Anglo: 2008 guarantee a ‘fix up’ for insolvent banks

The 2008 blanket bank guarantee was a “fix up” designed to give “insolvent” Irish institutions emergency funding they should never have received, with the “politically biased” error ultimately forcing the ECB to impose the November 2010 bailout when the full crisis emerged.

Financial expert Prof Gregory Connor made the claim as he insisted the Irish banking sector was effectively insolvent and €51bn in the red at the time of the guarantee, despite claiming to be only suffering from manageable “liquidity” issues.

Speaking at the latest meeting of the cross-party Oireachtas banking inquiry, the NUI Maynooth economics lecturer said the €64bn September 2008 measure should never have happened and the “costly error” directly led to the troika coming to Ireland just 26 months later.

Despite strict international rules outlawing emergency liquidity funding being given to insolvent institutions, Prof Connor said officials side-stepped these decisions and gave banks like Anglo and Irish Nationwide financial aid that should have only been available for solvent firms.

Prof Connor accepted the issue was partly caused by the fact banks “embellished” their accounts for a number of years to give the perception they were healthier than the reality showed, but said the decision was also “politically biased” as the Fianna Fáil-Greens coalition did not want any bank to fail.

When the extent of the difficulties became apparent, he said the ECB gave up on the “fix up” liquidity approach, forcing the country into the controversial austerity programme.

“The liquidity guarantee was a fix up, it was a patch-up to allow funding into the banking sector in the absence of solvency.

“The US crisis is correctly termed a credit liquidity crisis. Ireland did not have a liquidity crisis. It had a bank credit crisis. It received €136bn [from Government and the ECB combined] in liquidity support at peak. That was more than enough liquidity support.

“Ireland did not suffer a liquidity crisis. It suffered a bank insolvency crisis. With hindsight, the domestic banking system’s aggregate balance sheet was actually insolvent in September 2008,” he said.

In a wide-ranging two-hour meeting, Prof Connor also insisted that the Central Bank or the Financial Regulator should have picked up on the false picture of health.

He said they should have seen a “too fast” economic rise and growing international debt inflow and addressed “both”, thereby ensuring the crash “would not have happened”, but instead “did neither”.

Prof Connor described the “light touch” approach behind the indecision as the “second worst in the world” behind only Iceland in 2008.

He said senior bankers knew they were taking increasingly risky steps linked to a property boom but instead of warning the wider sector “embellished” their own figures.

Meanwhile, the banking inquiry will today hear from economist David McWilliams on whether he and others highlighted early warning signs of the collapse. Mr McWilliams will also be questioned on how he informally advised the late former finance minister, Brian Lenihan.