Guaranteeing Recidivism

, , Comment closed

9 Flares Twitter 0 Facebook 9 9 Flares ×
Print pagePDF pageEmail page

This article originally appeared in Irish Left Review, Issue 2, Vol 1., published in November 2013. 

Recidivism (from recidive and ism, from Latin recidivus “recurring”, from re- “back” and cado “I fall”) is the act of a person repeating an undesirable behaviour after he/she has either experienced negative consequences of that behavior, or has been treated or trained to extinguish that behavior.

shitting_itIn June 2013, the ongoing rumblings of discontent at the blanket guarantee decision exploded on to the front pages with the publishing of the ‘Anglo Tapes’ recordings by the Irish Independent. After three bank inquires of a sort, through the Nyberg Report, the Honohan Report and the Public Accounts Committee Inquiry, the remaining fog around the events leading up to the guarantee and what happened on the night and early morning of 29th and 30th of September 2008 was such that it only took the selective leaking of a fraction of the tapes held by the ongoing criminal investigation to stoke up public rage and renew calls for a proper inquiry or tribunal[i].

This continuing fog and the far reaching consequence of the decision have led many to reach all sorts of conclusions about who ultimately was responsible. In 2013 commentators like Fintan O’Toole[ii] and Stephen Donnelly TD appear to think that the protection of Irish banks provided by the 2008 guarantee was so devastating for the Irish economy that it must have been insisted upon by the ECB.

More often than not, however, this regularly repeated belief is a conflation of the 2008 guarantee with what Brian Lenihan, and later Michael Noonan, suggested was the insistence of the ECB that unguaranteed senior debt must be paid back after the 2010 bailout.

There is no indication of ECB involvement in the 2008 decision despite Brian Lenihan’s retrospective claim in 2010 that it was impelled by Jean Claude Trichet’s voicemail directive in 2008 to ‘save our banks at all cost’[iii]. On the contrary there is plenty of evidence that there was widespread surprise and anger in Europe at the ‘unilateral’ move and the problems it created, as well as pressure to change it.

It is important to understand that the original guarantee was an Irish decision alone, without any outside involvement, because it helps us dissect the nature of power and class in Ireland. The facts need to be separated from the myths in order to appreciate how decisions like it continue to determine the shape of the economy and the nature of Irish society.

The action in September 2008 is an illustration too of how a type of ‘rentier’ class in Ireland are able to exploit Ireland’s resources without consideration of the consequences for wider society. These rentier capitalists benefit from the managing of assets, whether through financial services, the movement of corporate profits tax-free or investment property. Their interests are boosted by the state leading to the side-lining of productive capital and the continually undermining of labour’s position[iv].

The guarantee was not put in place simply to maintain liquidity to Irish banks. Officials and politicians knew enough to be aware that the problems at Anglo Irish Bank and Irish Nationwide were far greater than one of a temporary lack of liquidity due to a crisis elsewhere. Funds from the Central Bank of Ireland had been provided to Irish banks through unprecedented quantities of Emergency Liquidity Assistance. Banks in other countries were experiencing similar problems and received extraordinary quantities of emergency funding from their central bank during the crisis in September. Yet, significantly, no other EU country provided an unlimited guarantee.

In Ireland’s case the problem was twofold. One, to keep cheap interbank lending available to Irish banks, they needed a guarantee that would remove the sense that Irish banks were increasingly high risk because of their over-exposure to collapsing property markets.

Two, in order to keep the level of emergency liquidity available to ensure that Anglo Irish Bank and Irish Nationwide remained open they needed a guarantee that would make an insolvent bank ‘solvent’. The dangers of this approach were clearly outlined before the decision was taken, yet we are still asking ‘why did they do it?’

To try and answer that question we have to go back to the last time the Irish government provided an unlimited guarantee to the banks to enable them extract themselves from a speculative fiasco even though there was incredible risks to the wider economy by doing so.

St Patrick’s Weekend, 1985

The press conference was due to start at 10pm on the evening of 15th of March. The lateness was unusual but the urgency didn’t surprise any of the hurriedly invited reporters. The country was deep in the midst of a prolonged economic crisis and twice in recent times the government had made late night announcements about companies in trouble which needed to be delivered before the markets re-opened the following day. The question was, which company was it this time?

As the Taoiseach was recovering from an illness at home the ministers attending the press conference had already visited him there to reach an immediate decision. However, as they presented it afterwards, there was no alternative. What they decided to do was required to protect the ‘Irish financial system’[v] and every man, woman and child in the Irish Republic would have to bear the burden.

The ministers informed the press that earlier in the evening the government had acquired a substantial Irish insurer for a nominal sum, which up to that point was the wholly owned subsidiary of the private and very profitable Allied Irish Bank. The company had already been placed under administration following a High Court order. This was necessary, the government outlined, because AIB’s board had informed the Central Bank of Ireland that, in the interests of its shareholders and to retain confidence in the bank, it was walking away from the subsidiary it had bought just two years before. In their statement the ministers said:

“When it became apparent that the restoration of the company to full health would require major funding and a substantial further investment, Allied Irish Banks informed the authorities of the position and the need for remedial action of the kind that is being taken”[vi]

The insurer was called the Insurance Corporation of Ireland (ICI) and the arrangement was for the Irish government to buy ICI from AIB for IR£5 and move it into a new semi-state company. Even though placed under administration this new company would not be liquidated[vii]. Instead it would simply operate to pay off the rising number of insurance claims from cheap policies that ICI’s seriously under provisioned London operation had sold through carelessly arranged reinsurance deals over the previous three years.

Although the government provided an estimation of what the losses might amount to, it had to admit that they had no idea of what the final figure would be. This was an unlimited guarantee [viii].

Maev Ann Wren describes the atmosphere at the press conference:

“The ministers, who fielded the questions of an incredulous press corps that night, could not avoid sounding weak. They had not known of this until a week before, they said. They were taking over a company without knowing its liabilities. Allied Irish Banks, the parent company, had only recognized the severity of the problem two weeks before, they had been told.

This was an insurance problem, not a banking one, Ministers John Bruton and Alan Dukes reiterated as the questions veered into dangerous ground. Yet they said that the bank could have come under “pressure” had they not agreed to act. Journalist pointed out that the bank intended to maintain its dividend and was not revising its profit forecast, so why not take the bank instead of the loss making subsidiary? This was an insurance problem not a banking one, the ministers replied.”[ix]

Speaking after the announcement AIB’s Chief Executive Gerry Scanlan said, “We didn’t go looking for help from anybody. We told them (the Central Bank) this was our decision and that it was likely to result in matters that should be covered by contingency planning.[x]

The open-ended nature of the deal was clear. In response to speculation, informed by sources in the London insurance business that the final cost could be as high as IR£500 million, John Bruton said:

“…on the basis of all the facts known at present there are no grounds for believing that the losses incurred fall outside the range of £50 million to £120 million.”

