Dark days: behind the bailout


IRELAND'S BAILOUT ONE YEAR ON:Over 10 weeks late last year, Irish and European officials engaged in a diplomatic dance of warnings, denials, negotiation and brinkmanship, before the November bailout by the EU and IMF. Here’s how it happened

A SCATTERING of November snow fell over Brussels, but Olli Rehn, Europe’s economics commissioner, still planned to go out for football training.

Rehn was at home, making coffee, when his phone lit up. Brian Lenihan, Ireland’s minister for finance, was on the line. The big question in Rehn’s mind was: would Dublin seek a bailout from the European Union and International Monetary Fund (EU-IMF).

“He called me to inform me that the request would come that day,” says Rehn.

It was November 21st, 2010, around 10am in Brussels, an hour earlier in Dublin. Brian Cowen and his ministers had tried to hold back the inevitable for months. Now the hour had come.

Rehn, who had been in near-constant contact with Lenihan for some months, rang Jean-Claude Trichet, president of the European Central Bank. His call went to voicemail.

More than an hour passed before the commissioner reached Trichet and told him of the developments in Dublin. Rehn, togged out for soccer, spoke with Trichet from the middle of an icy football field at Parc Cinquantenaire, an elegant public park about a minute’s walk from the European quarter in Brussels.

Dozens of IMF and EU officials were already in Dublin, but the government had been clinging to the notion that the State could survive without external aid.

Ten days previously, Rehn had phoned Lenihan from a tense G20 summit in South Korea, at which Ireland’s debt became the prime topic of discussion. “It’s midnight in Seoul, Brian. The situation has changed,” he had said.

Trichet and top officials had been keen for Ireland to enter an aid plan. Many in Brussels had formed the view two months previously that a bailout, Europe’s second, was in prospect.

“I would say that latest, from mid-September in my thinking, the probability of Ireland avoiding a rescue package was very small,” Rehn says.

Lenihan broke the news about the loan application at lunchtime after his conversation with Rehn, on This Weekon RTÉ Radio 1. Plans were already in motion for an emergency teleconference of euro-zone finance ministers that evening. The secrets, lies and denials were at an end. Ireland’s rescue was finally out in the open.

The formal deal was done within a week, the arrangement precipitating the implosion of the Cowen administration and paving the way for Fianna Fáil’s crushing election defeat.

Ireland had been in the danger zone long enough. As a heady boom turned to bust and the banks caved in, unfettered malpractice at home and a global economic earthquake left the State brutally exposed.

Ireland needed almost everything to go right to have a fighting chance of survival. But over 10 weeks in autumn 2010, nearly everything went wrong.


“There were meetings going on day and night. No one was in charge,” says a senior figure of the increasingly fraught atmosphere in government circles at the time. “The fellows in Finance were stunned. Nothing like this had ever happened to them. There was no book. There was no manual.”

For more than two months before the bailout, the increasing possibility that Ireland might need external aid was discreetly acknowledged at the highest levels within the government apparatus. It was the same within the EU institutions and other euro-zone countries, where senior people took to watching events in Dublin closely.

Lenihan had been buoyed by a successful oration to the Michael Collins commemoration at Béal na mBláth in August. Though now in the final year of his life, he kept a gruelling confidence game going as the political system and markets cranked into gear after the summer break, bringing with them problem after problem.

In the opening days in September, talks were already under way on the extension of the bank guarantee from the end of the month.


By mid-September, the yield on Irish 10-year bonds was never below 6 per cent. The yield, or interest rate the government had to pay on 10-year bonds was all-important. A yield of anything near 6 per cent was very dangerous; above 6 per cent was a grievous wound; and anything above 7 per cent meant disaster if the trend was not quickly reversed.

The wider debt crisis was worsening, making life difficult in all frail countries, and Ireland was the prime focus for restive markets. It was a constant state of emergency.

The State had been downgraded by the rating agency Standard Poor’s in late August, bank deposits were in steady decline and the ongoing transfer of bad property loans to Nama meant the banks would need yet more capital from the State.

