Banking Inquiry: ECB 'inadvertently' did Ireland a favour by forcing us into bailout, says Patrick Honohan
Published 25/06/2015 | 18:29
The ECB had “inadvertently” done Ireland a favour by forcing us into a bailout, Central Bank Governor Patrick Honohan has told the Banking Inquiry.
Mr Honohan said he believed Ireland could have avoided the IMF bailout programme if the ECB had been prepared to fund Irish banks.
We could have “staggered on through” the difficult years of 2011 and 2012 “and now we would be saddled with much higher servicing costs”, he said.
Instead the ECB “inadvertently did us a favour” by allowing us go into the bailout programme.
Read more here: I knew of bailout bid - bank chief
Chairman Ciaran Lynch asked if the structure of the Bank Guarantee had any bearing on Ireland’s entry to the bailout programme.
Mr Honohan said if it had been a three years Guarantee it might have deferred the crisis for another year but he did not think the total sums involved would have been in any way altered.
He told the meeting that the bank bailout had been raised with Finance Minister Brian Lenihan but rejected by him seven months before it was finally introduced.
Mr Honohan had made the suggestion to the Minister in April 2010 that Ireland might need a bailout.
At the time he was concerned that Ireland was being praised as being “ahead of the curve” because of the Bank Guarantee and the “well organised fiscal response” to the economic crisis.
“I was beginning to be conscious that it might not be enough,” he said.
In a phone call to Mr Lenihan, Mr Honohan suggested that Ireland could be next to need a bailout.
The Minister, he said, wanted to support a Greek bailout believing it would make money for Ireland
Mr Lenihan said he had been talking to people in Brussels who said that “Portugal could be next”.
The following month, Mr Honohan said he got a call of Ashoka Mody of the IMF “out of the blue” who asked him if Ireland would be interested in a “precautionary line of credit”.
Read more here: 'Johnny Logan Group' set up to examine funding
He thought this had potential but it was ruled out by the Department of Finance.
By November 4th he knew that Ireland needed a bailout, he stressed, as borrowing rates on the open markets had shot up and deposits were flowing out reflecting a loss of confidence.
“It was clear to me that application for a programme could no longer be safely deferred."
Discussions began in Dublin on November 18th, the day that Mr Honohan made his controversial call to RTE’s Morning Ireland programme to announce the bailout.
He said he was “anxious to make a credible public statement” as the previous day had seen an outflow of €900m in deposits from Irish banks - the largest daily figure before or since.
Read more here: 'Guarantee in train hours before Cowen met banks'
In an unprecedented move, the Governor rang the radio programme on the morning of November 18th 2010 from Frankfurt where he was attending the European Central Bank’s governing council meeting.
“The start of negotiations provided a basis for convincing reassurance, which was clearly needed, and I gave a radio interview to that effect.”
RTÉ sports presenter Des Cahill was the person who picked up the phone when Mr Honohan phoned RTE's Morning Ireland to confirm Ireland was entering a bailout programme.
Mr Honohan said he had learned the previous day there were discussions at a meeting of the Euro group of Finance Ministers and many of them had pressed Brian Lenihan to announce he was going to apply for a loan. He had refused saying he did not have the authority
“There was a sense of alarm in Frankfurt and they were anxious I would convey this to the Minister. They all were at one saying you should be going into a programme.”
The Governor said he phoned Mr Lenihan to discuss it but the Minister was “very cross” and said he could not make the announcement without a government decision.
He said he had not consulted either the Minister or the Taoiseach before making the call to the radio station.
It might have been a courtesy to inform the Secretary General of the Department but “it didn't occur to me in my excitement to get the message across”.
He stressed that the Minister took the action of going into a bailout programme several days later
Although he found the terms of the bailout programme unsatisfactory, Mr Honohan had advised the government to accept it, he said, because without it spending and tax adjustments would have been much more severe.
On the Bank Guarantee he said he had been in favour of nationalising Anglo and INBS immediately and excluding subordinated debt and existing senior term debt.
He believed, however that even with a more limited Guarantee savings of between €2b and €10bn “could be imagined but no more than that”.
The focus on the night of the Guarantee, he added, was excessive and much of the losses and costs for the Irish people at that point “had already been ineradicably incurred”.
Moving to the present situation, Prof Honohan said: “The banks have now got reasonably effective systems in place to deal with collection and restructuring on the scale needed.”
He stressed, however that “they did not introduce adequate systems until chivvied by the Central Bank from late 2011”.
He also said he found former Taoiseach Brian Cowen to be a very businesslike and effective chairman, courteous and in command of the situation and “he sometimes doesn’t get that image”.