Given what was known at the time, however, the government estimate was extremely low. Draft accounts for the year ending Dec 31st 1984, as disclosed in the High Court (on the 25th of March 1985) showed ICI already had a trading loss of IR£65 million. Contrary to the government’s claim that it only found out a week before about the extent of the problem, a 26th of March report on the Irish insurance industry revealed that the government had been aware since the previous June that ICI’s rapidly expanding business was not being matched by an associated increase in compensation funding.

It would be several years, however, before the Irish public would discover just how unrealistic John Bruton’s estimate was. In 1993, the High Court appointed administrator, William McCann, calculated that the final net liabilities would be £267 million[xi], with the estimated cost to the taxpayer of the bail-out in nominal terms as £184 million[xii], ‘unless future liabilities turn out to be even greater’[xiii].

The Generous Deal

The arrangement made with the Irish government in 1985 was that AIB would have to make some contribution. However, the terms were extremely generous to AIB given that it was such a profitable bank and Ireland had a debt to GDP ratio of 116% in 1985[xiv], the highest in the OECD. As a result of the national debt Ireland was paying 66% of tax income on interest rates for government borrowing. Part of the cost to AIB would be its inability to recoup any of the £86 million it had put into ICI up to the middle of March. It would also have to provide the Central Bank with two low interest loans[xv]. This included interest subsidies of £6 million on a £50 million loan over three years and an additional interest free loan of £20 million which was worth almost £3 million per year at 1985 interest rates[xvi]. Including the cost of providing low interest loans, which were eventually paid back by the State in 2000[xvii], the bank annually paid IR£5.5 million into the Insurance Compensation Fund, which was about the same as the amount other Irish banks had to pay.

At the time of the deal the Central Bank of Ireland claimed that this was as much as AIB could afford. On the agreed arrangement the AIB chairman commented:

“The basis of the agreement with the Central Bank of Ireland (in which the Minister for Finance concurred) is that AIB will not be required to contribute further to the funding of the administration” (AIB, 1986: 9 – cited in Cotter[xviii]).

It was only in 1992, once it was clear that the insurance companies who had used ICI for reinsurance deals were taking advantage of the government guarantee by refusing to pay out their contracted liabilities, that the annual fee paid by AIB increased to IR£8.8 million.

Shares in both AIB and Bank of Ireland began to slide in March after news of the state takeover of ICI was announced. They soon rallied, however, once details of the arrangement became public. Despite the real and opportunity cost to the state in wrapping up many millions of exchequer funding to cover the liabilities of ICI over almost a decade the state took no equity in AIB as compensation. Therefore, it couldn’t benefit from the changing fortunes of AIB shares. Others, however, such as AIB’s Chief Executive Gerry Scanlan, could. A year after ICI was taken into state ownership Scanlan had to answer shareholders questions about why he had acquired 50,000 in AIB shares shortly after the share prices dropped in March 1985. By July of the following year the price had risen by over 65 pence[xix] providing a tidy sum for Mr. Scanlan.

An economics lecturer in Trinity College Dublin at the time, Anthoin Murphy, wrote in the Irish Times that the arrangement created a dangerous principle which enabled “a profitable financial institution to divest itself of sizable monetary liabilities at little future expense to its shareholders”.

“It is a dangerous principle for it creates an asymmetrical nexus between the government and the banking system whereby profit made from financial diversification programmes accrues to the banks’ shareholders while losses, provide they are sufficiently large, are expected to be borne by the taxpayers because of the invocation of the “financial stability” criterion. If this principle becomes enshrined in our legislation it will create a most undesirable precedent.”[xx]

And so it did.

The Sinking of Irish Shipping

“Mr Joe Rea, president of the Irish Farmers Association, was a happy man when he met agricultural journalists yesterday to celebrate six months in office as the IFA’s leader. The sinking of Irish Shipping was what made him happy: “It was the shooting of a white elephant – I didn’t think they’d have the guts to do it.” Nov 16th 1984[xxi]

The willingness of the Irish government to create a semi-state company to cover a private bank’s losses contrasts sharply with its attitude towards the semi-state company that sold ICI to AIB in the first place: Irish Shipping.

Irish Shipping had a long and distinguished history as a semi-state company, particularly when it was supplying Ireland with vital imports during the Second World War and for the majority of its 44 years in existence it had been profitable. In 1984, however, due to long charters set at fixed rates during a period of extreme volatility in the freight market, the company’s losses began to mount and it required several state guarantees to finance its business. But the problems in Irish Shipping had been developing for a number of years and while company mismanagement was a factor it was also stymied by legislation and government neglect.

In January 1984, Irish Times journalist Padraig Yeates reported that Ireland’s merchant marine, 72 percent of which was publically owned tonnage-wise, received “well under a quarter of the assistance granted to Aer Lingus, even though 90 percent of our trade still comes through our ports.[xxii]

By the end of the year Irish Shipping was gone[xxiii].

GPA Getaway

In 1987 the Fine Gael/Labour coalition was out of office having campaigned for another round of austerity to combat the continuing decline of the Irish economy under Garrett Fitzgerald. On the night the election was lost Fitzgerald offered his parties support to Fianna Fail if they continued with austerity. This became known as the Tallagh strategy, with Alan Dukes declaring in a speech to the Tallagh Chamber of Commerce that Fine Gael would not oppose austerity measures ‘in the national interest’. Despite the regularly repeated claim that the ‘hairshirt’ budgets of Ray McSharry launched the celtic tiger[xxiv], eventual economic recovery came about through a combination of devaluation (in 1986), a tax amnesty, Ireland’s position within the single market and the rising of both the average industrial wage and public sector pay.[xxv]

But the pace of economic change was not fast enough for Garrett Fitzgerald. After leaving politics he chose speculation as the way forward[xxvi], and used a substantial loan from AIB to fund it. In April 1988 he took out a loan of $322,000, $125,000 of which was used to buy shares in Guinness Peat Aviation, a company he was a director of, alongside Nigel Lawson[xxvii]. In 1989 he took out an additional loan also to buy GPA shares, believing they would go sky high on the back of an aviation leasing boom that he had ably supported by providing tax breaks while in government. Later, following the collapse of GPA, Fitzgerald nursed a massive loss on this investment[xxviii]. However, AIB were willing to settle the outstanding IR£170,000 debt by accepting IR£40,000 on the loan and writing off the rest.

Of course, AIB have a history of offering all their customers’ similar generous terms. Money, credit and debt are after all, a social relation[xxix].

