Honohan-Supported-Guarantee Talking Point Still Going Strong

Stephen Collins writes in today’s Irish Times that “Fine Gael also had the courage to support the bank guarantee which, despite the Anglo shambles, was in principle the right thing to do as the governor of the Central Bank, Patrick Honohan, has repeatedly said.”

The guarantee was perhaps the most momentous policy decision in the history of the state. Unfortunately, the standard of commentary on this decision from prominent media columnists has, in general, been pretty lamentable. Here, Mr. Collins repeats a talking point that has been rolled out repeatedly by government TDs. Well, repetition of a talking point doesn’t make it true.

As I’ve noted here and elsewhere, there is a world of difference between Honohan’s support for a guarantee and the idea that he supported the guarantee that was actually put in place.

And again contrary to a widely repeated talking point, Honohan’s primary objection to the form of the guarantee was not the inclusion of subordinated debt but rather the inclusion of almost all existing long-term bonds. He argued that this inclusion “complicated eventual loss allocation and resolution options” and that it “pre-judged that all losses in any bank becoming insolvent during the guarantee period – beyond those absorbed by some of the providers of capital – would fall on the State.” In other words, it worsened the cost of what Collins calls “the Anglo shambles.”

These comments were consistent with Honohan’s previously-expressed opinions on this issue, as shown for example in this article published in the Economic and Social Review in 2009, published a few months before he was appointed Governor.

No public indication has been given that the authorities gave serious consideration to less systemically scene-shifting – and less costly – solutions. For example, they might have provided specific state guarantees for new borrowings or injections of preference or ordinary shares – approaches that were widely adopted across Europe and the US in the following weeks.

Footnote 15, placed after the word “costly” in the above paragraph, reads as follows:

Blanket guarantees are among the “accommodating” approaches to crisis policy shown by Honohan and Klingebiel (2003) to have added considerably to the fiscal costs of banking crises around the world.

The working paper version of this 2003 publication is available here.

We also know now from the documents released by the PAC, that the form of the guarantee that was given was not recommended by the government’s own advisors Merrill Lynch, nor is there evidence that senior civil servants were recommending this approach either. So, at this point, the last refuge for those who want to argue that the government’s approach on September 30 was the right decision is this misleading Honohan-supports-it talking point.

For what it’s worth, also, I think one could argue just as strongly that it was Labour who showed more courage in objecting to the guarantee: Indeed, to this day, Labour are still getting flak from government politicians and commentators like Collins for failing to fall in line with the consensus to support the guarantee. Moreover, my understanding of Fine Gael’s position at this point is that they consider themselves to have been essentially misled by the government into supporting the guarantee.

88 replies on “Honohan-Supported-Guarantee Talking Point Still Going Strong”

Is Patrick Honohan somehow constrained in his position that he cannot correct opinions attributed to him erroneously. Surely a short statement (or a libel suit) would sort this kind of nonsense out once and for all

We looked at the announcement and had to read it twice because there seemed to be no logical reason for guaranteeing anything other than deposits and any future, newly raised bonds.

The guarantee of all banking liabilities was commonly, and within minutes of being read, summarised in the City as the government putting the country “all in” in a game of poker against the bond market.

They probably didn’t realise that if a player goes all in he is required to show his cards.

Well said Karl.

This kind of inept commentary is at the core of a lot of the Irish medias ‘analysis’. A characterisitc of the deeper ‘half-assed’ professional class culture in Ireland.

Imagine it’s two years since that decision was taken and we’re still reading/hearing this kind of rubbish. We still only have a couple of sound bites to explain why such a generous gaurantee was given, another failing of the Irish Media.

“They probably didn’t realise that if a player goes all in he is required to show his cards.”

That is, I think, the key to the entire shambles. Our Glorious Leaders believed (believe still, if the Minister for Health is typical) in the power of the Word, the Story put forward with ostensibly authoritative eloquence. I wouldn’t really expect them to take account of the fact that there might be a reality that is not the same as they say it is, but I thought they might by now have realised that there are people — important people, not just citizens — who don’t believe what they say.



If I am not mistaken, Honohan has already said as much in public (for example, see his interview with Vincent Browne on tv3). It obviously hasn’t gotten through to the wider commentariat….. as usual we will have to rely on irisheconomy.ie to disseminate some sense of reality.

Well said on Irish journalism.
“You want me on economics,…, ok I will give it a lash”

Now was that the Financial Regulator or the Editors office….

“pretty lamentable”

Very politely put.

But journalism is about selling a title. If the mob wants sensationalist narrow minded thinking and not truth then that is what journalists give them.

But the ferocity of negativity in the mainstream media is so strong that I wonder is there a “Third Force” actively at work trying to destabilise the country, aiding and abetting the start of civil war?

Stranger things have happened elsewhere……….

I’m afraid, contra sporthog, that the problem is actually an instinctive repugnance of anything that seems sensationalist or populist on the part of a certain kind of journalist, who may be called a responsibility junkie.

Indulge me while I quote my own comment from the last time (http://www.irisheconomy.ie/index.php/2009/08/04/note-to-opinion-columnists-it-does-matter-how-we-deal-with-the-banks/) Karl had cause to take issue with Stephen Collins:

“Many political correspondents seem to be ruled by the idea that implementing unpopular policies is the height of virtue in politics. They therefore take it upon themselves to police all criticism, opposition etc. of such policies, such criticisms being by definition opportunistic, populist, irresponsible etc. I think it must be something akin to the fetishisation of “moderate” views and bipartisanship known in the US as High Broderism.”

That a Very Serious Person (to use Krugman’s term) like Patrick Honohan could actually share the view of the irresponsible, populist, opportunist etc. etc. clearly does not compute. Too much cognitive dissonance I suppose.

I suspect Stephen Collins would probably see the Tallaght Strategy as the high point of Irish statesmanship since Lemass. Fair enough. But the problem is it actually matters what the content of the policy is – bipartisanship in support of a bad policy is not good.

