Siobhan Creaton: New government has to get bailout back on track -- fast
They are famed for their unintelligible speech and mystical jargon. So when a central banker uses words like "alarm" you know it is time to sit up and listen carefully.
Once again it has been left to Patrick Honohan to tell us what is really going on behind the scenes in our banks and he has painted a troubling picture of what is facing the next Finance Minister.
The Central Bank governor was the first to tell us that Ireland was about to be bailed out by the IMF and the EU in a memorable early morning radio interview last November when all the politicians had gone to ground. Yet again as we find ourselves in a political vacuum, Mr Honohan went on RTE's 'Primetime' to tell us how the IMF/EU bailout was going, and it wasn't exactly reassuring.
While Fine Gael and Labour are trying to form a new government, Mr Honohan's update revealed that over time Ireland may be able to renegotiate parts of the €85bn bailout package, including the high rate of interest on these loans. But his latest television appearance was a firm warning to the new government to urgently start fixing the banks and to get on with honouring the terms of the bailout deal.
Listening to Brian Lenihan's explanation of his final decision as Finance Minister to defer drawing down the €10bn due to be injected into AIB, Bank of Ireland and EBS before the end of February, you could be forgiven for thinking this was par for the course for an outgoing government. He told us they had decided to leave it to their successors to pour further billions into our banks after consulting with EU and IMF officials.
"They conveyed to us they understood the Government's decision," Mr Lenihan expl-ained. In other words, we all thought there was nothing to worry about. The IMF and the ECB weren't losing any sleep over it and the banks could easily carry on without this cash for a few more weeks.
But we now know, thanks to Mr Honohan, that the discussions about postponing the next phase of the bank bailout were anything but calm. Indeed the governor, who sits on the board of the ECB, said Ireland's decision to cavalierly dismiss what he described as "an important deadline" was greeted with "alarm".
Since then he has been left picking up the pieces and has spent a lot of time explaining the situation to his European colleagues to soothe this serious breach of a newly brokered bailout deal. It's clear, from Mr Honohan, that this has been no easy task.
It appears that many people in the ECB "had to be convinced" that it wasn't unreasonable for the Government in its dying days to duck a decision to pump €10bn into the banks so close to a new government being elected. But having explained to his European colleagues there would be greater "buy-in" from the Irish public if they delayed the decision until the new government was in situ, his next task is to ensure they actually do it.
"I think the money will be put in as capital," he said. "I would recommend that it's put in promptly." And he has already set a new deadline for this to happen. The IMF and EU want to see the €10bn make its way into the banks by the end of this month. By then the bank stress tests will have been completed and we should finally know the full extent of the bankers' reckless lending and begin to repair the damage -- almost three years on from when it first began.
But both Fine Gael and Labour haven't committed to readily putting any more money into the banks in the absence of a "burden sharing" agreement that would include inflicting some pain on the bondholders as part of the banking solution. This won't be easily achieved.
Mr Honohan definitely ruled this out, saying that defaulting on any of our debts was not an "attractive option" for any part of Irish society. In reality, most commentators believe this will only happen as part of a wider European deal with bondholders some time in the future.
One of the more interesting aspects of his television appearance was his insistence that Ireland had done Europe a favour by guaranteeing Anglo Irish Bank -- a decision that has bankrupted the State and has never been fully explained. He also admitted for the first time that had the Government known how bad Anglo's losses were they wouldn't have guaranteed all of them. But Europe was relieved that it did.
If the Government had let Anglo collapse in September 2008 it would have "been something like a European Lehmans" he said, and would have brought other European banks down with it. Ireland "would not have been thanked by its European partners", said Mr Honohan. And that fateful decision "has to be recognised", he added.
Was he suggesting this is a potential bargaining chip for the new government in any negotiations on the bailout and specifically in dealing with the bondholders? Only time will tell. As Mr Honohan explained, Ireland will be in negotiations on its public finances for the next decade or more.
Mr Honohan was careful to praise the incoming government as "serious people" prepared to continue to tackle the yawning gap in the public finances "with vigour" but he knows they have to urgently start meeting the IMF/EU deadlines.
Brian Cowen's Government's political "stroke" has left a bad taste and some of our European colleagues remain "sceptical" about Ireland's ability to honour the deal, he said. Missing that deadline has undoubtedly squandered some goodwill towards us and gives the new government little time to put the bailout back on track.
- Siobhan Creaton
Irish Independent
