PENGUIN IRELAND
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First published 2011
Copyright © Matt Cooper, 2011
The moral right of the author has been asserted
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ISBN: 978-0-14-197158-2
Prologue: Thursday, 18 November 2010
PART ONE: THE END OF AN ERA
1. Greece is the Word
2. The Man in Charge
3. The Hangover
4. Brave Little Ireland
5. Déjà Vu All Over Again
6. A Taxing Issue
7. Dinner with Olli
8. Surrender
9. Welcoming Mr Chopra
10. Playing Politics
11. Terms and Conditions
12. Saving Face
13. A Long-awaited Heave
PART TWO: BAILING OUT THE BANKS
14. Why Did It Happen?
15. The Bad Bank
16. Sean Quinn vs the Financial Wreckulator
17. From Bad to Worse
18. It’s So Hard to be Humble
19. Fingleton’s Fianna Fáil Friends
20. The View from Abroad
21. Getting Personal
PART THREE: WELCOME TO NAMALAND
22. Solution or Problem?
23. The Carrot and the Stick
24. Developers in Denial
25. The Walk of Shame
26. The Empire Strikes Back
27. A Very Irish Monster
28. A Country Rent Apart
29. Carry On Regardless
PART FOUR: THE BLAME GAME
30. A Comfortable Bankruptcy
31. Wright and Wrong
32. Taking the Pain
PART FIVE: BRAVE NEW WORLD
33. No Free Lunches
34. A Gallic Spat
35. Pillars of Society
36. The More Things Change …
Acknowledgements
Matt Cooper is the No. 1 bestselling author of Who Really Runs Ireland?, which was shortlisted for an Irish Book Award for non-fiction. In over twenty years as a reporter (Business & Finance, Sunday Business Post, Irish Independent) and editor (Sunday Tribune), and now as a radio presenter (Today FM) and newspaper opinion columnist (Sunday Times, Irish Examiner), he has enjoyed proximity and access to the most significant people in Irish politics and business, hearing from them and hearing about them from a variety of sources. His depth of experience means he is in an unrivalled position to assess and interpret the actions of the powerful and their implications for us all.
‘Shocking, hilarious, but ultimately depressing … as an overview of what went on this is by far the most readable of the various books now on the shelves … hugely entertaining as well as instructive book’ Irish Independent
‘Impressive and eminently readable’ The Irish Times
‘The detail is riveting … and a lot of it illumination on the predicament the country finds itself in’ Irish Examiner
‘I am disgusted at how well written it is and its insights about the social partners and the tribunals … my heart sinks when it becomes clear that this is a readable view of some of Ireland’s insiders’ Shane Ross, Sunday Independent
‘A superbly readable and insightful study of power in contemporary Irish politics and business … a must-have’ Irish Mail on Sunday
‘Highly accessible and there is a nice pace to the book, akin to a good thriller … fascinating … compelling’ Sunday Tribune
‘His snappy writing and anecdotal style give new life to events … a lively yet informative insight into Irish society during the Celtic Tiger era’ Evening Echo
‘The scale of Cooper’s research is highly impressive … an in-depth reference guide to the folly and hubris that brought the country to its current state’ Sunday Business Post
‘Particularly strong for drawing together in the one book a list of the big property developers, bankers and business people’ Irish News
‘Complex but surprisingly reader-friendly … a rattling, and frequently horrifying, read’ Hot Press
‘A terrific book’
Noel Whelan, The Week in Politics, RTÉ One
‘An eye-opener … you might be driven to tears of rage reading Matt Cooper’ David McCullagh, The Week in Politics, RTÉ One
To the memory of my late parents, Matty and Kathleen
Taoiseach Brian Cowen was furious. The governor of the Central Bank, Patrick Honohan, had conducted a morning interview on national radio, without first telling him that he would be doing so or what he would be saying. He had pulled the rug from under Cowen’s feet, flattening and embarrassing him.
An unwanted agenda of action was being imposed on our government, despite its best efforts to keep a lid on the Irish financial version of Pandora’s Box. It had been known that representatives of the International Monetary Fund (IMF) were arriving in Dublin that day, Thursday, 18 November, but the government had been trying to downplay the significance of their arrival, to the mounting disbelief and anger of the public. Everyone had to wake up and smell the coffee, as Honohan used his breakfast-time interview on Morning Ireland to set the record straight, to let the people of Ireland know what was happening, that the game was up.
Honohan was in Frankfurt, where the real decisions were being made, at a meeting of the European Central Bank’s governing council, of which he was a member. He outlined the reason why the IMF officials were arriving in Dublin: it was to work out the details of giving our state ‘a very substantial loan’, in conjunction with the special rescue fund set up earlier that year by the European Union to deal with members in financial distress. Why else, he asked rhetorically, would they be in Ireland?
