Banking on Europe: the true story behind Ireland's bailout

 

Public denials amid behind-the-scenes scrambling to prevent Ireland’s financial collapse and a potential catastrophe for the euro zone – what exactly went on in the days leading up to last November’s loss of economic sovereignty?

ON THE afternoon of Friday, November 12th last, a report flashed across the news wires. Citing a European Central Bank (ECB) source, it said at a meeting the previous day, Ireland had been pressured to tap the rescue fund set up earlier in the year for weak euro zone countries.

Over the following 16 days, an extraordinary series of events played out, culminating in Ireland being bailed out.

Although the risk of the State being pushed to that point had been on the horizon for two years, and it had loomed ever nearer from mid-2010, the government in November had no immediate funding needs.

Its line in public and private was that it was fully funded up to the middle of 2011. Unlike Greece in early 2010 and Portugal now, Ireland did not face the threat of default within weeks. This alone made the Irish case different from other bailouts.

Interviews with many of those directly involved cast new light on the events of last November.

On Monday and Tuesday, November 8th and 9th, the then minister for finance, Brian Lenihan, met European commissioner Olli Rehn in Dublin. Lenihan recalled: “The commission felt that Ireland should be given a chance to see whether it could survive. I don’t think the commission were anxious to bounce member states into a programme. That was my strong impression from my discussions with commissioner Rehn.”

Earlier this month, Amadeu Altafaj Tardio, Rehn’s spokesman said of the commissioner’s visit “he didn’t want to push the authorities in one sense or another”. Danny McCoy of Ibec, the major employers’ body, and Jack O’Connor of Siptu, Ireland’s largest trade union, met Rehn separately on the Tuesday. Both men said Rehn had communicated the ECB’s unwillingness to continue its support of the banking system indefinitely – but he gave no hint whatsoever that the situation would change within days.

The European Commission’s position contrasted with that of the ECB, according to Lenihan. The ECB had been ratcheting up pressure on Ireland the more Irish banks tapped its short-term liquidity funding. That, he said “gave the governing council [of the ECB] the opportunity to intervene and comment and they commented with great vigour.”

He went on “while I found Mr [Jean-Claude] Trichet very helpful throughout the crisis, I have to say I could not say that of all of his colleagues. Some of them were inclined to brief newspapers in their own member states, giving them an assessment of the Irish position, which I viewed as damaging.”

Lenihan also differed with the ECB on policy issues. “I didn’t share the bank’s analysis that putting the fiscal house in order on its own would solve the banking difficulties. But that seemed to be a strong conviction in the upper echelons of the bank”.

He claimed that prior to November, that the ECB had been “rather disinterested in Ireland” in relation to banking issues and that had it made suggestions on changing the approach to the banks “we would have been willing to contemplate a more aggressive banking policy”.

For the Green Party, the suddenness of the move in mid-November came as a surprise. Eamon Ryan, then minister for the environment, received a phone call from a journalist at midday on Friday 12th. His comment was sought on rumours that Ireland was being pressed to seek help.

Ryan recalled that it was “quite a shock” and that there had been no indication prior to that time that Ireland would be pressured to seek assistance.

It also appears to have been unexpected for the International Monetary Fund’s (IMF) Ajai Chopra. He said that he was in Brussels for the week beginning November 15th to discuss wider European issues with the European Commission. He was scheduled to continue on to Frankfurt but instead cancelled the Frankfurt meetings and flew to Dublin in the middle of the week.

Replying to a question as to whether he supported seeking external assistance at that time, the governor of the Irish Central Bank, Patrick Honohan replied that “by the very first days of November it had become absolutely clear to me that this was the way to go.”

As speculation intensified over the weekend of November 13th and 14th, a series of denials by members of the cabinet was made. Dermot Ahern, flanked by Noel Dempsey, appeared on RTÉ television describing media reports to that effect as “fiction”. Their ministerial colleague at the time, Eamon Ryan, said simply that Ahern’s denial wasn’t true. He went on to say that these denials did “huge damage” and that “there was a huge loss of confidence among the Irish public about what they were being told”.

