independent

Saturday 19 April 2014

'We were a war cabinet and Lenihan was leader'

In an exclusive interview with Daniel McConnell, Alan Ahearne recalls how every day was another battle to save the economy

DURING the darkest days of the last government, Dr Alan Ahearne dreaded the daily walk up the steps and through the imposing door that guards the Department of Finance.

He spent two years in there, and every day was like going over the top at the Somme.

"No, I don't miss it, I remember going in on the train thinking what missiles will be fired at us today, it was awful," he says.

Now, seven months after leaving his post as Brian Lenihan's adviser at the Department of Finance, Ahearne is back lecturing in NUI Galway, reflecting on his time at the heart of the darkness.

In his first major interview since departing Merrion Street, he speaks with remarkable candour about his time as the key economic adviser to the most hated government in the history of the State.

The 44-year-old former Federal Reserve economist strongly defends his record and remembers with remarkable honesty his "close" relationship with the late Brian Lenihan in the "war room" in Finance.

And he explains why the public sector is paid too much, the reasons AIB bondholders should be burnt, and his belief that Greece will ultimately default -- and Ireland still may have to.

After meeting Ahearne a number of times, Lenihan asked him to be his special adviser in March 2009.

Leaving his wife and young family behind in Galway, Ahearne moved in with an uncle in Castleknock in Dublin four days a week. While that was hard, nothing could prepare him for what he encountered in Merrion Street.

LIFE IN MERRION STREET

"From the first day I went in, it was incredibly stressful. A constant battle. I remember meeting someone two weeks after I started and he said 'Jesus, you don't look good, you look pale and your eyes look terrible.'

"It was awful. But when you are part of a team in a battle, you do become quite close. The team was also the Central Bank Governor John Hurley and later Patrick Honohan, John Corrigan from the NTMA. Senior guys from the department, guys like David Doyle, Kevin Cardiff and Jim O'Brien. Then there was Cathy Herbert (Lenihan's political adviser) and me. We met a lot -- many, many times. We nicknamed the room we met the 'war room'. It was war, every day a new battle. We were a virtual war cabinet, with Lenihan as the Churchillian leader."

I ask him to elaborate on that siege mentality.

"It was always very stressful, I remember going in on the train every morning thinking what missile is going to be launched at us today. A constant feeling of being in the trenches, a new battle everyday," he adds.

"Lenihan was a fantastic general in meetings. He was a natural leader, and that didn't change after he got sick."

In an implicit swipe at former Taoisigh Bertie Ahern and Brian Cowen, who "doled out the cash", Ahearne says in contrast, he and Lenihan had the "toxic" task of implementing austerity while ploughing money into bust banks.

"It's easy in 2005 and 2006, when you are doling out the cash, but very hard to explain reducing people's standard of living when you are having to bail out reckless bust banks. Putting taxpayers' money into banks is such a difficult thing to do. Anything to do with banks is politically toxic."

ARRIVAL OF THE IMF/ THE DARKEST HOURS

Ahearne also experienced first-hand the arrival of the IMF last November, and he reveals in detail exactly how Ireland was bounced into the €85bn bailout deal.

"The entire two years I was there, it was stressful. I don't remember the run-up to the IMF bailout being any more stressful. It was just another crisis, another problem to deal with. I don't remember pressure ratcheting up. Every day you'd be downgraded, more problems with the banks."

Amid huge international pressure and media attention, nine days before the white flag was officially raised, a threatening letter from Jean Claude Trichet, head of the ECB, arrived in Merrion Street.

"Yeah, the letter came in on the Friday from Trichet. The ECB were getting very hostile about the amount of money that it was having to lend to Ireland's banks. The ECB demanded something be done about it and it mentioned Ireland going into the bailout. They were keen to get Ireland into the programme."

He added: "Lenihan rang Trichet that day, and they agreed officials would meet the following day in Brussels. When they met, the ECB put huge pressure on Ireland to go into the programme."

Ahearne said Lenihan was now at the centre of international chaos and Ireland's future hung in the balance.

"The following Tuesday, Lenihan went to the eurozone meeting, and I remember him coming back and describing it as a total circus."

Ireland was front and centre at that meeting and would be the first country to draw on the EFSF bailout fund. The only problem was that no one knew how it was supposed to work.

"None of the political leaders knew how it should or would work. It was farcical. For example, Ireland's corporation tax rate came up at that meeting, one country wanted collateral for lending money, so people were looking for state assets. It was crazy stuff. Lenihan coming back saying this was a free-for-all," he says.

Ahearne also gives a fascinating insight into Central Bank Governor Patrick Honohan's appearance on Morning Ireland, when he said a bailout was inevitable. Lenihan was furious.

"It made it politically more difficult. There was criticism because it wasn't the Taoiseach or Finance Minister announcing it, it was someone else. Lenihan was not happy. It made it much harder for him. While it didn't change the outcome, but Lenihan was certainly wrong-footed politically. Politically, it was tough.

"Honohan called him shortly before he went on as a courtesy to let him know he was going on. Honohan would have come under huge pressure at ECB level to make the bailout happen and he called from Brussels or Frankfurt, so he was under great pressure. He was worried about financial stability."

Ahearne dismisses suggestions that Honohan was acting in the ECB's interest and not the country's. "I think he has always acted in the country's interest. But he is independent of government and ministers can't tell him what to do."

AUSTERITY/TENSIONS WITH COWEN AND THE CABINET

Ahearne says Lenihan's attempts to grasp the nettle back in 2009 were continually interfered with by former Taoiseach Brian Cowen, other ministers and backbenchers.

"Yes, he was dragging a whole lot of people with him -- the rest of his colleagues along with him. There was opposition to the cuts from the backbenchers and from within the Cabinet. They were totally unrealistic," he says.

