by Conor McCabe
When asked as to how much of a discount the government would seek on the toxic loans, Lenihan replied, ‘we cannot in this particular exercise show you our set of cards today. We wait to see their [the banks’] position but we have to protect the taxpayer in the interest of the State.’105 Davy Stockbrokers suggested a discount of 15 per cent on the book value. ‘This would involve the State paying €76.5 billion for €90 billion in bank loans,’ said The Irish Times, ‘or roughly 1.4 times the national debt of the State.’ In the Dáil, Enda Kenny asked ‘how much does the government expect the Irish taxpayer to have to pay for the acquisition of dodgy debts to banks? … The government is asking us to give it another blank cheque.’
Shares in both AIB and Bank of Ireland fell sharply on news of the NAMA plan, while the credit rating agency Fitch stripped Ireland of its top AAA rating, ‘citing the heavy toll on the public finances from the economic downturn’. Ireland’s GNP contracted by an unprecedented 11.9 per cent in 2009, while GDP contract by 7.1 per cent. Yet the Minister’s focus was on ensuring that speculators got a good deal for their loans, and that the banks remained in private hands.
One week after the NAMA announcement, an article appeared in The Irish Times which was signed by twenty economists working in Irish universities.106 Entitled, ‘Nationalising banks is the best option’, it set out to challenge the logic behind NAMA and to propose an alternative solution to the banking crisis. The economists noted that international financial regulations require that banks hold certain levels of capital in order to stay in business. The deepening recession meant that the amount of bad loans on the banks’ books would increase, thereby requiring the banks to attain capital in order to keep regulatory levels of capital in place. ‘The highest grade and most desirable form of capital is ordinary share capital’, wrote the economists, ‘and in the current circumstances the Irish government is the only conceivable investor willing to provide this capital.’
The NAMA proposal – to buy loans at a discounted price as a means of recapitalising the banks – has been suggested to carry an inherent contradiction. The larger the discount on the loans, the greater the need to recapitalise the banks. Every cent it saved on the loans was simply one more cent to inject into the banks via State (rather than NAMA) recapitalisation. ‘There is thus a fundamental contradiction in the government’s current position,’ read the article. ‘The government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership. These three outcomes are simply incompatible.’ Furthermore, by trying to achieve all three at once, it would end up achieving none:
A Government that needs to be seen to purchase the bad debts at a reasonable discount and that does not want to take up too high an ownership share may end up skimping on the size of the recapitalisation programme. Thus, rather than create fully healthy banks capable of functioning without help from the State, the process may continue to leave us with zombie banks that still require the state-sponsored life-support machine that is the liability guarantee.
The economists proposed an alternative: the nationalisation of the banking system. ‘We do not make this recommendation from any ideological position,’ they said, lest it be thought that they harboured any left-wing views. ‘In normal circumstances, none of us would recommend a nationalised banking system … However, these are far from normal times, and we believe that in the current circumstances, nationalisation has become the best option open to the government.’ They believed that nationalisation would bring transparency to the banks, mainly because ‘The Government would own both the [asset agency] and the banks, so the price would hardly matter’. There would be no need to rob Peter to pay Paul. The separation of toxic assets from the banking system was defended by Dr Bacon and the government as necessary in order to keep stock market listing and market monitoring functions in place. However, as the economists pointed out, ‘The experience of recent years is one that would have to cast doubt on the ability of markets to effectively monitor financial institutions’.
Towards the end of the article, the economists touched upon what they probably believed to be the real reason behind NAMA, but were too cautious to explicitly state out loud. ‘The Government’s plans seem likely to keep in place the current management at our biggest banks,’ they said. ‘It would be difficult to avoid claims of crony capitalism and golden circles were billions of State monies to be placed into the banks with minimal changes in their governance structure.’ Nationalisation, on the other hand, would provide a clean break with the dubious practices of the past:
Nationalisation provides the opportunity for a fresh start for Irish banking. The State should run the temporarily nationalised banks as independent semi-state operations headed by highly independent boards of senior figures of the upmost integrity. Executives for these banks should be sourced through an international search, and remunerated accordingly.
These executive boards should be charged with a clear mandate to improve risk management practices, restore the brand image of Irish banking and finance, and return the banks to private ownership in a reasonably short time frame, for as high a stock price as possible.
This would certainly see substantial changes in senior management and board members in these banks, and allow for a rebuilding of the reputational capital of these institutions.
Therein lay the rub. Whatever its inherent contradictions, and the way that those contradictions damned it to failure even before it began, NAMA would achieve one thing: the decisions surrounding Irish banks would remain the preserve of Irish bankers. This was a gentlemen’s club, one that had used the Irish economy as it had seen fit for the past eighty years, and it was not about to be dictated to by anyone. This was about power; those who had it had no desire to hand it over, and the Fianna Fáil/Green coalition ensured that there was no need to do so. The parties of government were protecting the needs of a tiny section of society, against the needs of both the state and the wider economy. And even though it had existed for decades, and crossed party lines, the sheer nakedness of the relationship between government, bankers and speculators was a shock to many.