All of that was to say nothing of a ruling by Eurostat, the EU’s statistical body, that the government would have to record up front the cost of rescuing the banks. As the bank-rescue bill rose, the size of the Irish deficit was the subject of much speculation in Brussels. The figures coming through from Dublin were greeted with amazement.


Two days before an EU summit on September 16th, Brian Cowen’s “Garglegate” radio interview in Galway added to dissipating confidence in Ireland. Cowen emerged from the summit saying his administration had the confidence and trust of the European authorities to see Ireland through the crisis.

At that point the ECB had already made its first forays into the market for Irish sovereign bonds, a clear sign of worry at the rising yield. The new element of danger was that the ECB, which is resolutely opposed to any open-ended commitment to buy bonds, would call a halt to the initiative at a certain point.

This helps explain a new wave of pressure from Europe to go further, faster with what was already an onerous austerity drive. “The people in Brussels and Frankfurt thought they should move faster. Already in the middle of September, they wanted to bring forward the budget and go further,” says a source involved in the discussions.

For months, Trichet would press the Irish to demonstrate an ever-larger “fiscal appetite” when it came to cutbacks and taxes. Furthermore, concern was brewing about an imminent new bank recapitalisation plan. Ireland featured heavily at a meeting of senior European Commission officials the day after the summit.


Five days later, Lenihan flew to Brussels for a secret meeting with Rehn, the EU competition commissioner Joaquín Almunia and ECB executive board member Jürgen Stark. To the surprise of some present, news of the meeting did not leak out.

As the four men sat down to dinner high up in the commission’s Berlaymont building, there was no open talk that a bailout might be needed. Stark, in particular, wanted to hear more about how Lenihan was going to meet his fiscal targets.

There was anxiety about the increased risk in Ireland’s situation, however. Rehn and Lenihan agreed during bilateral talks after the wider meeting that they should start to keep the IMF posted on developments in Ireland.

This was not the same as starting a “concrete discussion”, says a source. At this stage the IMF had little focus on Ireland and was concentrating on Spain and Portugal.


The concern in Brussels about Ireland intensified almost immediately. At a meeting in the commission on September 24th, officials reviewed data from Dublin on the new plan for the banks, which was to be published on September 30th.

As the cost of attempting to rescue Anglo Irish Bank ballooned, the total bill for bank bailouts would rise €17 billion to €45 billion and possibly as high as €50 billion. In the new worst-case scenario, Ireland was looking at a budget deficit of 32 per cent of gross domestic product. This was almost 11 times the EU limit. No one could remember a deficit like it.

“That was the first time that everything or close to everything was revealed to us from the regulators in Ireland. After that the world changed for us and probably changed for the rest of the euro zone,” says a commission source.


Two days before a banking plan announcement, Rehn told The Irish Times, in response to written questions, that the Government should have no need to seek emergency aid. However, he urged Lenihan to quickly set out specific budget and reform measures for the next four years. The implicit message was that external forces would impose such a plan if Dublin did not seize the initiative itself.


By the time Lenihan made the September 30th banking announcement, the National Treasury Management Agency (NTMA) had resolved not to proceed with bond auctions scheduled for October and November. Lenihan declared that Ireland was “fully funded” until late June 2011, suggesting there was no need to be in markets at that point. In the weeks that followed he said it again and again.

The idea of withdrawing from private debt was to seek clear ground to quickly win back investor confidence. The strategy, however, was predicated on the NTMA being able to return to markets early in 2011. If it could not, the longer its exclusion from markets dragged on the more dangerous the situation would become.

The announcement from Dublin that morning was the top item on the agenda of euro-zone finance ministers, who had a scheduled meeting in Brussels. For 30 minutes, Brian Lenihan briefed his counterparts by phone. The mood was not good, although Rehn, Trichet and the chief of the group with political control over the euro, Jean-Claude Juncker, made clear their support for the plan.

