Lenihan says threat of default worried US
THE UNITED States was concerned about a default on debt by Irish banks, according to former minister for finance Brian Lenihan.
He said the US was concerned about credit default swap contracts being triggered, although he did not say why. Credit default swaps are a type of insurance that come into play if a borrower does not repay a debt. Entities holding debt in Irish banks may have credit default swaps with US institutions.
Mr Lenihan said that he raised with the ECB, the European Commission and the IMF the sharing by bank bondholders of some of the burden of Ireland’s banking losses. He said he raised the question of “extensive haircuts” as a contribution by the banking sector to the resolution of the banking crisis.
He said that during negotiations with the troika, Ireland got agreement on subordinated debt and introduced legislation that allowed it to be “expropriated”.
“The preferred route has been to do it through voluntary arrangements and that’s as it should be. If you do voluntary arrangements, you don’t trigger the credit default swap, which is a big issue with the United States authorities,” he said.
He said he also raised the issue of senior bondholders making a contribution and there was a considerable amount of dialogue on the issue.
He said the IMF was more sympathetic to the Irish view than the other two members of the group.Ultimately, however, the troika took a view and there was “no budge” on the issue.
Mr Lenihan made his remarks during his extended interview with Dan O’Brien, economics editor with The Irish Times.Some of the interview was broadcast in a BBC Radio 4 programme at the weekend.
He said there was a sense of continual crisis during the period between his taking up office and the deal with the EU and the IMF in November 2010. On the banks, he said the “big difficulty was that actually measuring the scale and depth of the crisis took time. I acted on the information I was given.”
He said the big question many would ask is why the government was so optimistic about the conditions of the banks from the onset of the crisis. Yet the crisis continued to get worse through a series of assessments.
To his mind there was a degree of denial around Ireland’s banks and Ireland’s banking system that “ultimately proved very dangerous for the country”.
He believed “there was in operation a herd mentality where the Irish banking system was concerned”.
This herd mentality concerned not just the bankers but also the regulatory and Central Bank systems, and the general commercial world in Ireland, he said.
He said he didn’t have time to react to the fact of the progressively worsening assessments. “I had to move on and take whatever initiatives were required at the given moment to try and move matters on.”
He said that when the bailout deal came, he felt he had “delayed the inevitable rather than stopped it. That was my dominant emotion at the time. And the rest, as they say, is history.”
He said the plan had been for Ireland to come out of the markets, address its budgetary situation and see how the markets would be in the spring of this year. But then the German chancellor Angela Merkel and the French president Nicolas Sarkozy met in Deauville and said sovereign debt might be dishonoured after 2013.
That meant the appetite of lenders to lend to Ireland diminished and interest rates rose.
He said the ECB wanted Ireland to wind down Anglo Irish Bank. The difficulty was that the amounts involved were so big. Anglo Irish Bank had grown and “it became a threat to the sovereign and to the banking system in Ireland”.
However, if Anglo had been wound up and there had been a default on its obligations then “you have a banking and sovereign collapse”, he said. He said the policy had been to prolong the loss over as long a future period as possible and that was the policy his government implemented.
He said he believed the ECB thought that Ireland could not afford an upfront winding up of the major institutions, that it was not capable of supporting itself, and that it therefore should sign up to a programme of outside assistance.