‘WE WILL HAVE PLENTY OF TIME TO DISCUSS NAMA, WHICH IS THE ONLY SHOW IN TOWN’107
Brian Lenihan speaking in Dáil Éireann, 16 June 2009.
On 7 April 2009, the government published NAMA: Frequently Asked Questions, as part of the documents relating to the supplementary budget which was passed that month.108 ‘NAMA is firstly an asset management company dealing with assets transferred from banks,’ it said. ‘NAMA will not be a bank as it will not be taking deposits from the public and will not have a banking licence.’ It also stated that, contrary to public speculation, Anglo Irish Bank would not be turned into a ‘bad bank’, but instead ‘will remain as a going concern operating at arm’s length from Government’. The initial documents in April 2009 mentioned that NAMA may have recourse to use a Special Purpose Vehicle (SPV) – a financial practice which allows companies to place risky loans off their balance sheets. Enron had used it to hide losses before it filed for bankruptcy in November 2001. The government said that ‘in order to achieve the optimal return, some property loans sold to NAMA will be capable of being transferred into NAMA SPVs which will be capable of being worked out and disposed of in an orderly manner with private equity partners’.109 When the NAMA legislation was presented to the Dáil, ‘some property loans’ had become all of the loans earmarked for purchase by NAMA.
On 22 September 2009, Bill Keating, assistant director general of the Macroeconomics Statistics Division, Central Statistics Office (CSO), sent a letter to Eurostat regarding the classification of NAMA and its borrowings. It wanted to know whether these borrowings could be excluded from the national debt. The CSO explained that once NAMA was established, it planned to create ‘a separate Special Purpose Vehicle to purchase certain assets from participating institutions [and that] mo
st of these assets will be loans associated with property development’.110 This SPV, known as the Master SPV, would be responsible for the purchase, management and disposal of NAMA’s loan book. It would be a separate legal entity, with 51 per cent of its shares held by private investors, and 49 per cent held by the Irish government, which would have a veto over all decisions taken by the SPV. In addition, the Master SPV would have the authority to create a number of subsidiary SPVs, ‘each of which will be responsible for the loan book of an individual financial institution’. Keating said that as the Bill to establish NAMA was currently before the Dáil, he would be grateful if Eurostat could give him an answer as soon as possible. On 13 October 2009, staff from the CSO, the Department of Finance, and NAMA travelled to Eurostat in Luxembourg in order to provide further information. Three days later, Eurostat gave its answer. ‘Based on the preliminary information provided,’ it said, ‘Eurostat agrees with the CSO’s analysis that NAMA should be classified inside the general government sector, and that the Master SPV should be classified in the financial corporations sector.’111 Essentially, the solution to the problem presented by NAMA was to call NAMA something else.
Brian Lenihan welcomed Eurostat’s decision, adding that it meant that the toxic loans due to be purchased by the NAMA SPV ‘will not increase the general government debt ratio and neither will our budget balance be directly affected by the NAMA initiative’.112 Not everyone, however, was convinced by such a desperate scramble to reposition the reality of Ireland’s banking debacle. The head of global economics at Fitch Ratings, Brian Coulton, said that ‘NAMA loans will still count as national debt regardless of Eurostat’s accounting, and stripping out the debt will not improve the way Fitch rates Ireland’s creditworthiness.’113 He added that NAMA would put Ireland’s debt ratio to 110 per cent of GDP – the third-highest in the eurozone.
The reaction of the opposition parties was equally dismissive. Sean Barrett of Fine Gael called the SPV ‘a con job’, while Labour’s finance spokesperson, Joan Burton, said that it was ‘extraordinary the NAMA Bill could have got as far as committee stage without the SPV architecture being set out in detail’. And even though the CSO, the Department of Finance, NAMA and Eurostat had been discussing the possibility of a NAMA SPV for weeks, the Dáil had not been told about the scheme, and only found out about it with the release of Eurostat’s preliminary judgement. The Bill marched on through committee stage regardless, and was signed into law by President McAleese on 22 November 2009. The Irish government had committed €64.1 billion to the banks and a further €31.6 billion for bad loans in NAMA. Twelve months later, Ireland was forced to accept a joint EU/IMF bailout of €67.5 billion, after fears of contagion swept the European Union.
‘CUTS DON’T EQUAL SAVINGS’114
Michael Burke, economist, 16 October 2009.
The Irish government brought in three budgets in the wake of the banking crisis. Each one had a deflationary impact on the Irish economy. The first of these budgets was put to parliament on 14 October 2008, less than two weeks after the bank guarantee was signed into law. Normally, Irish budgets are put before the Dáil during the first week in December. Brian Lenihan said that the decision to move the budget forward by two months was made so that the government could ‘seize the initiative [and provide] political leadership in the time of changed economic realities’.115 He added that ‘while the strength of the economy in the past decade has given us some room for manoeuvre, we cannot put our reputation for fiscal responsibility in jeopardy’. With this in mind, Lenihan told the Dáil that the government planned ‘to reduce public expenditure as much as possible on the current side and as much as is sensible on the capital side’. Lenihan said that the choices made in the budget did not serve any vested interest. ‘Rather,’ he said, ‘it provides an opportunity for us all to pull together and play our part according to our means so that we can secure the gains which have been the achievement of the men and women of this country.’ He ended the speech by saying that the budget was ‘no less than a call to patriotic action’ – thus proving that while patriotism may be the last refuge of a scoundrel, it’s the first port of call for a government minister under pressure.
