September 2008: The European Option

In Friday’s testimony before the Oireachtas Committee, Patrick Honohan encapsulated the European option that might have been pursued in September 2008:

Professor Patrick Honohan: I draw the attention of members to the report I prepared in May 2010, which lays out in considerable detail, though perhaps in not in headline grabbing language, the regulatory experience and the policy on regulation and financial stability in the Central Bank and the Financial Regulator’s office in the years running up to the crisis and the night of the guarantee. It lays out what the people thought, what preparatory work they had done, the way in which the banks were supervised, the style and approach adopted then and the quality of the information. Information was not of high quality, which led to the situation in September 2008 when neither the Central Bank nor the Regulator had anything like enough information about the condition of the banks and, furthermore, to a large extent, they did not realise the degree to which they did not have the information. They did not realise, therefore, the risks that were involved and the huge risks being presented by the policy action.

The Senator has put his finger on an important point. The decision taken at that time was to say “We are a triple A rated country; we can take this on our books no problem with everything guaranteed”. The decision could have been to say, “This is quite a big and unknown risk; it may be too big to take on our books. We need to get the European tie in”, which would not have been easy. We know that the message from Europe at that time was that everybody had to solve their own banking issues because each country had problems. However, our problems were much larger proportionately than those in any other eurozone state. If that had been brought to the European table with an acknowledgement and a sharing of the risks involved, we would not be in the position we are today. The information was not there and the decisions taken by the Government at the time were based on a quality of information that should have been better.

35 replies on “September 2008: The European Option”

I doubt it would have made a difference. It would have made borrowing cheaper, but the overall amounts would have remained the same. The problem wasn’t just that the banks couldn’t borrow -it was that they were bust.

The cheaper lending he refers to has largely been achieved retrospectively with State to state lending.

I doubt it would have made a difference. It would have made borrowing cheaper, but the overall amounts would have remained the same. The problem wasn’t just that the banks couldn’t borrow -it was that they were bust.

The cheaper lending he refers to has largely been achieved retrospectively with State to state lending.

Hindsight is 20/20 vision.

Which is unusual in this case, because you’re usually not supposed to see mirages in hindsight. This stuff about bring the Europeans in for the 2008 bank guarantee reads a wild “what-if” scenario. Anyone who has ben paying attention for the last two years knows that there was no way whatsoever that the Europeans were giving one red cent to Ireland without six months of negotiations and at least two previously failed manoeuvres.

As to the “quality of information should have been better” comment, this is PR speak for, ‘Our entire regulatory structure in the Central Bank, Financial Regulator, and the Department of Finance, was sleeping at their desk or out on lunch break for the previous 10 years’.

I don’t buy that line – even Dorks knew we were F$£ked in 2007 / 08.
Simply incredible really.

Water under the bridge and the Rubicon was crossed with the public announcement of the huge commitment, prior to any consultation with Trichet, Lagarde (head of Ecofin) and Juncker (head of the Eurogroup).

One difference at least would have been that the banking crisis would have been brought to a head, not 2 years later.

McWilliams, the self-proclaimed Rasputin of the affair, made clear in 2009 that the Dept of Finance opposed a blanket guarantee and documents released in 2010 confirmed that this was the position in early 2008.

McWilliams wrote in The Irish Independent in 2009 in respect of his contacts with the late Brian Lenihan: “He was worried that this guarantee idea was too radical. And I could understand this because he was the man who had to make the decision, not me.

I told him he simply had to guarantee everything for a limited period to make sure that an illiquid dilemma didn’t lead to an insolvency catastrophe…I walked him out to his car and he reiterated the fact that his officials would explode if they knew he was there. I said I wouldn’t tell a soul if he didn’t.

The minister called me the next day and again on Friday, the 19th, when he rang to say they were contemplating a partial guarantee. My view was that such a move would accelerate capital flight, not avert it. From then on, we spoke on a daily basis, but he still wasn’t convinced and, from what I could gather, his officials in the department were dead set against a full guarantee, although they didn’t seem to be coming up with an alternative.”

I agree with OMF on the Europeans. Would a plausible solution have been guaranteeing only future bonds and all deposits. Then making any recapitalisation contingent on existing bondholder write-downs, reducing the cost of the bank bailout. Any legally required write downs in deposits could have been refunded by the AAA Irish State.

Morgan Kelly was in the IT on 3 Oct 2008 :

“The Irish Government should have done what the Swedes did in 1991. The Swedish government stepped in and, in return for banks’ admitting the scale of their losses and firing the senior managers that had caused their problems, provided capital in return for a share of ownership. As the Swedish economy recovered, the government was able to sell off its share in the banks, with the result that the Swedish taxpayer lost nothing on the bailout. In Finland, by contrast, the government denied that there was any problem until their banking system had collapsed and was then forced into a ruinously expensive bailout. The Government should have offered new capital to four of the institutions, and left the others, where the real problems lie, to fend for themselves.
Not only does the Government guarantee of bank borrowing fail to solve the underlying problem of bad loans; it faces the Irish taxpayer with a real risk of enormous losses. “

Didn’t the banks accidentally/deliberately make the situation with Europe worse by deciding to bring things to a head on a Monday. (29 Sept ’08). BL couldn’t get Euro involvement, suggestions or sign off in time.