Their endorsement went only so far. All it took was a glancing reference to Ireland by Klaus Regling, the chief of Europe’s bailout fund, to illustrate that the country was a potential candidate for a bailout. Thanks to additional budget measures from “the relevant countries”, Regling said his central scenario remained that the fund would never become operational.

Ireland’s 10-year bond yield stood at 6.64 per cent at the end of the day. Word emerged via Le Monde that France had started to agitate against Ireland’s low, 12.5 per cent corporate tax rate. Officials in the commission started making contingencies for a possible Irish bailout. The temperature was rising rapidly.


The bond yields and the “spread”, or premium between German and Irish yields, were a constant worry. “We kept asking: how are the spreads today?” says a former government official. At this point, however, the prime focus within the Department of Finance remained on the 2011 budget and the four-year plan.

Lenihan had signalled that the “adjustment” target in the looming budget would rise well above €3 billion. The eventual sum he disclosed in November, with Rehn’s approval, would be €6 billion. Yet still there was constant pleading from the ECB to quicken the austerity drive. At one point a figure of €8 billion was mentioned, a sum that many officials in Dublin found difficult to fathom.

In the face of pressure to bring forward the budget, Lenihan’s response was that a democratic process was in place and that there was no reason to deviate from it. Lenihan had critics in Europe, and in the eyes of the more strident ones this smacked of a failure to fully comprehend the force of the mounting market strain on Ireland.


The 10-year yield was still hovering around 6.5 per cent when Lenihan left Dublin for Washington on October 7th. There he attended the annual meetings of the IMF and the World Bank. The next day’s agenda included a “routine” meeting with IMF officials, an engagement Lenihan was very keen to play down.

“I really do not want to see a headline in Ireland saying ‘Minister meets IMF’ at present,” he told reporters. “It is a normal attendance for the minister to be here at the annual meeting, and it is normal as part of that meeting that you meet the officials who liaise with Ireland.”

But context is everything. Looming in the background was the fact that Ireland was in serious trouble. In the course of the meeting someone asked out of curiosity what it would be like if the State were to find itself in an IMF programme, at which point an IMF official explained what might be involved.

On the Irish side the response was held to be reasonable enough, more or less in line with the policies the government might seek to execute, and not quite the stuff of IMF bogeyman legend. Notwithstanding the pressure to avoid a rescue aid at all costs, the sense was that the day-by-day strictures of a rescue might not be “as bad” as had been feared.


Lenihan and his entourage were on their way back to Dublin by Tuesday, October 12th, and senior officials from the European Commission were coming to Merrion Street for talks on the budget and the four-year plan.


What happened next made a bad situation much worse. The venue was Deauville, France. At a bilateral summit in the Normandy resort, German chancellor Angela Merkel struck a deal with French president Nicolas Sarkozy that would determine the next phase of Europe’s response to the debt crisis.

The main elements of the plan were the creation of a permanent rescue fund in 2013 to replace the temporary fund set up the previous May in response to the Greek debacle; a change to European treaties to facilitate such a step; and an insistence that private creditors make a contribution to future rescues. This seemed to raise the dreaded prospect of yet another Irish referendum. More importantly, the German-inspired drive to impose costs on private investors spooked markets.

Ireland, by then first in the line of fire, took an immediate hit. Within days, the 10-year bond yield was approaching 7 per cent. A well-placed source reports despair within the ranks of the NTMA, as officials realised that the return to private markets had just become much more difficult. It was like a portcullis crashing down.


By now, say several Irish and European sources, the going was getting very tough indeed. Anxiety intensified by the day, and not only in Europe. Concern about Ireland is said to have been raised at a weekend meeting of G20 finance ministers in Gyeongju, South Korea, on October 23rd and 24th.

Lenihan went to Brussels to meet a jet-lagged Rehn directly on the latter’s return from the G20 meeting on Monday, October 25th. Jürgen Stark of the ECB was there too. They spoke for 90 minutes about the economic situation and the 2011 budget. Lenihan’s trip back to Dublin delayed the start of a bank-holiday cabinet meeting at Farmleigh on the looming round of cuts and tax measures.