In April 2009, the government passed a supplementary budget in order to provide a correction to the ‘unexpected’ deterioration in the state’s finances. Once again, draconian cuts were made in an effort to stabilise the deficit, and once again the effect was to further shrink the economy. On 9 December 2009, Brian Lenihan presented his third budget to the Dáil, but before doing so he commented on his previous two efforts:
The government over the past 18 months has made budgetary adjustments of more than €8 billion for this year [2009]. Had we not done so, the deficit would have ballooned to 20 per cent of GDP … Because of these decisive actions, we are now in a position to stabilise the deficit.
He announced that the government planned to make cuts of €4 billion for 2010, despite the fact that the EU Commission had given Ireland some leeway in meeting its target of a deficit of 3 per cent of GDP. ‘We welcome this revision,’ said Lenihan, ‘but it does not change what needs to be done in this budget. €4 billion is still the right target. Our strategy is on track.’
Three months later, a letter appeared in The Irish Times which was signed by twenty-eight leading economists, social scientists and analysts. Entitled, ‘All the wrong options have been pursued’, it set out to explain why the government’s deflationary policies were counterproductive, and what the government could do to help, rather than hinder, growth.116 The letter was the initiative of the independent think-tank TASC. ‘Budgetary policies have been short-termist and reactive,’ it read. ‘Instead of cutting real waste in the public sector by increasing productivity and efficiency, the Government has cut public services and the living standards of those who can least afford it, further reducing domestic demand and, thus, employment.’ The signatories argued that the only way to combat debt is to outgrow it. Borrowings should be used to enhance and modernise the country’s infrastructure, as such investments lower business costs for all in the long-term, and they stimulate growth and increase tax revenue in the process. ‘It may seem astonishing that we face … economic and social deficits after 15 years of boom,’ they said, ‘but these are the consequences of pursuing a failed low-tax, low-spend model which sought short-term gains from the speculative activity of a small but powerful golden circle.’ The Irish government was borrowing billions of euro to soak up toxic property debt, while the real economy lay dying of thirst beside the fountain. ‘Embedding investment, rather than debt, into the economy,’ they said, ‘while restructuring taxation and expenditure in a progressive and expansionary manner to ensure a job-rich recovery – this, and not the current deflationary strategy, is the road to success.’ The idea that the road to recovery is paved with cuts – that cuts are identical to savings – was so embedded at this stage that the TASC initiative was ridiculed as madness. The government insisted it was on the right path; the logical, sane and sober path to recovery, and for the most part Ireland’s media agreed with them. Meanwhile, the economy continued to contract.
The debt obligations bestowed on the State by the banks and speculators, however, had become almost impossible to bear. In May 2010, Greece was forced to accept EU/IMF funding in return for a series of austerity budgets. It was reckoned that either Ireland or Portugal was next. The pathological rush to deflate the Irish economy, the obvious instability of the Irish banking system, and the announcement that the government intended cutting a further €15 billion from its budget, saw the State slouch towards its endgame. On 18 November 2010, a delegation from the IMF and EU arrived in Dublin to discuss a funding strategy for Ireland, despite a deluge of almost surreal denials by the government that such meetings were due to take place. By the end of the week an announcement was made that Ireland had accepted a three-year, €85 billion bailout. Ireland would contribute €17 billion from its national pension fund, while the remaining €68
billion would come from the EU, the IMF, and individual states within the European Union. The news shook the ruling Fianna Fáil/Green coalition to its core, eventually leading to a general election in February 2011. Both government parties were decimated at the polling stations. The Taoiseach-in-waiting, Enda Kenny, assured the Irish public that he would not shirk from the ‘tough choices’ to be made regarding cuts in social provisions. He also promised that, above all else, Ireland’s corporation tax rate would remain untouched. The parties may have changed, but the approach and analysis remained the same: just keep on digging.
6
THE OTHER SIDE OF THE SHOW
On 19 April 2011, the Irish government published a report on the Irish banking crisis entitled Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland. It is more commonly known as the Nyberg Report after its author, Peter Nyberg, a former senior official at the Ministry of Finance, Finland. He was the sole member of the commission which was set up to investigate procedural and oversight failure within the relevant financial and State institutions. Nyberg could not investigate anything before 1 January 2003, nor anything after 15 January 2009. And he could not investigate, nor draw conclusions from, anything relating to illegality or corruption. In the words of Nyberg, the ‘mandate of the Commission did not include investigating possible criminal activities of institutions or their staff, for which there are other, more appropriate channels.’1 Furthermore, the statutory instruments which framed its investigation stated that ‘evidence received by the Commission may not be used in any criminal or other legal proceedings.’2 Given such constraints, Nyberg was led to conclude that in the six years prior to the guarantee, decisions within the world of Irish finance were ‘made more because of bad judgment than bad faith.’3
