Life on planet Bertie and other favourite financial fictions of the past 12 months

 

From ‘turning corners’ to Nama ‘getting credit flowing’, 2010 had some interesting fairytales, writes PROINSIAS O'MAHONY

EVERY YEAR throws up its financial fictions and 2010 was no exception. Much anger has been vented over the Government’s surreal denials of an International Monetary Fund bailout just days before the deal was done, while Brian Lenihan’s repeated assertions that Ireland has “turned the corner” helped earn him the sobriquet Comical Leni. Here are five other porkies to enjoy.

Patrick Honohan supports the bank guarantee

Patrick Honohan’s July report on the Irish banking crisis “fundamentally undermined” those who opposed the bank guarantee introduced in September 2008, Fianna Fáil’s website states, noting that the Central Bank governor wrote that “an extensive guarantee needed to be put in place”.

Green Party Minister John Gormley recently agreed that the report “very clearly” said that while the bank guarantee “may have been too broad, in that it included subordinated debt”, it was nevertheless “absolutely essential”.

Before becoming governor, Honohan had been critical of extensive banking guarantees, both in a paper co-authored while working for the World Bank (such guarantees “add greatly to fiscal costs” so it’s “clearly” better to favour a “strict rather than an accommodating approach”) and in a 2009 article in the Economic and Social Review (“No public indication has been given that the authorities gave serious consideration to less systemically scene-shifting – and less costly – solutions”). So why the change of heart? Answer: there wasn’t any. This year’s Honohan report noted that not only was the guarantee on subordinated debt too generous, “the inclusion of existing long-term bonds” was “not necessary in order to protect the immediate liquidity position”. This support for existing bondholders “complicated eventual loss allocation and resolution options”.

In other words, the guarantee unnecessarily cost the taxpayer billions. As UCD professor and blogger (irisheconomy.ie) Karl Whelan notes, there is a “world of difference between Honohan’s support for a guarantee and the idea that he supported the guarantee that was actually put in place”.

The European debt crisis is the fault of speculators

Market speculation, rather than chronic financial woes, caused Greece’s bond yields to go sky-high, prime minister George Papandreou complained last March. Bizarrely, the leaders of Germany, Luxembourg and France echoed his call for an inquiry into the matter.

Spanish minister José Blanco, meanwhile, complained of deliberately “apocalyptic editorials in foreign media”, adding that Spain was “the victim of an international conspiracy designed to destroy the country’s economic status and, then, the euro” so that anti-regulation speculators could “go back to their old practices”. Spain’s National Intelligence Centre (CNI) launched an investigation into the matter, seemingly unaware that investors were concerned over an exploding budget deficit, 20 per cent unemployment and a property crash.

An investigation by BaFin, the German financial regulator, found no evidence of increased speculation in Greek debt. Despite that, an EU clampdown on financial speculation was announced in September.

Denial “is not a useful policy for dealing with a financial crisis”, as Prof Kenneth Rogoff, one of the world’s foremost authorities on sovereign debt crises and a critic of Europe’s management of its debt problems, noted recently.

Nama would increase bank lending

The National Asset Management Agency (Nama) was meant to liberate funding and get credit flowing into the Irish economy – at least, that’s what the Government endlessly told us it would do. That misplaced confidence was all the more puzzling given that, as Simon Carswell revealed in this newspaper last February, the IMF warned against such a notion.

Minutes of a private meeting between Mr Lenihan and IMF officials in April 2009 showed that the IMF “do not believe that Nama will result in significant increase in bank lending in Ireland”. Brian Cowen reacted to the revelations by saying that while Nama might not have been “sufficient in itself” to get credit flowing, people “should contemplate what level of credit accessibility we’d have in this economy” if it hadn’t been established. Hmmm.

It was all Lehman’s fault

The notion that Lehman Brothers’ bankruptcy was the trigger for all of Ireland’s woes is more of a 2009 fiction than a 2010 one. Since the June publication of the Honohan and Regling-Watson reports into the Irish banking crisis, after all, most Ministers have eased off the L-word and accepted that serious mistakes were made.

The damning reports meant they had little choice. Heavy banking losses were “inevitable . . . regardless of international factors”, with Anglo Irish Bank and Irish Nationwide already “well on the way to insolvency”. The theory “that property prices would have remained much higher and for much longer had it not been for Lehman Brothers is not convincing”. This was a “homemade” crisis, with “about three-quarters” of the downturn “attributable to local factors”.

Even after the reports, however, one figure remained defiant. “If Lehman’s didn’t collapse, then we wouldn’t have had a hard landing,” Bertie Ahern said in September. “What we needed to do was get a few years’ break, where we would have had a soft landing, but because of the international situation we didn’t get that, which blew a bubble that we otherwise probably would have got away with.” The reality, he said, was that he “left this country in a state where we had low national debt, where we had full employment, low taxes and I didn’t foresee Lehman’s coming down and the rules changing.”

Only on planet Bertie . . .

AIB – one of the finest banks in the world

If planet Bertie is a strange place, planet Ned is, well, an indescribable one.

Cork East Fianna Fáil TD and AIB shareholder Ned O’Keeffe said this year that “no bank has served Ireland better than AIB”. Initially a supporter of “the Nama”, which he described as a “badly needed rescue of the economy, property developers and the banking system”, the prospect of State control led him to slam the agency and “foreigners” like Financial Regulator Matthew Elderfield. “They want to get their claws in there and run that bank, that’s one of the finest banks in the world, my constituents tell me.”