On the plane to Washington D.C. that month for the annual IMF/World Bank meetings, Lenihan and I discussed at length the pros and cons of exiting the euro area. He was always willing to investigate alternative strategies. Lenihan concluded that an exit would be disastrous for the people of Ireland. He recognised that the European Central Bank was providing invaluable support to the Irish banking system, but he wanted the ECB to do more. He pointed out that if Ireland were a state in the United States, the Federal Reserve would be offering unconditional support. He admired the Fed as a genuine lender of last resort.
Instead, the ECB was pressurising Ireland to reduce the amount of emergency loans that the Eurosystem had extended to Irish banks. In frustration, Lenihan sometimes referred to the ECB as ‘that bank in Frankfurt.’ He became aware that senior people at the ECB were briefing market investors that the bank was considering the withdrawal of financial support to parts of the Irish banking system. Investors were alarmed. By now, funding in debt markets for the Irish banks had dried up and they were haemorrhaging deposits.
As the financial pressure on Ireland intensified, the Government hoped that the ECB would step up its purchases of Irish bonds under the Securities Markets Programme. These hopes were dashed. One-and-a-half years later, with Italy and Spain under severe financial pressure, the ECB, under new boss Mario Draghi, belatedly introduced a potentially limitless bond-buying programme. In response, market confidence in Italy and Spain improved dramatically.
In early November, Lenihan came up with a plan which he hoped would keep Ireland out of a formal EU/IMF programme. He pointed out that, unlike Greece months earlier, the Irish State was not about to run out of cash. In fact, Ireland was fully funded until the middle of 2011. Lenihan wanted the European Commission to endorse the National Recovery Plan and the ECB to provide unequivocal liquidity support to the Irish banks. He believed that such European support would boost investor confidence in Ireland and quell the financial panic. In return, he would agree to increased surveillance by the European authorities – including quarterly surveillance if necessary – and that Ireland would enter a formal bailout programme in 2012 if things hadn’t turned around by then. He intended to discuss the plan with the French Finance Minister, Christine Lagarde, and the German Finance Minister, Wolfgang Schäuble.
But towards the end of the second week of November, a long-distance phone call from Olli Rehn, who had visited Dublin a few days earlier, confirmed that Lenihan’s bespoke plan for Ireland was not going to work. Under pressure from the ECB, the Government shortly afterwards applied for a financial assistance programme from the EU/IMF. In the negotiations, Lenihan, supported by the IMF staff, wanted to reduce the cost to the State of recapitalising the banks by imposing losses on the banks’ senior bonds. But the ECB would not countenance such a move. In fact, there was considerable opposition to bailing in bondholders in finance ministries across Europe and in the G7 group of countries. In the end, the Troika ruled out imposing losses on senior bank bonds. When the issue of burden sharing came up during the general election campaign in early 2011, Lenihan remarked that the new government would probably have more success pursuing other approaches at European level to reduce the cost to the State of rescuing the banks.
Europe’s evolving response to the euro crisis was at times chaotic. Lenihan described a meeting of euro area finance ministers around that time in which the Finnish ministry wanted Ireland to offer the state-owned ESB as collateral for loans from the European rescue funds.
The measures for ending the banking crisis contained in the EU/IMF programme built upon Lenihan’s efforts. As he put it himself, the programme meant ‘more capital and more NAMA.’ Lenihan had long wanted more support from Europe to repair the banks. ‘A small sovereign like Ireland faced with an outsized problem that we have in our banking sector, cannot on its own address all those problems,’ he said. By the time he left office in March 2011, the institutional arrangements in Europe to address banking crises were still not fully in place. Things are still evolving in that regard. As the head of the European Stability Mechanism (Europe’s bailout fund), Klaus Regling, said in early 2014,the European-level responses to the crisis have evolved over time and that options that were not available to Ireland, Portugal or Greece have become available now, while new options may become available in the future.
CONCLUSION
Ireland’s property bubble was one of the largest on record internationally. For nearly three years as finance minister, Lenihan lived with the consequences of the bursting of that bubble. The international experience provides plenty of examples of banking crises less severe and less complicated than Ireland’s where bank depositors lost their life savings and businesses their working capital. Ireland did not suffer that fate.
Lenihan was the doctor on duty when the critically injured banks arrived at the A&E department. In working out the consequences of the property bubble, extraordinary measures were needed to meet extraordinary challenges. For sure, the Irish banks have not yet been restored to full health. History, however, will surely show that Brian Lenihan’s incredible hard work and courage during the most acute phase of the crisis put the banking system and the Irish economy on the road to recovery.
2 A MAN OF CHARACTER
JIM FLAHERTY
IN 1985, CANADIAN PRIME Minister Brian Mulroney and American President Ronald Reagan met in Quebec City for a bilateral summit. Because of their shared Irish heritage, the meeting was dubbed ‘the Shamrock Summit’ – an amusing title which reflected the good-natured relationship between Prime Minister Mulroney and President Reagan. Since Canada’s Confederation in 1867, Irish heritage has played a critical role in our history and our relationships. When I became Canada’s Finance Minister, I wanted to continue the tradition of strong Irish-Canadian relations. Upon meeting my Irish counterpart, the late Brian Lenihan, I could tell that we would share a good working relationship. What neither of us knew at the time was that we were about to embark on one of the most challenging periods of our lives: the global economic crisis. Although Brian did not survive to see his good work come to fruition, I can honestly say that his steadfast leadership and commitment to fiscal responsibility helped Ireland to stave off the worst effects of the recession. His commitment to his country and his resolute leadership stand as important reminders for future generations of the Irish people – at home and abroad – of what it means to be a good public servant.
I became the Minister of Finance for Canada on 6 February 2006. We were elected as a minority government. This meant that we always had two strategies: a short-term one should our government be defeated in the House of Commons and a longer-term strategy focusing on long-term economic growth, jobs, and prosperity. This government was re-elected in October 2008, but again as a minority government.
I mention all of this because Brian Lenihan became Minister for Finance in Ireland in May 2008. Ireland forms part of the constituency led by Canada at the IMF and World Bank, along with the English-speaking countries of the Caribbean. Brian became Minister at a time when the credit crisis was well underway having first surfaced in the sub-prime mortgage market in the USA in August 2007. The developed economies, including Ireland and Canada, were also entering the crisis in the real economy, now referred to as the Great Recession. So, I had to deal with a minority government at home and a deteriorating economy at home and abroad. Brian was confronted by an Irish economy which experienced one of the worst recessions among developed countries, with growing unemployment and government deficits.
In the autumn of 2008, banks were failing in the USA, UK, and some regional German banks. On 30 September 2008, the Government of Ireland extended a bank guarantee designed to cover all deposits, covered bonds, senior debt, and dated subordinate debt. This initiative sent shockwaves outside of Ireland. Then, in December 2008, the Irish Government announced a capital injection of US $7.6 billion into the country’s three main banks.
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