At a meeting of EU finance ministers in Brussels on Tuesday, November 16th, the pressure on Ireland had become intense. State secretary at the German finance ministry, Jörg Asmussen who attended the meeting, said: “It was made very clear to the Irish finance minister that it is not just about Ireland. The functioning of the currency union was at stake.”

At that meeting Asmussen’s boss, Wolfgang Schäuble, Germany’s finance minister, pressed Lenihan to hold a press conference immediately after the meeting to announce an application for aid. Lenihan responded: “I refused and said I wouldn’t participate on that basis; that my government had the sovereign right to decide how it conducted these discussions.”

Denials continued on the Wednesday, up to and including the then taoiseach Brian Cowen. On Thursday 18th, Patrick Honohan appeared on RTÉ Radio One’s Morning Irelandprogramme to state frankly that there would be an aid package amounting to tens of billions of euro. This intervention came, he said, when he learnt the night before that an editorial was to appear in the Financial Timesnewspaper “saying effectively people should be planning on bank runs”. He was concerned about the possible effect it would have on financial stability and said he needed to provide reassurance.

Asked if he had consulted the government on the radio appearance, he said: “No, I operate an independent role here.”

By that point, dozens of officials from the “troika” were in Dublin and the formal application for assistance was made three days later on Sunday, November 21st.

Lenihan says the main reason no formal application for aid was made earlier, despite pressure the previous week, was because other EU members were raising the issue of Ireland’s corporate tax and he wanted to have the issue taken off the table before the application was made.

Representatives of the troika and Honohan all say the issue was never raised in the talks in Dublin. It did, however, come up in EU ministerial forums. Asmussen says Germany did raise the matter and that it was “a difficult issue in the design of [Ireland’s aid] programme”.

“The general feeling here among many Germans is that if you need financial assistance you cannot keep your corporation rate at the lowest in the EU,” he continued, but said his government ultimately relented because the setting of tax rates is a competence of national governments. He added that “Ireland was not isolated” on the issue.

Eamon Ryan said the main criticism of Irish policy made by the EU-IMF teams when they arrived in November was not about the broad thrust of either budgetary or banking policy policy, but that on the pace of banking policy implementation. He believed it was a “valid criticism”.

Chopra described the situation in uncharacteristically dramatic terms: “What we were trying to do was to avoid a situation where you had a fully-fledged bank run. The banks were already in cardiac arrest, so we all had a common purpose of making sure that what was already a difficult situation did not become totally chaotic.”

The troika believed only radical measures had any chance of restoring confidence. Lenihan recalled: “It became clear to us that the European solution was to stuff the banks with capital and see would that generate confidence in them.” He added that the amounts involved “stunned my officials in their sheer scale and size.”

If Lenihan was dubious about the terms of the bailout in relation to recapitalisations, he was plainly critical of the accelerated schedule for downsizing the banks by disposing of their non-core assets: “It is worrying that the European Central Bank didn’t read how unimplementable the original ideas about the Irish banking system are.” He was scarcely less critical of the interest rate on the bailout funds “It was a high rate . . . it was above what was required.”

The weakness of the Irish position was also evident on budgetary policy, even before the bailout discussions began. On the framing of the 2011 budget, Lenihan said: “I was concerned that once we went beyond the figure of €4.5 billion adjustment, about the economic damage it would do to the country, and I was unhappy at having to put the figure much higher than that.”

The figure ended up at €6 billion.

Lenihan said disagreement on tax issues with the commission had not been on corporate tax, but on value added tax, with which the commission had an “obsession”, he said.

Germany’s Asmussen provided the clearest statements to date on the reason for rejecting the government’s proposal to haircut senior bank bonds. He said it had not been tried in the past and “we have no idea how market participants and investors would react”.

When asked if other countries should share the cost of bailing out senior bondholders in Irish banks, Asmussen raised the multibillion euro cost to German taxpayers of HRE, the bailed-out parent bank of Dublin-based Depfa, saying that the major problem stemmed from its Irish operations.


DAN O'BRIENis Economics Editor of the Irish Times. This article is based on extensive interviews with all of the main players involved in Ireland’s EU-IMF bailout conducted over a period of months for a BBC Radio Four documentary due to be aired tomorrow at 1.30pm