meet Trinity College Dublin economics professor Patrick Honohan.

Faced with a multibillion-euro tax shortfall amid a collapse in property deals, rising social welfare costs as unemployment crept up, and an economy technically in recession (though he did not know that yet), Lenihan was canvassing views outside his department as to how to frame his next budget.

Perhaps reflecting Lenihan's sense of the weight of the challenge ahead, he spent much of his time with Honohan discussing the 1998 tome of the late former UK chancellor of the exchequer Roy Jenkins on 19 men who had been in charge of the British coffers between 1886 and 1947.

"Banks didn't come up at all," recalls Honohan in an interview with The Irish Times more than a decade later.


Banks would soon engulf Lenihan's ministry as the collapse of Wall Street giant Lehman Brothers in September 2008 prompted investors globally to fret about risks elsewhere.

The government would be forced into a snap guarantee of Irish lenders by the end of the month, covering €440 billion of liabilities in a desperate effort to stem a silent, but deadly, run on Irish banks as major corporate depositors pulled tens of millions of euro at a time at a click of a mouse.

Within a year Lenihan would give Honohan, a former World Bank economist and a specialist in banking collapses in developing countries, the job of sorting out problems closer to home, installing him as the Central Bank's 10th governor tasked with restoring the institution's battered credibility and overhauling the State's ailing banking system.

"I often wondered why we hadn't had a banking crisis in 100 years," says Honohan (69), who led the Central Bank through the tumultuous period between September 2009 and November 2015. "I rationalised it that Irish banks were sufficiently profitable over the years, and because it was well paid work the best thing to do if you were working in a bank was to make sure your show stays on the road. Whereas in some emerging markets people say 'I'm in a bank. How much can I steal'? "

Back in October 2006, when he was still working as a World Bank economist, Honohan delivered a paper at the annual conference of the Dublin Economic Workshop in Kenmare, Co Kerry, where he put up a chart showing the extent to which Irish banks had become reliant on overseas funds to fuel the property boom.

Astonishing speed

“Credit institutions have recently become net importers of funds to Irish residents on a huge scale: 41 per cent of GDP by the end of 2005,” he told the audience at the time. “And this has changed with astonishing speed – up from about 10 per cent at end-2003.”

Honohan would conclude in a report for the government in 2010 on the Irish financial crash that lenders’ increasing reliance on cheap, international finance to fuel the construction boom – as house prices quadrupled in the decade to 2007 – “greatly increased banks’ vulnerability to changing market sentiment and ultimately triggered their downfall”.

Ireland, of course, was far from the only country hit by the Lehman Brothers collapse. But the Honohan report noted that home prices had already been falling for a year and a half by September 2008, making heavy bad-loan losses on banks’ development property portfolios “inevitable”.

The shortcomings and failures of bank directors and senior management, auditors and accountants, the Central Bank, the Financial Regulator, and a bubble-fuelling government fiscal policy were all looked at in detail in Honohan's 183-page document – the first of a series of reports commissioned by government and the Dáil into the banking crisis.

Ireland was like the roadrunner – running so fast when the crash hit that it went way over the cliff edge – and then crash"

"Other countries in Europe were sort of plodding along, and when the global financial crash came they started to slide down the cliff," says Honohan, almost three years after retiring and working on a book called Currency, Credit and Crisis: Central Banking in Ireland and Europe, which is set to be published next year . "But Ireland was like the roadrunner – running so fast when the crash hit that it went way over the cliff edge – and then crash."

For Honohan, if Anglo Irish and Irish Nationwide Building Society (INBS) never existed, "nobody would be talking about the Irish banking crisis today".

"AIB may have needed to have been nationalised and capital injected into it, but it wouldn't have been a huge meltdown. Those two banks really created the doom loop."

A decade on, Honohan hasn’t changed his mind on whether Anglo should have been allowed to capitulate into bankruptcy at the end of September 2008. “Anglo was a systemic bank, with a balance sheet over €100 billion.”

But he maintains the State’s largest property lender and Irish Nationwide Building Society should not have been covered by the guarantee but nationalised to give authorities time to see if another solution could be found for the lenders, whose business models were by then irretrievably broken.

Blanket guarantee

“Although there were better options than the blanket guarantee, none of them would have saved anything like all of the €35 billion or so that those banks cost us.”

Honohan has no doubt where fault lies for the lack of options available to Lenihan and his boss, taoiseach Brian Cowen, on the night of the guarantee.

The blame for that must attach really mostly to the official sector, not the politicians, for not having it mapped out in more detail

“The blame for that must attach really mostly to the official sector, not the politicians, for not having it mapped out in more detail. They left it too late. The responsibility was in Dame Street,” he says, referring to the Central Bank’s base at the time.

Honohan said there was enough information available from a broad exercise by the regulator in December 2007 – assessing the multiple relationships between five big property developers across the five main lenders – to indicate that “these banks were in trouble”.

Honohan, who spent a period as TCD economics professor between 2007 and taking up the Central Bank job, was moved to contact Lenihan when it emerged in December 2008 that the minister was planning to buy preference shares in Anglo Irish, as well as the two main banks AIB and Bank of Ireland.

“I raised the point in the letter that by doing this he was removing the possibility of subordinated debt-holders in Anglo being ‘haircut’,” Honohan says, referring to an option of imposing losses on junior bondholders in the bank. “If you put the capital below subordinated debt in the capital structure you’re lifting them up and making them safe.”