This was a cataclysmic event. For the first time in history we were turning to what was effectively the lender of last resort. It was likely that the terms and conditions set by the IMF in return for a loan would be brutal. Even after a couple of years of successive harsh budgets that had reduced living standards, more austerity would be imposed: taxes would be hiked even more, public-sector wages and jobs would be slashed further and services reduced accordingly. Those were the practical realities, but the state would also have to deal with the issue of how we would now be viewed in a larger sense, both by ourselves and by others: we had become indigent and could not look after ourselves. We were at the mercy of what one prescient economist had described as ‘the kindness of strangers’.
Honohan had undermined almost completely whatever vestiges of Cowen’s authority and standing remained. Cowen had been made to look foolish at best, delusional at worst, and, even if he thought he was acting in the public interest by not conceding until he absolutely had to, he would still be regarded as untrustworthy because he hadn’t given the people he represented the truth about our situation. All week he and government ministers had sought to reassure the public that things were not as bad as they seemed and that, specifically, the country had enough resources to negate any perceived need to turn to the IMF and the EU for help. Only the previous day Cowen had told the Dáil that it was not in the national interest for him to indicate the government’s negotiating position before talks began with officials of the IMF. He maintained that the government’s main objective was to ensure, as quickly as possible, that the country retained a banking system that could access funds on the open market at reasonable and affordable prices. ‘There has been no question, as has been stated all over the weekend, of a negotiation for a bailout,’ he added.
Now Honohan was confirming that our emperor had no clothes. His decision to take to the national airwaves at such a crucial time was pointed. Nobody could ever have imagined any of his eight predecessors – unlike him, all loyal time-serving civil servants – being as brave. ‘I think this is the way forward,’ said Honohan, the externally appointed academic, selected for his independence by the minister for finance, Brian Lenihan. ‘Market conditions have not allowed us to go ahead without seeking the support of our international collaborators.’
To anyone listening the impact was electrifying. Cowen bridled at Honohan’s intervention. ‘The governor gave his view,’ he told the Dáil later that day. ‘He is entitled to give his view. I am entitled to give the view about the decision the government will take when the necessary discussions are over.’
Cowen drew attention to Honohan’s dual position: he was our Central Bank governor and also a director of the European Central Bank (ECB). ‘The governor is part of the governing council of the ECB, and it is a matter of public knowledge what the ECB general view has been,’ he said. ‘We understand all that. At the end of the day, we have to determine what is the best option for our country and for our people at the time. At the moment we are in the process of working out what the best options are and I think that is what people would expect of a government that is working to protect the interests of the taxpayer,’ he said. At that stage the public didn’t care about any possible conflict of interest on Honohan’s part. They just wanted the truth, and Honohan, unlike their elected politicians, seemed to be the one who was giving it to them. Confidence in Cowen and his government had evaporated.
Honohan was in a somewhat less difficult position than Cowen because he did not have to worry personally about domestic political repercussions. He was not being blamed for the crisis – having only taken his role in 2009 – and he did not have to account publicly for his actions to the electorate. His job was safe. He had sussed the reality, and therefore the inevitability, of the situation long before then. He had feared the worst from the time of the Greek financial crisis in May that year and worried about how Europe had dealt with setting up a controversial rescue package. He knew instinctively that Ireland would have problems securing new loans on the international bond markets, as investor concerns would force the yield demanded on Irish bonds to ever higher levels. As the year went on, he could see deposits leaving Irish banks; he was being told regularly by the ECB that this could not be allowed to continue. By the first week of November he had decided it was inevitable that Ireland would have to seek a bailout. Tellingly, it seems that his views were shared by his deputy, the tough Englishman Matthew Elderfield, who had been recruited as financial regulator; by Kevin Cardiff, the man who was promoted to secretary general at the Department of Finance, despite having overseen the banks prior to the disastrous September 2008 blanket government guarantee to honour all the Irish banking system’s debts to depositors and bondholders (the institutions that lent money to the banks to top up the amount they could lend in turn); and by John Corrigan, who had been promoted in 2009 to run the National Treasury Management Agency (NTMA), which manages Ireland’s assets and liabilities.
Honohan had developed a very strong working relationship with Lenihan, who had broken convention by appointing him – an acknowledged international expert on banking – as governor of the Central Bank; and Lenihan continued to support him strongly. But, while he had bonded with Lenihan – with whom he shared something of an air of academic eccentricity born of their keen intellects – he was nowhere near as close to Cowen, and therefore unable to convince the Taoiseach about the reality of the situation they were facing.