But despite Fitzgerald’s speculative miscalculation, becoming a beneficiary of the generosity of AIB just as AIB had benefitted from his generosity over ICI, internationally the period from the mid-90s on would be a burgeoning speculative frenzy fuelled by multiplying forms of credit creation which itself was propelled by US corporate expansion following three decade of Gleichschaltung against labour. As Robert Brenner describes it[xxx]:

“Most decisive […] was Treasury Secretary Robert Rubin’s shift to the high dollar in 1995, quickly followed at the Federal Reserve by Greenspan’s turn to asset-price Keynesianism to drive the economy. This was supplemented by the repeal of the Glass–Steagall Act, to permit combined operations across investment banking, commercial banking and insurance by financial giants like Citicorp. These measures served to blow up a historic equity-price bubble, quickly followed by an explosion of corporate finance through debt and stock issue.”

From 1997, the already rising property market in Ireland, as elsewhere, spiked considerably, leading to a grotesquely over-sized speculative property bubble fuelled by an Irish banking system that grew to become over seven times the size of the country’s GDP[xxxi]. As we know, this led to the spectacular crash which began in 2008.

March 2008: Over-Exposure to Property Bubble There for All to See

The Merrill Lynch research analyst Philip Ingram was a big fan of Morgan Kelly’s series of Irish Times articles on the overheating of the Irish property market and the vulnerability of Irish banks. He visited Kelly in his UCD office to discuss the disparity between his arguments and what he heard Irish banks claiming and the conversation informed the approach he took to a note on Irish banking in March 2008. In it he chose to interview the bank’s UK developer clients rather than base it on loans data. As commercial property deals between bankers and property developers are kept between client and the bank, data on how these loans are performing and the way the banks conduct business is not available to outside analysts. The subsequent report contained quotes verbatim from these industry insiders who were very critical of the aggressive lending behaviour of the Irish banks in the UK property market.

According to the Michael Lewis’ Vanity Fair article that brought the March report to worldwide attention in 2011[xxxii], moments after Ingram hit the send button Irish banks were on the phone to Merrill Lynch furious at what Ingram’s report was saying about them. They threatened to take their multimillion Euro business from Merrill Lynch, Lewis claimed, unless they retract it. This they did, reissuing a sanitised version which ‘de-emphasized the conclusion about the riskiness of the Irish banks’ and ‘also stripped [it] of the colourful survey responses’[xxxiii]. However, the essential conclusions remained identical in both reports: in the UK commercial property market Irish banks were the ‘most aggressive lenders’ with Anglo Irish Bank and AIB leading the field.

Moreover, Ingram continued to write negatively about Irish banks and was only let go from Merrill Lynch following a restructuring of the research department once the bank merge with Bank of America. In a report published in Property Week on the 30th of May 2008, Ingram is again quoted in an article, this time with the incendiary title: ‘Merrill Lynch Warns of Meltdown in Ireland’ [xxxiv]:

“Irish commercial property is facing a severe drop in value of up to 30%, which would hit the country’s three specialist property lenders and have a knock-on effect on the UK market.

Merrill Lynch’s banking analyst Philip Ingram said in a note this week that the Irish commercial property market faced several pressures that could bring about a correction in prices similar to that seen in the UK. Like the UK, Ireland has also seen a sharp fall in property yields because of overvaluation and the availability of cheap debt.

‘UK capital values have dropped by over 15% to date, but Irish values have only fallen by 3%, despite our belief that Irish commercial real estate is overvalued,’ said Ingram.

‘There are three reasons why we think Irish capital values are only just beginning to correct. Most importantly in our view, are ownership differences. The Irish market is dominated by private investors who are not required to mark to market and may not need to, or are reluctant to, realise losses.’

The biggest risk, Ingram said, was that 37% of commercial property debt outstanding at December 2007 needed to be refinanced in 2008 and 2009, which would be difficult given the credit crunch.”

Although the Irish banks continued to deny it, claiming that their only problem was a loss of liquidity following the collapse of Lehman Brothers, all the indications of a massive over exposure to a property bubble in the UK, the US and Ireland was there for anyone to see, long before the blanket bank guarantee was decided upon[xxxv].

September 2008: Meltdown

Liquidity support from Central Bank of Ireland almost doubled for Irish domestic banks in the year between September 2007 and 2008. Meanwhile, the Irish banks’ share prices lost about two-thirds of their values by July 2008 from their mid-2007 peak[xxxvi].

In September, the crisis that had been building during the second half of 2007 and all of 2008 was coming to a head.[xxxvii].

After an informal ECOFIN meeting on 12-13th of September the Ministers of Finance and Central Bank governors released a statement on the need to wait for the coordinated joint response[xxxviii]:

“EU economy and finance ministers and governors of the central banks agreed on a joint response to confront the economic slowdown and restore confidence in the financial markets. ECOFIN agreed to implement a consistent and coordinated response at European level.”

On the 15th of September 2008 Lehman Brothers was allowed to fail and the subsequent reaction in the money markets rapidly increased the cost of interbank credit.

Despite the informal ECOFIN agreement the Irish government on the 20th of September increased deposit guarantees to €100,000 euros from €20,000, the level provided by most EU governments at that time. The decision, taken unilaterally, put pressure on other EU governments to do the same. According to the statement from Minister for Finance, Brian Lenihan the 100,000 euro deposit insurance protected 97 percent of customer deposits[xxxix].

Towards the end of September France, the Netherlands and Belgium injected €11.2bn into Fortis, Belgium’s biggest bank and then, a couple of days later, on the 29th of Sept, the Netherlands was forced to take over Fortis’ Netherland operation at a cost of €16.8bn. On the same day the German government attempted to rescue Hypo Real Estate Holdings, whose main problems stemmed from a bank created under Irish law that it had taken over in 2007 – Depfa Bank.

The problems were Europe-wide. Central banks rushed to add liquidity to the markets and UK Libor rates as well as Euribor rates continue to climb[xl]. The UK government, having already rescued Northern Rock now had to step in nationalise Bradford and Bingley building society. Several other large UK banks were also in trouble.

Acting Unilaterally

At 6.37 pm on the 29th of September 2008 Kevin Cardiff, Second Secretary General at the Department of Finance, sent an email to Henrietta Baldock of Merrill Lynch which contained only the subject line: ‘In meet with taoiseach – need note on pros and cons of guarantee a sap‘.

This email and the attached report in the response from Baldock was made available in a partially redacted form to the Public Accounts Committee which was examining the guarantee[xli].

