What Brian Lenihan could not say at last Thursday's press conference announcing the final bill for Anglo and the extra cash required for AIB was that it was the end of the road for his government's banking strategy of the last two years. Ireland, like Greece earlier this year, has been shunned by the international bond markets, and the most junior banking staff trading government bonds across Europe know that the new figures are a significant development. Last week, the finance minister could not admit to an unspooling of the unsuccessful banking policy of the last two years.
Protecting banks is meant to limit the damage to the economy by ensuring their survival, allowing them to resume lending. But the real aim of a banking strategy, such as setting up Nama, is mostly about making sure that the banks' bond debt does not infect the interest rates that the sovereign has to pay to service its national debt.
The finance minister said at his press conference that the latest banking measures would restore international confidence and credibility. But as he spoke on Thursday the average of the annual interest rates that Ireland must pay to borrow for three and four years remained unchanged at 5% – the same rate that it has cost Greece since it first tapped its special bailout money last May.
The market was saying that Ireland, though not having officially posted its invite, has effectively crossed the threshold into the expensive embrace of the European Financial Stability Facility run by Klaus Regling in Luxembourg.
The government has attempted to pretend that the sovereign market crisis unfolded only over recent weeks. The crisis certainly came to a head because AIB and other Dublin banks hit serious bumps in refinancing the 'bunching' of their bond debt – another unforeseen consequence of the state's blanket guarantee of 2008. The gestation of the sovereign debt crisis has lasted longer than the past nine months because the successive sovereign market crises of the last two years pushed the gap wider between Ireland's interest rate and the rate Germany had to pay. This year started badly and got worse. The markets listened and monitored the government's banking recapitalisation estimates and became increasingly sceptical.
In late December, it seemed Ireland had avoided another instant blowout as the scare eased about property and bank over-lending in Dubai. Irish interest rates fell significantly to the still high 4.7%, compared with the modestly high rates of 3.7% Spain and Portugal were paying. Economic figures around Christmas even hinted the recession here was technically at an end, but the markets remained sceptical about the horrors lurking in the Dublin banks.
A few weeks earlier, Greece had admitted its 2009 budget deficit was about twice the amount it had told Brussels. Arguably, something similar happened here last week, as the government embarrassingly admitted that the credit rating agency Standard & Poor's was almost right in its most recent estimate of the final banking bill for Anglo Irish. As the new year started, the Sunday Tribune wrote that Ireland could only hope to be bracketed with debt-laden Italy, whose sovereign interest rate was falling very quickly: "Being the second-worst in the class (after Greece) may not bring much relief. Every time there is a ripple of worry around the world, Irish rates will likely shoot higher again. Prime minister George Papandreou formally confirmed his new government's plan to cut the budget from an Irish-style 12.7% of GDP to below the 3% eurozone ceiling by the end of 2012. He said his government planned to achieve the remarkable target by cutting spending on hospitals and defence."
By February, the EC's mis-handling of the Greek bond market crisis had hit confidence in the euro and European bank shares were hammered. Fears rose that banks around Europe holding dollops of Greek, Spanish, Portuguese and Irish eurozone debt paper were suffering as the value of those bonds fell in inverse to their soaring sovereign interest rates. The market numbers showed the dangers facing Ireland: the annual interest rate of just under 5% to borrow money for 10 years was the eurozone's second-highest after Greece.
By March, Greece entered its own full-blown market crisis. The agony would last through the spring until after its regional elections. Germany finally helped to put together a bailout for Athens. In April, the markets took more fright at Greece's flagging government revenues, increasing the pressure on Dublin. In May, the eurozone's pledge to set up what was to become the European Financial Stability Facility failed to stop talk that Ireland would need to cancel an auction or two, as interest rates here again spiked.
An unfortunate pattern had been established by June. Irish interest rates remained high while investors increased their bets that Ireland and Greece would default on paying back the full value of their bonds. Through September, markets had called time on Ireland. By this weekend, the government was cut off from tapping sovereign bond markets.
The government's banking strategy of the last two years was threadbare.