Honohan was also worried about Cowen’s mental strength after the worst two and a half years imaginable, as the latter dealt with an avalanche of economic and political crises. He was not alone in this concern. The public had lost confidence in Cowen’s ability to lead and communicate long ago, but many of those closest to him had come to share those fears. They were worried also about both the quality and the timing of his decision-making; and they despaired at the mood swings, which resulted in some public performances that showed strength of character and ambition but too many others that showed a lack of self-belief and a lack of genuine confidence that Ireland’s problems could be confronted and overcome.
Cowen had much on his mind. As well as trying to cope with the present and the future, he was dealing with enormous amounts of guilt about his failures in the past. He could never admit it, but the blanket guarantee of bank deposits and bonds that he had authorized and then foisted upon his government in the early hours of 30 September 2008 had not merely failed but made things far worse. His prior record as minister for finance had been eviscerated by the critics because his actions were tantamount to throwing fuel on to the fire of an out-of-control economy. He tried then to put out that fire, though he moved to do so far too late. Unemployment had reached record levels. Forced emigration had returned. Incomes were collapsing. People were struggling to cope with excessive debts. The national mood was grim.
He had since tried to take tough remedial action, authorizing spending cuts and tax increases that were anathema as much to his political instincts as to his economic ones, but he was only accused of making things worse. There were times when he was brave but other times when, for political reasons, he pulled back on certain things that he knew, for economic reasons, he should have done. Cowen loved the Fianna Fáil Party he led; it was arguably as important to him as his country, although some of his critics felt that he regarded the two as almost indistinguishable. He knew that he was being held responsible for wrecking both. He had come to power citing his admiration for his visionary predecessor, Sean Lemass, but would get nowhere near him in the history books of party or state. It was a heavy burden for him to bear. Lenihan’s naturally more optimistic nature meant that he soldiered more bravely, remarkably so for a man who had been told in December 2009 that he was suffering from inoperable, and therefore almost certainly terminal, pancreatic cancer, to which he succumbed eventually in June 2011.
Cowen had been so damaged politically by the events of the previous two years that he knew his days as Taoiseach were numbered; he was facing into an electoral disaster of epic proportions that he wanted to defer for as long as possible. He hung on to power tenaciously with a wafer-thin Dáil majority, maintained partly by an unwillingness to hold by-elections in which his opponents would have strengthened their numbers and brought down the government. His critics said that he did this for selfish political reasons and that he was motivated partly by a desire to try to do something, anything, that might minimize losses for Fianna Fáil – but Cowen thought that it was his responsibility to bear these burdens and that it would be cowardly to pass them on to anyone else. He dismissed the argument that his government had performed so poorly that anybody else could do better, and he was contemptuous of what he regarded as empty posturing by some of the most prominent figures on the opposition benches.
But now things had taken a much worse turn than he had expected. He had refused to believe that it had become impossible for Ireland to return to borrowing on international financial markets from 2011, no matter what his experts were telling him. He had been persuaded by the experts around him that introducing yet another savage budget – one that would cut spending and increase taxes by at least €4.5 billion in 2011 – might help to restore international confidence, at least more so than anything else, and by mid November the government had conceded that it would have to do even more, increasing that budgetary adjustment to €6 billion. He had believed the problems at the banks would not get any worse, but now it was all unravelling. Honohan’s public comments had put the tin hat on a brutal week for Cowen and Lenihan, and they weren’t helped by the fact that they knew it was only going to get worse – for Ireland, for Fianna Fáil and for them. Having done everything that could have been expected of them, they believed, at great personal and political cost, they found that the result of all their efforts was to be punishment rather than reward.
There was much that Cowen couldn’t say publicly, including the fact that the IMF wasn’t necessarily the most important actor in this unfolding horror story. It was the European Central Bank that had put a loaded gun to the Irish government’s head, prompted by even more significant political forces from across the Atlantic.
On the previous Friday, frustrated that the Irish government would not do as they demanded, members of the governing council of the ECB had decided to brief the international media as to what they felt should happen to Ireland. It was unattributed stuff from ‘sources close to the ECB’, but everyone who was involved knew where it was coming from and why. It was cynical behaviour, designed to back a sovereign nation into a corner, and seemed worse because Ireland had done almost everything that had been asked of it by the European Commission and the ECB, had suffered a great drop in living standards because of its compliance, and had acted with more transparency and honesty than any other country in similar circumstances. The implied threat that the ECB would withdraw liquidity support from our banks – which it actually was not entitled to do – was highly dangerous too, because it accelerated the flight of deposits from the Irish banks.
