by Shane Ross
For years Higgins had called for nationalization of the banks. By June 2009 he had enlisted plenty of mainstream converts to his convictions. His views on the banks, once considered extreme, were no longer taboo.
George Lee – who had resigned as RTÉ’s economics editor only weeks earlier to enter politics – had meanwhile attracted an astonishing vote in the by-election in Dublin South, one of the most middle-class constituencies in Ireland. Lee, standing for Fine Gael, received more than 50 per cent of the vote and was returned on the first count, something not achieved in a by-election for over 30 years.
Lee would probably have been elected as an independent. He was a fresh, non-political face and he was an expert in the right subject at the right time. He had been a fierce critic of the government’s handling of the economy for many years, and he had been a thorn in the side of the banks. In 1998 he and his RTÉ colleague Charlie Bird had exposed an over-charging scandal at National Irish Bank.
Back in third place came Shay Brennan, son of the late government minister Seamus Brennan, the last Fianna Fáil TD for the area, whose death had caused the by-election. Shay Brennan was an unfortunate choice as Fianna Fáil candidate. Chosen by the party in the belief that a sympathy vote for a member of the deceased’s family would cushion the inevitable defeat, he disappointed from day one. Shay was a banker. Not only was he a banker, he worked for the most notorious bank in town – Anglo Irish.
A well-known broadcaster who had exposed a bank scandal was going head-to-head with a banker who worked in the most infamous banking joint in town. Banking abuses were not an overt election issue, but they lurked beneath the surface.
Shay Brennan rightly protested that he should not be blamed for the sins of Anglo, but the link made for uncomfortable explaining. During the by-election campaign it was pointed out that, as Minister for Transport, his father had appointed Anglo’s Sean FitzPatrick to the board of Aer Lingus. Seamus the elder had also appointed Tiarnan O’Mahoney, Anglo’s head of Treasury, to be chairman of the Pensions Board after he left the bank. Young Shay had worked in O’Mahoney’s Treasury Department.
George Lee had demolished another Fianna Fáil dynasty.
Many of those who backed socialist Higgins in the European elections voted for Lee, the free marketeer, in the by-election on the same day. Middle Ireland was in rebellion.
In a separate by-election, in Dublin Central, a third Fianna Fáil family brand took a blow. Maurice Ahern, the 72-year-old brother of former Taoiseach Bertie, was crushed into fifth place behind a left-wing independent winner, Maureen O’Sullivan. Fine Gael’s Paschal O’Donohoe, Labour’s Ivana Bacik and Sinn Féin’s Christy Burke all garnered more votes than Bertie’s big brother.
Maureen O’Sullivan carried the noble legacy of Tony Gregory, the independent TD for Dublin’s inner city who had died in December. O’Sullivan’s politics had yet to be given proper media coverage but her mentor, Gregory, had been a consistent critic of Ireland’s corporate swindles.
Two independents and a novice politician running under the Fine Gael flag had routed the government. (Fianna Fáil’s partners in government, the Green Party, were savaged too. They won no seats in Europe, failed to feature in the by-elections and lost 15 of their 18 seats in the local councils.) Ireland’s voters were sending a solemn message: their rulers had failed them on the economy. By extension they were returning a vote of no confidence in the banks, the builders, the social partners and the other powerful forces ruling Ireland.
Labour had a good election, winning a European seat in the East constituency through Nessa Childers, the daughter of a former President of Ireland. They won another in the South constituency with a thrusting young candidate, senator Alan Kelly. They gained 31 council seats – up to 132 from 101 in 2004. Higgins’s Socialist Party took six seats at local level, while the People Before Profit Alliance, another left-wing party, made a breakthrough with five seats. Elsewhere, left-leaning independents captured some of the spoils.
Ireland’s centre-right government had been hammered. This could not be ascribed to global economic conditions: elsewhere in Europe the opposite happened. Incumbent centre-right parties swept the board in Germany, France, Poland and Italy – and, in contrast to Ireland, Green parties had a good election in most European countries.