When Lenihan hired Peter Bacon in early 2009 to assess whether the State should create a bad bank or an insurance scheme for risky commercial property loans on lenders' balance sheets, he asked the economist to run his recommendation about establishing the National Asset Management Agency (Nama) by Honohan.

“I remember saying, ‘wow, that’s a big plan, but what about residential mortgages?’ But Peter said that it would make it too big. That was the missing ingredient in Nama.”

Honohan followed up with a letter to Lenihan. “I told him that it was a risky thing but it’s worth trying. But he had to be sure that the purchase prices were realistic and didn’t give a handout to the shareholders. That was my mantra then for a while – that Nama could end up being a bailout for shareholders and developers.”


A strong rally by bank shares in Dublin in the six months after Nama was unveiled suggested investors initially thought the same. That was before the bad bank put out an initial estimate that it would apply a 30 per cent discount to toxic commercial property loans it was taking over.

In the end, the discounts would be almost twice that estimate, wiping out shareholders and fuelling the taxpayer bailout bill. Meanwhile, Nama has taken either partial or full enforcement action to seize assets belonging to 47 per cent of the 800 or so debtors that went into the bad bank, according to a spokesman for the agency.

Honohan moved quickly to establish a credible team around him on taking over the helm at the Central Bank. He hired Matthew Elderfield, a former head of the Bermuda Monetary Authority who had spent eight years at the UK's Financial Services Authority, as head of financial regulation in early 2010. He followed that soon thereafter with the appointment of fellow Brit, Jonathan McMahon, as head of banking supervision.

The trio immediately abandoned the previous light-touch regulatory regime for an assertive and intrusive one. They also presided over a round of banking stress tests in March 2010. However, it was an exercise that fell wide of the mark.

“It didn’t go far enough. My first thought was ‘we’ve got to overcapitalise the banks to deal with bad loans and make them bullet proof’. But then you start to realise, actually, with the public finances deteriorating for other reasons...overcapitalising the banks wasn’t an option.”

Within six months of the stress tests Anglo required a further multibillion-euro bailout and AIB was faced with nationalisation as Nama applied much deeper-than-expected discounts on commercial property loans it was taking over from the banks.

Bad debts

Meanwhile, the international creditors of the banks and the Irish sovereign were beginning to fret about a “second wave” of bad debts as distressed mortgage holders began to default in their thousands. The government was rapidly losing control of the situation, and heading inexorably into an international bailout as its fading ability to prop up the banks caused its borrowing costs to spiral in capital markets.

Honohan took it upon himself to call RTÉ from Frankfurt on November 18th, 2010, and go on the Morning Ireland radio programme – at a time when Cowen's government was denying it was in rescue talks. He declared the State was likely to ask the European Union and the International Monetary Fund (IMF) for "tens of billions" of euro to rescue the banks and plug a budget deficit.

The intervention blindsided and angered the government, which was trying to create some leverage in early negotiations with the troika in advance of applying for aid. But Honohan was seeking to avert a run on the banks at a time of feverish speculation and market turbulence. It engenderned public trust in Honohan at a time when faith in authorities in Ireland was in short supply.

For Honohan, the most difficult period in office was in 2011, when Ireland was under the protectorate of the troika.

"It was a time when it wasn't at all clear that [the bailout programme] would work. The interest rates on the loans were very high, and we still needed to negotiate things around Anglo Irish Bank and all its heavy indebtedness with the ECB. And then there was the risk of the euro breaking up. But you couldn't talk about these things."

Honohan, known for speaking his mind, decided to cut down dramatically on his number of speeches.

But why didn't Ireland experience the riots and protests seen in Greece as the Oireachtas passed some €30 billion of austerity measures between 2008 an 2014?

“My explanation for this is Ireland’s involvement in globalisation,” says Honohan. “There are a lot of people here working in multinational companies and they’re aware of the interconnectedness of the global economy, and that you’ve got to play the game, even if you don’t like the game, if you want to be successful in a globalised economy.

Correction was essential

“We also have a very well educated electorate and general public in Ireland...who knew that urgent measures had to be taken to stabilise the situation. They may not have liked the particular decisions that were being made, but they bought into the idea that a correction was essential.

Because the boom period was so favourable for many, many people that they thought it was too good to be true. And hey! It was

“And also because the boom period was so favourable for many, many people that they thought it was too good to be true. And hey! It was.”

Honohan’s parting “gift” before retiring from the Central Bank in 2015 was the introduction of mortgage rules, capping loans against property values and borrowers’ incomes. These were aimed, as he said at the time, “at stopping a boom and preventing the credit-chasing-prices-chasing kind of bubble” of the past. More than three years on, the limits continue to have as many critics as supporters.

Honohan believes successive Irish governments should be given kudos for their determination to increase tax revenues and bring down spending during the financial crisis to close the budget deficit.

“Where they were less effective was in developing a narrative which would be convincing to the public that says ‘here’s how we’re going to structure our spending and our tax over the years ahead in the new situation – and here’s why we’re doing it and why it’s good’.

“There is a simplistic narrative out there that remains from the crisis, which is: We had our backs against the wall. We squeezed everything down and as soon as we get some money, everything should pop back to the way it was. Wrong! It should be different.”