of the technical complexities.
In order to understand the context and, more particularly, what Brian and the Government faced in September 2008, it is necessary to describe briefly some of the international events which brought much of the western world’s financial system to the brink of destruction. It must be remembered that Ireland initially faced this crisis entirely on its own and without the financial or economic resources enjoyed by the large states and without the monetary tools necessary for this purpose. Ireland was a member of the Economic and Monetary Union, (EMU), but it retained sovereignty and responsibility in respect of its own financial system. Under the then European Treaties,3 the European Central Bank (the ECB) was responsible for monetary policy, but it not only had no responsibility for intervening to prevent the collapse of a Euro member’s financial system, but was expressly prohibited by law from doing so.4 In fact, as Governor Mario Draghi was later to demonstrate, the ECB could have done much more than it did in those early critical months. Jacques Delors, one of the Euro’s chief architects, in a speech in Brussels on 28 March 2012, criticised the ECB’s approach at that time. When Governor Draghi took over the ECB he reversed the interest rates increases in November/December 2011 and expanded the pre-existing longer term refinancing operations (LTRO), which permitted banks to borrow large amounts of money from the ECB for terms as long as three years and demonstrated that much could be done by the ECB within its legal constraints.
Many would say that the financial crisis, which led to what is now known as the ‘Great Recession,’ began in 2007 in the US with the collapse of the sub-prime mortgage market.5 The problems in financial markets gathered pace in 2008. In March 2008, the US Federal Reserve, supported by the Treasury, contributed almost $30 billion to facilitate the takeover of Bear Stearns by JP Morgan. International financial markets were getting very uneasy. However, there was still great optimism with regard to the future and little sense of the impending calamity. Governor Jean-Claude Trichet, in June 2008, at a ceremony in Frankfurt’s Opera House to celebrate the tenth anniversary of the ECB, hailed the Euro as a ‘remarkable success’ and stated that he had no wish to name and shame those who predicted it would fail.6 However, unlike other Central Banks, such as the US Federal Reserve Bank and the Bank of England, the ECB could not act to regulate liquidity and interest rates in capital markets by making large-scale purchase of government bonds. Under the then interpretation of its mandate and powers, it in effect was an interested but powerless bystander. As mentioned above, the ECB’s legal mandate to address the dramatic events of September 2008, which triggered, certainly in this country, a financial and economic crisis of unprecedented proportions, was limited. The ECB did, of course, have power to cut interest rates, but it refused to do so until October 2008. The 4 per cent overnight rate that prevailed in August 2007 did not fall to 3.25 per cent until November 2008 and did not get as low as 2 per cent until January 2009. By contrast, the Federal Reserve was virtually 0 per cent by December 2008. This situation undoubtedly made it more difficult, particularly for a small country like Ireland, to address the problems created by the financial crisis.
On 16 September 2008, the US Federal Reserve had to extend a loan of $85 billion to AIG, the American insurance giant to save it from collapse. Morgan Stanley was also in trouble. It borrowed heavily from the Primary Dealer Credit Facility set up by the Federal Reserve’s Board of Governors to lend money to securities firms by broadening the range of eligible collateral. Morgan Stanley and Goldman Sachs applied to the Federal Reserve to become banks in order to obtain the protection which was available to banks. Merrill Lynch was about to collapse and was sold to Bank of America in order to save it. Washington Mutual, the nation’s largest savings and loan association and the sixth largest bank of any kind, failed on 25 September 2008. All this followed the collapse of Lehman Brothers on 15 September 2008.
Around the same time in Germany, Hypo Real Estate Bank had to be supported with a €35 billion credit arranged by the German Finance Ministry because of a liquidity run. The proposed deal fell apart on 6 October 2008 and the Bundesbank had to arrange a new line of credit, this time for €50 billion and subsequently the bank was nationalised in 2009.
Following the collapse of Washington Mutual in the United States, there was a silent run on Wachovia, the US’s fourth largest bank (it was twice the size of Washington Mutual). The market value of Wachovia’s ten-year bonds dropped from 73 cents in the Dollar to 29 cents. In effect, the bonds of America’s fourth largest bank were then junk bonds. Wells Fargo stepped in on 3 October 2008 under government pressure to save Wachovia and, on the same day, the US Congress passed a modified version of the Troubled Assets Relief Programme (‘TARP’).7
On 25 September 2008, rumours circulated that Fortis, a gigantic banking insurance investment conglomerate, based in the Benelux countries, was in difficulty. The Belgian, Luxembourg and Netherlands Governments offered support to Fortis. They announced that the banking division would be nationalised, with the three countries investing a total of €11.2 billion in return for about two-thirds ownership. A few days later, Dexia, a substantial Belgian bank with worldwide operations, came under severe pressure and sought State Aid. It received a capital injection and State guarantee of its liabilities and subsequently had to be nationalised in October 2011.
On 29 September, the US House of Representatives rejected the TARP. After its rejection, the US Stock Market fell almost 9 per cent the next day, destroying about $1.25 trillion of wealth – representing twice the monies for which TARP had provided.
On 11 October 2008, an emergency meeting of the Euro Group launched a comprehensive plan in an attempt to save their banking systems. The plan consisted of thirteen points and provided for the ECB to intervene in the financial turmoil to boost liquidity. Eurozone governments undertook to underwrite bank debt until the end of the following year and committed to preventing the collapse of ‘systemically relevant institutions through appropriate means, including recapitalisation.’
The Euro Group had been encouraged to adopt this rescue plan by the British Prime Minister, Gordon Brown, who emphasised that government guarantees for inter-bank lending were ‘absolutely critical’ to freeing up the banking paralysis. The French Government announced that it would legislate on similar guarantees, while Chancellor Merkel and her government prepared draft emergency plans which were reported to factor in up to €300 billion for underwriting German bank debts issuance.
The UK Government the previous week announced a three part £550 billion programme, which involved the injection of £50 billion into bank capital reserves, £250 billion to guarantee loans between banks and involved lending another £250 billion directly to commercial banks.
On 23 November 2008, the US Treasury, the Federal Reserve Bank and the Federal Deposit Insurance Corporation (FDIC) issued a joint press release bailing out CitiGroup, the giant conglomerate which was the nation’s largest bank at the time, and they agreed to guarantee a designated pool of US$306 billion in assets.
The great Central Banks of the world, the most experienced of politicians and finance ministers and the most celebrated economists struggled to cope with and control ‘the Great Recession.’ There were no tried and tested solutions to the problem. The ECB had no answer and its powers were limited. The scale of what was emerging, the enormous uncertainty created by the events which were occurring, the difficulty in predicting what would happen and the inability to control exogenous factors and, in particular, developments in other states and international market forces, posed an enormous and unprecedented threat to Ireland’s financial and economic survival.
It is easy at this remove to lose sight of Ireland’s isolation and its complete inability to control international events and, in particular, events on the financial markets having the most profound consequences for Ireland and its financial system. This lack of control coupled with the inherent difficulty in devising workable solutions made the problems faced all the more intractable and daunting. Added to these problems were the difficulties in predicting financial markets and their ongoing impact on the economy.
The
