Derek Scally: Don’t blame German banks for the Irish economic crisis

‘German banks were not big lenders to Ireland’s pre-crisis domestic banking sector. British banks, US banks and offshore banks were’

At a friend's dinner table in Berlin recently I sat opposite a woman visiting from Ireland who had an important announcement to make. She said how, on previous trips to Berlin during the darkest days of Ireland's crisis, she'd felt obliged to walk around with her head bowed. But now she was going to walk tall because she had nothing to apologise for. Sure wasn't it the German banks who were to blame for Ireland's woes? German banks, she said, shouldn't have lent us all that money.

That German banks wrecked the Irish economy is one of the most persistent legends of the crisis. German bankers lent recklessly to the innocent Irish and then sent in Angela Merkel, the Austerity Queen, to get back their bad investments.

Looking at it from Berlin, the "German banks" narrative of the Irish crisis sounds like a perfect example of "truthiness", a term coined a decade ago by US satirist Stephen Colbert. Truthiness is something that feels right and is so clearly true that you need no evidence or facts to back it up.

Truthiness is the truth we want to exist. In Colbert’s case truthiness described the hunt for – and war over – Saddam Hussein’s mythical weapons of mass destruction. But truthiness can also apply to Ireland’s obsession over Berlin’s weapons of financial destruction: German banks.

Sub-prime disaster

Yet, while it is a fact that German banks played a key role in the US sub-prime disaster that triggered the financial crisis, German banks were not big lenders to Ireland’s pre-crisis domestic banking sector. British banks, US banks and offshore banks were.

Banking data on this period is patchy and, even after all these years , information from the crisis years is patchy. But as of now there are few traces of a disproportionate German financial presence in Ireland, at least none to justify the vehemence of the “German banks” theorists.

Take bank deposits. Central Bank data shows that of the €588 billion bunkered in Irish banks in August 2008, 41 per cent was Irish-held. Just 7 per cent of deposits were euro area, while 38 per cent came from the UK, US and the rest of the world.

German private depositors comprised less than 5 per cent of total non-resident deposits in Irish banks in 2008.

Prof Philip Lane of Trinity College Dublin comes to a similar conclusion in a study of pre-crisis bank funding (http://bit.ly/1TLXjex): that the majority of lending was not euro area but non-euro.

There was a “high reliance” on US dollars and sterling, he writes, consistent with strong linkages between Irish banks and the UK and US financial systems. He also notes that “the expansion in the US dollar share from 2005 onwards is striking”.

What of interbank lending, another source of Irish bank funding?

Figures for September 2008 show German interbank lending to Ireland was up 575 per cent on eight years previously. Is this the smoking gun? Central Bank analysts say not, because this data set is distorted by large capital inflows to IFSC-based German banks.

Many of these, like SachsenLB, WestLB and Depfa, are now synonymous with reckless lending. But they were in Dublin for the tax breaks and negligible regulatory oversight, not to lend into the Irish economy.

The debts they ran up and the bailouts they required were not part of the Irish bank guarantee and bailout, nor were Irish people left to pick up the tab.

The cost of these German banks’ IFSC speculation, thanks in part to lax Irish regulation, has so far run into hundreds of billions but was shouldered by the German – not by the Irish – taxpayer.

And so, much of the spike in pre-crisis lending from German banks to Ireland was not feeding the Celtic Tiger but financing – and bailing out – German banks operating worldwide from Dublin.

And what of our infamous bondholders? Of the €107.97 billion worth of bonds financing Irish banks a month before the guarantee, the euro area – and thus Germany – was a modest player.

Smoking gun

Of various data sets, Prof Lane writes that the euro share in external bond liabilities was consistently below 50 per cent. My own trawls suggest one quarter of Irish bank bonds in August 2008 were in Irish hands and 63 per cent held outside the euro area. More data may emerge in the years to come but for now it’s hardly a smoking German gun.

The main problem with the “German banks” theory is not that it is misleading but its long-term corrosive effect – both on the debate about EU integration and on bilateral relations with Germany.

Anyone who rabbits the “German banks” truthiness is applauded as a patriot; anyone who asks for numbers to back up the claim risks being branded a Manchurian Candidate for Frankfurt lenders. Seeking simple answers to a complex crisis is understandable, as is the temptation to blame someone else. But the answers to Ireland’s crisis are neither simple nor are they exclusively German. Fintan O’Toole is on leave