The sovereign interest rates the government has had to pay to service a growing national debt have been flashing red for the past two years. Everybody saw the warning signs except the government, who insisted that there was no problem.
We have been tracking the signals and two weeks ago the Sunday Tribune revealed that Ireland was facing an imminent sovereign bailout of its public debts. All the evidence was there and the international media knew the writing was on the wall for two years. The more private banking debts that were dumped on the taxpayer, the greater the risk of national bankruptcy.
The government's approach has been to deny for as long as possible that there was a problem and to pretend that it needed only a loan from the EU partners to shore up the banks. We now know that is simply untrue. We face two bailouts: a huge loan to bail out the banks and a second loan to bail out the sovereign state because taxpayers do not have enough money to cover the costs of the banking bailout.
Ireland's sense of unreality has increased since the summer. Official Ireland went on holidays in August, just as it does every year, right at the time the republic faced its severest ever test.
The banks began running out of money throughout the summer. It was, of course, the canny big companies which were withdrawing their funds. In September, the banks needed to refinance huge amounts of money to keep their doors open. They only managed this by using huge emergency loans from the Irish Central Bank on Dame Street. It was the last straw for the European Central Bank, which had already funded Ireland's broken banks with tens of billions of euro in increasingly risky loans this year. Frankfurt became increasingly edgy about the funding of the Irish banks. But this new €100bn overdraft to the banks, backed by dodgy security, will now have to be paid back by Irish citizens.
Facing into two bailouts, Irish government policy evidently failed. Now we ask if there was anything the government could have done differently? The answer, almost everything.
Not just in the last two weeks, but during the last two years. Here's one for future researchers – does Ireland have the largest public relations industry employed by private companies, banks and government in Europe?
Bankers got so used to telling lies during the boom that they carried on lying to the government about the insolvent banks. The government then evidently baulked at telling its citizens the truth over the last two years and obscured the status of our insolvent lenders. By so doing, the hole for future generations may be even deeper. This sickness was shown in the last two weeks. Had the government told the truth about the insolvency of the banks two years ago, the debts that needed to be repaid may have consequently been lower.
This is not a reference to the infamous September late night two years ago when the government, after meeting with its advisers and Ireland's top bankers, mortgaged multiples of what it gets from us in annual tax revenues to guarantee a huge tower of private debt built by the same private bankers.
In September 2010, the scale of the catastrophe became clear: the Irish authorities had allowed the banks to dangerously bunch huge amounts of bond debts into a few days in September. Banks keep their doors open week-by-week by deciding how much cash is coming in and calculating how much they need to raise by issuing bonds to other banks. But cut off from the so-called inter-bank markets, the Irish banks were forced to turn to the European Central Bank, the lender of last resort, by pledging their loans or assets as security to get cash in return.
As the original guarantee was coming to a close, the Irish authorities inexplicably allowed the guaranteed banks to erect a so-called 'wall of money' in tens of billions of euro that required rolling over during a few days in September. The ECB had earlier this year looked on in horror as AIB hit a huge road bump in refinancing when Ireland's largest bank failed to tap some sort of loan. It is becoming clearer that the strain was much greater than anyone could have suspected because some lenders soon exhausted the assets the ECB was prepared to accept.
September's 'wall of money' may have been the reason the ECB finally called time on Ireland by telling the Irish Central Bank to cap its funding lifeline. Irish banks together were getting between 15% and 25% of all the funding provided by the ECB to banks across all the 16 countries in the eurozone.
But the bunching of the banking finances across a few days in September led to the explosion of the sovereign bond rates, as sovereign bond holders realised that the ECB was worried aboit funding the banks. The bluster of government ministers last weekend denying any bailout talks was designed to disguise the evident nature of the interlinked banking and sovereign blowouts. But why did the Irish authorities over the last two years allow a banking crisis turn into a sovereign blowout by failing to manage more smoothly the Irish banks funding needs? As the banking guarantee came up for renewal, they instead allowed the banks to erect a huge insurmountable wall of money that needed refinancing. September days will take on a new meaning for generations to come.
What should they have done differently with the blanket guarantee? Not listened to the advice of the bankers, of course, and bought time by introducing a partial guarantee. The bond debts of Anglo could have been guaranteed, say, to March 2009, buying time to examine the other toxic bank, AIB, too.
Former US treasury secretary Hank Paulson wrote in On The Brink, his diary-like account of the Wall Street crisis, as he learned about our blanket guarantee early Tuesday morning on 30 September, 2008. "Ireland said it would guarantee payments on as much as €400bn in bank debt. The figure guaranteed nearly the entire Irish banking system and amounted to twice the country's gross domestic product, " he pointed out.
