Dark days brought us to an economic hell
revisits the fateful days leading up to the bailout, telling the story of one of Ireland’s darkest days — in the words of the people who were there
Just 26 months after the €440 billion bank guarantee was introduced, the game was up for little old Ireland.
By the end of November 2010, a beaten and battered Irish Government finally succumbed to the inevitable and handed the running of the country over to foreign overlords.
The decision to issue the guarantee set the country on a course which it could never recover from.
After months of mounting pressure on Ireland, by late September, the cost of Ireland’s borrowing hit its highest level since the euro currency had been established.
Since the spring of 2010, Ireland had found it more and more expensive to borrow on international financial markets.
The financial crisis had tightened its grip on Europe and some countries, notably Greece, Ireland, and Portugal, were finding it more difficult to borrow money.
As the crisis worsened, a committee was established by the European Commission with the European Central Bank (ECB) and the International Monetary Fund (IMF) to organise loans to embattled countries. It became known as the troika — the Russian word for a sled pulled by three horses.
Throughout 2010, the besieged Irish Government struggled to maintain confidence in its efforts, while those outside Ireland’s borders struggled to find anything to feel confident about. The hits kept coming for Ireland. Standard & Poor’s, a credit agency, gave a very unfavourable rating assessment for the country that autumn and Irish government bond yields increased steadily.
Former Central Bank governor Patrick Honohan said that when the rating agency downgraded Ireland, it indicated that international financial opinion-makers saw Nama as a serious liability to Ireland.
I think Standard & Poor’s must have had some kind of sense, even before they were announced, that the Nama valuations were coming up worse. And they had started to realise in their mind that Nama was implicitly an obligation. They started to add all the sums together and they were getting very big.
Then, on September 30,Brian Lenihan revealed the full cost of bailing out the Irish banking system — €50bn.
Many who worked in Leinster House during those days recall this as perhaps the darkest of days. Labour’s Joan Burton dubbed it ‘Black Thursday’.
Dara Calleary, then a junior finance minister, remembered vividly the shock when he heard the figure: “I went, ‘What the fuck?’” He had been sent to Brussels to deputise for Lenihan at a meeting of EcoFin (European finance ministers), which he believed was a mistake.
He told Lenihan, “There is no sense in me going over — a junior minister that they have never met — to explain this.” It was decided that Lenihan should participate in a conference phone call with EcoFin.
I could not get over that day, the respect that was there in the room for Brian Lenihan, particularly from Christine Lagarde. Massive respect with all his colleagues.
Calleary got a up-close view of some senior players in world finance — Ireland’s bête noire, Jean-Claude Trichet, and the since disgraced IMF boss Dominique Strauss-Kahn. “Trichet was a prick, and Dominique Strauss-Kahn was a bigger prick.” Calleary said of the ECB boss: “Every word he said there was a lie, Trichet, that day at EcoFin.” When news of the €50bn cost to the Irish banks was revealed at the meeting, those enemies of Ireland went in for the kill.
“Strauss-Kahn was actually the worst that day, they were going around saying Ireland is fucked, Ireland is fucked,” said Calleary. “And if they were doing that at EcoFin, they were feeding the markets. I have absolutely zero doubts about it. Strauss-Kahn was in agreement with Trichet: Ireland, little Ireland can go piss,” was Calleary’s interpretation of what he observed there that day.
“But, the other element in this is [US treasury secretary] Timothy Geithner, like they’re [the US administration] getting away with it in terms of their role in this.” Fearing Ireland could destabilise the world economy, Geithner was to intervene in the Irish saga again in the coming weeks.
The fears of contagion, the fears that countries which were in financial freefall would drag down other European countries, were very real in late 2010.
On October 18, in Deauville, France, German chancellor Angela Merkel and French president Nicolas Sarkozy declared that a new permanent euro-area financial rescue fund to be set up by 2013 would require private sector creditors to accept some debt restructuring.
This would mean that those financial institutions lending to sovereign governments would face losses, big losses.
It could only mean that the risk was much higher with countries like Ireland, and so the cost of borrowing increased again — at the worst possible time. “This was known as the Deauville declaration” said Cowen, adding that they tried to clear up the mess too late. “It was clarified afterwards that the debt restructuring provision would only apply to new debt after 2013. The original statement had caused further market jitters: the damage was done and bond yields jumped further.” To try and stave off such attacks, the Irish Government was working on a recovery plan. “We had indicated to the EU Commission and the ECB that we were preparing a four-year National Recovery Plan to be published in November, prior to the budget,” said Cowen.
By October, low-level meetings and discussions were taking place between Irish officials and the EU, and to a lesser extent the IMF, about the country’s fiscal and banking difficulties. That month, the ECB began to turn the screw on Ireland.
Lenihan received a pre-emptory letter in October from the ECB president expressing concern about the Irish banks. More letters and messages would arrive in the coming weeks.
Irish financial institutions were totally reliant on the ECB for funding. The level of ECB emergency funding that had been put into Ireland now topped €130bn. It was unsustainable.
By November 11, the bond yield rose to 8.6%. The ECB, concerned that it now had lent one-fifth of its entire stock of reserves, €130bn (including almost €40bn in September and October), to Ireland, decided enough was enough.
The ECB and others in Europe began briefing the press, principally the international financial media, in what was interpreted by the Irish Government as a dastardly scheme to push them into a bailout.
