Friday 23 August 2019

Colm McCarthy: Brian Lenihan was an exceptional minister for an exceptional time

The banking guarantee casts a long shadow but his efforts to stem the crisis took great courage, writes Colm McCarthy

Brian Lenihan was Finance Minister for less than three years. His elevation to cabinet (as Justice Minister) came only in 2007, so he led the department unburdened by responsibility for the economic policy excesses of the previous decade.

By the time of his appointment to Finance in May 2008, it was already clear that the fiscal position was deteriorating rapidly -- several banks had already collapsed in the US and elsewhere and the Irish banks were under attack in the markets. Lenihan persuaded his government colleagues to introduce the first budgetary cutbacks pretty quickly, in July of that year, and the Lehman collapse in mid-September triggered the worst financial crisis since the 1930s. His entire period as Finance Minister was devoted to battling the deficit and the implosion of the Irish banking system, and the second half of it to a third battle against cancer. He had hoped to find time in opposition to write about his first two battles but sadly has lost the third.

When the dust settles, Lenihan will, I believe, be judged to have contained the exploding budget deficit as well as could reasonably have been expected in circumstances which included not a single lucky break. But the scale of the banking disaster has exceeded the direst predictions and has laid low the solvency of the State itself.

It would be disingenuous to describe Irish policy through the short few years of Brian Lenihan's tenure at Finance as a success story. It has ended in failure: the State is unable to borrow, reliant, in Morgan Kelly's resonant phrase, on the kindness of strangers. But journalism is the first draft of history and it should be easy to persuade you this morning that Brian Lenihan was an exceptional Finance Minister: his successors would be grappling with far worse problems had he not understood very clearly what finance ministers are supposed to do in a modern democracy.

Finance ministers are charged with the maintenance of the solvency of the states that they serve, and the practical precondition for national solvency, especially in a small country, is that the incessant and unceasing demands for more public spending and more tax loopholes need to be resisted. Brian Lenihan understood this from the outset. From his first days in Finance it was clear to him, if not to his colleagues in government, that the solvency of the State was on the line and he proceeded accordingly. In a suicidally populist political culture this takes courage.

The series of corrective Budgets and mini-Budgets over the last few years have failed to close the gap between spending and revenue, and the State has ended up in receivership. The gap to be closed would have been far wider, and the receivership would have occurred far sooner, had a less resolute individual been appointed to the hot seat in Merrion Street. For this thankless public service, there has been belated recognition since Brian passed away on Friday morning, along with perfectly understandable criticism of his handling of the banking collapse.

The events surrounding the bank guarantee of late September 2008 have, after three official reports and uncountable journalistic treatments, come to be seen as the principal source of Ireland's current woes. The bank guarantee was a mistake and several commentators said so at the time. The full story of what happened over those fateful days has yet to be told but it is too simple to fault a single decision for the accumulated vulnerabilities which were the true legacy of the Ahern era.

Politicians are lay people and engage specialist advice on matters which they cannot reasonably be expected to master from their own knowledge base. Brian Lenihan was a spectacular victim of bad advice in September 2008, principally from the Central Bank and Financial Regulator's office, the people (a combined staff of over 1,000!) to whom supervision of the financial system has been delegated by statute since 1942. Several weeks later, the Financial Regulator was maintaining in public that the Irish banks did not face solvency challenges, it was just a temporary liquidity problem.

In mid-September 2008, the senior executives in Anglo Irish, a bank which has already written off about half of its total loan book and about 10 times its capital, were kind enough to drop round to Lenihan's department to explain the robustness of their business model, their strong capital position, cross-collateralisation (remember that) of their lending and multiple other assurances laughable in retrospect and which should not have been believed.

The guarantee was put in place by a government which never expected, on the basis of advice from the banks and their supervisors, that it would be called upon. It is reasonable to hold government to account for decisions taken, and this was done at the recent election. It would be nice if those furnishing spectacularly bad advice, including banks whose assurances appear to have been consciously misleading, were equally accountable. There has still been no definitive inquiry into the banking collapse and the misleading advice to government in September 2008.

The decision to guarantee the banks has cast a long shadow and foreclosed policy options which might have contained the enormous Exchequer cost. As events unfolded, the budgetary corrections overseen by Brian Lenihan have proved inadequate and the State was forced into a rescue by official lenders, the EU and IMF, in November 2010. Had the costs of the bank rescue been as modest as the optimists believed in September 2008, it is a fair bet that Lenihan's fiscal consolidation would have worked and that the State would have retained its credit-worthiness.

Ireland's run of bad luck has continued since the impossibility of a purely domestic policy fix emerged during 2010. Last Autumn, former Taoiseach John Bruton had the temerity to suggest that there might have been failings in the European response to the crisis in Ireland, in addition to our own admitted mistakes. For his trouble, Bruton was likened by an unidentified EU Commission official to " ... a thief accusing the policeman", no less. Throughout Brian Lenihan's tenure at Finance he had to contend with a deeply unsympathetic EU Commission and a dysfunctional European Central Bank.

The EU/IMF rescue package last November followed Ireland's exit from the bond market and was perhaps unavoidable once the full extent of the liabilities to creditors of bust banks finally emerged. The proximate cause of the Irish inability to return to the bond markets was the Deauville proposal on October 18 last by German Chancellor Angela Merkel and French President Nicolas Sarkozy that European sovereign bonds should contain punitive default clauses from 2013 onwards. This cut the legs from under the more vulnerable issuers of sovereign bonds, Ireland included.

The deposit flight from the Irish banks intensified in response to a series of undisciplined and irresponsible solo-run pronouncements from European Central Bank officials from August onwards. One ECB governing council member proposed publicly on August 20 that emergency support from the ECB for Europe's distressed banks should be phased out, encouraging, through September, various other ECB officers to urge curtailment of liquidity support to troubled banks. A deposit flight from Irish banks ensued (not surprisingly) and this deposit flight reinforced, and was reinforced by, the Government's problems in the bond market.

So John Bruton was not exactly making it up when he drew attention to the contribution of incompetent European institutions to the eventual failure of Irish policy and the IMF/EU bailout at the end of November. It would have been fascinating to read Brian Lenihan's own account of these extraordinary events but sadly that is not to be.

He believed in open government and transparent access to information about how decisions get taken. It would be a nice tribute to his memory if the Government ensured that we do not have to wait 30 years for a full account of Brian Lenihan's conscientious stewardship in Merrion Street.

Ar dheis De go raibh a anam uasal.

Colm McCarthy lectures in economics at University College, Dublin. He has headed an expert group examining state assets and chaired the Special Group on Public Service Numbers and Expenditure Programmes, aka An Bord Snip Nua. He is also the author of the report into the semi-state sector from the Review Group on State Assets and Liabilities

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