Brian Cowen was back in Brussels for an EU summit that Thursday and Friday. In public, at least, all the talk was about Merkel’s push for treaty change. The eventual agreement to go down that road was made on the basis that the manoeuvre would not trigger a referendum in Ireland or any other member state. But this was no longer the main event. As the taoiseach left for home, Ireland’s 10-year bond yield closed at 6.92 per cent. Never again before the bailout would the yield close below 7 per cent.


The first week of November was crucial. At very high levels within the EU institutions, doubt intensified about Ireland’s capacity to weather the storm.

By Wednesday, November 3rd, Cowen took a severe blow when the High Court ordered an end to the delay of the Donegal South West byelection to fill the Dáil seat vacated by Fianna Fáil MEP Pat “the Cope” Gallagher. The ruling brought with it the danger of a government defeat, eroding its slim majority.

On Thursday, November 4th, Lenihan finally unveiled the €6 billion target for the budget adjustment. It was an enormous sum, guaranteeing increased tensions within the ranks of the government, but markets were unimpressed. The 10-year yield rose above 7.5 per cent for the first time, reached 7.8 per cent and closed at 7.66 per cent.

That same day in Frankfurt, Trichet gave a guarded welcomed to the new budget target. At a press conference, he said the decision to front-load the four-year plan with a €6 billion package was of “extreme importance” and said the scale of the overall endeavour was “not insufficient”.

Privately, however, there was a growing body of opinion within the ECB governing council that Ireland would need a bailout. Officials in the commission had come to the same conclusion. Time was running out.

In Dublin, public attention centred on preparations for Olli Rehn’s imminent two-day visit. That weekend , however, moves were made to step up contact with the IMF.

“IMF discussions should be discreet,” ordered Lenihan. Talks would be under way within a week, but the government, keen to maximise its hand, was divulging nothing; nor had it resigned itself to the inevitability of external aid.


Rehn arrived in Dublin on Monday for talks with Brian Lenihan, Central Bank governor Patrick Honohan, the opposition and the social partners.

Even as the 10-year bond yield spiked to 7.87 per cent, the commissioner’s public message was essentially a soothing one. The State faced a huge challenge to stabilise the public finances, but its “formidable strengths” should not be overlooked, he said. “Ireland has done it before and it can do it again.”

In some of Rehn’s private discussions, however, the prospect of an intervention was never far away. It was no wonder. By the time he flew out of Dublin on Tuesday, November 9th, the 10-year yield had climbed above 7.9 per cent. This was an impossible rate of interest, but that wasn’t the end of it.


By Wednesday night the 10-year yield had reached 8.63 per cent, and on Thursday it closed at 8.89 per cent. Any sense of confidence was gone. Ireland would not be able to get back into markets at those rates.

The system in Dublin was in overdrive. With the banks at the heart of the problem, Lenihan wondered whether it might be possible to arrange aid for the sole purpose of boosting the banks. It wasn’t a runner. Money for the banks could not be drawn directly from the European bailout fund, and there was no way for the government to approach the fund without triggering intrusive policy oversight.

There was a second strand to the debate. Cowen wanted the ECB to ease the pressure on Ireland by continuing to buy up Irish sovereign bonds. The ECB disagreed. The ECB was unhappy that Dublin wasn’t facing up to the problem and was concerned about its mounting exposure to the Irish banks. The sense was that the European Central Bank was leaning towards a radical new solution.

In government circles the surprise was that it had all happened so quickly. There was annoyance with the ECB and a sense that it was looking out for itself rather than the interests of Ireland and its people. This was denied in Frankfurt, where the case is often made that the extent of ECB support for Ireland’s addled banks is entirely without precedent.

Concern about Ireland’s situation had “gone viral”, however. Conscious of the mistakes made in the long delays over the Greek bailout, the EU authorities were keen to avert the eruption of contagion from Ireland. They were not alone. In spite of the government’s insistent protests to the contrary, a tidal wave of woe was pushing Ireland into the bailout zone.

