Banking crisis: Wild west image is hard to shake off

The Government’s efforts to repair our battered reputation abroad has been made much more difficult by the Anglo tapes, writes business correspondent John Walsh

THE Government must be mightily relieved that the Anglo tapes did not see the light of day before agreement was reached in February on the restructuring of the €28bn of promissory notes.

It was a hard-fought battle lasting more than two years, but the Government eventually got it over the line — thanks in no small part to the growing level of goodwill towards Ireland among fellow eurozone member states, most importantly Germany.

The Department of Finance had been locked in negotiations with the troika, and particularly the ECB, since roughly Nov 2011 on securing a deal on the promissory notes. Defeat had been grasped from the jaws of victory a few times over that period as the ECB balked at the last minute.

The German Bundesbank was opposed to any potential deal on the basis that it was very close to monetary finance, which is a massive red line for the ECB. In the end, the ECB president, Mario Draghi, threw his weight behind the deal because he knew it was extremely important to put Ireland’s debt at more sustainable levels, which would help the country make a smooth exit from the EU/IMF bailout.

What helped Ireland more than anything was that the deal received the tacit support of Berlin. Chancellor Angela Merkel understood the need for a successful outcome to the bailout programme.

The Government also made a convincing case for why there should be some form of burden sharing. After all, the mess that Anglo Irish Bank made was caused as much by reckless lending — mostly by German banks — as by reckless management. However, this is not a narrative shared by the German public, which remains implacably opposed to any sort of fiscal transfers.

If these tapes had emerged during those sensitive negotiations, it would definitely have had the potential to scupper the deal. In many respects, it confirms the worst fears among the German public which was that Ireland was indeed the Wild West of the financial markets that was eventually undone by criminally loose regulation. The German taxpayer was nursing billions of euro of losses from the collapse of Depfa, which was headquartered in the IFSC in Dublin.

Maybe that is why this Government resisted a bank inquiry all along so as to ensure that these highly uncomfortable details did not emerge when it mattered.

The fact that Irish bankers were caught laughing at the Germans would have the same effect as pouring vinegar into an open sore.

COULD Mr Draghi have prevailed without the consent of Berlin? Even though the ECB is supposed to be independent, political considerations are never that far from its thinking.

What do the tapes mean now? They will rightly cause outrage both here and abroad. But how different would it be if the taped conversations from the same period in 2008 of senior personnel from any bank across the eurozone, or indeed the Western world, were released?

Bankers are not noted for their decorum when behind closed doors. During the height of the financial crisis, then finance minister, Brian Lenihan, appraised a number of senior London-based bankers about the health of the Irish economy by teleconference. When the system malfunctioned and it allowed a two-way exchange, the minister was greeted to a chorus of monkey chants and other lewd noises. This sort of behaviour would be far from uncommon.

The recklessness of Anglo was also far from uncommon. The Vanity Fair journalist, Michael Lewis, in his book Boomerang, gave a very detailed account of how German banks gambled and lost hundreds of billions in outrageous punts on the US subprime market. Even when every other financial institution was trying to offload subprime assets when it became obvious the market had collapsed, the industry joke was that the Germans were still willing buyers.

The Government is still looking to recoup the €30bn it has pumped into the Irish pillar banks through a retrospective recapitalisation through the ESM fund. But that door is closing, regardless of the contents of these tapes.

When the Fine Gael/Labour coalition came to power in Mar 2011, its first major challenge was to repair Ireland’s tattered reputation. It looks as if the job has suddenly become much harder.