On the question of who was and was not courageous, I suspect it was more a matter of who read the politics correctly – in this case Labour. As it happens this was also sound on policy grounds. Sinn Fein’s support for the guarantee does suggest opposition was seen as politically risky though – fear of being seen as playing politics with the economy etc.. Even then I wonder did they know Labour were going to oppose it, and hence provide them with political cover should they do likewise.

To quote Orwell’s definition of The Big Lie:

“To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then when it becomes necessary again, to draw it back from oblivion for just so long as it is needed….”

The question is why?

Is this just not further evidence that (a) all policy decisions are made without any effective scrutiny or evaluation that might winnow out the bad ones – or at least modify their baleful impact; (b) the Government spin machine will go into overdrive to generate wall-to-wall post hoc justification of all decisions made; and (c) even the best journalists, constantly exposed to this background din and with the best will in the world, will succumb occasionally and swallow and regurgitate fragments of the story being spun?

I am sure Prof. Honohan (and possibly Mr. Elderfield) recognised that the Government would seek to purloin some of the lustre their integrity and reputations generate to justify its policies and to deflect attention from its own deficiencies. FF will do or say anything to secure or retain political power. In this respect it is probably more successful than the original ‘stupid party’ – the British Tories – which, for some time, became entrapped in the dogmatic and ideological residue of Thatcherism. FF-lite (aka FG) never really developed the knack.

It is unfortunate, but inevitable, that such a distinguished reputation has to be defended from this grubby, petty, expedient and unjustified misuse. If you sup with the devil, you need a long spoon.

One mistake it’s easy to slip into is to ascribe tremendous insight, judgement, knowledge and reasonability to the great and the good. 2008 should have revealed the falsity of these ideas, but it’s only natural we’re easily impressed by people who are held in high esteem and enjoy the trappings of wealth and power.

Taking the property developers as a case in point, they weren’t nearly as clever as they imagined themselves to be. Nearly to a man (and they were nearly all men, unsurprisingly in an ego-driven business) they kept upping the stakes right to the end which is why they’d all be bankrupt now if there was any justice in the country. Even Charlie McCreevy continued piling into property right to the end.

Likewise the politicians and the ESRI. It turned out in the end there was really nothing more than 4 or 5 truisms at the root of all their thinking. I came across this yesterday while browsing the archives. It’s priceless: a precise prediction of everything that would happen three months previously. And yet the exact same logic was just as applicable three years earlier. In fact it was inescapable.


There are a few clips of the Ch4 hoax reality TV show Space Cadets on youtube. The ‘contestants’, selected by psychologists for their propensity for groupthink, participated in a ludicrous exercise where they supposedly trained and took part in a spaceflight. Not one contestant spotted what common sense should have told him immediately. The entire thing was designed as an experiment in stupidity.

The contestants didn’t lack intelligence as such. One described afterwards how he knew — or ought to have known — the whole thing was a hoax but, after already getting involved and making a giant ass of himself, contemplating this idea just gave him a confused headache. It was more satisfying and reassuring to believe he really was going into space as that way there was still some chance he wouldn’t be exposed as an idiot and hey, he might even really go into space.

Sep 2008 was the moment the political and economic leaders of the developed world took their space flight — all bar a handful who had consistently warned of impending disaster for years and got derided as a result for ‘predicting 5 of the last 2 recessions’ and so on (George Soros, after years of issuing warnings, even came out of retirement to clean up yet again. He must be shaking his head still at human foolishness).

There was no money to be made in talking down the economy, tons to be made in spewing out propaganda to boost your sector and together the vested interests’ propagandists succeeded in fooling each other.

Of course bankers’ bonuses meant they’d every reason to always bet the farm on another lucky dice roll.


The politicians, bankers, developers and so on had all been massively impressed by one another. Surely one or two must have suffered confused headaches in the preceding years, but their minds were calmed by the thought that the smart money was on their side. I’m sure the headaches grew more intense when the three-way-splits started in the central banks, that’s to say when expertise provided no answers, judgements differed, and the experts just had no idea what to do.

Look at him: he’s got a Mercedes and a Rolex and a PA and a big house and everything and he thinks it’ll be grand so he must be right.

Deregulation good. Markets good. De-unionisation good. Free trade good. If you could only learn these few phrases, get a good education, and not be eccentric by thinking too much or too independently you couldn’t fail, and damn the lessons of history. Dow 30,000. New paradigm. Goldilocks economy. Downsizing. Leaner. Meaner. Well, meaner anyway.

Nietsche observed it requires courage to think — to drift, that is, in perception instead of moving cautiously via conscious decision from position A to position B. If the issue is morally or emotionally loaded, there is the fear of thinking all sorts of dangerous thoughts: angry thoughts, fascist thoughts, selfish thoughts, racist thoughts, homosexual thoughts. It’s frightening to think you might drift for a moment and wake up a maoist or a hindu. The fear may not always be realistic, but it’s often powerful so people control their thoughts to say sane — a necessary nonsense.

Not every issue is loaded to every person, but some are loaded to each person. The great and the good stood to lose most if they started believing foolish things: the warm glow they felt every time they looked in the mirror. Better to ‘decide’, even though will or determination, implicit in the concept of decision, aren’t logically applicable in the domain of perception.

In the end, Cowen and Lenihan got bounced by a bunch of very wealthy, very cynical men with a nice line in quality tailoring. They couldn’t believe the 5 platitudes they’d learned by heart could fail them and they gave the guarantee. Neither courage nor overt intellectualism are assets in either politics or banking of course, and they may well be handicaps.


I also read this article Karl, was duly irritated by precisely this point, and added Collins to my list of journalists not to be taken seriously. How you find the energy to constantly nail this kind of misrepresentation is beyond me. It would be nice to think that people were listening.

I think Labour deserve a huge amount of credit for objecting to the guarantee: it must have been a lonely and somewhat scary place to be at the time, but they have been proved to be right.

