Saturday 18 November 2017

Banking inquiry: 'Johnny Logan working group' established during bailout to examine funding - Cardiff

Clodagh Sheehy

'A “Johnny Logan Working Group” was set up within the Department of Finance to extend national funding by a further year during the €67.5bn EU/IMF/ECB bailout.

The name of the group was based on the Logan song title “What’s another Year” former Department of Finance Secretary General Kevin Cardiff revealed to the Banking Inquiry.

During the bailout “we found we could find ways to extend the funding of the State beyond the end of 2013.”

The group was working on that and “a few months of extra funding was potentially available”, he said.

“The suggestion was they could reduce our debt by a few billion and arising from that exercise that would improve our overall situation” to make “us a little bit more of a good bet” to get money in the market.

The downside, however, “was if you want to continue to get money from your funding partners then they have to be on board”.

Mr Cardiff was responding to a question from Deputy Pearse Doherty about the NTMA recommending on March 28th 2011 that senior bondholders across the six main banks be burned to save €16bn.

Earlier the inquiry heard that Cardiff made “discreet” inquiries in September 2008 about how Ireland could access an IMF programme.

However, he later clarified that the inquiries were not made to the International Monetary Fund and that he asked a colleague to check how it would work.

The move was not requested by anyone senior to him in government, he added.

They were very very preliminary inquiries, he said.  He had asked a colleague to make the inquiries “just as a precaution”.

In 2009 he  believed there were some hints in Washington that the IMF programme would be available if required.

Finance Minister Brian Lenihan, however, was firmly insistent that Ireland would not engage with that.

In 2010, the IMF/ECB/EU troika arrived in the form of a €67.5bn bailout package.

Mr Cardiff explained that “a bank crisis means you have to fill gaps in liquidity and bank liquidity gaps are enormous.”

The State had no problem accessing market funding, the problem was with  banks getting funds for themselves and “for that we needed the ECB.”

There would not have been any huge advantage to an IMF programme at that time unless it had an element relating to the banks.

By the time Ireland  “got into the IMF programme the Sovereign itself had a problem”.

He told Deputy Eoghan Murphy (Fine Gael) there was never a serious discussion with Mr Lenihan about an exit from the Euro but the department like many other countries in the eurozone did consider contingency plans.

He admitted that when the crisis hit the department was working on a strategy in case “we found ourselves unceremoniously shown the door” by Europe but it would have been “ridiculous” to say so at the time.

Over-politicisation within the Department of Finance in the run up to the economic crisis has been described by the Department's Chief Economist.

Mr John McCarthy has told the Banking Inquiry that in his time in the Department there were instructions given to people to take things out of statements because they were "too political".

“I would agree that there was some over politicisation” and these instructions had come “from beyond my pay grade within the Department.”

Mr McCarthy was discussing the budgetary process and the role played by the economic division within the Department including a budget strategy memo produced in June of every year.

This document was the starting point of the budgetary process every year.

Mr McCarthy also said there were clear policy mistakes within the Department before the crisis.

Advice had been taken by the Department  both internally and externally but it was clear the tone and content of these warnings “should have been adapted.”

“We should have articulated our views more strongly but at the end of the day we advise we are not the decision makers.”

Regarding suggestions of a ‘soft landing’, he said that “ultimately the exposure of the banking system to the development-related loans was not fully appreciated.

“There was a generalised failure - including by the Department - to join the dots between the property market bubble and financial stability.”

He stressed, however, that “it simply was not possible to foresee the crisis”.

Asked by Deputy Pearse Doherty about the shortage of economists within the Department at the time, Mr McCarthy said to him there was no correlation between the number of economists and the quality of policy making or the ability to foresee the crisis.

If they had more economists, however,  they could have allocated more resources to looking at the imbalance.

He told Deputy Sean Barrett that when the crisis developed there were very few economists working in the division but it was fair to say the picture had changed in the intervening period.

They were now approaching a “critical mass” of economists and his division had 20 positions, not all of which were filled at the moment.

He stressed there was now a career structure within the department where economists could go all the way to the top.

Asked by Senator Marc MacSharry if advice from his department was ignored, Mr McCarthy said between 20010-2007 the Minister of the day had not ignored the advice given usually in June or July but it was “overtaken by events”.

The Department was seen as “the boy who cried wolf”  before the crisis because their warnings did not come to pass, stressed Mr McCarthy.

Asked by Fianna Fáil Senator Marc MacSharry if dissent was discouraged to the extent that it could hamper a career, he said that was not really the case.

“There was a kind of Departmental view that policy was moving in the right direction. Most people bought into that, some were more vocal than others,” he said.

"There was a consensus within the Department that there were problems but we simply weren’t being listened to.”

Mr McCarthy joined the Central Bank as an economist in 1996 and was appointed Chief Economist in November 2013.

He agreed  there was “an element of group think” in the department.  He told Deputy Joe Higgins that there had been financial stability for years and years and the models “couldn’t capture financial disruptions so these models failed”.

Deputy Kieran O’Donnell asked how robustly the Department had challenged Ministers on taxes based on property development, Mr McCarthy said it was not his job to look at that area. His colleagues in the tax section looked at that.

Mr Cardiff said there was no global consensus about burden sharing.

In November 2010 the government when discussions started on a troika programme The IMF were saying they might even make burden sharing with the senior bondholders a requirement.

Ireland was told  that Dominque Strauss Kahn believed he could get this agreed to by Europe and the US and he was “pretty confident”

There was even a hint through Mr Strauss Kahn that the Secretary of the US Treasury Timothy Geithner “was showing himself to be a little bit in favour”, said Mr Cardiff.

There was a phone conversation and  “the message we got back was exactly the opposite, very negative.”

Geitner and Trichet among others were not in favour.  “I don’t know who was for and who was against”.

“We had one great optimistic day”, he said of events before the message came back.

If Ireland had waited to enter the bailout programme until March 2011 instead of entering in November 2010 “it might have had to be much bigger. It might not have worked”

By going into the programme in Movement “It meant that we had funds for all of 2011 and 2012 and we didn’t have to rely on a market that was extraordinarily difficult”.

In July 2011, for example, the interest rate on two years Irish money was at 20pc.  By the end of the year it was down to 8pc. “That was the stormiest period and we were able to weather it”

On Mr Trichet’s evidence to the Inquiry Mr Cardiff said some of it was accurate and in other parts was the “kind of truths where every word was true bu the impression was not.”

He said the idea that the ECB was just giving advice was not accurate.

mr Cardiff did say, however that the ECB had given enormous amounts of funding to Irish banks and the irony was that while practically speaking they have great help in public they were a little bit reticent.

Asked by Deputy John Paul Phelan if he felt he had been scapegoated for decisions taken over the Bank Guarantee and the Bailout, Mr Cardiff said the country had been through and awful time and whether he had been affected personally was not important.

“I would say that probably some things, some criticism is valid and some so far off the mark as to be laughable.” He only took offence when criticism was deliberately untrue.

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