But what was going on behind the scenes, at the international political level, was possibly even worse. The previous day the G20 summit of leading industrial nations had started a regular meeting at Seoul in South Korea. The Irish situation came to the top of the agenda unexpectedly because of its importance to the stability of the euro; the fear was that an unmanaged collapse of the Irish State’s finances would create a tidal wave of bank losses across Europe and economic panic. Ireland was not represented at the meeting at which its future was discussed other than by the European Commission. The US government’s secretary of the treasury, Tim Geithner, took a particularly strong stand. He wanted Ireland’s finances forced into the control of the IMF, and also to avail of the specially established European emergency borrowing fund. The ECB was delighted. The bank felt that it had done what it could in providing emergency funding to the Irish banks to replace deposits as they fled, but it now had well more than €100 billion at risk that it wanted back. In any event, its concern was not Ireland but the wider seventeen member states of the euro. The ECB conveniently forgot its own enormous failings in dealing with the crisis, as well as its responsibilities.
European Commission President José Manuel Barroso rang Cowen after the G20 meeting in Seoul to explain that the game was changing. This news came as a considerable shock to Cowen. He and Lenihan had been telling the truth earlier in the month when they’d said that they had not been put under pressure by the commission to get loans from the IMF or the emergency European funds. Lenihan received an official letter from ECB chairman Jean-Claude Trichet that brought up ‘the question about whether Ireland would be participating in a programme at that stage’, and an angry telephone call between the two followed. Lenihan’s department officials ran into an unexpected firestorm at a meeting in Brussels when details of how they would deal with a bailout were demanded of them.
In the face of this unrelenting pressure, Cowen and Lenihan met privately on Saturday for hours to decide on strategy. Lenihan emphasized the views of his officials, Honohan, Corrigan and Cardiff, but bowed to Cowen’s superior position and his right to make the ultimate call as to strategy. Cowen was not prepared to give up without a fight. They decided that they could not show weakness – that is, acknowledge the possibility of surrender – and to trust very few people with the reality of the situation, even their cabinet colleagues, for fear that loose tongues would cause unwanted damage.
On Monday, 15 November, Cowen went on RTÉ news to emphasize that Ireland would not be making any aid application to the EU or the IMF ‘for the funding of the state’ because the country was already funded right up to the middle of next year. The following day he went into the Dáil to repeat this message – condemning what he called ‘ill-informed and inaccurate’ speculation about the government seeking a bailout – but he conceded that intensive discussions with our European partners were taking place about the banks and the public finances. ‘What we need are calm heads and cool consideration of all the issues. These are complicated matters that are not easily understood,’ he said. ‘This is not an insurmountable challenge and, through working together with our partners in a calm and rational manner, we can resolve these issues and underpin financial stability in the medium and longer term. It is in all of our interests that we find a credible, efficient and above all workable solution that will provide assurance to the markets and thereby restore confidence and stability.’
Yet he was aware too – although it was not disclosed to the public until later – that Lenihan had been put under shocking pressure, at a meeting of European finance ministers in Brussels, to make an immediate announcement that Ireland was seeking an IMF/EU/ECB bailout. An indication of what Lenihan would face had come in the hours before the meeting, from the European Council president, Herman Van Rompuy. ‘We’re in a survival crisis,’ he’d said publicly. ‘We all have to work together in order to survive with the eurozone, because if we don’t survive with the eurozone, we will not survive with the European Union.’
Lenihan made a valiant defence, refusing to do something that he did not have the authority to do, but he had to make arrangements for the arrival of the IMF and the EU in the coming days. ‘Clearly it’s important that those who wish to help us and those that wish to work with us should find out all the facts on the ground in Dublin and that will be arranged for them,’ Lenihan told reporters after the meeting. ‘There’s no decision and the government did not commit to enter a facility but there are serious market disturbances. They jeopardize not just Ireland, they threaten the eurozone, so it is essential that we address those structural problems and that we deal with them.’
The public pressure continued. Jean-Claude Juncker, the Luxembourg prime minister, who was also chair of the eurozone finance ministers, said he expected ‘within the coming days’ a definitive decision on whether Ireland would seek a bailout. Cowen continued to insist that ‘there has been no dictation from anybody. What we’re involved in here is working with colleagues in respect of currency problems and euro-issue problems that are affecting Ireland, they’re affecting other countries. They’re particularly affecting Ireland at the moment.’ Cowen, in a phrase that was thrown back at him many times afterwards, insisted that ‘I don’t believe there’s any reason for Irish people to be ashamed and humiliated.’ He maintained that position even after Honohan spoke on Morning Ireland. There began an extraordinary period in which many Irish people felt very ashamed and very humiliated by the manner in which our economic sovereignty was removed and we were bludgeoned into accepting loans on terms that would be ruinous to the country’s economic recovery.