“Courage” had nothing to do with it. Saving their investments and fear of loosing personal gains had everything to do with the decisions. There is no moral leadership, no fear of God, no mercy and therefore no justice. No need to wonder why the land becomes a band of robbers in these conditions.

Wow, can anyone else think of another example of groupthink anywhere? Anyone?

Some points, in no particular order:

If we just guaranteed new deposits, I believe Anglo would have gone bust the next day, probably followed by BOI and AIB in very short order – funds and banks don’t decide to increase their exposure to a country when they know/believe they are about to lose some of what they had already lent. We cannot ignore that point, and throw criticisms and seek recriminations based on partial analysis.

We love “trusted figures” in this country, such as Honohan. Why doesn’t someone ask him about only guaranteeing new deposits at the time? Or maybe ask Elderfield, the regulator for northern rock who is

But maybe this would have been the best approach to follow, but what would the consequences have been? Immediate lack of funding for Ireland at a time when the global economy was in freefall, immediate substantial losses for international banks and pension funds which would really pleased their governments and taxpayers. Ireland would have been all-in then anyway, we could only have got funding from the IMF, so we would have had a major our fiscal adjustment in one big dose already. Where would welfare rates, pensions, public sector wage levels be now? Not in the top decile of European countries, that’s for sure.

But maybe that would have been the best approach for the country, but I doubt it. I have 4 kids and I am glad we avoided an immediate Armageddon scenario in 08. Maybe we could have excluded the sub debt, but how much would that have saved us?


Well, my point exactly.

For the politicians, if they believed everything was going to hell they were doomed anyway. But if they held on to every crumb of comfort, they felt there was always a chance things would work out. So they gambled the nation’s wealth on trying to prop up property prices: tax changes with every budget etc.

If they’d any integrity they’d get angry. Not uncontrollable anger necessarily, but enough to make very distracting the urge to perpetrate physical violence against the main perpetrators undermining the nation’s future and prosperity so long as they were in their presence. As that would be just about all their peers, people of that temperament would tend to avoid politics as a career.

When examining the long serious of decisions that have created this mess, why don’t we start with benchmarking and vilify the people behind that, who never published their ‘analysis’? Oh wait, they included a respected (??) academic economist and a whole bunch of social partners, so they obviously acted in the best interests of the state.

A Fianna Fail Finance Minister could never do that, so there must be some devious rationale behind his ’08 bank guarantee decision….


Space camp was 2003-2008. The guarantee was just the launch date.

Whatever happened to the banks, the country couldn’t have landed itself in a bigger mess than its in. Even if they all went bust, the staff, computers, branch offices etc. would still have existed.

The key point is that the Govt *nationalised* the issue with the guarantee — it provoked a similar response throughout Europe. We’re lucky we didn’t have to make good the disastrous losses of the German banks in the IFSC (the ‘wild west’ as it was known due to the lax regulation) due to this ‘stroke’.

One of either AIB/BOI was the most that needed rescuing. The idea that these institutions had been operating in the national interest is nonsense. One domestic bank plus foreign competition would have been fine, and the bondholders for the rest would have gotten cleaned out and the property developers wiped out.

That would have left plenty of cash for reflation and rescue packages for 1st time buyers etc sucked in by appalling Govt/Bank boosterism in 2005-2008.

@De Roiste
“Anyone know if it is accurate?”
Even if it is accurate, it is not telling the full story. Many of the companies mentioned are nominee accounts, so they are vehicles for purchases of bonds. The ultimate owner is still opaque.

If you knew the difference between deposits and bonds, we might be able to take your rant seriously.


1. To expand on hogan’s point, you’re on your own debating the idea that only new deposits should have been guaranteed. Deposit insurance already existed (though this was extended on September 30). The debate is about bonds.

Click on the link above to the previous piece that I wrote on this subject and you’ll find the proposed alternative:

“To be concrete, consider an alternative decision in September 2008 to fully guarantee deposits and guarantee new issues.”

I probably should have put the word “bond” in front of “issues”, but that’s what I meant.

2. “Oh wait, they included a respected (??) academic economist and a whole bunch of social partners, so they obviously acted in the best interests of the state.”

If the economist you’re referring to is Jim O’Leary, it might be worth pointing out that Jim resigned from the benchmarking board and has never supported its recommendations.


I believe Anglo would have gone bust the next day, probably followed by BOI and AIB in very short order – funds and banks don’t decide to increase their exposure to a country when they know/believe they are about to lose some of what they had already lent. We cannot ignore that point, and throw criticisms and seek recriminations based on partial analysis.

You seem to suggest that the policymakers were in totally “uncharted waters” on the night of Sept, 29, 2008.

It was 14 months short of a week since the onset of the international credit crunch and the ECB had shown in that time that it was ready to act swiftly to provide liquidity to Eurozone banks.

For example, just before Christmas 2007, it had provided emergency liquidity of €348.6bn.

Prof. Morgan Kelly pointed out on Sept 30 2008 that it was fear of insolvency rather than a liquidity problems that had resulted in problems for Anglo.

Have a look at the Anglo Powerpoint presentation to DoF officials in Sept 2008 and wonder how could this spoof have been been bought from a bank totally exposed to the property market, 19 months after HSBC Bank had triggered the news in the US of the impending collapse of the sub-prime market and days after the collapse of Lehman Brothers?

There was no need to guarantee existing bank debt.

If Anglo had collapsed, it could have been given 90 examinership protection; unguaranteed debt would have been wiped out and the senior bondholders would have had no choice but to accept an equity stake similar to what happened with GM in the US.

Outcomes should be the starting point for the design of policy, and the yardstick by which the effectiveness of interventions should be judged. We had the money to reengineer the social welfare and tax systems, yet the reforms which have come in many areas since 1999 have been limited to tinkering around the margins and introducing some limited new or part payments such as the part-payment of Carer’s Allowance.