Although discreet preparations were under way, both Cowen and Lenihan continued to insist that Ireland would not capitulate.


When Rehn left Ireland, he travelled to Seoul for a summit meeting of G20 leaders, which began on Thursday and continued on Friday. The summit was critical. The time difference made co-ordination difficult, but matters appeared to come to a head on Thursday night in Seoul, which is nine hours ahead of Dublin.

For months European leaders had been under pressure from their global counterparts to sort out the mess in the euro zone. Reform of the world’s economic system was supposedly at the top of the agenda, but much time was spent on Ireland, which isn’t even invited to G20 meetings.

Word of a possible bailout was spreading. Angela Merkel said the EU was ready to deal with all scenarios in the Irish financial crisis. “It is up to every EU country to apply for help if they need it,” added her finance minister Wolfgang Schäuble.

It was a portentous remark. In a bid to calm nerves, Schäuble and his French, Italian, Spanish and British counterparts issued a statement in which they declared that any effort to enlist private creditor participation in future bailouts would not apply to current bondholders.

There were other tensions. Two sources have said US treasury secretary Timothy Geithner became very exercised about the frailty of Anglo Irish Bank and was concerned about its potential to renege on some of its liabilities, triggering insurance payments against any defaults. This concern mirrored anxiety within the ECB.

Rehn made his midnight phone call to Lenihan, saying the tide had turned. It wasn’t the only call to Dublin from Seoul. José Manuel Barroso, chief of the European Commission, rang Cowen. Some Dublin sources thought this very unusual, but the conversation was seen in Brussels as part of an ongoing engagement. Precisely what was said is not known. In Brussels, however, the clear sense of Cowen’s stance was that he wanted the ECB to continue buying bonds. He was not given that assurance, yet he insisted there would be no change of course in Dublin. After the G20 meeting, this was an increasingly difficult position to sustain. According to a central banker, Dublin “didn’t want to recognise” the gravity of its situation once the yield went above 7 per cent.


On the morning of Friday, November 12th, The Irish Times reported that informal contacts were under way between Brussels, Berlin and other capitals to assess their readiness to activate the bailout fund in the event of an application from Dublin. That day Lenihan received a letter from Trichet. In Lenihan’s own account, the letter “raised the question about whether Ireland would be participating in a programme at that stage”. Dublin officials believed the letter to be forthright, with an implicit threat that support for Ireland’s banks was at risk. Lenihan phoned Trichet.

Late that afternoon, Reuters reported that Ireland was already in talks about a drawdown of emergency aid, which Cowen denied. “We have made no application whatever for funding.” That evening, however, the government instructed officials to prepare for exploratory talks on a possible deal.

Officially at least, the objective was to ascertain what might be on offer. Over the weekend a succession of senior ministers – Dermot Ahern, Noel Dempsey, Batt O’Keeffe and Mary Hanafin – denied in unambiguous terms that anything of the sort was under way.

Still, at midmorning on the Sunday, a delegation of the State’s top financial officials gathered at Baldonnel aerodrome to take the government jet to Brussels. The team included Department of Finance secretary general Kevin Cardiff, Honohan of the Central Bank, financial regulator Matthew Elderfield and a clutch of other senior officials.

A key concern was to maintain secrecy. Among some of those present there was a downbeat sense that “something terrible” was afoot in relation to a bailout. Others were more circumspect. In Department of Finance records this crucial engagement in Brussels was described as a “non-meeting”.

They didn’t arrive home until Monday night, by which stage senior ECB figures made clear the pressure on Ireland while emphasising that the decision was the government’s to take. This annoyed Lenihan greatly.


Cowen told RTÉ that Ireland was not making any aid application “for the funding of the State” because the country was already funded until the middle of 2011. It seemed increasingly implausible.