After outlining several workable options, including immediately taking Anglo Irish Bank and Irish Nationwide into ‘state custody’ and providing an appendix of the bank bailout strategies which had been used by other countries over the previous weeks it described its sixth and final option: Guarantee for Six Primary Regulated Banks:

“The alternative to a SLS [Secured Lending Scheme] facility is to offer a complete State guarantee to all depositors and senior creditors of the six primary regulated financial institutions. This should stem outflows and encourage inflows of deposits. However, the scale of such a guarantee could be over €500bn. This would almost certainly negatively impact the State’s sovereign credit rating and raise issues as to its credibility. The wider market will be aware that Ireland could not afford to cover the full amount if required. It might also be poorly perceived by other European states if they come under pressure to do the same as liquidity flows migrate. A coordinated response across Europe could make this option more viable. Commends in such regard have already been made by several European governments.”

Once the decision was announced much of what the advice described occurred. Deposits started to flood into Irish banks with Irish bankers now infamously declaring to ‘get the fuckin’ money in[xlii]. Alistair Darling, who had been assured that such an event wouldn’t happen by Brian Lenihan as late as the 29th of September, accused the Government of “acting unilaterally and jeopardising the health of other banking systems” when Lenihan finally phoned him the morning after the guarantee was announced. In his book Darling said:

“I knew full well that if the Irish government’s bluff was called they would be bankrupt. It was a promise on which they could never deliver.”

Because of the UK subsidiary banks operating in Ireland the movement of deposits from the subsidiaries to Irish banks lead Darling to ask Ireland to them under the scheme[xliii] . In 2011 a FSA report on the part-nationalisation of Royal Bank of Scotland[xliv] said that the bank, through its Ulster Bank subsidiary, lost £723 million in the four days following the Irish guarantee.

Given the destabilising effect on the movement of European banking deposits it seems surprising to even consider, as many in Ireland have, that the decision could in any way have an ECB imprint on it. As Yves Smith at Naked Capitalism put it at the time[xlv]:

“While the ECB coordinated rescue of Fortis was a positive sign, Ireland’s move to guarantee all bank deposits was a blow, since it is drawing funds from EU institutions to Irish ones.”

The statement from the ECB on the guarantee on the 3rd of October[xlvi] confirms that this was a move that came from the Irish government alone:

“As a further general comment, the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans.

A further point relates to the risks to the Government’s budgetary position arising from any financial support to Irish credit institutions. While the ECB appreciates that any guarantees provided by the Minister under the draft law would be contingent in nature, given that the financial exposure of the Irish State under such guarantees is potentially very large, the Irish Government could be obliged to make significant payments in case these guarantees are called over the next two years. At a point in time when the Irish budgetary position is deteriorating and may risk exceeding the 3 % of GDP reference value for public deficits, as specified under Community law, this is a cause for concern, even when the provision of financial support would, under the draft law, as far as possible ultimately have to be recouped from the credit institution or subsidiary in question.”

On Sunday the 5th of October the Observer newspaper reported[xlvii] that the Irish government was under pressure to modify the guarantee. The piece, entitled ‘EU plans to mount collective response to crisis in tatters’ states:

“… emerged that the EU is forcing Ireland to substantially change its plans to offer all savers and businesses an unlimited guarantee on their bank deposits.”

The report also quotes Neelie Kroes, EU competition commissioner saying that the Irish scheme was discriminatory and would be modified. “A guarantee without limits is not allowed,” she told Dutch TV.”

The Sunday Times also reported Kroes comments:

“I would like to plead with national governments today not to act unilaterally, but rather to continue their practice of consulting the Commission when they are confronted with problems that may require state aid to the banking sector,” she said. “That’s a must. Governments must pick up the telephone and take the opportunity of allowing us to give a helping hand.”

The reported added:

Privately, EU officials drew unflattering comparisons between Dublin’s behaviour and the close contacts with the British, French, Belgian, Dutch and Luxembourg authorities as rescue packages have been put together for Bradford & Bingley, Fortis and Dexia.

We also can’t ignore fact that the Greek government attempted its own blanket guarantee and even issued a statement shortly after the Irish one was announced. Yet they were forced by the EU Commission to rescind it immediately[xlviii].

The Irish Advocating ‘Irish-like Solutions’

Whatever about what politicians may say for public consumption, the  publication of the confidential US Embassy cables by Wikileaks in 2010[xlix] shows a well-positioned Irish official stating in private that this was a decision made by the Irish alone and which they then had to convince the EU and the ECB to accept.

The Political and Economics Chief Theodore S. Pierce in the Irish US Embassy in Dublin filed a report on discussions he had with three officials from the Central Bank of Ireland and the Financial Regulators office on the 6th of October as well as a conversation about the guarantee, shortly after it was announced, with Kevin Cardiff of the Department of Finance.

“Although the move did not win any friends across Europe, Cardiff said that there is a gradual realization in Brussels that each country should be allowed to tailor its response to local conditions. He characterized the Irish government’s discussion with EU officials as “positive” and indicated that the Irish solution would soon gain approval. In an aside, he pointed out that Irish Finance Minister Brian Lenihan and his British counterpart, Alistair Darling, had engaged in a very constructive exchange of views. Cardiff continued that the prevailing mood in Europe is that “large-scale failures just make things worse” and that he expected more Irish-like solutions. He warned, though, that the battle had just begun.”

The anticipation of similar ‘Irish-like’ solutions mirrors the claims published in Irish newspapers after the announcement that there would be many imitators of this ‘innovative’ strategy. But while state guarantees are not an unusual mechanism in a financial crisis there is a considerable difference to the type of state guarantee that Ireland provided[l] and the decision itself changed how governments responded to the crisis. German’s Chancellor Angela Merkel, having condemned the Irish decision on the 30th of September announced a German government guarantee the following day stating “We’re saying to savers that their deposits are secure.”[li] Just prior to this Peter Bowe was singing Deutschland Uber Alles into the phone during a discussion about the movement of German deposits into Anglo Irish Bank[lii]. Denmark too brought in a broad guarantee.

Of the guarantees that were brought in, however, Ireland’s was the only one that was unlimited and secured old, that is ‘dated subordinated’ debt. The co-ordinated response which had been discussed in the early part of September was to put in place guidelines for a specific limited guarantee which would be followed by all EU governments. The details of this were agreed by the ECOFIN ministers in October and the final guidelines published by the ECB later that month.

These included a guarantee of deposits, but not an unlimited one, and not one that included dated subordinated bonds or interbank deposits. Similarly all the guarantee schemes brought in by other European governments covered only new debt created after the guarantee. Old debt was considered to be part of a bank’s capital ‘buffer’, which is the first to go when problems refinancing debt in a bank occurs[liii].

As the ECB guarantee guidelines outline, its purpose was to ensure that ‘solvent’ banks were able to maintain access to liquidity.

Recommendation 1 states[liv]:

“The framework for the granting of government guarantees on bank debt should aim at: (i) addressing the funding problems of liquidity-constrained solvent banks by improving the functioning of the market for bank debt of longer term maturities; (ii) preserving the level-playing field among financial institutions and avoiding market distortions; and (iii) ensuring consistency with the management of liquidity by the Eurosystem and with its operational framework, so as not to impair the implementation of the single monetary policy.”