The point about Carer’s Allowance is that it is paid to someone who is caring for one or more family members on a full-time basis. The state’s aim is to keep people out of institutions as much as possible, yet no consideration is given to whether carers can actually afford the income, pension and social contribution hit they incur by caring for family, or if by paying Carer’s allowance on a universal basis would be a value-for-money initiative. Séamus Brennan admitted in 2007 that the department has not done that analysis.


On benchmarking, you may also wish to acquaint yourself with relevant facts.

The benchmarking body said its conclusions on withholding 75 per cent of the average payment hike of 9% payment until “real outputs” were determined and a system for “validation” had been put in place, were to be taken as “integral parts of the recommendations on pay.”

In November 2003, McCreevy said in a speech: “while the Government is committed to honouring benchmarking, I would like to stress that the payments are dependent on compliance with the terms of the agreement. If the conditions are not met in any sector, grade or organisation then the payments will not be made in that area.”

Bertie Ahern must have given the green light for payments to be made without any conditions.

As a minister and TD, he received 2 benchmarking payments himself.


@ Eoin

Hindsight etc. Cant you do any better than that?
There is the guarantee and there is the renewal of the guarantee, in part or in full. DMcW supported the original guarantee then and, as far as i’m aware, has not changed his mind on this.


Wow! Groupthink indeed. The almost overwhelming consensus that the blanket guarantee was totally and utterly flawed is breathtaking.

It was not technically necessary to guarantee existing bonds, we all know that. In a desire for simplicity Lenihan ignored this technicality. A good consequence of this is that it allowed Honohan something to polish his reputation for independence upon.

But Honohan’s argument was somewhat theoretical. He argued that it restricted our options on a resolution scheme during the 2 year period. Would we have exercised those options in the absence of the blanket guarantee? Are we going to exercise those options in January when the period expires? The fact is we would likely be in no different place today if we had gone with the more precise guarantee rather than the crude blanket version.

The suggestion that we really blew it with the blanket guarantee and we would be in so much better place if only we had left out existing bonds is extremely flimsy but what disturbs is the Groupthink in this blog which engorges itself on that suggestion.

@ Cillian

huh? This post is about the original guarantee, not the renewal of it. I think the original guarantee, with hindsight, was the wrong decision, but that doesn’t make it a stupid or irrational decision. As i referred to above, a lot of smart (or allegedly smart) people thought it was a great decision then. Also, im not sure if you are aware, but the renewal of the guarantee excludes an awful of of the banks debt, and there’s very few complaints about this renewal. What is your specific complaint about the renewal?

@ Brian Woods II

You are correct in suggesting that a failed political system characterised by panic and slow motion, may not have departed from its conventional modus operandi, irrespective of the detail of the guarantee.

It has after all taken the bond markets and the European Commission in recent times to get some positive action in the sclerotic system.

However, it’s hardly wrong to say for example that only 2 countries guaranteed existing bank debt during the crisis and the guarantee may have closed off options before the nationalisation of Anglo.

So would you prefer to leave the field to the spinners?


“If we just guaranteed new deposits, I believe Anglo would have gone bust the next day, probably followed by BOI and AIB in very short order – funds and banks don’t decide to increase their exposure to a country when they know/believe they are about to lose some of what they had already lent.”

I personally wasn’t aware anybody had suggested just guaranteeing new deposits. You might be mixing this up with new bond issues?

Competent bond portfolio managers invest in bond issues. If they made a misjudgement of risk and invested in an Anglo bond they expected to loose money. If then new bond is issued, this time with a sovereign guarantee, managers analyse this as a quasi-sovereign bond, not as an ordinary corporate bond with corporate risk.

I have seen these assertions that if investors loose money on an investment in a country then they will not invest in anything else there . I have never come across a fund manager likely to take that view. It seems very naive.

@ Eoin

We’re obviously talking apples and oranges here. I took your ‘hindsights a great thing’ post as a sleight on the ‘allegedly smart’ DMcW – that he has done a flip flop. I’m not expressing an opinion on either the guarantee or its renewal – just pointing out that DMcW appears to hold a consistent postion in regard to the original guarantee.


@ Cillian

im not making a point about inconsistency (although McWilliams HAS moved away from his original enthusiasm for the decision, somewhat explicitly but without doubt implicitly – you cant complain about not burning bondholders and at the same time think the guarantee was “a masterstroke”, the two issues are heavily interconnected), simply that we seem to have some sort of revisionist history whereby we always should have known that the guarantee was a stupid or irrational decision. Quite the contrary, at the time lots and lots and lots of people thought it was a great idea.

“What is your specific complaint about the renewal?”
I’ll make a complaint about it if you like – that it has happened at all. If the original guarantee was the result of unforseen incompetence, the extension of it can only be seen as the result of forseeable problems.

Unpopular discussion sites posited the following problems at the end of the guarantee:
1. A rollover wall.
2. No incentive to resolve banks.
3. A feeling of smugness that the worst was over so business as usual could continue.
4. It being a bet on the Irish economy significantly improving in the interval.

All of these things have come to pass. The original guarantee, the subsequent Anglo nationalisation act and the NAMA act gave the minister extensive powers to break up the banks where he saw fit. He chose not to exercise these powers, going so far as to allow himself to be outmaneuvered by BoI and AIB in the appointment of executive officers.

This prevarication was based on the hope that it would all turn out grand. Hope is not a strategy. In particular it is not a strategy when faced with entirely forseeable obstacles. You don’t drive at a wall and hope it will move out of the way.

Having supported the guarantee, the next step in Mr. McWilliams plan was to resolve the banks by whatever means necessary. No means were actually required, because no resolution was performed. Even the corpse of Anglo was electro-convulsed into a semblance of life until the EU pulled the plug with their “you must be ‘aving a laff”.

@ Michael Hennigan

I am confronting the implication of the opener that the blanket guarantee was a terrible mistake, and that if only a more “conventional” approach excluding existing bonds had been followed we would be in a far better place today.