Taoiseach Brian Cowen and finance minister Brian Lenihan have quoted the 'bible' on the September 2008 blanket guarantee, the report written by Central Bank governor Patrick Honohan into the domestic banking implosion. The new governor should not have commissioned himself to write a report on the failed watchdog and he pulled his punches. Nonetheless his report said that the government was blindsided by the true nature of the banks' debts when it agreed to introduce the blanket guarantee.
Here's the puzzle. The theory of nationalising banks is that the government has to step in when the shareholder equity has evaporated. The real purpose is for the state to find out what is going on before, during and after it pumps public money into private institutions. That is what happened in Sweden in the mid-1990s. Yet, the government here pumped money in, took small chunks of ownership and kept the banks open. And the banks continued to lie to them.
Many were taken aback to hear EU monetary affairs commissioner Olli Rehn say in recent days that the EU had to establish the facts and discover the real state of Irish banking. Like any good lender, the EU, before bailing out Ireland, wants to find what it is getting into with the Irish banking scandal. So, how did the government not know the losses in the banks a full two years after guaranteeing them? Why did banking directors, who have a legal responsibility to produce real figures, never mind the minister for finance, report on the real value of the banks' accounts? Consultants and auditors have done well out of the banking crisis that has led to the loss of our national sovereignty.
Not just the subordinated but the senior debt holders. This could have been done two years ago, but it may be too late now. Put simply, the government saved the banking bondholders and betrayed its sovereign bond holders. Betraying sovereign bondholders means that the government betrayed current and future generations because they will have to pay back much larger sovereign interest rates. Worse, Ireland may, with Greece, be forced into defaulting on its sovereign debts, with consequences for generations of Irish people.
Nama did not cause the banking crisis but it was led down a blind alley. The theory of setting up a so-called asset management agency is that it quickly takes the bad loans off the banks. Sweden achieved this by setting up a bad bank and taking bad loans from lenders in quick time. But Nama was neither a bad or a good bank, it was a strange hybrid that took out both the good and bad loans. It was hindered from the start because the banks were not nationalised. But Nama itself has complained it has continued to be misled by bankers.
This is where government policy got truly bizarre. Anglo was allowed to draw up a business plan to the European Commission earlier this year that proposed that the toxic lender would boost its balance sheet to levels of the boom.
The move was one step from insanity and Ireland's credibility in Brussels started to fray. Then the government let the bank revise its plan. There would be a good Anglo and a bad Anglo, not forgetting that part of Anglo that was already marked off to go into Nama. The bank then bluffed about the additional costs of closing down the bank. All the time, the private banking bondholders of the nationalised bank were still getting repaid by Irish taxpayers. So, what could have been done differently? The model was there by the actions of Bank of Scotland Ireland. It did the conventional thing by closing for new business and hived off the deposits. Anglo's whole loan book ought to have been shifted into Nama overnight.
Instead of setting up a banking commission, the government should have investigated the toxic bank, AIB. The puzzle is the power that insolvent AIB has continued to wield over the past two years. Former AIB executive and non-executive directors have had a good banking crisis. Some have been re-appointed to other insolvent banks and as government advisers. Minister for Finance Brian Lenihan showed flawed judgment in listening to advice and then failing to clear out the boards of AIB and Bank of Ireland. There are plenty of senior managers in the banks and outside the banks who could have done the job better in the last two years.
We live in a world of markets, yet the civil service was designed for an economy of the 1950s and few in the public service seem to understand them. The guardian of the EU statistics, Eurostat, did not allow the government to spread its banking recapitalisation over 10 years.
Officials then faced the near-impossible task of presenting the largest 'kitchen-sink' budget deficit in peacetime Europe – 32% of GDP – because of the huge debts of the insolvent banks. Our national sovereignty was under risk from that moment on.
The game was up when on the day before the IMF officials arrived here the Latvian president offered Ireland its moral support on CNBC.
'Éireann Go Broke' and 'How did Ireland Go So Wrong' were only some of the articles to be read by the influential business leaders in the international business press.
We will have to grin and bear pictures of beggars, ghost estates and film crews in Irish pubs, all of course explaining our indolence.
But our only goal now is to save the 12.5% corporation tax rate. The government has not only steered us into national bankruptcy, but it has put at risk our only means of getting out of it. Let's lose the attitude, and build a coalition of Baltic, Iberian and Greek states.
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