Despite the recession, voters in much of mainland Europe rallied to their governments. Not Irish voters. They punished their leaders.
Ireland’s electorate was slowly becoming aware that the Irish problem was different. Ireland was far worse off than the rest of Europe, for special reasons. At the time of the 2007 general election the electorate had swallowed the eternal-prosperity fantasy peddled by Fianna Fáil. They had voted the peddlers back into office. By 2009 they realized that the 2004–8 period was when the madness should have been halted, the time to tame the banks and the builders, the time to cool the economy.
Now the people knew the truth about what had been happening. The elections of June 2009 provided an opportunity to deliver a retrospective verdict on Bertie Ahern and Brian Cowen. They gave them the thumbs down.
In the European elections of 2004 Joe Higgins had trailed in with just 5.5 per cent of the vote. In 2009 his vote more than doubled to 12.4 per cent. Higgins attracted thousands of middle-class voters. The prosperous suburbs of Dun Laoghaire, even the residents of mansions in Ballsbridge, recorded number-ones for the man who had little sympathy for private property. Rich and poor alike were angry with Ireland’s oligarchs.
Foremost among the hate figures were Ireland’s bankers and developers. At the centre of the banking and building oligarchy was Anglo Irish Bank. Anglo was both a symbol of the darkest days and a tangible cause of the economic disaster. Voters had made the direct link. Taxes had been raised to save Anglo, and would be raised further. Expenditure had been cut to save Anglo, and would be cut further. Borrowing had been increased to save Anglo, and would be increased further.
A week before the election Anglo’s 2008 figures had been released. They showed that €308 million lent to the Golden Circle – the ten Anglo customers who had used the non-recourse loans to purchase 10 per cent of the bank’s shares and prop up the share price – had been written off by the bank, in recognition of the tanking of the share price.
Who paid the €308 million?
The taxpayer.
Another €31 million was written off for former directors of Anglo who could not repay loans.
Who paid the €31 million?
The taxpayer.
As thunderstorms broke all around him, Brian Lenihan launched a fightback. His earlier commitment in the April Budget to NAMA had helped to convince investors that the minister was now dead set against nationalizing AIB and Bank of Ireland. The government’s pillaging of Michael Somers’s national pension fund may not have been popular with pensioners at home, but it reassured global investors that Ireland was at least confronting the depth of the problems at the banks. Gradually the stock market regained a little composure. Overseas confidence in Brian Lenihan’s stewardship rose as he made more presentations to investor groups. In May and early June a tentative rally in Bank of Ireland and AIB shares lifted them both above the €2 mark.
Investors may have been picking up cheap bank shares in the hope that the banks would survive in one form or another; but the state of the real economy reflected the penal cost of the decision to bail them out with taxpayers’ money.
In early June Ireland’s credit rating was marked down for the second time in three months. Standard & Poor’s took a dim view of our prospects. A day after the European elections S&P lobbed in a grenade: it was cutting Ireland’s debt rating to a fourteen-year low. We were back to pre-Celtic Tiger levels. Worse still, S&P indicated that Ireland was on ‘negative outlook’, meaning that we were in danger of further falls.
Credit rating agencies have received justifiable stick in recent years because of their failure to spot the risk in the mortgage-based securities whose implosion sparked th
e credit crunch, and also their apparent reluctance to downgrade their big banking clients, but their influence on global markets remains strong, especially when they are rating nations rather than banks. On the international money markets Ireland’s cost of borrowing increased in response to S&P’s verdict. The adverse reaction on the bond markets to Ireland’s lower credit rating meant that future generations would be saddled with mountains of debt. S&P blamed the Irish banks:
We have lowered the long-term rating on Ireland because we believe that the fiscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected when we last lowered the rating in March 2009, and, consequently, that the net general government debt burden will also be significantly higher over the medium term.
Our nearest neighbour, the UK, still enjoyed an S&P rating of AAA – comfortably above our own – as did France, Germany, Sweden, Norway, Finland, Denmark, the Netherlands and Austria. Belgium, despite all its economic ills, was up there with a score of AA+. Ireland, with its AA rating, was marginally above Portugal and Italy; but they were awarded a ‘stable’ outlook while we were on ‘negative’ watch.