In support of the thesis Honohan’s declaration of independence is widely quoted. I want to ask Karl and also for that matter Honohan what would be different today? Let’s say that by about mid 2009 we could have decided that we had enuff of Anglo, let’s say we could have rushed in the Resolution legislation. Then we could have torched those bondholders whose bonds were maturing in the last 12 months and we would have got say 50% from them. So how much are we are talking about?

Honohan in particular has to explain what he would have done differently, if anything, if only the guarantee had been less blanket and he has to give a figure for how much the taxpayer has lost as a result. It is simply not good enough for him to say that our options were restricted, he has to state and quantify what should have been done if our options had not been so restricted.

Phrases like “credit crunch” and “abnormal credit conditions” were misleading. Many credibly managed banks with limited exposure to CDOs had no trouble accessing credit throughout the entire period, albeit at elevated rates to account for grim business conditions generally.

Banks and governments conspired to paint as a strange and incomprehensible phenomenon something that was in reality common-sensical and natural. “Abnormal credit conditions” was a preposterous non-explanatory explanation, just a continuation of the “just send us on another bunch of suckers” pyramid-scheme logic of the later boom period.

Nothing could be more natural than that the availability of credit should wax and wane. The problem was not some mysterious and intangible force arriving out of some abstract dimension: asian creditors simply began to lose confidence that the junkie would ever pay off his tab.

The CDOs, often paying 10% and with serious losses in prospect no more often than every 500 years according to the quants, were purest moonshine. The rate of return on investment, in the broadest terms, is a function of human psychology. Such opportunities may fleetingly present themselves before market price-levels readjust — something that might be expected to happen litterally in days. What simply is not possible is to earn a risk-free 10% on an off-the-shelf product forever; it may be possible in alien civilisations whose impatience to spend their money makes credit scarce, but not on a planet inhabited by humans.

The CDO phenomenon was simply the transference of all the old and common misconceptions — “bricks and mortar are a safe investment”, as if price levels simply wouldn’t readjust if this were true — about property from the private to the corporate sphere. The deceptively mathematical sophistry practiced by the quants proved to have no basis in science.

In the Ireland of 2005-2008, the messengers were invited to “go off and kill themselves”… by the Taoiseach no less, who has every reason to hide in a cupboard. The government’s enthusiasm for market forces did not apply to the property market where up was defined as good and down bad.

Never mind that society was exhibiting some bizarre fads: family annihilation, for instance, where a loving but bankrupt parent decided to take accelerate nature a bit and take everybody to heaven where they felt things surely couldn’t be worse. This was a symptom of the unfolding national nervous breakdown. It was met with tut-tutting and willful ignorance of the root cause.

This phenomenon was in effect encouraged by the government and vested interests; vast levels of household debt, three-hour commutes and hair-shirt family budgeting were normalised, all for a 40-yr ball-and-chain in the form of a poorly built two-bedroom house four miles outside Carlow or Kinnegad. The whole system ran on hopes that had to be disappointed, just as happened in every bubble in history.

The phrase “soft landing” was cooked up even though it had no basis in science. Jim Power, Dan McLaughlin, Austin Hughes etc. trotted it out on RTE as if it meant something, as if they weren’t paid PR men whose predictions were always rosy, and officialdom conspired to encourage the belief also.

Overall, the episode was sadly reminiscent of Tammany hall politics in NY of a century ago, where naive Irish men and women were met by their exploiters, slightly less naive Irish men and women, given a boardinghouse, a job and a crook to vote for all in one, and the insiders engaged in a conspiracy of silence while fleecing their victims mercilessly. The only benefit was not being Black, Italian or Jewish, the excluded groups who were forced to prop up the system, and a nation that defined itself by innocent victimhood could not understand that its sons might exploit them so ruthlesslessly.

“BTW re dramatic effect – ops like hip replacements are put back every time a surgical ward closes”
Off topic, but, I don’t understand how cancelling operations saves a single penny for the system. The buildings are in place, the doctors and nurses are employed, the patient is on some sort of relief medication until the operation takes place.

So what is being said? Do we pay extra for each operation? If not, how do we save anything by cancelling operations?

@ Adrian
Trying to save only one Irish bank, while letting the others fail is of course complicated by the massive amount of overseas funding they all need. And I don’t think our European partners would have appreciated letting their banks and pension funds suffer.
As for leaving money available for reflation?? Again, we have an underlying deficit of over 11%, would any international investor lend us money if it was even higher than this?
And I believe the property developers have already been wiped out. As with most people, I wish our bankruptcy laws were more stringent and didn’t allow them keep family homes on ailesbury road and their large cars etc,

I believe we had to guarantee existing senior debt, not sure about the sub debt. Deposits were already guaranteed, but only up to 100k if I am correct. I would like to know what portion of the total deposits in an irish bank is covered by that? Is it known? Do pension funds and banks place deposits at all?
Re benchmarking, I thought prof Brendan Walsh was on the committee, apologies for the reference if I was wrong about that, or if he is not considered a respected academic economist.


Reference was to original 2008 guarantee when most of the cartel could safely have been left go to the wall. Our credit position would not have been seriously strained if not for the overstretch the guarantee induced.

I accept you have a point morally speaking; having for years consciously sucked cash out of the European finance system via lax regulation, there was responsibility for the losses nationally. Moral considerations played no part in the Govt’s decision, however.

The crisis had been ongoing for a long time by sept 08, and is still ongoing, and authorities are still grappling about how best to deal with it. The boe and fed are discussing even more QE, the fed funds rate was still well above zero in sept 08, and most people would have disagreed strongly in nov 08 if you said the fed would cut to almost zero within weeks. The crisis kept on surprising almost every policy maker and economist, and continues to do so today.
The US succeeded in screwing the bondholders in favour of the unions, and good for them, but I don’t think we could do the same. The fed is there to print money for the US economy if necessary, we only have the ECB. I think the eu/IMF will bail us out also, but let’s see what they demand in return. Why did they insist on pay cuts for the Greek public sector, and reductions in pensions and welfare?

@Michael Part II
So benchmarking wasn’t the problem, it was the guys who implemented it??
I suppose I can’t disagree with you on that, as it should never have been implemented.

