At 7.30am last Thursday, Vincent Leonard sat at his desk in Bloxham
Stockbrokers in Limerick. It was only nine hours later, when the markets
closed, that he again became aware of time. He hadn’t moved; he hadn’t
eaten; he hadn’t done anything except try to protect his clients from
tumbling market shares. All around him his colleagues whispered urgently to
each other, everyone incredulous that things had become quite that bad. It
was, said Leonard, like watching the Twin Towers falling over and over
again.
Last weekend, the Irish government’s €400 billion guarantee scheme for banks
was hailed as a stroke of genius. Brian Cowen and Brian Lenihan were basking
in coverage that proclaimed them as men who had made the toughest of
political decisions and possibly saved the country.
Then the stock markets opened on Monday and everything changed. Shares
plunged, the European commission decried the anti-competitive nature of the
Irish scheme and 10 Downing Street trumped the government with an
announcement that it would recapitalise British banks.
As unforeseen problems arose, the taoiseach was forced to admit that the
drafting of the scheme was taking longer than expected. The details will not
be announced until this week. Meanwhile, the spotlight has moved onto
capitalisation and away from liquidity. Irish banks need more money,
something the guarantee scheme is not going to provide.
So, despite the euphoria that followed last week’s “masterstroke”, is it
possible the Irish government has actually failed to address the nub of the
credit crisis, while still putting the Irish taxpayer at huge risk?
In the offices of Bloxham Stockbrokers, any residual relief has been nullified
by the new, more pressing concern about capital. “For a few days after the
announcement the market improved hugely,” said Leonard, the company’s
regional director.
“There was a real sense of confidence that this would work, and even a sense
of pride that Ireland had come up with this solution. But then the market
moved very quickly onto concern about the capital held by banks, and shares
started falling again.
“The more people talk, the more they realise that no-one actually knows what’s
going on. Nobody has lived through this before. We go home, turn on CNBC,
watch the markets, try to figure out what’s happening, but nobody knows. The
level of volatility is unprecedented. As a result, there is panic, fear and
confusion.”
Aware of the need for haste in finalising the details of the guarantee plan,
Lenihan travelled to Luxembourg on Monday, where he received a frosty
reception from European colleagues. He spent the evening in talks with
Neelie Kroes, the EU competition commissioner, trying to assure her the
state guarantee was legal. Kroes was concerned foreign-owned banks operating
in Ireland, such as Ulster Bank and Halifax Bank of Scotland, would be
unfairly disadvantaged if not included in the scheme.
The talks finished on Tuesday evening when Lenihan returned to Ireland saying
he was confident that an agreement would be reached with the EU, but
publication of the bail-out smallprint would now be delayed by at least a
week.
In a market where confidence is key, the announcement sent analysts running
for the microphones to declare that in the rush to pass the legislation, the
government may have failed to understand the problematics of the design.
“Those buggers decided to shoot before they looked,” said one economist. “They
have just put a sticking plaster over the problem and it could turn out to
be an expensive one. What we have here is the law of unintended
consequences: one problem is creating another. The advice given to the
government last week was bad.”
On Thursday, Lenihan said he was extending the guarantee scheme to include
foreign-owned banks which had significant subsidiaries in Ireland,
increasing the risk to the taxpayer to €485 billion. The news was welcomed
by the banks it covered, but met unease elsewhere.
“The government had no choice but to do it because of the EU competition
rules, but can they control it?” said Alan Ahearne, lecturer in economics at
the National University of Ireland, Galway (NUIG). “Can they isolate the
activities and fundings taking place in these subsidiaries? What is to stop
an Irish-based, British-owned bank taking money from the home office into
Ireland, and then using it to fund foreign investments, effectively using
the Irish guarantee as a vehicle to transfer funds? The Financial Regulator
can try to regulate it, but it will be extremely difficult.”