The situation at Anglo had deteriorated markedly since the last downgrade, just three months earlier. Ten days before the S&P statement it had emerged that the Irish government needed to find a fresh €4 billion for Anglo, on top of the other rescue packages for AIB and Bank of Ireland. Threats of huge liabilities in the event of a wind-up of Anglo were in the air; Brian Cowen stunned the Dáil with a figure of €60 billion. Anglo itself warned that it might need another €3.5 billion if property prices fell further.
Tiny as Ireland is in the context of the eurozone, the day after the country’s downgrading by S&P the euro took a bath. Several global foreign-exchange dealers claimed that the scale of the banking meltdown in Ireland was being felt on the big-ticket currency markets. On 11 June Brian Kim, a foreign-exchange strategist with UBS Bank, told me, ‘S&P’s downgrade of Ireland was a point of pressure on the euro in the following days. The downgrade caused a pull-back in the euro.’ And, even more ominously, ‘If the peripheral states have issues it will only underscore the divide between the larger and smaller ones.’ We were becoming a drag on the euro. Our European colleagues might not mind us being reckless at home, wrecking our own economy and impoverishing our people; but if little Ireland was pulling down Europe’s treasured currency the Merkels, Sarkozys and Berlusconis would not be amused.
Our status as good Europeans had already been greatly weakened: we had rejected the Lisbon Treaty; we had caused offence to our partners by going it alone on the bank guarantee; we had breached Europe’s rules on budget deficit limits by a country mile. The EU had been tolerant, giving us a derogation until 2013. At the same time we were drawing heavily on the European Central Bank to help our banks’ short-term requirements. Now our bankers’ wrongs were damaging the currency itself.
Europe has ways and means of dealing with errant nations. European leaders do not want any of the eurozone member nations to default on their debts. At the same time, if we continued to twist their tails in defiance of their rules we might find their support beginning to wobble.
The relative success of the rest of Europe in riding out the recession made a mockery of much of the rhetoric of Ireland’s apologists for the state of the nation. The ‘global’ recession excuse was for gullible home consumption, but was unsustainable. The glib line that the collapse of Lehman Brothers was a source of Ireland’s woes no longer fooled even the simplest soul. Our cover had been blown.
While Standard & Poor’s was downgrading the nation’s credit ratings, it was simultaneously reducing the ratings of our banks. The two were directly related.
The S&P report stated:
Our revised opinion follows the recent announcement by Anglo Irish Bank of losses at the upper end of S&P’s expectations as well as the government’s announced intentions regarding the scope of the operations of the new National Asset Management Agency (NAMA)… We believe the recently announced losses at nationalized Anglo Irish Bank Corp. highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support.
And the final sting:
We now believe that Ireland’s net general government debt could exceed 100 per cent of GDP over the medium term – a level that is higher than for Ireland’s ‘AA’ rated Euro-zone sovereign peers.
We were on the way to a further downgrade.
S&P was at odds with more cheerful sentiment in the stock markets. At the beginning of June, while Bank of Ireland and AIB shares were enjoying a happy rally, brokers in Dublin were reverting to type, drumming up business, suggesting that S&P were ‘behind the curve’, that a significant rally was in full swing. The usual form.
The bounce in bank shares was explained by the diminishing likelihood of the nationalization of AIB or Bank of Ireland, real-live possibilities when they hit rock bottom in early March. The rally was no more than a blip. Even in mid-July the prices, while way off the floor, were still as much as 90 per cent lower than their February 2007 peaks.
Just as Ireland was deemed a riskier credit bet than almost every other country in Europe, Ireland’s banks trailed even the troubled UK banks in the credit ratings. Comparisons with Spain were even more depressing. Spain, often compared with Ireland as a bubble economy with a similar property boom-to-bust story, had no such banking problems. S&P rated Spain’s two biggest banks – Santander and BBVA – with ‘AA’ rankings, better than the top UK and French banks.