I disagree with your comment on fund managers. I have worked with many, and I believe any fund that lost a portion of a 100m deposit, or a senior bond, would never be allowed to lend to that institution/country again.
The equity holders were all wiped out, and many have come back to buy again, but equity managers, and indeed junk bond managers, are very different to the investors who place deposits, buy government bonds or senior bank debt (well, pre 2008 anyway)


But a distinction could be drawn between the banks and the state up to the guarantee. The fund manager’s losses simply weren’t the state’s liability. So they would have been reluctant to lend again to the bankrupt banks: same difference. This would not have affected the govt borrowing rate.

@Adrian II
I believe you are 100%wrong if you think we could have ‘safely left most of our cartel go to the wall without seriously straining our credit position’.

Especially if you are suggesting we shouldn’t have honoured deposits over 100k, or senior debt. The lights would have gone out there and then. The country would have been all in then alright.

If you were suggesting we let the equity holders swing, that happened. The management survived, which was remarkable. And most of the staff also survived, probably still on the same high salaries they ‘earned’ in the good old days when they were giving out those loans.

The immediate problem we have is to reduce the deficit from over 11% to zero. I think that is where we need to focus our energies, rather than wishing away the mistakes of the previous decade.


I think the point is that there was no need to guarantee existing bonds. For that matter there was no need to guarantee existing deposits. As the bonds (or deposits) matured they could simply be paid back from new bonds and deposits. Liquidity is essentially about access to new money.

But the distinction is extremely theoretical; there is no way a bank could continue to raise new funding whilst welching on existing funding, the latter involves a liquidation.

The only option that was closed off was a retrospective resolution scheme which could wind down the bank and torch pre 2008 bonds maturing in 2009/10. So at the very, very worst we have been unable to discount those pre 2008 bonds which matured during the last two years.

The option is now open to torch all pre 2008 bonds yet to mature. Is it going to be exercised? Is Karl/Honohan recommending that it should be? Seems that with our new clean sheet we are still not going to exercise that option. Thus the whole discussion is irrelevant.

There were no silver bullets missed then and there are no silver bullets available now, despite what Prof Lucey, David “rockstar” McWilliams and others may claim.

Insurance of deposits was necessary. You’ll have to provide some justification for the claim that the state could have been made liable for bankrupt banks’ bond liabilities beyond simply re-stating it over and over again.

The bankers went to Cowen and Lenihan and basically said pay up or the puppy dog gets it. It was a bluff. The consequences of collapse of the entire financial system couldn’t have been worse than what happened. It wasn’t Stalingrad; Dublin wouldn’t have been rendered a bombed out ruin. The financial system could have been revived and both emergency credit and temporary suspension of debt judgements provided for until the fraction of the finance system necessary for the economy to function was resuscitated. This isn’t what I’d have suggested, but it was perfectly feasible.

@JCY as with previous remark

I’ll add by way of an apostrophe that setting up the government as guarantor of the financial system or putting in place a tradition of acting in such a way is more dangerous — encouraging reckless behaviour — than default.

The whole point of finance is to establish a connection between risk, reward, investment and demand for credit. If the govt guarantees all obligations in the financial system *it cannot ever be stable*.

@ Adrian
The state did not have to assume liability for the banks, you are correct. But not assuming responsibility for external deposits and external senior bonds would have shut off external funding to the country. I agree that we could have taken that option, but I’m glad we didn’t.

Patrick Honohan refuses to refute misquotes, like the one here, because it would start him down the path of explaining how bad our situation is today. He suffers the error of thinking that once in power you need to cheerlead to get out of current problems rather than remain frank and pressure for serious change. So he errors, at least in his public statements, by inciting people to make bad investments: He calls the current interest rates on our debt “ridiculous”, and just a few months ago he said we would all realize by year end that the problem in our banks has been solved!

@ Jcy

“Re benchmarking, I thought prof Brendan Walsh was on the committee, apologies for the reference if I was wrong about that”

Brendan Walsh was not on the Benchmarking Body. See their report:


Feel free to withdraw the statement that Walsh was part of the body and the unnecessary “perhaps he’s not respected statement”.

Perhaps you’re new around these parts but you’re showing some strong troll-like tendencies here. Take it easy or your contributions will be deleted.


No no no… The bondholders needn’t have gotten a penny. They were someone else’s debts — private debts, resultant from contractual agreements between third parties to which the state was in no way obligated.

Please explain how contracts between third parties could have affected the credibility or integrity of the state: the factor determining the difference in bond rates between two equally-indebted nations. This is exactly the point I have asked you to justify instead of simply repeating.

@ BW2

“I think the point is that there was no need to guarantee existing bonds. For that matter there was no need to guarantee existing deposits.”

If “the point” you’re trying to express is my point, or Patrick Honohan’s point, then attaching the “For that matter” to it is misleading, as I didn’t question the decision to fully guarantee existing deposits. Quite the opposite in fact.

As for “The only option that was closed off was a retrospective resolution scheme which could wind down the bank and torch pre 2008 bonds maturing in 2009/10”, I don’t share your lack of concern at the lack of damage caused by the effective closing off of this option.


I wasn’t making any particular point re the deposits.

My essential argument has two facets:

1) Would we have actually used our increased optionality? Seems not coz now that we have a complete clean sheet regarding those pre 2008 bonds we are not proposing doing anything.

2) Even if, say, sometime in 2009 we had flexed the optionality we are talking real small beer, the value of pre 2008 bonds maturing in the last 12 months.

This is a quite immaterial point which you are stirring up to look like a cataclysmic fault line in the original decision when it is no more than a theoretical nuance.

I already said I apologise if prof Walsh was not on the committee. I checked the 2007 report rather than the 2002 one.
Being new to these parts I wrongly thought you were maybe being sarcastic in your original reply.
Mea culpa again.
Troll-like tendencies? Must look up that one.

You’re correct, I cannot show a formal contractual link between the banks’s liabilities and the state. Rather i have tried to describe ethereality as I see it.

