Entering Government Buildings early on September 29th five years ago, minister for finance Brian Lenihan was clearly worried, even though the bailout was two months away. However, the storm clouds were already gathering.
By then, the Fianna Fáil-Green government was on the brink of finalising and revealing its plan to shore up the country’s banks.
The sums involved were enormous. Ireland’s headline deficit would jump to more than 30 per cent of GDP.
Eight weeks later, the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF) troika arrived in Dublin, greeted with shock but also shame.
In a September memorandum marked “secret”, Lenihan had told his cabinet colleagues that the three institutions had “mounting concerns about our fiscal and banking situation and the implications for our debt dynamics”.
The situation, he told them bleakly, was “very grave”.
The story behind the days leading up to the troika’s arrival on November 28th is told in newly released official cabinet papers, some under the Freedom of Information Act, others from Green Party leader Eamon Ryan.
In them, Lenihan is seen telling colleagues that a headline deficit of 30 per cent of GDP for 2010 was technically a once-off development but it was unlikely to be favourably viewed.
The omens ahead of that September 29th cabinet meeting were not good. A memo from Lenihan’s department said: “The yield on 10-year Irish Government bonds, as of Wednesday morning 29 September, is just under 7 per cent.
“Were yields to remain at this elevated level, the consequences would be severe given the extent of the borrowing to be undertaken in the coming years.”
The government was still hoping to go it alone, on the back of major spending cuts, greater than those that had been included in a four-year plan due for publication in early November.
That plan would bring the deficit below 3 per cent of GDP by 2014. However, Lenihan warned that more could be necessary “to underpin confidence” among lenders.
If so, he would announce metered water charges, cuts in the number of State employees and offer a new, less generous pension scheme for new entrants to the public service.
The then government had already indicated that reductions of €3 billion to spending would be required for 2011.
However, Lenihan told the cabinet deeper cuts were now likely to be required.
Within a fortnight, on October 14th, this forecast had hardened and Lenihan told the cabinet: “Significant levels of additional consolidation above those announced in Budget 2010 will be required.”
He said the European Commission and ECB wanted “an ambitious consolidation“ to get the deficit down below 10 per cent of GDP.
However, this would involve €7 billion worth of cuts and risked damaging the economy.
The situation moved rapidly. Within days of the September 29th cabinet meeting, Lenihan told his colleagues that the commission and ECB had made it clear they regarded the government’s November cuts plan – one that would run to 2014 – as being “absolutely fundamental to their continuing support for the Irish budgetary system (including ongoing supports for the banking system made available via the ECB)”.
Current spending would fall by more than €2 billion. Capital spending would drop by €2.25 billion.
Taxes would rise. Social welfare, under Lenihan’s proposals, would be cut by 5 per cent across the board, and health spending would drop by €600 million.
On October 22nd the cabinet received a further memo from Lenihan which, among other issues, raised concerns about a declaration on the structure of any future bailouts that had been issued in Deauville, France, several days earlier by German chancellor Angela Merkel and then French president Nicolas Sarkozy.
They had resolved that private creditors would have to make contributions to any further rescue of any other euro-zone country.
In hindsight, it was a key factor in pushing Ireland towards the bailout, even if that was not fully recognised at the time.
Why lend to a highly indebted country if you might not get your money back if that country went bust?
By the following week the influence of the commission on Irish budgetary strategy had become more obvious.
In a further “secret” memo from Lenihan, the cabinet was told that, following discussions on October 25th, the commission and ECB were prepared to accept cuts of €15 billion to allow for a 3 per cent deficit figure to be reached by 2014: “The Commission and the ECB laid absolute store on a general government deficit of less than 10 per cent of GDP for 2011 to convince the markets.
“To achieve this, a package of at least €6 billion in expenditure and tax measures is required for 2011 in their view.”
Lenihan said the Irish economy could bear only a €5 billion cut, so the additional billions being sought by the commission and ECB would have to come from “areas that have a limited, one-off impact” on economic growth.
While the official memos reflect it only towards the end, it was clear the combination of budget and banking pressures was pushing Ireland in the direction of the bailout.
Realisation
The pressures had been building for two years, since the controversial bank guarantee.
The newly released government memorandums reveal a dawning realisation of the enormous cost of the decisions ahead, centred on a huge increase in Ireland’s national debt as the cost of dealing with the bad loans being transferred to the National Asset Management Agency (Nama) and the need to recapitalise the banks fell on the taxpayer.
Nor is there any sign from the official papers of Europe stepping in to help.
In fact, the documents show that a so-called non-paper – effectively a discussion document – from the commission in mid- 2009 noted that no financial assistance instruments were available to help Ireland and that the ECB, under its rules, could not buy Irish government debt.
The message was clear: you are on your own, get your house in order.
Throughout 2009, the memos and notes show the rapidly worsening position of the banks.
A March 2009 note to government shows the United Kingdom’s Financial Service Authority threatened to stop Anglo Irish Bank from operating in the UK market, unless the government pumped in more cash.