We now know that by allowing for the use of Emergency Liquidity Assistance to cover the loss of deposits when it became clear that Anglo Irish Bank was insolvent post-guarantee, the ECB broke its own rules by providing liquidity support to a bank that was ‘insolvent’.

But arguably that was only done because the Irish government brought it within a blanket guarantee in the first place. As Belgian economist Paul DeGrauwe’s points out[lv], if a country within a currency union appears likely to default (and the Irish sovereign had guaranteed Anglo so if ELA was not provided they would be forced to) there will be a spill-over effect in the rest of the currency union. The cost of the ECB breaking the rules for Anglo came in 2010 once the original guarantee ran out and the slow bank run in our insolvent banking system resumed.

But to return to the ECB guidelines on government guarantees. In Recommendation 2 it explicitly states.

“With regard to the scope of the bank debt guarantee scheme, government guarantees on interbank deposits should not be provided.”

This was published in the weeks immediately after the Irish government had done just that.

Why Protect Subordinated Debt and Interbank Deposits?

Throughout the Honohan report on the Banking Crisis the phrase “the problem was seen as one of liquidity” is repeated as an expression of the thinking among those officials who were observing the loss of deposits in the Irish banks throughout 2008 and the sudden drop in Irish banks’ share prices that summer. They also thought this, reportedly, when they were monitoring the Quinn CFD affair with Anglo funding the purchase of its own shares[lvi]. They apparently thought it too when looking at Anglo’s back-to-back loans with Irish Life and Permanent and the reciprocal loans with banks such as Merrill Lynch and Hypo RE throughout 2008[lvii]. All of this, against the background of a collapsing property market, expressing prices that had long been considered to be far too high for an economy of Ireland’s size, only indicated that it was just ‘one of liquidity‘.

Kevin Cardiff, in his conversations with the US embassy official said that all credit virtually dried up on the 29th of September. What if the crisis for the banks that week, with the exception of Anglo, was not the closing off of access to funding but the loss of ‘cheap’ funding?

A 2010 study the market during this turmoil has shown that the collapse of Lehman Brothers did not lead to a ‘freezing’ or drying up of interbank lending[lviii]. Rather ‘rates spiked and loan terms became more sensitive to borrower risk’. However, ‘mean borrowing amounts remained stable on aggregate‘. The riskier the institution the more expensive was the funding of that institution. Around the world, governments acted to reduce this cost by providing guarantees and injecting liquidity into banks. In most cases, however, the rate that banks were charged depended on the collateral that they used. The rate a bank was charged, therefore, depended on the quality of their collateral.

A country on the other hand still had its sovereign rating, the rate at which it could borrow money. The differences between Ireland in 1985 and Ireland in 2008 were many. But perhaps, in this context, the greatest was the rate at which the country could borrow. In 1985 it was prohibitively expensive, as Ireland’s debt to GDP ratio at 118 percent and was by far the biggest element of government spending. They provided an unlimited guarantee for AIB debts anyway. In 2008 it was at an historic low of 25 percent.

The decision to guarantee all deposits and subordinated debt was put in place to reduce the high cost of interbank lending for all Irish banks by replacing a rate that suggested the investment was high risk with a rate that at a stoke made Irish banks appear ‘safe’ to invest in. However what the banks needed, as far as they were concerned, was maintaining their access to cheap short-term funding, including securities and subordinated debt. This is the source of funding upon which they relied. And this came not from European banks, but from the UK and US money markets.

A 2007 IMF working paper on the venerability of Irish banks to contagion within the financial markets[lix] points out that the three main Irish banks, AIB, Bank of Ireland and Anglo Irish Bank, had one of the highest loan-to-deposit ratios for industrialised countries.

“…increased reliance on wholesale funding in recent years, including interbank borrowing and capital market issues, is another potential source of international interdependencies. The average loan-to-deposit ratio for Ireland exceeds 150 percent, one of the highest for industrial countries. All of the major Irish banks are dependent for funds on the interbank and securities markets—AIB and BoI fund about 40 percent of lending in the market, while the market funding requirement for the Anglo IB is at about 35 percent. The overwhelming bulk of both nonresident interbank borrowing (83 percent) and debt securities issued and held by nonresidents (83 percent) in 2004 were vis-à-vis non-Euro area residents.

In September 2013, the Central Bank of Ireland published a highly significant report as part of its Economic Letter Series[lx] which used Bank of International Settlements data to find out exactly where the surge in foreign funding flows to the Irish banking system between 2002 and 2008, the ‘key driver of the credit boom in Ireland’, came from.

The authors of the report found the results ‘surprising’.

The top three lending locations to pre-crisis Irish banks were mainly from the UK, followed by the US and offshore centres[lxi].

“Throughout the 2000s the UK remained the predominant source of foreign funding for the Irish banking system, representing 77 per cent of foreign funding by mid-2008. After the UK, creditors in the US and off-shore centres accounted for the most substantial shares of foreign funding at 13 and 5 per cent, respectively, by mid-2008.”


“Germany was the source of approximately 11 billion or 25 per cent of total foreign funding at end-2002. Thereafter, absolute German funding fell quite quickly to below 5 billion, or 5 per cent, by end-2006 and to below 1 billion or 1 per cent by end-2007. Pfandbrief banks headquartered in Ireland accounted for nearly eighty per cent of this funding.

The relative unimportance of other euro area countries as a source of the Irish banking system’s foreign funding is surprising.”

This was not about the protection of the investment of German banks or due to the reduction of ‘currency risk’ and the shrinking of interest rates between European banks after 2003 following the launching of the Euro. It was about the expansion of credit from the shadow banking system which really began to accelerate after 2000[lxii].


As the chart above demonstrates, the increasing reliance on the international interbank market became noticeable from the beginning of 2000s and is attributable ‘to increased inflows of foreign retail deposits from the non-bank sector’ (page 3: Coats & Everett, 2013).

The Merrill Lynch report provided to the government on the 29th of September 2008 also indicated that funding was provided mainly from the UK and US money market: at ‘Anglo the majority of equity and debt investors are Irish, UK and US institutional holders’.

The reason for the blanket bank guarantee, therefore, was two-fold:

  • By including interbank deposits and subordinated debt keep borrowing cheap, despite the enormous risk
  • Prevent Anglo Irish and Irish Nationwide from going under at all costs

At the time the guarantee was provided, 97 percent of deposits were covered. The size of the remaining three percent, (that is, the size of deposits greater than 100,000 euro) indicates how much Irish banks were rolling over debt through short-term interbank borrowing. The objective, from the bank’s perspective, was to keep things going with business as usual. It was 1985 all over again.