Maybe as a genuine service to the people on this site, someone involved in the international markets could offer an opinion? Ciaran O’Hagan has made contributions in the past, has he opined on this? Is there anyone that people here would trust and respect?

And while we’re at it, why not ask German or French economists, or anyone at the ecb, about the efsf and any conditionality that might apply to it?

@Brian Woods II

Having taken guaranteed the bonds once and precipitated a Europe-wide reaction with lamentable results not least for ourselves, it’s too late to backtrack now. The guarantee is and always was effectively perpetual.


For my part, I’ll mention that the state could not have wholly avoided the dirt thrown up during the cowboy years, when we (we deserve to share responsibility with out political masters) were glad to suck cash out of the EU economies via transfer pricing and lax financial regulation.

My point was a technical one. The state did bear a degree of moral responsibility, having connived with the bankers for years in the most disgraceful fashion to exploit the masses of the naive and the young.

The sad thing is that it’s the naive and especially the young who benefitted least from the boom (the self-congratulatory Celtic Tiger nonsense always made me nauseous) and will pay the heaviest price for the disaster.

Does this matter any more? Goldmann owns a lot of our bonds. Sutherlands his man on the inside. And FG support the consensus.
The guarantee was a mistake but fixating on it now is also a mistake. Germany is not generous. They probably will not help enough. Time to start preparing for life without the Euro. It’s not what we want but it’s the way this is probably going


Agree. Waste of time plowing this field now. An unwise decision at the very least or a reckless promissory note guaranteed to bankrupt future taxpayers. Whatever. It can’t and won’t be unpicked.

Ghastly to read today that FG are coming around to consensus on objectives and reducing the deficit to 3%. Metaphors of soup and forks come to mind. The last thing the country needs is consensus. It has had near on 13 years of it and look at the result. Looks as if the alternative the FF/GP Titanic is an FG/Lab Lousitania.

“..what would the consequences have been? Immediate lack of funding for Ireland at a time when the global economy was in freefall, immediate substantial losses for international banks and pension funds which would really pleased their governments and taxpayers.”

Others have refuted adequately your suggestion that somehow a bank problem would be irrationally seen as a sovereign default – but the reference to “substantial losses for pension funds” is interesting. Pension funds here and I presume elsewhere have been decimated in recent years, despite these implicit and in Irelands case, explicit, bond guarantees. Why?. I suspect – and am as usual open to correction – that the pension funds major exposure was to bank shares since these were normally paying dividends and as a result were seen to be sound investments by the managers. These as we all know have been wiped out.

@ The Alchemist, Eureka,

It certainly seems to look that way. Even if the conversion of corporate bonds into sovreign bonds was the right thing to do, there is still a limit as to how much debt this country can shoulder.

A rather philosophical question, but would the “Nuclear Winter” have been the better option? Perhaps getting the pain over in one sharp shock two years ago would have worked out. We may never know.

Blaming the Irish Financial Regulator is one thing, but I believe Europe should have taken a much greater interest in what was going on in the periphery. In that some blame lies at Europes feet for this mess. I think the whole European concept was not properly thought through. And now we pay the price.

Here’s the back cover blurb from Breaking the Mould: How the PDs changed Irish Politics:

On a cold December morning, four days before Christmas 1985, a new political party was launched on a deeply depressing Irish political scene. At a hastily organised press conference, Desmond O’Malley, Mary Harney and Michael McDowell told a group of sceptical journalists about their plans to radically alter the nature of Irish politics. Despite the cynicism of the depressed 80s, that is precisely what the PDs have done. Their low-tax, free-trade agenda has been the dominant philosophy of the Celtic tiger and has transformed the whole intellectual climate of Irish public life. The PDs have been vastly more important than their time in government has warranted, impressive though that has been. It was they who finally subverted the Fianna Fail core principle of never entering coalition; it is they who have set out the intellectual template for the politics of modern Ireland; it is they who have fundamentally changed the climate of public discourse. Stephen Collins’ authoritative history is based on his many years as one of Ireland’s most distinguished political journalists; on interviews with leading figures in the party over its twenty years; and on a close observation of the party in power. Love them or hate them, there is no denying the pivotal role that the PDs have played in the making of the new Ireland.

Even getting away from the ‘It was a dark and stormy night’ of the bumpf above, I think the title would have benefitted from the insertion of a couple of “failed to”s.

Upon reflection my real gripe is with Holohan. There is no doubt that he quite strongly criticised the original guarantee for its blanket coverage and to that extent Karl and others are justified in developing the theme.

But Holohan merits at least one or two supplementaries, and I hope some Oireachtas committee gets to ask them:

Q1. If the blanket coverage was in error, what could we have done if this error had not been committed?

If the answer is nuffin, then end of matter, and please don’t raise it again for the sake of looking independent. If on the other hand there was some radical initiative that we could have taken but for the blanket guiarantee, then:

Q2: How much has the blanket guarantee cost us on account of being debarred from this initiative? and

Q3: Should we now act against pre 2008 bondholders?

I am fed up with people debating the past when negotiating the future is the key.
Bottom line – we had major house price (and general property) inflation because of the badly designed Euro.
Now let’s deal with the issues. The ECB need to sort this out. If it means that every mortgage taken out over the last 8 years is extended in term by 10 years (with the ECB covering the increased insurance on it) then so be it.
Time to forget Lord Blankfein and his minions. The system works well when based on common sense and collective interest but not when exploited by greedy little feckers in FG and elsewhere


It would be very convenient if every debtor could walk into his/her bank and say ‘Hey look at the mess you got me into with those loans. You really should have known better. Now I can’t pay back but I am damn well demanding that your lender pays up.’

However, the Irish credit bubble was born and nurtured feverishly in Ireland – not helped by Cowen’s 10% yoy jacking up of public expenditure. Irish developers and mainly Irish banks were drunk on hubris. So why should the ECB shore up mortgage defaults in Ireland and not in Greece, Portugal, Spain, France, etc?