Lenihan went to Brussels on the Tuesday evening for a scheduled meeting of eurozone finance ministers. Arriving late due to fog at Brussels airport, he was the last man into the meeting and came under huge pressure from Schäuble to leave immediately and announce henceforth that Ireland was applying for aid. Christine Lagarde, the French minister, backed Schäuble. However, Lenihan argued that he had no mandate to negotiate a bailout. He was backed by Austrian minister Josef Pröll and, at a follow-on meeting the next day, by British chancellor George Osborne. That night, however, the euro-zone ministers endorsed moves to intensify “short and focused” preparations for a rescue plan. The game was almost up.

The idea was that officials from the commission, the ECB and the IMF would travel to Dublin to step up the talks that were already under way. For many of the key players, indeed, the parameters of the eventual deal were already clear. If the aim of the euro ministers was to provide some sense of clarity that night, they were mistaken.


On Wednesday, November 17th, Irish banks suffered their biggest one-day loss of retail deposits. Honohan invited himself on to Morning Ireland on the Thursday to declare that a rescue plan involving “tens of billions” of euro was in train. That was the day the IMF mission chief to Ireland, Ajai Chropra, arrived in Dublin, his stride past a beggar sitting by a postbox instantly becoming the iconic image of the bailout.

The Dublin phase of talks began in earnest on the Friday, but still the Government had not conceded on the most basic point: whether it would be making any application for aid. In a conference call with G7 finance ministers on the Saturday, Lenihan was strongly encouraged yet again to take the final step. “He sounded ready then to do it,” a source says.

Lenihan’s call to Rehn came the next morning. The day after that, Monday, November 22nd, the Greens declared they were leaving government. The final negotiation took a week, culminating in an €85 billion deal at a meeting of euro-zone finance ministers in Brussels on Sunday, November 28th.

These were the days in which the expression “troika”, as the IMF, the commission and the ECB were collectively known, entered Irish parlance. Dozens of external officials were in town, and considerable speculation centred on who they were.

Chopra was accompanied by Ashoka Mody, the IMF’s expert on Irish affairs. Istvan Szekely, a Hungarian economist, led officials from the commission. In charge of the ECB team was Klaus Masuch, head of its EU-countries division.

Tension surfaced as Lenihan sought to raise the possibility of imposing losses on senior bank bondholders, to ease the burden on the State, which the ECB opposed but the IMF believed would be feasible.

Fearing an outburst of contagion in wider bank markets, the ECB insisted that a “relatively small amount of money” was at stake against the risk of destabilising the total stock of European banking debt. But the IMF refused to yield, saying the question should not be ruled out. “The idea smouldered in the background,” says a source. The ECB kept seeking to have the notion taken off the table entirely while the IMF and the government sought the opposite. Legal advice was taken, yet there was no end to the stalemate.

On Friday, November 26th, The Irish Times reported that losses for senior bondholders were under examination, which surprised certain members of the cabinet. Markets responded badly, with European banks under heavy pressure and yields for Irish, Greek, Portuguese, Spanish and Italian bonds rising to record levels.

Another teleconference of G7 finance ministers was convened, at which Geithner argued strongly against any losses being imposed on senior bonds and a succession of European ministers rowed in behind him. It was only after that meeting, say two well-placed sources, that the IMF pulled back.

By Friday evening the talks were almost done. Cowen, Lenihan, Honohan and the NTMA chief John Corrigan were in Government Buildings late into the night.

One of the last questions to be settled was the interest rate on the European element of the loan package, as the IMF rate was being set at a fixed percentage. There was some uncertainty because the European fund from which the Irish loans were being drawn had never been used before.

The final figure was close to 6 per cent, an onerous rate that led to immediate accusations the Government had done a bad deal. The interest on a home loan might be 2 per cent, but here was the State paying 6 per cent. This weighed on Lenihan. “I think he was discouraged by the difficulty of communicating that,” a source says.

The cabinet met on Saturday, November 27th, to sign off on the agreement. The meeting continued past midnight. The fate of Cowen and his party was sealed. It had been a tumultuous few weeks.