How much European, particularly German, money was in the Irish economy when the music stopped?
Banking data is compiled along the “nationality concept”, ie attributing data to the country where a bank’s headquarters is based. This method does not always take into account the source of the funds being invested nor does it take into account indirect investment. German banks had huge exposure to US and UK lenders who, in turn, were big lenders to Ireland as well as big losers in the sub-prime debt crisis.
Taking all this into account, establishing the origin of pre-crisis capital flows to Ireland is a complicated task. Information is patchy, not everything was collated and not all collated data is publicly available. Pre-crisis banking data for Ireland seen by The Irish Times and Die Zeit indicate that direct euro zone lending to Irish banks before the crisis was unimportant relative to lenders in other locations.
Euro area figures for Ireland show the top three lending locations to pre-crisis Irish banks were, in order, the UK, offshore centres and the US. In 1995, UK funding for Irish banks was 94 per cent of the total foreign funding; by mid-2008 the UK-sourced funding in Irish domestic banks was 80 per cent of the total. US-based funding accounted for 13 per cent in 2008, while 5 per cent came from off-shore funding, where the nationality of investor is not clear. Which leaves 2 per cent of total Irish bank funding directly from the euro zone.
Pre-crisis Irish banks funded themselves in four ways: interbank lending; deposits; debt securities; and other sources. Central Bank of Ireland statistics for August 2008, the month before the bank guarantee, show consolidated bank liabilities of €587.648 billion. Of that total €241 billion (41 per cent) were Irish deposits and securities (long- and short-term bonds). Some €41.5 billion (7 per cent) were euro-area deposits and securities. Meanwhile €225.5 billion (38 per cent) was deposits and securities from the rest of the world, including the UK and US.
Statistics show a rise in euro area funding to Irish banks in the pre-crisis decade and a sharp reversal in 2007. Irish statistics do not give a breakdown of interbank flows between banks in Germany and Ireland, however Bundesbank statistics indicate a growing German investment. In early 2000, German banks had €20 billion invested in Ireland, according to consolidated figures. By the end of 2006 that had quadrupled to €79 billion. By September 2008, the month of the bank guarantee, the level was €135 billion – a 575 per cent increase compared to eight years earlier. Investment declined rapidly between September to October 2010 from €157.5 billion to €78.3 billion. Currently the amount is €51 billion.
The Central Bank of Ireland says Bundesbank data sets relating to Ireland carry health warnings. A law change in 2001 allowed IFSC-based non-Irish-owned banks issue covered bonds which impinge minimally on the Irish domestic bank sector but were still collated in Irish banking data. Thus Bundesbank data relating to Irish banks is, the Irish Central Bank warns, distorted by large capital flows of German banks to and from their IFSC subsidiaries.
Tracking the identity or nationality of bank bondholders is a difficult task. Purchases are anonymised by a clearing house system and bonds change hands rapidly. Consolidated Central Bank figures from August 2008 nevertheless provide an interesting snapshot. Debt securities, including short- and long-term bonds, contributed €107.97 billion to Irish bank financing a month before the bank guarantee. Of this total, one quarter of bonds were in Irish hands, while 63 per cent were held outside the euro area. Euro area banks comprised just 13 per cent of bondholder total.
Of non-resident deposits in August 2008, Central Bank of Ireland figures show that just 10 per cent came from the euro area. Internal CBI statistics indicate that German non-bank retail depositors – private savers – comprised less than 5 per cent of foreign deposits at the Irish peak in 2008.
Blogger Paul Staines caused a furore by publishing a list of what was purported to be Anglo Irish Bank ’s pre-crisis bondholders. Of the 80 bondholders on the published list – a small subset of the full book – about 30 institutions (37 per cent) are German institutions such as Deutsche Bank and AXA. “It is not a great conspiracy list as it shows representatives of the bond business and has the names of everyone you would expect to be there,” says Mr Staines now. The spreadsheets on which he based the published list, he says, show “there was more British money than German [in Anglo], which didn’t exactly serve my argument that Ireland was bailing out the euro zone”.