The Spanish escape did not provide any cause for hope in Ireland. Spain had always been ready for the rainy day. During the years of its property bubble the Spanish financial regulator had forced the banks to put money aside for the bad times. As a result the property bust failed to plunge Spanish banks into the same life-or-death battle against bankruptcy as Ireland’s. Spain had behaved responsibly, and now its banks were expanding into foreign countries, buying up troubled institutions at rock-bottom prices. The lesson was chilling.
Despite the blanket government guarantees, despite the recapitalization programme, despite the nationalization of Anglo, despite the fanfare around NAMA, Ireland’s banks were still low down the European pecking order. At the beginning of June Anglo, AIB and Bank of Ireland were still regarded as the riskiest trio in the eurozone.
The possibility that Ireland might default on its sovereign debt was the elephant in the room at the Central Bank, the Department of Finance and the cabinet table. It was whispered in the corridors of Leinster House, but even the parliamentary Opposition was reluctant to spell it out in the Dáil. Such talk was considered damaging to the nation. Diehard opponents of the government baulked at denouncing the party in power for having spent the state into near-bankruptcy.
That did not stop an immediate opposition motion of no confidence in the Dáil following the series of government defeats at the polls. The government was reeling after its landslide losses. The Greens were under pressure, losing popularity because of their alliance with Fianna Fáil and facing the likely loss of all six of their Dáil seats if the government fell and an election was called. The smaller party in government held firm, along with a cabal of unhappy Fianna Fáil backbenchers and a handful of pro-government independents. The two governing parties agreed to consider a review of their joint programme.
The vote of no confidence was defeated by six votes. There were no defections from either government party. The political ship was steadied as the Cabinet set its sights on the political sanctuary of the summer recess.
Lenihan was meanwhile filling some of the vacancies in the banks. In the early days of June it was announced that Richard Burrows was to be replaced as governor of the Bank of Ireland by Pat Molloy. Another oligarch was back.
Lenihan had been influential both in bringing an end to Burrows’s reign and in the appointment – or the restoration – of Molloy. Molloy was a former Bank of Ireland
lifer. He was now seventy-one, returning to old pastures, paraded by his cheerleaders as the safest pair of hands in the business.
Molloy’s competence was not in question. Untouched by scandal, his tenure as a Bank of Ireland director had ended just before the property madness took off. But the appointment hardly bolstered the drive for a new image for the wounded bank. The combination of Molloy as chairman and Boucher as chief executive sent out the wrong message: that nothing had changed at the Bank of Ireland.
The almost universal approval from official Ireland for Molloy’s appointment should have acted as a warning sign. Mainstream media fawned at the return of the old banker. They never stopped to ask if the appointment of a career banker as governor was appropriate. Banking at the Bank of Ireland was Richie Boucher’s business. The Bank of Ireland had set its face against putting bankers in the chair: Burrows was a drinks magnate, his predecessor Lawrence Crowley was an accountant, Howard Kilroy was a paper trader and Louden Ryan an academic. For sound corporate governance reasons top bankers do not take the chair at top banks. Anglo’s Sean FitzPatrick was the only other recent example of this route to the chair. Although the eleven-year gap since his departure as chief executive make Molloy’s case very different from FitzPatrick’s, Molloy was very much a Bank of Ireland insider. He had even taken the well-trodden directors’ route between the boards of Bank of Ireland and CRH, joining Tony Barry, David Kennedy and Howard Kilroy among those who had done that double.
If Lenihan wanted Molloy’s wisdom, it is puzzling why he was not installed at AIB, where he owed no past loyalties.
After news of Molloy’s appointment had leaked, the Bank of Ireland made it known that its own nomination committee had been thinking along exactly the same lines: Molloy had been top of its list of candidates to succeed Burrows as governor. Under the recapitalization deal Lenihan was now entitled to appoint 25 per cent of the board. Molloy headed his list of nominees. The minister, the Department of Finance and the board of the Bank of Ireland were – not for the first time – all in agreement. Face was saved. At the AGM on 3 July Burrows handed over the governorship to Molloy.
