Tuesday 12 July 2016

Memories of the Irish financial crisis


Ireland requested financial assistance in November 2010. © Dirty Stacks

On his recent published book “Recap: Inside Ireland’s Financial Crisis”, Kevin Cardiff, former second secretary general of the Irish Finance Ministry describes the fateful moments in the backstage scenes of the financial crisis in Ireland. The crisis came to the surface in late 2008 with subsequent serious concerns on the sustainability of the banking sector.  As a consequence, the once-called Celtic Tiger had to seek financial assistance from the EU and the IMF in late November 2010. By the end of the programme, in 2013, Irish banking system and public finances were stable.

 Default of the Irish banking system


What began as a banking crisis with the two biggest banks – AIB and Bank of Ireland - operating on the Irish markets, rapidly turned into a serious financial crisis. Six Irish banks were bailed out in Ireland. As a consequence, a series of extraordinary official meetings took place between the representatives of the Central Bank, the Financial Regulator, the Department of Finance and the National Treasury Management Agency, where the different actors were analysing the different possible aspects of crisis response applied to the country as well as developing legislation to be implemented according to the current needs. In the meantime, the National Asset Management Agency, the so called "bad bank", was created as a response to counter the financial crisis.

In parallel, meetings have also occurred with delegates of the Irish banking sector, who have shown a slight rejection in matters of cooperation regarding the takeover of the Irish Nationwide Building Society (INBS). “The regulators received a strong refusal: the banks were concerned that INBS’ s very high property exposure would be too difficult for them to digest.” The author questioned this refusal: “did their reluctance now in supporting INBS suggest we needed to get more and better data on the INBS property book for ourselves?” Perhaps the government should have had better control supervising the banking sector. Nevertheless, work on the potential rescue of the banks was in course and the nationalisation was likely to be the response. A nationalisation bill was sent to the Oireachtas, the legislative branch of the Irish government, and passed on 20th-21st January 2009.

Early in 2008, Sachsen Landesbank, a publicly owned German bank with subsidiary in Dublin’s International Financial Centre was bailed out.  The crisis was systemic and contagion needed to be tackled. The sleepless media was already announcing the collapse of the banking sector which left costumers terrified queuing in ATMs to withdraw cash. Brian Lenihan, the then Finance Minister asked the head of RTÉ News to avoid creating panic within the population. In order to calm down social speculation, an increase of the level of protection on banking deposits to €100.000 was established.

Trichet’s demand


The instability in Ireland raised concerns at the European level too. Jean-Claude Trichet, the then managing director of the European Central Bank (ECB) sent out the message that “it is essential for European and Irish financial stability that there are no bank failures in Europe.”

Both AIB and the Bank of Ireland were in difficulty to attract funds and soon “the Irish banks would not have the cash to honour them.” A guarantee framework granting broad guarantees to all significant Irish banks was then framed. It was generally accepted by the parts that the bondholders must be kept on board to encourage the flow of new funds and the question to how the State would charge the banks for its guarantee was being worked on.

Unsteadiness was growing and the faster legislation could be passed, the less likely the guarantee would be questioned in the market. In October 3th 2008 the bill became law. Alarmed with the risk of contagion, other banks approached the Ministry of Finance asking to be covered by the Guarantee, a request the Irish government couldn’t cope with. Later on December 14th, the government announced its proposal approach to recapitalisation.

Countless reunions with all the stakeholders involved in the rescue of the banking sector in Ireland marked the last months of the year 2008 until late 2010, when the official request of financial assistance was formalized to the EU and the IMF. During these problematic years of crisis and consequent demanding negotiation meetings, many prominent bankers resigned to their functions. 

In late September, ECB’s chief Trichet called the finance minister Brian Lenihan to assess the Irish situation. Lenihan explained he and his office were doing the possible to restructure the banking sector whilst preparing the budget for 2011, year of general elections in Ireland. Cardiff wrote that “Trichet demanded that the European Commission be allowed to come to Ireland to examine the situation – an immediate mission from the Commission was required, he said.”

Jean-Claude Trichet was the IMF's managing director during the Irish crisis. © Google

Preparing the bailout


The back and forth with Brussels had begun and the Irish Finance Ministry staff would soon be quite acquainted with meeting rooms in the Berlaymont and Beaulieu. The main focus of recurring negotiations lied on the financial assistance package and consequently on its guarantees for the creditors and obligations for the lenders. Despite recognising the willingness of the ECB in supporting the Irish crisis, Kevin Cardiff claimed “there was great pressure on Lenihan to agree immediately to request an EU/IMF programme.” After all, the Irish Central Bank governor Patrick Honohan, made the official announcement from Frankfurt, over a telephone interview to RTÉ News. The Irish government requested EU/IMF assistance on Sunday, November 21st 2010.

Senior Bondholders


Amidst the rough negotiations was the question of burden sharing by senior bondholders. However, according to Cardiff, the burden sharing stopped being negotiable after rejection of IMF officials and a warning from the Commission. “The pro-burden-sharing views of the IMF officials on the ground in Ireland were overruled, and the IMF stance on such burden-sharing became officially negative. The Commission reported to us that the EU position was now that if there was to be burden-sharing for senior bondholders, there would be no programme,” wrote Kevin Cardiff.

The prospects of a bailout and deteriorating political developments alarmed the markets leading to a decrease of credibility on the Irish financial system. Standard and Poor’s reduced the credit of rating on Irish government debt and bond yields rose.

Later on, in 2010, the iconic meeting in Deauville determined that sovereign bailouts from the European Stability Mechanism would require that losses would be imposed on private creditors. This was a decision defended by chancellor Angela Merkel and criticised by then French president Sarkozy. Although, the vast majority of the Irish citizens probably concurred with Merkel that foreign creditors who loaned billions to Ireland's bans without due diligence (by mispricing credit) should share the cost of the bailout, such talk only served to further unnerve the jittery investors, sending shockwaves in the bond markets and pushing up yields in several Eurozone countries. According to several media outlets, this agreement was blamed for the increase in sovereign spreads in late 2010 and early 2011.

In fact, the EU/IMF package exempted senior bondholders (although subordinated-debt holders were not spared), who lent money to Irish banks from suffering any losses – even though the EU agreed that private investors would be held accountable for losses in future crisis. However, this procedure only became effective once the permanent rescue mechanism came into force in 2013.

Former IMF officials speak out on the Irish crisis


Towards the end of the programme in July 2013, former IMF representative Ashoka Mody said austerity was a "potentially self-defeating policy". The IMF distanced itself from Mody's comments, declaring that "Mr Mody has retired from the IMF and his views do not represent the Fund's position."

In September 2015, former IMF mission chief Ajai Chopra appeared before the Banking Inquiry committee accusing the EC and the ECB of putting euro-wide concerns "above what is appropriate for the individual Member State even when this resulted in higher Irish public debt." With regards to the correspondence exchanged between Trichet and Lenihan in 2010, Chopra said that it showed that Ireland was being issued with an ultimatum. He stressed that the ECB had exceed its mandate by discussing Ireland's fiscal policy and the need for structural reforms.

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