Many months later, not long before his death, Lenihan, who was usually very careful to be positive in his public utterances and wonderfully informative in private conversations with journalists, gave a rare on-the-record insight into the trauma he had suffered. In an interview for a BBC radio documentary he described his feelings as the deal with what came to be known as ‘the troika’ – the IMF, the European Union and the ECB – neared its conclusion. ‘I’ve a very vivid memory of going to Brussels on the final Monday to sign the agreement and being on my own at the airport and looking at the snow gradually thawing and thinking to myself, this is terrible. No Irish minister has ever had to do this before. 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.’
This is the story of how we arrived at that hell.
Minister for Finance Brian Lenihan and Central Bank Governor Patrick Honohan were at odds over what the international financial rescue of Greece in May 2010 meant to Ireland. Greece had gone bust effectively, its debts of over €350 billion too much for it to bear. It needed rescue by the IMF and the EU, and it would have to make savage cuts to its public budget, to the horror of the Greek people. The ever optimistic Lenihan took solace from the Greek tragedy when he publicly claimed that it somehow emphasized Ireland’s strength, that the budgetary measures we were taking were the correct ones and would allow us to escape Greece’s fate; we would remain in favour with the international lenders who supplied the money to run the country. Honohan, though, feared that events meant not just that we were vulnerable but that the escape was temporary and that our fate was inevitable: we were heading for the Greek experience of requiring rescue. He feared that loans to the country would become more expensive, then prohibitively so, which would mean they’d dry up and we would be left holding out the begging bowl to the IMF and the EU. They would provide, but they would do so expensively and with onerous terms and conditions.
Greece had much bigger debts than Ireland and far less means of paying them. In April 2010 Greece succumbed to the pressure of the markets, and then the EU, and asked for help. As yields on its two-year bonds went as high as 15.3 per cent, meaning it was impossible to borrow, Greece agreed to ‘accept’ a rescue package of over €110 billion in new loans but on terms that led to rioting on the streets as Greeks realized that their lifestyles would be changed dramatically and not for the better. The EU and the IMF had stipulated very specific measures as part of the deal: these included adverse changes to the retirement age, pension arrangements for public-sector workers and taxes.
Greece got into trouble on the financial markets because it had lied about its true economic position and lost the trust and confidence of lenders. Even when times were good, Greece had run up very high borrowings and engaged in accounting tricks to hide the true ratios between its debts and its economic activity. It managed to hide the actual figures in the returns it sent to Brussels. A new government, elected in October 2009, admitted that its predecessor had been cooking the books. The European Commission attacked its ‘exceptional combination … of lax fiscal policy, inadequate reaction to mounting imbalances, structural weaknesses and statistical misreporting’.
The ratings agency Standard & Poor’s slashed Greece’s credit rating to ‘junk’ status, which indicated a high risk of default, or non-repayment. In such circumstances, investors demand much higher interest rates if they are going to hold a country’s debt, if they hold it at all. The market effectively stopped lending to Greece, forcing it to call in the IMF and the EU to help it find a way to cope with its debts; about €135 billion was owed to European banks, with two thirds of that owed to German and French banks alone.
It threatened to be the sovereign equivalent of the 2008 subprime mortgage banking crisis. Greece became the sovereign version of Bear Stearns, the Wall Street brokerage saved in March 2008 (by contrast with Lehman Brothers, which collapsed the following September).
A senior official from the Organisation for Economic Co-operation and Development (OECD) publicly compared what was happening to Greece to getting the ebola virus and then unhelpfully added that if you have a virus in your leg you cut the leg off. If Greece were to be evicted from the euro, the pressure to do the same to the other members of the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) would have become enormous, irrespective of the size of the Spanish and Italian economies, because of perceived weakness in their national balance sheets and their inability to repay debts.
Other European countries, most particularly the Germans, took some persuading that Greece was worthy of saving. They did not want to bail out the indigent, especially when they reckoned that the swift plummeting of the euro – down almost 20 per cent against the dollar in six months – could be blamed on the fiscal incontinence of the Greeks and other eurozone member states. The currency decline was hitting the Germans hard, as their valuable non-EU exports were no longer as profitable as they could have been. People in Germany were speculating that they should expel others from the single currency or leave themselves. Instead, they were being asked to lend Greece more money that they might not get back.
There were the usual rants about speculators, the same investors who apparently had ruined the banks, although they would argue that they had merely taken logical advantage of the self-inflicted weaknesses of those institutions. European Commission President José Manuel Barroso laid the blame for the eurozone’s travails at the feet of ‘speculators’. These speculators were the same institutions which had bought bonds from governments previously and which had been called investors then for doing so. When they had acted to safeguard or to increase their money – according to their assessment of the information available to them – they were renamed ‘speculators’ and spat upon, irrespective of the fact that they often had clients’ interests to represent.