Worse, there were fears that the ECB would withdraw liquidity from the bank unless it was propped up.
In May 2009 there was a proposal to pump €1.5 billion of State funds into Anglo, with a further €1.5 billion estimated to be needed later.
In June, the government decided €4 billion was needed. By October it was clear another €4 billion at least would be needed, and probably significantly more.
Letters of comfort had to be given to Irish Nationwide (INBS) and EBS, with even a plan to merge the two.
Promissory note
By early 2010, the yawning hole, particularly at Anglo, was starting to become clear.
The Department of Finance came up with the idea of providing a promissory note to Anglo and INBS, basically an IOU that would spread the capital cost over a period of years because the State could not afford to pay it up front.
Lenihan told the cabinet on March 30th that all the banks would need new capital as a result of the losses emerging from the Nama transfers.
That day’s meeting heard the Anglo bombshell. Another €8 billion would be needed for the bust bank and Lenihan “asked his colleagues to note that additional support of up to €10 billion is likely to be required”.
That would have brought the total to some €22 billion. In the event, even more was needed – a total of €30 billion.
As the autumn of 2010 drew near, things got only worse. Preparations were made to recapitalise the banks.
A government memo notes the advice of the National Treasury Management Agency and other advisers that to impose losses on the senior bondholders who would move out of the State guarantee at the end of September “would be extremely detrimental to the raising of finance by both the State and the Banks”.
It was clear that the bill would fall to the State and that it would be enormous. The net was closing.
Lenihan’s final two November 2010 memos to government are stark. One, with a date of “November 2010” was for a cabinet meeting just before the application for the bailout on the weekend of 20th-21st of that month.
Lenihan asks the government to “authorise him to submit a formal request of external assistance to the European authorities and then to the IMF”. It outlines what was on the table.
The main points were sketched out: an €85 billion programme, a commitment to follow the budget cuts in the four-year plan, and a restructuring of the banks.
It also shows the intense pressure on ministers at the time on a range of fronts. Clearly, in the background, negotiations had been under way for some time, as the likelihood of a bailout grew.
Lenihan told his colleagues the economic costs would be huge but that at least one threat had been narrowly avoided: “We understand that requests to include an increase in the corporation tax rate in the programme have now been dropped, though no commitment has been given.”
The banks were “extremely fragile”, Lenihan told his colleagues, having lost €134 billion in funds since January 2009 and €10 billion in the last two weeks alone.
“The governor of the Central Bank of Ireland has confirmed to the Minister that in the absence of this support from the eurosystem the Irish banking system would not be able to meet its obligations as they arise.”
Reference was made to the infamous letter from ECB president Jean- Claude Trichet, threatening to withdraw liquidity from the banks if Ireland did not go into a programme.
And there was more, from the ECB, as the memo reveals.
Frankfurt wanted Ireland to borrow money under the bailout and use it to repay the Anglo and INBS promissory notes and contribute to the funding of the wind-down of the two banks.
It is a move that would surely have made the programme a failure from the start, but given the ECB a lot of its money back up front.
“This has not been agreed,” Lenihan told his colleagues, “and the size of the package being discussed does not include money for this.”
The extent of the budget adjustment was spelled out. The message was clear: there was no alternative.
Final note
The final note was of a cabinet meeting on November 27th, 2010. It was to sign off on what had been agreed in negotiations.
The likely interest rate of close to 6 per cent on the loans was noted.
All the terms and conditions were outlined. And, no doubt conscious of the political price of this all, Lenihan’s memo to government noted: “The loans require that we agree to detailed, onerous quarterly, or even more frequent, monitoring and assessment of progress made in fulfilling the conditions of the loan.”
All major policy decisions would have to be approved by the Commission, IMF and ECB, it warned.
The political price of the bailout was a surrender of sovereignty.
The memo lays out the pros and cons of burning senior bondholders – at that stage there was €4.7 billion in unguaranteed senior debt in Anglo and €15.3 billion in the banks as a whole, it estimates.
The memo does not give Lenihan’s view, but it suggests that it was not going to happen, given the perceived threats to financial stability internationally and in Ireland.
The memo makes clear that the ECB opposed any hit to senior bondholders.
It said that Central Bank governor Patrick Honohan had been in negotiations in Frankfurt to try to ensure that the funding to Anglo and INBS was not “suddenly called in” – which might have happened given the clarity that the two were by then bust.
It made clear the ECB felt imposing losses on senior bondholders “would be damaging to the ability of the banks in the euro area to fund themselves”.
Therefore, it said, Honohan hoped to get an explicit commitment that the ECB would fund AIB and Bank of Ireland and allow them to escape from emergency liquidity and that they would help to convert the money used to rescue Anglo and INBS into longer-term, cheaper funding.
In the event, the ECB made no public commitment to fund the Irish banks and it was to be February 2013 before the refinancing of the rescue of Anglo and Irish Nationwide was agreed.
Appended to the documents were the formal letters of request for help to the EU Commission, the ECB and the IMF.
The troika was coming to town.
