to be necessary, appropriate and proportionate.’ How can a policy that is deemed to be necessary, appropriate and proportionate be a mistake? Moreover, the Commission later sided with the ECB against Lenihan and the IMF staff in protecting senior bank bondholders. It is not clear how these apparent contradictions can be explained.
One cannot help feel that for many people it is convenient to blame the country’s entire economic woes on the blanket guarantee. Many people are uncomfortable discussing what they said and did – and in some cases what they did not say and did not do – during the years of the bubble. If the public can be convinced that our problems began on the night of the guarantee, then nearly everyone is off the hook. The simplistic narrative that the bank guarantee cost the State €64 billion and that we ended up in an EU/IMF bailout programme because of the guarantee is too often used to distort the truth.
BATTLE TO RESTORE MARKET CONFIDENCE
The introduction of the guarantee bought time for the banking system, but by early 2009 the banks’ funding position was becoming strained again. For sure, the banks were supported by the State, but investors were becoming concerned about the sustainability of the State’s finances. During the first quarter of 2009, the economy lost nearly 8,000 full-time jobs per week. The bulk of these jobs were in construction and other property-related sectors. Economic activity plunged, led by a collapse in new homebuilding, and the public finances deteriorated at an alarming pace. The economy was falling off a cliff. Ireland’s costs of borrowing on international markets rose steeply.
The deepening recession affected investor confidence in the banks. In turn, the weakening banking system further depressed the economy and damaged the public finances. The toxic inter-relationship between the State and the banking sector was threatening to bring both of them down. It would be another four years until European leaders would agree to begin to build a banking union in Europe to break the link between sovereigns and banks. In the future, we may see a common backstop for banks in the European Union. But during Lenihan’s tenure at Finance, each member state was responsible for stabilising its own banking system.
Lenihan believed that the battle to restore market confidence and stabilise the financial system had to be fought on three fronts. First, the public finances had to be put on a sustainable footing. The transient taxes of the boom had evaporated, revealing a huge structural gap between government spending and revenues. To that end, Lenihan ‘executed’ (as he put it himself) €21 billion of budgetary adjustments, pushing the enormous boulder of fiscal correction more than two-thirds the way up that particular mountain.
Second, the country had to regain international competitiveness to improve its potential for growth. As Lenihan put it: ‘Unless we regain our competitive edge, we will be unable to return to the tried and tested strategy of export-led growth that ushered in the boom in the early 1990s. We must be able to compete and win again in the international marketplace.’ To measure competitiveness, Lenihan put a great deal of stock in Ireland’s unit labour costs. He studied these data regularly and was encouraged by the marked drop in costs in Ireland relative to our main trading partners during 2009 and 2010.
Despite the tight constraints imposed by the need to reduce the fiscal deficit, Lenihan’s Budgets contained initiatives to boost the competitiveness of various sectors of the Irish economy, including tourism, agriculture and agri-food, forestry and bio-energy, cons- truction and the retail trade. He also enhanced the incentives for R&D and intellectual property to help the country to attract new business and new jobs.
Lenihan was an optimist. He was convinced that the Irish people could work their way through the crisis. Lenihan could see light at the end of the tunnel when many others could see nothing but unrelenting economic gloom. He often reminded those around him how important it was to give people hope of a better economic future, lest they give up the fight to restore order to the public finances. Some of his more positive public comments about the future reflected this view.
NAMA
The third set of actions to repair the banking system involved recapitalising, shrinking and restructuring the banks. Lenihan wanted to ensure that the banks had enough capital to enable them to make loans to support the real economy. Lenihan also recognised that because of their large and risky loan books, the banks would constantly struggle to attract badly needed funding and capital. He also knew that a return to sustainable economic growth in the medium term would require a functioning banking system. In response, Lenihan set up the National Asset Management Agency (NAMA) to help to deleverage and de-risk the banks.
The establishment of NAMA was strongly supported inter- nationally by those with experience in resolving banking crises. When the plan for NAMA was outlined to visiting officials from the IMF in April 2009, they responded by saying: ‘If you hadn’t suggested NAMA to us, we would have suggested it to you.’ International support was hardly surprising, as a ‘bad bank’ was a standard tool to assist in the resolution of troubled banks.
The domestic reaction to the announcement of NAMA was more sceptical, however. Ireland had never experienced a systemic banking crisis, and few people here were familiar with the resolution toolkit employed by policymakers in such circumstances. Lenihan welcomed and encouraged constructive debate about NAMA, but despaired at the opportunism and cheap point-scoring that sometimes poisoned the political and wider debate. He remarked on how casual and ill-informed some of the media commentary was about banking issues. Lenihan had hoped to achieve political consensus around NAMA in order to improve international confidence, but to no avail. Nonetheless he was buoyed by the public support given to NAMA by people such as Alan Dukes, Garret FitzGerald and Ray Mac Sharry. Lenihan more than once called for a united national effort to confront the difficulties the country faced.
The charge that NAMA was a bailout for developers and bankers was politically potent. At this remove, the charge seems absurd. Nowadays, critics accuse NAMA of being overzealous in dealing with debtors and it would be difficult to find a banker or bank shareholder who would claim to have been enriched by NAMA. But critics made a populist appeal by misrepresenting NAMA as a novel construct established by a crooked government to protect narrow sectional interests. The debate intensified in the weeks and days before the internal Green Party vote on the policy on 14 September 2009. Opponents reckoned that if the Greens voted against NAMA, the coalition government would collapse. They made a big effort to affect the vote, but were unsuccessful.
Others had different reasons to oppose the setting up of NAMA. Lenihan was annoyed when he learned that some people at AIB were covertly briefing the media against NAMA. The NAMA process would force the banks to face up to the reality of their property losses; some at AIB would doubtlessly have preferred if the unpalatable truth about the state of that bank’s loan book had remained concealed. Lenihan was also exercised by an article critical of NAMA by financier Dermot Desmond published by The Irish Times on 16 September 2009, the same day the Dáil commenced second-stage debate on the NAMA bill. During that debate, Lenihan provided estimates of how much NAMA would pay for the loans. It was not clear how useful these high-level estimates would be, since under EU law the actual purchase price would be determined by detailed loan-by-loan valuations. But the Opposition had demanded estimates, and in any event Lenihan believed it was wrong to ask the Oireachtas to vote on a bill without some indication of the potential up-front cost involved.
Lenihan believed that effective rebuttal of critics’ arguments was the key to winning the debate over NAMA. Time has proved Lenihan right and the critics wrong. No serious commentator today could claim that investor confidence in our banks has not benefitted from the transfer of loans to NAMA. One shudders to think how the banks would have managed their development property loans had they remained on their books, given how slowly they have tackled mortgage arrears. The Spanish government three years later established a bad bank identical to NAMA to aid recovery from that county’s property crash, and Slovenia took NAMA as a model in late 2013. In both cases, the bad banks were set up with little or no controversy.
REFORMING