Most of the buyers of this so-called sovereign debt were long-term investors, looking for security or definite repayment. These are typically pension funds and other investment products looking for stable, long-term investment returns to match their liabilities: the pensions or investment returns they must pay to their customers.
Their continued involvement in the markets, to provide money to countries, was needed. A euro country had never defaulted and lenders to such countries did not expect to lose their money. The practicalities of ensuring that the European banks that had lent to Greece got their money back overcame the moral hazard of rescuing the Greeks from whatever they might have deserved.
With Germany leading the way it was decided that Greece was to get more than €110 billion over three years at an interest rate of just over 5 per cent, compared to the 7.3 per cent that had been demanded of it on the ten-year money markets in previous weeks. Bizarrely, given our financial situation, Ireland was forced to provide €1.3 billion towards the cost of the loan to Greece. Lenihan said the loan would be repaid, with interest, as Greece’s economy improved and would not be included in our own overall deficit statistic because ‘it is classified as a financial transaction.’
Lenihan exuded his customary confidence in denying that Ireland was at ‘great risk’ from fallout from the Greek debt crisis. ‘The risk of contagion in my view does not extend to Ireland,’ he declared. ‘Over the last eighteen months we have taken many of the measures that the Greeks are only beginning to take … One of the reasons markets are critical of countries other than Greece is because some don’t just have public debt problems, they also have structural problems with their economies … We’re not a country that has the severe structural problems that some of the other Mediterranean countries have shown and the markets have tended to differentiate Ireland out from these countries.’
Honohan, however, knew what ECB President Jean-Claude Trichet was saying about the implications of Greece’s situation. Trichet persuaded Germany that it had to act to save Greece by telling one crisis meeting of European leaders that ‘this isn’t only a problem for one country. It’s several countries. It’s global. It’s a situation that is deteriorating with extreme rapidity and intensity.’
Brian Lenihan was in an incredibly optimistic frame of mind for a man who was suffering from a form of inoperable cancer and who had been given relatively little chance of more than short-term survival.
Lenihan was diagnosed with pancreatic cancer in December 2009, shortly after he had delivered that year’s budget. He had told a select group of people his diagnosis before Christmas and word leaked out. A television report broadcast the news before he had made his official statement. When that came in early January, he emphasized that he would continue in his job for as long as he could.
It was a big decision for Lenihan to make personally – would he be able to have the necessary medical treatment while continuing to perform properly in an incredibly arduous role that would require him to have all his wits about him? Once he had indicated to Cowen that he wanted to stay, it was a big decision for An Taoiseach to endorse. Lenihan’s aggressive medical treatment would be time-consuming and physically very draining. There was the potential for it to interfere with his judgement. Was Lenihan going to be available at all times when required and would he be impaired in the performance of his duties?
Cowen reckoned that he needed him, almost no matter what. Communication was Lenihan’s forte, much as it was one of Cowen’s greatest weaknesses. Lenihan was articulate, seemingly plausible and likeable to many, notwithstanding the bad news about the economy and the measures he was imposing to fight the collapse. All are important attributes for a politician. He was the most popular member of a very unpopular government – possibly the only one – even before the revelation of his cancer. But this standing was enhanced by the attitude he displayed towards fighting his illness. There was no trace of self-pity, no hint of evasion of his responsibilities. Indeed, it seemed to invigorate him, and friends speculated that his need to discharge his public duties, and the adrenalin coursing through him, assisted him in prolonging his fight against the spread of the cancer.
That didn’t mean the issue of his continued holding of the ministry was closed to reassessment, however. There were times in March and April 2010 when some of Cowen’s closest advisers wondered if a mistake was being made, especially as Lenihan took decisions with which they disagreed. It was known in government circles that he did slump during periods of intensive treatment, although this was masked well from the public, and it was appreciated that this was understandable. But there were people close to Cowen who did wonder if they should challenge the consensus about keeping Lenihan in place or if he should perhaps be asked to step aside temporarily. It was a complex dilemma: without the job Lenihan might lose much of what drove him to confront the cancer, but could the country indulge his need to keep a job that might better have been given to someone else?
Lenihan was not flawless in his communication either. He had more than a touch of his late father, a former Tánaiste, and an approach that caused many to remember Brian senior’s ‘no problem’ mantra. He could be almost naive in believing that some of his comments would not offend.
It is likely that a speech that he made at the Irish League of Credit Unions conference in Killarney in late April 2010 would have caused ructions had it been made by anyone else. Lenihan said other European governments would not have been able to impose the kind of pain on their people that the Irish government had. There would have been ‘riots’ in France had the pension levy on public servants been introduced in that country. ‘The steps taken had impressed our partners in Europe, who are amazed at our capacity to take pain,’ he said. What was impressing Europe was that Ireland was showing adaptability. ‘The view in Europe is that Ireland is taking steps to put her house in order.’