"The Taoiseach was closer to social partnership and the unions, so there was opposition there about cutting pay, so they needed more convincing. Lenihan was less enthusiastic about social partnership all right. He had to get on with the business of making the adjustments, and what role was social partnership going to play. I think there was a deep sense of unreality in there as well. The Budget 2009, there was talk of the pay cuts and then there was the 12 days of holidays' proposal. This was madness, crazy stuff. Lenihan had a job to do and social partnership was getting in the way."

NAMA

Alan Ahearne stoutly defends some of the more controversial aspects of his time in Merrion Street, including the creation of Nama and cuts to public sector pay.

"Of course, it does stick in the craw that Nama is dealing with developers. But if they just sent every one of them into receivership, sure it would make everyone feel better, but how much would it cost to do that.

"Nama says it will get back the €30bn, and it needs the developers. If they bankrupted them all, which would be very satisfying for society, but then it could only realise €25bn, is it worth it? People need to ask themselves. How much are people willing to pay to bankrupt the developers? Nama can't do that, by law, they have to get the best return."

On public sector pay, Ahearne says that progress in reducing the pay bill has not gone far enough and that further cuts are needed, for those at the top.

"The overall bill for public sector pay does have to come down. Some of the pay rates were, and are, ridiculous. They have come down a bit but some at the top are still out of whack," he adds.

BURNING BONDHOLDERS

Like Lenihan, Ahearne supported the position that senior bondholders in Anglo Irish Bank and Irish Nationwide should be burnt.

"It would have been good, it would have been fair, and a proper outcome if the senior bondholders in Anglo and Nationwide were burnt. I agree with Michael Noonan's argument that Anglo bondholders should be hit. There is no bank in Europe as toxic or as insolvent as Anglo. It would have been fairer and a more just outcome if there had been discounts, but the ECB was steadfast against it."

But he also said there is a case for burning bondholders in AIB.

"You could make a case to hit bondholders in AIB. Anglo has cost us €30bn, and (Anglo CEO) Mike Aynsley has said it could fall to €25bn. AIB has cost almost as much as Anglo, about €18bn-€19bn. So there is a good argument for making them take losses. There is a case to hit AIB, but it is difficult given it is an ongoing bank, a pillar bank."

GREECE AND EUROPE

Ahearne feels it is inevitable that Greece will default and that all the current moves in Europe, in terms of bank capitalisations, are merely preparing the ground for an orderly "event".

"Bank recapitalisation will be put in place to absorb the losses that are inevitably coming from Greek bonds. Greece's debt levels are unsustainable."

So are we looking at a Greek default, I ask him.

"Default is an emotive word, but yes. The 21 per cent writedown is not enough. They say Greece's economy is going to contract by five per cent this year, two per cent next year, it's an impossible situation. They are working very hard on the fiscal consolidation, but the ground is being moved from beneath them. Their debt is far too high."

So will Ireland default?

"If you crunch the numbers now, Ireland passes the sustainability test. Our national debt will peak in 2013 and then fall, so it stops growing. It's tough but it's do-able.

"But that's assuming the economy grows as forecast, but there is a lot of doubt about that. This economy desperately needs growth. If we don't get growth around Europe, all bets are off, we're in trouble," he adds.

"If growth comes in below forecast, then we fail that test. Our numbers will be unsustainable," he concludes.

Ahearne also feels that a federal Europe is inevitable, and that Ireland should not fear such a move.

" EU federal fiscal union is the ultimate goal, the end game of all of this. Part of the goal of setting up the single currency was establishing a fiscal union. That thinking is right, for a properly functioning single currency, you need fiscal unity. In general, EU integration has been good for Ireland. Our future is with Europe. Fiscal union is the end game," he says.

LENIHAN AND CANCER

Things in the 'bunker' changed markedly in late December 2009, when Brian Lenihan was admitted to hospital suffering from a suspected hernia. As we all know, it turned out to be pancreatic cancer.

"Certainly after the Budget he was very jaundiced, and I remember him going to hospital. There were all sorts of rumours going around. I didn't believe them. But I only heard the news of his cancer when I saw the TV3 news on St Stephen's Day.

"It did change things certainly, because he was around more. That was a bit of a shock. He wasn't gallivanting around the place, so that was strange."

But, after speaking to Ahearne, it is clear there were attempts to conceal the toll the job was taking on Brian Lenihan while he was receiving chemotherapy and radiotherapy for his cancer during the first half of 2010.

"He had to take rests a lot. There was a bed brought in for him to lie down during the day and his private secretary would make sure that he was left alone when he needed to rest. He used to rest for a couple of hours during the day. But he still did long hours, early morning, late evenings. In meetings, he was still very focused."

I ask Ahearne did he ever become concerned for the Finance Minister, and what was his reaction when Lenihan was particularly poorly.

"There were days, yeah, he looked bad. I remember the first day I came up after that Christmas he was diagnosed, we sat together and he looked at me and said: 'You look very worried'. So, yeah we were always worried about him, concerned about it, given the diagnosis he had."

LEAVING OFFICE/ LENIHAN'S DEATH

Days before he left office, Brian Lenihan appointed Alan Ahearne to the Central Bank Commission.

"He said it to me late, I hadn't asked him. I was surprised, but delighted because it keeps me involved in high finance. You get very isolated out here."

I asked him when did he last speak to Lenihan.

"He gave me a few books in March, just days before the new government came in when I was leaving. I spoke to him a couple of times over the phone after that. But I met him by chance on Grafton Street, I was talking to some lad on Grafton Street and he walked past.

"I walked him up to the taxi rank, he was getting a taxi home. He was in great spirits, great form. He said he was to come down to Galway at the end of May and he said we would go for dinner. But it never happened. That was the last time I saw him."

Sunday Independent

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