“The state guarantee allows the six lenders to borrow more freely and more cheaply for short-term funding that had become scarce due to the global credit crunch.

Denis Casey, chief executive of Iris Life and Permanent, said the guarantee would allow Permanent TSB and the other Irish banks covered to borrow more cheaply.

The oxygen supply for Irish banks was being cut off and healthy banks were starting to gasp for breath. This guarantee turns on the oxygen supply.” [lxiii]

‘You Make Investments…’

We are freelance broadcasters and clearly we have to look after our own pensions and our own futures, so you make investments,” “They look good at the time, but they didn’t turn out so well. So yes, I was hit hard, but not ‘holed below the water line’. I’m not sinking.

Broadcaster Pat Kenny, Aug 2013

Some of the investments that Pat Kenny made over the years included a hotel suite in the Ritz Carlton worth a reported 2m euro. He was also an investor in the Conduit partnership and invested €600,000 in the Four Seasons Hotel in Budapest, Hungary[lxiv], and well as being an investor in another well-known property investment company, the Lucy Partnership. Gay Byrne and Marian Finucane also invested in property and were customers of Anglo Irish Bank and Irish Nationwide[lxv]. It is not they are (or were) RTE broadcasters that is important. It is simply that because they work(ed) for a public broadcaster we know that they are paid very well, and as such are members of a relatively small group of Irish people known as high net worth individuals.

In June 2013, the Barclays Wealth Insights report provided some insights in to what high net worth individuals in Ireland do with their money:

“Irish high net worth individuals are likely to hold the majority (55%) of their wealth in property, more than in any other country globally. Only 2% of wealth is held in business/entrepreneurial interests while 18% is held in cash, 16% in investments and 7% in tangible assets and collectables.”

When it comes to the speed of wealth creation Irish HNWIs take longer than their European counterparts to accumulate their wealth, with 54% saying that it took over 30 years to accumulate the majority of their wealth compared to 35% globally.”[lxvi]

Ireland’s wealthy, more so than any other country, try to increase their wealth by investing in property.

Investment in property is considered to be ‘unproductive’ capital and the investors themselves are described as being involved in ‘rentier’ behaviour. It’s characterised as unproductive because nothing has to be added to the asset for it to provide a return or a profit for the investor. Two acres of unused land in the middle of an urban landscape, surrounded by flats and offices where the homes that had existed are demolished in anticipation of development could remain an empty space and an eye sore for local inhabitants for a decade. The land could change hands over that time, or be used as collateral backing the creation of more credit and the formation of new debt. The potential future value of that collateral would also be monetised as it would be based on the expected rising price of property in the area. This rise in prices could be boosted by government policy. They could announce plans to provide additional transport links, better road access, or improving utilities. They could also offer tax breaks, so that investing in the designated area would ensure that the investment would be deducted from the investors overall tax bill, allowing for the avoidance of tax on other profits earned through unproductive investment elsewhere. Such a scheme also boosted prices as the investors could sell on the tax breaks with the properties.

Derek Quinlan, the former Revenue inspector and property developer, for example, built up much of his business by selling tax-based property investments to high-net-worth investors like Pat Kenny through entities like the Conduit and Lucy Partnerships[lxvii]. Typically he would separate the property assets from its tax allowances and sell on the tax breaks to investors who needed them. In effect, these high net worth individuals were buying pure tax allowances, and had no real ownership or interest in the property itself[lxviii].

Investors could also reduce capital gains tax on profits from the sale of land, or allow certain forms of unproductive investment being included within the corporation tax regime, which may have been lowered to incentive investment. Despite such generous incentives these types of investment do not generate employment, expand business, create demand for services or increase the purchase of plant or machinery which may provide additional income in the economy.

It is a well-established fact that successive government refused to implement the recommendations of the Kenny Report (1974)[lxix], which stated that the price of land should be capped at its agricultural value plus a small percentage to prevent price speculation on land banks. In July 24th 2013 the corruption trial involving businessman Jim Kennedy and three former councillors collapsed because Frank Dunlop, lobbyist for Jim Kennedy, who paid local councillors to approve the rezoning of agricultural land in Carrickmines, South Country Dublin for urban development, collapsed due to Dunlop’s medical condition[lxx].

In 1984 the Minister for Finance, Alan Dukes stated that he felt that reports of uncollected taxes were “vastly exaggerated”[lxxi]. In 1986 DIRT on savings accounts was introduced. In 1999, successive ex-Ministers of Finance expressed their shock at the extent of DIRT tax evasion the banks facilitated through the use of bogus non-residency accounts during the previous 12 years being investigated by the Public Accounts Committee, an investigation that only happened because of the emergence of newspaper reports in 1998. In 1997 the Minister for Finance at the time Charlie McGreevy announces legislation, planned by the previous administration, to reduce corporation tax to 12.5% by 2003, the year that the Euro was to come into being. The greatest effect of the reduction in corporation tax was the incredible reduction in the tax liability for Irish companies. Up to that point only Irish companies had to pay 38% corporation tax. Historically, foreign financial services and manufacturing companies paid between 0 and 10%.

The massive boost in profitability for Irish companies (and for individuals such as the freelance broadcasters Pat Kenny, Gay Byrne and Marian Finucane who earned their income through a holding company) coincided with a period when Irish banks quadrupled in size from €200 billion to €800 billion between 2003 and 2009. As we now know, this growth was directly funded by the shadow banking system[lxxii].

What Irish companies were using their additional surplus profits for was property speculation rather than expanding their businesses[lxxiii]. We have a tendency to think that the property bubble has only to do with houses and homes. But if anything the rising cost of typical family homes was only the backwash to the much bigger wave of speculation that occurred with commercial property. Banks often encouraged business to use their cash flow and assets to purchase property. They also chased high net worth individuals to invest in their private banking vehicles such as Anglo Irish Bank Private Bankers[lxxiv] which sought out clients with 1million euro or more to invest[lxxv]. We know of multiple million euro loans taken out by developers, solicitors and ‘enterprising’ individuals using the same assets as collateral or which lacked documentation or even legal title.

The 2008 blanket bank guarantee, which propped up the non-systemic financial institutions Anglo Irish Bank and Irish Nationwide, as well as temporarily stabilising AIB’s and Bank of Ireland’s house of cards, was ultimately put in place to protect the class who had most to lose. Alternatives were not considered because it was all about limiting harm to those directly exposed to the consequences of their folly. So, yes, they were hit hard, but not ‘holed below the water line’. The guarantee stopped them from sinking. Having grabbed the life rafts and with access to the considerable resources of the state to keep themselves afloat in the following years, that fate was reserved for everyone else.