The steps taken to stabilize the public finances had ensured that the government spending deficit had not drifted to as much as 15, 16 or 17 per cent of GDP, he said. ‘This economy will renew and recover and advance. We are going back a few years – we are not going back to the bad years of the seventies or eighties. We had the highest unit labour costs of any country in the eurozone. That is no longer the case.’
Lenihan had been getting some cautious slaps on the back from outside of Fianna Fáil. In February, Jean-Claude Trichet, president of the ECB, had declared that ‘Ireland is certainly not the weakest link of the euro area.’ He continued: ‘there is no weak link. The euro area is a very intertwined, single-market economy with a single currency. Speaking of any particular country in the euro area as a weak link is an error of judgement.’
But in April 2010 the commission warned that we were not doing nearly well enough in trying to address the issue of our public finances. Olli Rehn, the EU’s recently appointed monetary affairs commissioner, shocked many people when he said he was ‘examining whether Dublin should adopt new austerity measures’. This was not something that we needed when problems were emerging in our ability to borrow on international bond markets.
Ireland had to borrow to fund the near-€20 billion gap between what it took in taxes and what it spent – and that was even before the cost of refinancing the banks was taken into account. The country had gone through a lengthy period of annual budget surpluses, when the income the government received exceeded its annual spending comfortably. Fianna Fáil-led governments spent some of this money, and used some to reduce taxes and pay down a portion of the existing debt. They did not stop borrowing, however, going into the bond markets with new issues to raise funds to repay loans as they expired, usually on better or cheaper terms (bonds are a form of IOU that involves paying back the amount borrowed at a future date, after a series of interest payments have been made). By the end of April 2010 the difference between the cost of Irish ten-year state borrowing and the cost of benchmark German borrowing had widened to 2.55 percentage points, although this was small compared to what was about to happen. A few years earlier Irish bonds had traded at a discount to their German peers. The new rate was higher than at any time since the immediate aftermath of the introduction of the bank guarantee. Our vulnerability was visible for all to see.
Things had actually gone well in the first few months of 2010. As recently as March, the NTMA had sold €1.5 billion in bonds at a yield of 4.426 per cent. This was the smallest premium compared with the equivalent in German government bonds since December 2008 and 1.58 per cent below the peak spread of March 2009. Although the year was not yet a third old, close to the end of April the NTMA was not far off raising nearly two thirds of its 2010 funding requirement.
The NTMA was busy issuing bonds during the period of the Greek crisis, doing what are effectively door-to-door sales, or roadshows, as they are known in the trade, around Europe’s main financial centres. The task was tough and about to get tougher, as sentiment towards Europe’s peripheral countries began to change. Investors started to fear that other countries might be masking problems in the way that Greece had. While the Irish effort in reducing the exchequer deficit was appreciated, the size of the gap to be closed became a subject of discussion again, especially when the additional cost of recapitalizing the banks remained unsettled. Questions as to whether Ireland could repay all of its debts began to re-emerge.
The NTMA and Lenihan took a bad and significant blow in April, when Eurostat, which issued the formal statistical information upon which investors relied, decided that the Irish national debt during 2009 was much higher than had been stated previously. Ireland had not been cooking the books Greek style, but there was a dispute as to how the state’s investment in new capital for Anglo Irish Bank should be treated for statistical purposes. That may have seemed like a ‘so what?’ issue, but it wasn’t. Eurostat decided that the government’s ‘investments’ of capital in Anglo had to be accounted for immediately, rather than spread over the period for which the money was given. Even though the cash would transfer in lumps, year after year, the entire amount was to be added straight away to the calculation of the government’s debts.
This meant that the €4 billion given to Anglo during 2009 brought the government’s budget deficit for that year to 14.3 per cent of gross domestic product (GDP), or €23.35 billion more spent than raised in taxes. This was more than four times the EU’s 3 per cent deficit limit, and as a proportion it was larger than Greece’s.
‘This is a once-off impact, and will not affect the government’s stated budgetary aim of reducing the deficit to below 3 per cent of GDP by 2014,’ Lenihan said. But others could see immediately that it raised serious questions about the accounting treatment of the rest of the money earmarked for Anglo or indeed the other banks. The result was that it changed what the government would have to do to bring the budget deficit down to 3 per cent of GDP by 2014 – meaning further austerity.
Meanwhile the NTMA’s John Corrigan wrapped the ‘green jersey’ around himself and spoke positively. He said there was a ‘reasonable prospect’ that international ratings agencies would move their outlook on Ireland from ‘negative’ to ‘stable’, and that the country was entering ‘calmer waters’. Ireland was rated AA1 at Moody’s Investors Service and AA at Standard & Poor’s, and both had ‘negative’ outlooks on the nation’s debt. Fitch had an AA minus rating on Ireland, with a ‘stable’ outlook. ‘Sentiment towards Ireland as reflected by bond yields has improved,’ Corrigan said. The NTMA pressed ahead with the €1.5 billion bond issue and it was sold, albeit at a much higher rate of interest than heretofore.
