• Comment
• Print
• E-mail

Slippery Slope

Emmet Oliver reports

Six months ago today, the state guaranteed €440bn of potential bank debts, the biggest liability ever faced by the taxpayer. Since then, a can of worms has been opened and reform has been lamentably slow in coming.

Irish Bationawide chief Michael Fingleton

Denis Casey, ex-CEO of Irish Life & Permanent

Ex-CEO of Anglo Irish Bank David Drumm

Sean Fitzpatrick, former chairman of Anglo Irish

Minister for Finance Brian Lenihan has opened a can of worms in the last six months

• 1
• 2
• 3
• 4
• 5

The old maxim that everything secret eventually degenerates will never be used to describe events in Irish banking. The secret of what precisely happened on the night of 29 September in government buildings, when the bank guarantee scheme was agreed, remains so inviolable that even seasoned politicians fear to whisper the details of what happened to their closest confidants.

The government has refused to release supporting documents for the scheme under the Freedom of Information Act, citing what can only be described as extraordinary exemptions.

For example, to release documents outlining the reasons for the scheme and how the government arrived at its decision could have serious effects on the "financial interests of the state" and lead to "undue disturbance in the ordinary course of business generally", this newspaper was told several months ago.

These exemptions seem puzzling when the government is quite open in talking about why it took its decision. For example, it told the European Commission last year it had to guarantee all the liabilities of the Irish banks (including those of bond-holders) because not to have done so would have caused "irreversible damage to the financial system" and Ireland would have experienced a "systemic banking crisis".

The exact nature of this "systemic" threat has not been revealed and may never be, at least until the 30-year cabinet papers rule is triggered. Finance minister Brian Lenihan has denied a suggestion by economist Morgan Kelly of UCD that officials were more in favour of nationalising Anglo Irish Bank than guaranteeing the seven institutions covered under the scheme. The Irish Times, which published Kelly's original assertion on its opinion pages, later corrected the record in favour of the minister, and that is where that matter rests.

While the Central Bank and the Financial Regulator, who advised the government on 29 September, still claim the banks were suffering from a "liquidity crisis" at the time the decision was reached, evidence points to something approaching more of an old-fashioned bank run or deposit crisis. For example, the Sunday Tribune has evidence that Anglo Irish Bank was suffering from deposit withdrawals of a serious nature throughout 2008.

The government itself has told the European Commission, in documents not widely reported on, that the plunging share prices of the Irish banks in late September were getting so bad that deposit runs on a cataclysmic scale were a real possibility. The authorities have for a long time talked about the threat being from the wholesale markets, where money is borrowed through repo lending and via bank-to-bank arrangements and commercial paper, but it appears the vital trigger for the scheme was simply corporates and individuals threatening to remove their money.

The scheme of course remains highly controversial and the inclusion of smaller non-"systemic" lenders such as Irish Nationwide continues to baffle many people, not least those in the banking industry, locally and globally. In an attempt to explain why Irish Nationwide was included, government representatives are prone to describing that lender as Ireland's equivalent of Lehman Brothers.

But to accept this argument requires a sizeable leap of logic: Nationwide's balance sheet contained only €14.5bn of liabilities, according to its last annual numbers. Clearly this is not a small number, but it is relatively small compared to the kind of "systemic" risk to Ireland Inc that AIB, Anglo and Bank of Ireland represent. Irish Nationwide, for example, owes senior bond-holders only €6.7bn in total, its annual report shows. Would a haircut on these liabilities as part of a run-off arrangement really have sunk the government if it had taken that route? We'll never know, and as Patrick Neary of the Financial Regulator once said, nobody was macho enough to test the theory.

Ultimately, the guarantee scheme was an imperfect creation, designed to act as a sticking plaster and a short-term expedient pending longer-term reform. But it's in this second area that government has lamentably failed since the scheme was announced.

There has not been a jot of consolidation in the Irish banking market. Regime change has happened but slowly and not in a complete manner – half of the chief executives of the guaranteed banks (Eugene Sheehy, Michael Fingleton, Fergus Murphy) remain in place, for good or ill.

Anglo Irish Bank, the only nationalised lender, has no chief executive and no published business plan. Attempts to create a "super mutual" have foundered and the government's attempt to force the process has come to nought. No private investment of any kind has yet been placed in any Irish bank and the long-term funding of the banks remains clouded. The guarantee scheme is likely to be extended, but nobody knows when or by how long.

Meanwhile, a plan for the soured loans on bank balance sheets has not been articulated, apart from by Dr Peter Bacon, and debt and shares of Irish banks are trading at extraordinary lows. For example last week, some Anglo Irish bonds were trading at eight cent in the euro.

Meanwhile, Michael Fingleton's defiance of the government over his €1m bonus has left its attempts to deal with bank executives' pay in a shambles. The government wants a clear-out of guaranteed institutions, but if it sets the pay ceiling too low, foreign bankers are certainly not going to take a journey over the Irish sea to run an Irish institution.

Ironically, six months after the guarantee scheme, the dominance of AIB and Bank of Ireland, the so-called "too big to fail" institutions, has actually increased, as foreign banks wind down their lending operations, whatever about their deposit-taking.

Deposit flows in and out of Irish banks are shrouded in secrecy, even to analysts who are asked to take it on trust that everything is fine in that crucial area. The one area where the government has moved strategically and with at least some level of boldness – recapitalising AIB and Bank of Ireland – has met with only tepid approval in the markets.

The government is making its investment via preference shares, bolstering what is known as core tier 1 ratios. But analysts, especially those in London, favour a different measure (equity Tier 1, which does not include preference shares).

This simply measures pure shareholder funds (including cash received into a bank from the sale of its shares and also the retained profits of the bank). It does not measure the government's preference shares.

Finding a way to overcome this market scepticism is just one of the many items in the Lenihan's bulging in-tray, even six months after the traumatic events of 29 September.