[i] Although the publication of the tapes in 2013 created a great deal of controversy they provided no new information on what happened.

[ii] Nine failures of the blanket bank guarantee – and its sole success, Fintan O’Toole, Irish Times Sept 24th 2013

[iii] Freefall, RTE documentary first aired September 2010. In the documentary Brian Lenihan claimed that he received a voicemail message from JCT stating that he must ‘save our banks at all costs’.

[iv] Since 2008 the collapse of in Labour Share of National Income is the most dramatic of those in the EU15. Capital’s share in profits recovered after 2008, while employees earnings did not. The decline in Labour share is complicated by the prevalence of Transfer pricing practices by MNCs using Ireland to book profits and avoid tax.

[v] Already, 66% of tax revenues at this time were going to pay interest rates on state borrowing

[vi] Irish Times, Why Insurance Firm has been acquired” March 16, 1985.

[vii] Immediate liquidation would have meant that AIB would have been legally forced through an ‘unlimited guarantee’ it had provided previously to pay out the compensation. Maev Ann Wren, London Underwriters Reject ICI Guarantees, Irish Times, 4th April 1985.

[viii] Maev Ann Wren, 4th of April 1985

[ix] Contradictions in the State’s Position Exposed – Maev-Ann Wren, Irish Times, Dec 28th 1985.

[x] Profits at AIB show slight fall despite problems at ICI, Irish Times, May 23rd 1985, Padraig O’Morain

[xi] Taxpayer forced to pick up the tab for AIB failure, Brendan McGrath, Dec 11 1992. The 120 figure was based on ICI’s ‘net’ position and didn’t account for the fact that some of the reinsurers might refuse to pay for claims that they’d agreed to cover, a problem as most of ICI’s claimed were reinsured.  This was a concern raised by AIB when they were assessing potential losses in the business as early as Dec 1984 (Maev Ann Wren, If deficit is 500m then liquidation is the likely option, 5th of April 1985 – IT). By 1992, the administrator Billy McCann was still pursuing reinsurers who were failing to meet their obligation (McGrath ibid, IT 1992 cited above).

[xii]  Based in 1993 values

[xiii] Jim Dunne, Courts to examine insurance debacle Oct 2 1993, Irish Times

[xiv] Pre-Budget Submission 2003 – Irish Congress of Trade Unions

[xv] These loans were paid back to AIB with the interest charges by the Irish state in 2000. “The Central Bank confirmed yesterday that AIB will be repaid £70m under the terms of an agreement reached to cover the costs associated with the 1985 bail-out of the Insurance Corporation of Ireland (ICI). The payment will boost the bank’s bottom line profit this year, and will come as a surprise to many who believed that AIB did not stand to gain from the successful administration of the insurance company.” “AIB to recoup £70m ICI loan windfall”, Irish Independent, Pat Boyle, 7th Sept 20000

[xvi] There was also the handing over of the ICI’s life assurance arm which remained highly profitable for the nominal fee £5 and a portion of the proceeds from the lawsuit taken against the auditors Ernst and Whinney. See Insurance (Miscellaneous Provisions) Bill, 1985: Second Stage (Resumed). Thursday, 28 March 1985, Houses of the Oireachtas

[xvii] Irish Independent, AIB to recoup £70m ICI loan windfall, 7th of Sept 2000

[xviii] The Case of AIB and ICI 1985–1993: The Measurement and Disclosure of a Liability – Derry Cotter, IRISH JOURNAL OF MANAGEMENT Winter 2012

[xix] Purchase of 50,000 AIB shares to be queried, July 6th 1986, Irish Times.

[xx] Other options available to resuscitate AIB, Antoin Murphy, Opinion piece, Irish Times, 27th of March 1985.

[xxi] Rea ‘very weary of this tax thing’, Irish Times, Fergus Pyle, Irish Times, 16 Nov 1984

[xxii] As Padraig Yeats explains : “No subsidies are given to Irish shipbuilders/owners, unlike most maritime countries and Irish Shipping has been specifically debarred from borrowing badly needed capital from State lending institutions like the Industrial Credit Corporation. As a result it owns crippling foreign debts.” Padraig Yeates, No Such thing as a cheap shipping fleet, Irish Times, Jan 18th 1984

[xxiii] Oceanbank Developments, the Irish Shipping subsidiary that held a substantial number of AIB shares as part of the purchase of ICI in 1983, however, was not liquidated.

[xxiv] No less an ideologue than Jean-Claude Trichet claimed that Ireland’s ‘fiscal consolidation’ from 1987 was responsible for the eventual upturn: “In this respect, the dramatic acceleration of output in Ireland in the post 1987 period can be associated with a vigorous and successful project of fiscal consolidation starting in 1987” Keynote address by Jean-Claude Trichet, delivered at the Whitaker lecture organised by the Central Bank and Financial Services Authority of Ireland, Dublin, 31 May 2004.

[xxv] The average industrial wage rose by over 14% in the period 1986–89, or an annual average of 4.6%. See Stephen Kinsella, Is Ireland really the role model for austerity? in Austerity: Making the same mistakes again – Or is this time different? Volume 36 Issue 1 January 2012, Cambridge Journal of Economics

[xxvi] ‘The Way Forward’ was the campaign slogan for Fianna Fail in the November 1982 election. See Irish Election Literature

[xxvii] Lawson Criticised for Joining GPA Board, Irish Times, Feb 7th 1990

[xxviii] Executives lose huge paper fortunes, Irish Times, Jan 18th 1993. Fitzgerald’s stake went from being worth $500,000 to just $25,000.

[xxix] Kenneth Surin, Standing Schumpeter on His Head: Robert Brenner’s Economics of  Global Turbulence, Comparative Studies of South Asia, Africa and the Middle East, Vol. XIX No. 2 (1999) page 56. See also, G. Ingham, On the Nature of Money (2004).

[xxx] Robert Brenner, New Left Review, 43, January-February 2007

[xxxi] European Commission working paper on the prudential supervision of credit institutions and investment firms, 2011. Data from the ECB – Note, the only other country with a larger banking sector relative to its GDP was Luxembourg.

