EUROPEAN DIARY:Even as Rehn, Trichet and others expressed their faith in Ireland, the tide turned rapidly
THE IRISH bailout is now a done deal but questions linger as to when the tipping point was reached that made an intervention by the EU authorities and the IMF inevitable. Opinions vary in Brussels and Dublin as to when that line was actually crossed, although the inexorable forces that ultimately led to collapse are plain to see.
Looming like a malignant colossus over this entire scene is the banking guarantee, introduced overnight at the end of September 2008 as panic gripped the capitalist world in the wake of the Lehman bankruptcy. This intervention served to prop up the banks but it aligned the fortunes of the State with their fate. In the view of a senior Dublin official, everything that followed can now be seen as an effort to avert the prospect of external aid being required to help shoulder that monumental burden.
Add a wrenching recession into the bargain – with the economic contraction and the banking crisis feeding off each other – and the challenge was all the greater. The Government won plaudits in Brussels and Frankfurt, home of the European Central Bank (ECB), for the zeal with which it took a knife to public expenditure.
By its own hand, however, and through events over which Dublin had no control, the Cowen administration became trapped in a fiscal cul de sac which ultimately shut it out from markets.
On the domestic front, the advent of Nama compelled the banks to take losses they could not bear without ever-increasing amounts of capital from a State whose revenues had collapsed. In the outside world, meanwhile, the Greek debt debacle and the market tumult that accompanied it served to magnify the perceived risk in all weakened economies.
There are two ironies here. First, Irish borrowing costs were above those of Greece last year in the months before the crisis blew up when Athens admitted its public accounts were falsified. Second, the European authorities then used painful efforts to stabilise the Irish public finances as a stick to beat Greece down the austerity path.
At that point, said a Dublin official, there was some confidence in Government circles that it had the situation under control. Indeed confidence in Brussels was strong enough for economics commissioner Olli Rehn to publicly declare he agreed with Minister for Finance Brian Lenihan that the worst was over for Ireland. This was in early May, only weeks before the creation of the €750 billion bailout fund that Ireland is now using.
An earlier ruling by Eurostat, the statistical arm of the EU Commission, held that bailout cash for the nationalised Anglo Irish Bank would have to be included in the budget deficit. This was hugely significant as the State’s capital commitment to the banks was no longer obscured. Bank losses grew as Nama transfers continued, and with them their requirement for fresh capital from the Government. At the same time, the banks’ reliance on emergency ECB funding grew out of all proportion.
In late summer a credit rating downgrade by Standard Poor’s (SP) pointed to a continuing seepage of confidence. Whereas the downgrades that came with Greece’s slide into the abyss met a political fightback from Europe, the response to SP was muted. The agency’s critique was deemed more or less valid.
Alarm bells were already ringing loudly before Lenihan presented a new estimate for the cost of the bank rescue to an informal meeting of euro group finance ministers on September 30th, two years to the day after the Government first guaranteed the banks. This was the day the bailout bill climbed to €45 billion, with the prospect of another €5 billion also mooted. The budget deficit would reach 32 per cent as a result, more than 10 times the EU limit, not exactly conducive to confidence.
Even as Rehn, ECB chief Jean-Claude Trichet and other top officials expressed their faith in Ireland, the tide was turning rapidly. For some in Brussels, although no one would say it publicly, this was the moment at which the prospect of an external intervention became likely. While the Nama scheme had won formal approval from the EU authorities months previously, few were prepared for the drastic escalation of losses at Anglo that took the bailout to new heights.
Market pressure intensified, with a further build-up of tension taking its cue from the Deauville declaration on private sector participation in sovereign bailouts by German chancellor Angela Merkel and French president Nicolas Sarkozy. Days later, the endorsement of EU leaders for the Deauville statement served to pile yet more strain on Irish borrowing costs. Although some in Dublin hold this to have been the moment of no return, certain figures in Brussels say the game was up by then.
In the background, meanwhile, top-ranking ECB officials were becoming increasingly concerned about the frailty of Ireland’s banks. Their clamour for action reflected the view that survival was now impossible.
The melodrama which followed – with a string of increasingly implausible Government denials that any bailout was in prospect – marked only the culmination of the saga. From the outset of the crisis, the frailty of the banks meant more than a little good luck would be needed to ensure survival. As a confluence of negative forces took hold, it was not to be.