Under immense pressure, Cowen insisted all was well and no plans for a bailout were afoot.
Despite Cowen’s denials, during a tense call with Trichet, Lenihan agreed to the opening of talks in Brussels to explore what a possible programme for Ireland would look like. The next day, Cowen and Lenihan met with their key officials to discuss the next move.
Cowen severely criticised the off-the-record briefings against Ireland.
The off-the-record briefings were clearly trying to create a situation where a formal Irish application for assistance was being portrayed as a fait accompli by those informed sources, without prior agreement on conditionality. This was unacceptable to us,” said the former taoiseach.
Despite the pressure, the Cabinet denials persisted. In the most explicit denial, on RTÉ television’s The Week in Politics, Dermot Ahern said speculation that Ireland was about to seek financial aid from Europe was incorrect. “It is fiction because what we want to do is get on with the business of bringing forward the four-year plan. There is nothing going on at the direction of government in relation to this.”
The stonewalling and dissembling by ministers in Dublin, in the face of unprecedented press briefings from Europe, had become farcical. Some Irish politicians saw their reputations permanently tarnished.
Lenihan was responsible for the awkward predicament Noel Dempsey and Dermot Ahern found themselves in that Monday.
The two ministers were at an event in Dublin Castle when they were interviewed by reporters. Government Press Secretary Eoghan Ó Neachtain had insisted that Lenihan brief them directly. The minister for finance had spoken to Ahern before he went on TV the previous day and they spoke again minutes before they faced reporters in the courtyard of the Castle. Dempsey, too, spoke to Lenihan, who reiterated that there were no talks about a bailout. But talks were occurring at that very moment in the Department of Finance.
Dempsey and Ahern stood side-by-side, grim-faced and earnestly shaking their heads: “I’m not aware of it [pressure], nor is Noel,” said Ahern. “I have spoken to Brian Lenihan today and he will be going to the [European Council] meeting and articulating Ireland’s position and will be part of any initiative that the Council takes in conjunction with the Commission.” Mary O’Rourke stressed that the dysfunctional communication was a by-product of a collapse in trust between Cowen and Lenihan. “But it is clear the relationship between the two Brians had deteriorated, well I must tell you.” Patrick Honohan revealed that he had known as far back as early summer of that year that international power-brokers believed a financial programme should be imposed on Ireland, and that he was under pressure to get the government to seek help.
They communicated this to Honohan on November 17. “On Wednesday night, I called [Lenihan] because the ECB guys were jumping up and down … they thought this was very destructive to Ireland because they did not think Ireland was going to go into a programme, because Brian Lenihan had said in Brussels, 'I am not going to go into a programme, I am not going to apply for a programme.'”
On Thursday November 18 at 8.13am, Honohan blew the Government’s increasingly futile strategy out of the water when he rang RTÉ to try to get on the Morning Ireland radio programme. He phoned RTÉ from his hotel room in Frankfurt.
He says he made up his mind to break ranks with the government’s continued denials because of a damning Financial Times article he had gotten wind of the night before.
He decided that “I needed to try to stem the uncertainty and the panic. I think Morning Ireland is the obvious place and I had been on it before and I knew what the audience was.
He announced that Ireland was in talks with the EU and IMF about a bailout. ‘I know that these talks are serious talks, that the IMF and the EU Commission and the ECB would not send a large team if they didn’t believe, first of all, that … they could agree to a package, that there is a programme that is fully acceptable to them, that could be designed, and is likely to be acceptable to the Irish Government and the Irish people,’ Honohan told presenter Rachael English.
With the game up, the arrival of the troika officials led the Six One news that evening, and the country learned of the name of Ajay Chopra, the plump lead IMF official.
On November 19, ECB president Jean-Claude Trichet sent a letter to Lenihan threatening withdrawal of ECB funds in the absence of a formal bailout request. “This was not well received by us,” Cowen said.
On Sunday. November 21, the Cabinet met to formally agree to seek help. Cowen said during the negotiations, which were to continue for a week, that he attempted to get troika agreement for burden-sharing by unguaranteed senior bondholders — that would allow Ireland to default on huge debts to private lenders. He said that the IMF personnel in Dublin were sympathetic but that when it was referred to a higher level within the IMF, the proposal was rejected.
Cowen claimed at the Banking Inquiry that the United States vetoed the plan through Timothy Geithner, US treasury secretary. “He was opposed [to the default option] because he claimed it would totally undermine market access for those European countries that were in trouble. We also understand that the ECB were opposed to it for the same reason,” said Cowen.
There was also much criticism of the interest rate for the loans being set at 5.8%, when it was clear the cost of lending the money was substantially lower. Honohan, who had played a role in railroading the government into the deal, was deeply critical of the final agreement. “We could have got much lower interest rates, I didn’t like the interest rates, and they were too high, the whole thing was barely sustainable and I said this to the government.”
For Lenihan, the bailout represented a shattering and demoralising defeat. He poignantly described his feelings in his last major interview with the BBC. “I have a very vivid memory of going to Brussels … being on my own at the airport, looking at the snow gradually thawing, and thinking to myself: ‘This is terrible.’ I had fought for two-and-a-half years to avoid this conclusion. I believed I had fought the good fight and taken every measure possible to delay such an eventuality, and now hell was at the gates.”
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