In an effort to combat this possible pitfall, the department is working on
ways to determine what size the banks were before the credit crisis struck,
in order to draw up rules to ensure that they don’t grow disproportionately.
“We don’t want a €30 billion bank suddenly becoming a €100 billion one on
the back of the state guarantee,” said one government official.
Even at this stage, the terms and conditions are shrouded in mystery. Lenihan
has yet to decide how much to charge banks, whether to charge different
banks more depending on their level of stability, and how to limit the
guarantee to €485 billion without restricting banks’ ability to increase
their capital.
He also has to decide who should be in charge of what will effectively be a
whole new banking system. When a similar scheme was introduced in Sweden,
entire boards of executives were fired.
“A bank that says we are in severe financial difficulty and we are going to
avail of the guarantee is effectively saying ‘we have failed in our jobs’,”
said Sean Fleming, a Fianna Fail TD. “While it won’t happen immediately,
there have to be changes. The people who led us into this situation will not
be the same people who lead us out.”
A spotlight is also shining uncomfortably on the Financial Regulator and
Lenihan’s advisers. One Fianna Fail backbencher said: “Everyone is confident
in Lenihan, but there is unease that the same people who were meant to be
watching the banks are now the people advising the minister on how to deal
with the problem.”
With so many details yet to be finalised, some analysts wonder if Lenihan can
even meet this week’s deadline. In the careful statements by the government,
one can even detect barely suppressed panic.
“If what’s happening on the bridge of the ship isn’t elegant, it’s because the
storm is horrendous,” said Noel Whelan, a political analyst. “Anyone who
tells you they know what is going to be happening this time next week is
lying.”
Just hours before Lenihan announced that the details of the Irish guarantee
would be delayed, the British government revealed its plan to inject £50
billion (€63.5 billion) into its banks. By Thursday, as Lenihan was sending
a draft of the state guarantee to the European commission, there was a
growing consensus Ireland might have been better served with the British
solution. But the finance minister insisted the banks didn’t need
recapitalisation.
“It’s imperative that we recapitalise the banks,” said Ahearne. “There are few
things more dangerous than a bank with low capital, and there’s nothing more
dangerous than a bank with low capital and a state guarantee. Otherwise they
will just be gambling with taxpayers’ money. The incentives are all wrong.”
Dan Boyle, a Green party senator, said the government is “not convinced” the
British approach is better. “The Irish may end up adding it to the
guarantee, but nothing has been decided,” he said. “We’re confident the
guarantee was the right decision.”
Ahearne, too, does not believe the government was wrong to introduce the state
guarantee. Now, however, more needs to be done. Capital is needed. “I think
it’s pretty clear there is at least one Irish bank in need of money,” he
said. “Some of these banks, when they realise their losses on loans to
developers, will be insolvent. What we have to decide now is whether we try
to keep those banks going. It’s hard to make an argument for keeping them.
There will have to be closures. The business just isn’t there for banks now,
and it won’t be there in the future.”
A government official said there is no intention of letting any banks fail, as
this would lead to panic. Instead, the government is looking at mergers.
Talks have begun with banks to force the more stable institutions, such as
Bank of Ireland and AIB, to merge with smaller counterparts. Ned O’Keeffe, a
Fianna Fail TD, believes these mergers are of concern. “It was obvious from
the legislation that they are interested in mergers,” he said. “That is of
serious concern. Some Irish banks have been doing good business and are well
capitalised. I don’t see why they should have to help a bank that recklessly
loaned money in pursuit of big returns.”
As negotiations continue, the ongoing uncertainty is not helping confidence in
the market. Eamon Gilmore, the Labour party leader, has described the delay
in publishing the bailout details as a “matter of grave concern”. By close
of business on Friday, the draft was still with the EU commission.
Leonard was leaving his office after the worst week in the crisis. “I’m going
home and I’ll try not to think about it,” he said. “Who knows what will
happen on Monday? We just have to hope someone in charge will figure out
what’s happening — and soon.”