[xxxii] When Irish Eyes Are Crying, Michael Lewis, Vanity Fair, March 2011

[xxxiii] Henry Blodget, Here’s What Really Happened With That Merrill Lynch Analyst Who Was Fired After Pissing Off Irish Banking Clients, Business Insider, Feb 9th 2011

[xxxiv] Mike Phillips, Property Week, Merrill Lynch warns of meltdown in Ireland, May 30th 2008 (accessed August 2013)

[xxxv] Ireland had long featured in Economist articles on the international property bubble. In 2005 The Economist wrote: “Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries”. As an indication that international lenders believed that Irish banks were a considerable risk in July 2008 as bank share prices were falling through the floor, Donal Forde of AIB made a point of saying at an Oireachtas Finance committee hearing that the “bank would not amend its lending rules because it was conscious of the need to maintain the confidence of the international system and will do nothing to “diminish the standing of the Irish banks”. Both the bank and the markets knew the gig was up. Irish banks faced with their biggest test in a generation, Irish Times, 03 July 2008

[xxxvi] Did the ECB Cause a Run on Irish?Banks? Evidence from Disaggregated Data, Gary O’Callaghan, Dubrovnik International University, February 2011

[xxxvii]  The collapse in complex derivatives, the source of the problems in the US stock market moved swiftly to Europe, with Deutsche Bank holding the single largest derivative exposure in the world See page 87 of Deutsche Banks 2012 Financial Report and Zerohedge Apr 29, 2013

[xxxviii] Available from

[xxxix] Irish Times, Simon Carswell, Oct 2, 2008

[xli] Financial market turmoil pushes interbank rates higher, Guardian, 29th September, 2008.

[xlii] Abuse the bank guarantee, don’t get caught – David Drumm, Irish Independent, 25th of June, 2013.

[xliii] Evening Herald, 02 OCTOBER 2008 Britain bleats to Lenihan as billions flood into our banks

[xliv] The failure of the Royal Bank of Scotland: Financial Services Authority Board Report, 2011


[xlvi] OPINION OF THE EUROPEAN CENTRAL BANK of 3 October 2008 at the request of the Irish Minister for Finance on a draft Credit Institutions (Financial Support) Bill 2008 (CON/2008/44)

[xlvii] EU plans to mount collective response to crisis in tatters, Guardian, 5th of Oct 2008

[xlviii] “The Greek government, under pressure from Brussels rowed back from its decision to mimic the Irish.” The Guardian, Friday 3rd of October. World economic crisis: France moves into recession –

[xlix] WikiLeaks cables: Ireland ‘a bit optimistic’ on banks before bailout, The Guardian, Monday 13 December 2010

[l] In a widely cited 2001 study of banking crisis across 40 countries, Patrick Honohan found that blanket bank guarantee could cost between 40 and 55 percent of a countries GDP which is the same range as current estimates of the Irish bailout. Banking economist Pat McArdle estimates it is 40%. The Euro Crisis, Refinancing the Irish Bailout, IIEA Working Paper, 2012 (page 3). However, even blanket guarantees as the literature defines them do not include subordinated debt. “In terms of coverage, it is usually comprehensive—including foreign and domestic currency liabilities—but it commonly excludes subordinated debt (except the recent case of Ireland which includes dated subordinated debt)”  The Use of Blanket Guarantees in Banking Crises, Luc Laeven and Fabian Valencia, IMF Working Paper WP/08/250 October 2008

[li] The Guardian, Oct 5th, 2008

[lii] Abuse the bank guarantee, don’t get caught – David Drumm, Irish Independent, 25th of June, 2013.

[liii] The Irish Banking Crisis, Regulatory and Financial Stability Policy 2003-2008, A Report to the Minister for Finance by the Governor of the Central Bank, Patrick Honohan May 2010 “The scope of the Irish guarantee was exceptionally broad. Not only did it cover all deposits, including corporate and even interbank deposits, as well as certain asset backed bonds (covered bonds) and senior debt it also included, as noted already, certain subordinated debt. The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options.”

In an earlier report on the banking crisis (ERSI 2009) Honohan writes:

“No public indication has been given that the authorities gave serious consideration to less systemically scene-shifting – and less costly – solutions.

For example, they might have provided specific state guarantees for new borrowings or injections of preference or ordinary shares – approaches that were widely adopted across Europe and the US in the following weeks.”

[liv] Recommendations of the Governing Council of the European Central Bank on government guarantees for bank debt (20 October 2008)

[lv] Paul DeGrauwe, The Governance of a Fragile Eurozone, April 2011,

[lvi] Regulators ‘conspired with Anglo’ to prop up share price, Irish Times, Wed, Jul 17, 2013


[lviii] What happened to US interbank lending in the financial crisis? Gara Afonso, Anna Kovner, Antoinette Schoar, 26 April 2010 Vox EU “Many commentators have argued that interbank lending froze following the collapse of Lehman Brothers. This column presents evidence from the fed funds market that, while rates spiked and loan terms became more sensitive to borrower risk, mean borrowing amounts remained stable on aggregate. It seems likely that the market did not expand to meet additional demand for funds.”

[lix] External Linkages and Contagion Risk in Irish Banks, Elena Duggar and Srobona Mitra, IMF Working Paper WP/07/44

[lx] Profiling the Cross-Border Funding of the Irish Banking System, Dermot Coates and Mary Everett, Economic Letter Series Vol 2013, No. 4, Published Sept 2013 – Accessed 01/10/13

[lxi] Derek Scally, Irish Times, March 27th 2013, How much European, particularly German, money was in the Irish economy when the music stopped? Because Ireland created covered bond legislation for German banks in 2001, in effect making German subsidiaries like Depfa Bank in the IFSC into ‘Irish banks’ under Irish law, data on the movement of deposits into and out of these institutions were collated by the Central Bank of Ireland as Irish banking data. Thus Bundesbank data relating to Irish banks showing the 575 per cent increase in 8 years of deposits from German sources “is, the Irish Central Bank warns, distorted by large capital flows of German banks to and from their IFSC subsidiaries”.

[lxii] Shadow Banking Regulation, Tobias Adrian & Adam B. Ashcraft, Federal Reserve Bank of New York Staff Reports No. 559, April 2012

[lxiii] Simon Carswell, Irish Times, Scheme Designed to Protect Banks First and then Ordinary Depositors, 2nd Oct 2008

[lxiv] Along with fellow ex-Late Late Show host Gay Byrne, who invested 1 million euro


[lxvi] ‘Irish high net worth individuals most likely to hold wealth in property, report reveals’, Finance Dublin, June 2013

[lxvii] Quinlan, a property portfolio investors for many high net worth individuals in Ireland was also involved in the Glass Bottle site consortium financed by Anglo Irish Bank and personally owed the bank €300 million

[lxviii] Breakfast with Anglo, Simon Kelly(2010) p59


[lxx] See page 108 of the Kenny Report (1974) for a perfect description of what actually happened in Carraickmines.

[lxxi] Dukes says initiatives on jobs planned, Irish Times, March 1985

[lxxii] O’Callaghan, G. Did the ECB Cause a Run on Irish Banks? (2011) page 3

[lxxiii] The Superquinn Saga,

[lxxiv] Anglo used investors as ‘human shield’ to protect its interests, Irish Examiner, Oct 2012

[lxxv] Market mover: Cathal FitzGerald, Sunday Times, 2003