Financial advisers Merrill Lynch cautioned that a blanket guarantee could be “a mistake” and affect the country’s sovereign credit rating, making it more expensive for the Government to borrow money. The warning came in a meeting involving Merrill Lynch advisers, Finance Minister Brian Lenihan, departmental officials, the Central Bank and Financial Regulator on September 26, 2008.
Details of the warning emerged in partially censored Finance Department documentation released to the Dáil Public Accounts Committee, which is examining the collapse of the banking sector. The documentation also showed the then-secretary general of the department, David Doyle, warned on September 25, 2008, that the Government “would need a good idea of the potential loss exposures” within Anglo Irish Bank and Irish Nationwide prior to making a decision on any intervention.
Mr Doyle said “on some assumptions” Anglo was staring at €8.5 billion of losses while Irish Nationwide was looking at €2bn. The guarantee was decided upon just a few days later, on September 29. Publication of the documents yesterday led to Fine Gael leader Enda Kenny accusing Mr Cowen and Mr Lenihan of “deliberately deceiving” the public. “Their decision to give a blanket guarantee to Anglo Irish Bank and Irish Nationwide ignored clear warnings from professional advisers and senior civil servants to be cautious and was based on reasons that remain unclear to this day,” he said.
But Mr Cowen insisted the guarantee had been the “right decision” and pointed out that the recent report of Central Bank governor Patrick Honohan had broadly endorsed the scheme. Mr Lenihan, meanwhile, said the overall advice from Merrill was much more nuanced than the minutes of the September 26 meeting indicated. In addition to those discussions, Merrill delivered a separate analysis on the same day which outlined five options for the Government. All five had strengths and weaknesses and the Merrill analysis did not recommend one above the other, apart from stressing that no bank should be allowed to fail.
It said a blanket guarantee would be the “best/most decisive/most impactful from market perspective”, and would help to stem outflows from the banks. But it also questioned whether the markets would find the guarantee “credible” given its €500bn scale and question marks as to whether Ireland could “afford it”.
Mr Lenihan stressed that Merrill never recommended one option over another and the Government had plumped for the measure which advisers deemed most decisive. “The only option which Merrill Lynch discounted... was the option of allowing an Irish bank to fail,” he said.
“In the context of rapidly deteriorating circumstances on the night of September 29, the Government decided in favour of the option considered by Merrill Lynch to be the ‘best/most decisive/most impactful from a market perspective’.”