@ The Alchemist
Because some sort of action by the ECB is the only way out for us in this mess.
The flow of credit to the periphery caused different types of problems depending on he traditions and demographics of the region to which it flowed. Overgenerous to pensioners in Greece, overgenerous to the young here.

>>October 18th, 2010 at 8:07 am
Correction of typo in 8:07 am posting.

Village magazine links Collins of the Irish Times to lobbyist MKC via SOB, the ‘ex’-PD Policy Director.
FG’s marcom director Conlon is ‘ex’ MKC.
Do those dots connect?

Is it any surprise the honourable hack is pushing the FG party line?

Isn’t the crony cartel pushing the Anglo-DDDA-NAMA caper sort of similar to the covert gamers pushing the Poolbeg Incinerator.

On the proposed Poolbeg Incinerator, The Irish Times appears to simply retype press releases from MKC clients whilst curiously omitting letters to the editor from informed residents & omitting certain informed professional submissions to EPA and BP hearings.

MKC is also directly connected to Bertie and to the patriotic cartel pulling strokes for The Poolbeg Incinerator.

Strokes include a certain ESRI Professor funded via incinerator promoters DCC using the generally high-standard irisheconomy.ie site to spin to De Drumcondra Mafia’s agenda.

Chart based on Village magazine:

Galway Tent,

Any idea what your post has got to do with the thread. Quoting the Village Idiot as a credible source is bad enough but accusing an ESRI professor of being a Bertie acolyte takes the bikkie.

@ Cillian

“Hindsight etc. Cant you do any better than that?
There is the guarantee and there is the renewal of the guarantee, in part or in full. DMcW supported the original guarantee then and, as far as i’m aware, has not changed his mind on this.”

Mc Williams not only supported the guarantee but actually seemed to form the logical basis for it before it happened. He actually described it as a maverick move in his weekly column just previous to it. More recently he has said that it was “a bluff” which gave us time to sort out the banks.

However the thing that Mcwillianms seems to ignore in my opinion is that once you give a guarantee, YOU GIVE A GUARANTEE and that has certain legal implications. You cant just walk away from it, like it never happened.

His ideas since then have been to do just that.

@Brian Woods II

Q1: If the blanket coverage was in error, what could we have done if this error had not been committed?

A: Most or even all of the banks could have been allowed to fail.

Q2: How much has the blanket guarantee cost us on account of being debarred from this initiative?

A: I haven’t done the figures. Add up all the losses from the banks, subtract the losses of any one or two you’d have chosen to save and that’s your answer. Some of the difference would have been borne by private creditors here, some abroad.

Q3: Should we now act against pre 2008 bondholders

A: No. Having caused silent but righteous outrage throughout Europe by unilaterally preempting a unified response — a measure widely interpreted as weakening the EU itself — we eliminated all other avenues. There’s no walking away from those debts now.


I am fed up with people debating the past when negotiating the future is the key.
Bottom line – we had major house price (and general property) inflation because of the badly designed Euro.

You cannot just declare the debate futile, have your say and then terminate discussion. It would be more correct to say we had a major house price bubble because the government exploited the low interest rates offered by the euro for political advantage.

Debating the past is and will continue to be of immense importance in Ireland’s case. We have suffered an appalling self-inflicted wound, reflected in hundreds of thousands of personal tragedies all over the country. Our political system failed. The problem was identified but our institutions didn’t respond even with common sense. This must never happen again.

The ECB has a simple remit basically inherited from the Bundesbank: price stability. Alternative remits are possible, but to claim averting the crisis was beyond the power of the Irish government is simply wrong.

Lacking the interest rate mechanism, the government could have resorted to fiscal policy to reign in the madness, or it could even have simply pointed out the lunacy. Instead Ahern and Cowen chose to talk up the economy, reassure home buyers and lure yet more victims into the trap.


If those are the answers that Honohan would give then indeed the government have a lot to answer for. The insinuation of some of the posts in this thread is that Honohan would respond in this way. However, I feel pretty sure that Honohan would answer Q1 as follows:

A. “as it transpires, no we should not have acted any differently, but we did close off options, that’s my point”.

Q2/Q3 then become redundant and the whole debate becomes rather academic. Honohan should be forced to answer those supplementaries rather than leaving us guessing.

There is also the point that Morgan Kelly pointed immediately out after the guarantee was announced that the guarantee as announced would make sense if this was a liquidity crisis, but not if it was a solvency crisis.

Patrick is not the only smart economist in town, and Morgan got this one absolutely right. The Government can’t say it wasn’t warned.


There are many who support the Morgan Kelly view and maybe it is right. But that is not quite the point in the context of this thread. Karl is making a big play of the fact that Honohan disagreed with the blanket guarantee, which he did, but Honohan should be forced to state whether in HIS opinion the point is academic or is very real and a cause of us being in a far worse place today than if a more targetted guarantee had been given.

@BW2: yes, my comment is a little off topic, I agree. It represents my general frustration with the tendency in this country to constantly argue by appealing to authority: so and so has said such and such, so that must be that. Politicians and their media friends are for ever trying to stifle debate by using this approach, and in the long run it is costing us dearly.

” However, I feel pretty sure that Honohan would answer Q1 as follows:

A. “as it transpires, no we should not have acted any differently, but we did close off options, that’s my point”.”

There is an inherent contradiction in this speculative answer. Whether Adrians suggestion (“Most or even all of the banks could have been allowed to fail.”) is closer to the answer which might be offered by Prof Honohan is obviously for himself to say but in my view the bluff of the bankers should have been called. No amount of “systemic” argument will ever convince the majority of people that somehow they should have to pay (or guarantee) someone else’s debt.

Look, it is best practice when starting out on a long journey to pack your first aid kit. Lenny dispensed with the first aid kit. Yes we can wag the finger at this irresponsible behaviour. Would we have used that first aid kit if we had packed it in the first place? No is probably the answer so the ticking off is purely academic.

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