The Greek rescue failed to impress financial markets because of doubts about that country’s ability to implement associated austerity measures – and this had potentially damaging consequences for Ireland. More had to be done, as shown by the crisis in Greece, which had provided a number of uncomfortable truths. One was that the EU didn’t have the financial resources or the will to deal with the problem without the help of the IMF, which pitched in €30 billion of the required €110 billion, as happened subsequently with Ireland and Portugal. Nor was the EU as united as the title ‘Economic and Monetary Union’ suggested: Greece’s rescue package was coming from bilateral individual loans from fifteen member EU states, rather than from a united Europe. Few believed Angela Merkel when she said it was a one-off that wouldn’t be repeated.
There was a need to do more. Negotiations between EU member states continued throughout May and early June before a fighting fund was unveiled: this would be used to help EMU member countries in extremis to fend off speculative attacks based on the belief that they would not be able to repay their debts. The newly and specially created European Financial Stability Facility (EFSF) would get up to €250 billion from the IMF on top of loan guarantees for €440 billion from the sixteen other euro countries and €60 billion from the European Commission.
But what was also becoming clear was that the European Union was intensifying its campaign to take greater control over the fiscal behaviour of individual governments. At the end of the process EU Council President Van Rompuy confirmed that national budgetary plans would henceforth be presented to the commission and other EU member states. It was said that this was not for checking in detail or for formal approval, because that would be decided by national parliaments. But the main assumptions underlying the budgetary plans, like the levels of growth or inflation, would be examined by a government’s peers, and any country that presented a budgetary plan with a high deficit would have to justify itself. There were to be multi-annual budgets too.
Fine Gael was worried by the potential for this even before it was confirmed and raised the subject in the Dáil in May. Enda Kenny called on Cowen to give assurances ‘that in no circumstances would the government hand over sovereignty for the running of our economy to anybody else’. Kenny claimed that EU Commission proposals to compel euro states to seek preapproval from Brussels for the amount of borrowing in their annual budgets were effectively ‘handing over sovereignty for the running of the economy’ to the EU.
Lenihan described as ‘mischievous’ opposition suggestions that proposals to ‘reinforce economic coordination’ represented a dilution of Ireland’s ‘sovereignty over taxation matters’. Enhanced coordination aimed ‘to assist member states to be better prepared for any future crises’. Lenihan and Cowen took particular aim at Richard Bruton, who was described as ‘anti-European, irresponsible, reprehensible and jingoistic’.
Lenihan reiterated that he was under no pressure from the EU to accelerate his austerity plan. He also said he did not envisage Ireland having to seek help from the IMF should market funding rates remain high. He boasted that ‘my prediction in December’s budget that the economy would bottom out by mid year and that positive growth would resume in the second half of this year is being borne out.’
Lenihan was buoyed by some international support. ‘He made no attempt to gloss over the scale of the sacrifice needed from everyone, politicians included,’ the Daily Telegraph said approvingly of Lenihan. One of the strongest pieces of support came from the Wall Street Journal on 1 June 2010 in an editorial under the headline: ‘The Irish Example’. It began ‘What a difference credibility makes …’ and extolled the austerity programme the government had introduced. It detailed how government spending had increased by 138 per cent in the decade before the crash, against economic growth of 72 per cent. ‘By September 2008, the national debt was €46.96 billion in the hole … By April 2009, Ireland had cut public spending by €1.8 billion. It also managed to squeeze additional tax revenue out of its strapped citizens, though it achieved this largely by broadening the tax base, for instance by including minimum-wage earners, rather than targeting hikes only at the wealthy. Crucially, Ireland maintained its 12.5 per cent corporation tax rate. By the end of last year, Dublin had implemented spending cuts and tax hikes worth about 5 per cent of GDP.
‘The government used the report [from economist Colm McCarthy into public finances] to cut its 2010 budget by €4 billion and is going through its recommendations to find a further €3 billion in cuts for 2011. So far, public workers have seen their pay slashed by up to 20 per cent, the state’s child benefits have been cut by roughly 10 per cent, and unemployment and other welfare benefits have been similarly gutted.
‘The last year and a half of Irish asceticism is now seen as Europe’s Ghost of Frugality Future, and politicians around Europe could do worse than to look at Ireland’s cuts as a model … Meanwhile, the Irish people deserve credit for greeting their government’s attempted return to fiscal sanity with, well, sanity.’