What did the banks figure out on Monday that couldn’t have been relayed the previous Friday evening? They must have known how much worse they were making the situation with their timing.

It was so early in the week there was no chance of limping/bluffing along till the weekend. A weekend decision would have given BL time to discuss the situation with other EU finance ministers. (An option would have been to announce a bank holiday on the Tuesday – but that would have created mass panic anyway.)

I remember I was all in favour of announcing a limited bank holiday at the time, possibly even more than one.

FDR did this when he took over the presidency during the Depression.

However, in hindsight, the total lackof any recognition of the risk means that a bank holiday would not have achieved anything. The government would merely have had 60 hours in which to base their decision on no information instead of 12. There was no time to audit the banks. There was no information on the relevant assets. There was only the commitment to support the banks in spite of the enormous potential risk, and a bank holiday would not have changed this.

How come the former head of the NTMA,Michael Somers,in an interview with Pat Kenny some months ago said clearly that he called in one of his senior managers in 2007 to have a discussion about the astonishing balance sheet growth of the main banks – fuelled by massive borrowings – they agreed, tut-tutted,shook their heads – and never wrote,never ‘phoned,never mentioned it to anyone – according to him – ‘it wasn’t his business what they were up to in Dame Street…..great piece of silo governing!
By the way – there was oodles of information on the borrowings of Irish banks in the ECB….don’t give us any of this ‘we never knew nonsense’…
Utter incompetence,inertia,bowing to political and vested interests prevailed in the ‘highest’ political,administrative and regulatory levels…
And nothing has changed at political and administrative levels….

“If that had been brought to the European table with an acknowledgement and a sharing of the risks involved, we would not be in the position we are today. The information was not there and the decisions taken by the Government at the time were based on a quality of information that should have been better.”

Aodh Rua Mac Domhnaill, 1608, somewhere on the continent

Why o why o why was the regulator not more aware of losses on the banks balance sheet

the regulator must have known that the banks had lent tens of billions to developers and builders

the regulator must have known what was likely to happen to development land prices in a bust – surely this was considered in the years running up to 2008 (at very least in 2007).

I just cant understand how the scale of the losses was not better understood

@humble student

i think i’m right in saying that that is the consensus view as to what ought to have been done

I remember very well the surprise in Europe at the time, over Sep/Oct 2008, at the decisions of the Irish government. To an awful lot of people – even those without much insider knowledge about banking or even about Ireland (I suppose Morgan Kelly above is in the former case), the risk taken was unreasonable. Indeed as far as I know, the Irish government took an unprecedented financial risk for any country in modern times.
Remember that the Irish Finance Minister signed the bank guarantee law into law on 26 Oct. So there was time to have a second think about it. And indeed there was time to read what the ECB, the European Commission, the UK, France etc all had to say about it. And a good deal of material is there in public for an enterprising scholar to do some research, as I am sure will be done in time. However I am afraid that a different version of history will be written than the one I saw, especially given the comments before the Oireachtas Committee last week.

It is in this context that Governor Honohan’s remarks are particularly striking. It is one thing to take a momentous decision late one night. It is quite another to have received plenty of advice from friends in the interim, have had time to look at the books, have done a little bit of thinking, and then sign it into law a few weeks later. That is what surprise me most.

In the Oct 2008 ECB decision (CON/2008/48) Ireland, 15.10.2008. as Frankfurt said at the time, “the ECB notes that uncoordinated decisions to guarantee interbank deposits in Member States should be avoided” “The ECB also notes that the Heads of State summit declaration states that the euro area Governments would make available a Government guarantee of new medium term (up to 5 years) bank senior debt issuance”

The Irish government at the time however choose instead to go its own way, in going far beyond the mandate given by the EU Council. The EU, the EC and ECB doesn’t deserve medals for dissenting in couched terms from the Irish government’s actions at the time, and making comments – in public – that were all too meek (excused maybe in that their attention was elsewhere in the wake of the Lehman aftermath).

There was never any question of Europe creating a Europe-wide fund to repeat the same mistake that Ireland took. A European option was trashed out (as above), and indeed it did the job for banks in other countries at the time. But as Governor Honohan notes, the European option at the time was not followed by the Irish government of the moment, although we seem to have a different memory of what that EU policy was.

Among the many relevant comments from the time, let’s cite just what Dr Merkel said in an interview on 2 Oct “The federal government cannot and does not want to issue a blank check for all banks, regardless of whether they have acted responsibly or not’. These views applied as much to German as to any other banks. Later in Parliament on 15 Oct, Dr Merkel said the aid on offer “is about the protection of citizens, not the protection of banking interests … We’re offering something and they (the banks) have to offer something in return.” etc.

Let’s say they didn’t know in September 2008. How did BLTD RIP get a statement from Neary in January 2009 that Anglo was solvent when he nationalised it? I’m hoping Carswell’s book has something new on this.


It mystifyies me why people claim it would have taken a lot of time to establish the position at the banks. Surely the loans were all so similar and the position of the creditors so similar, that a really reliable and accurate picture of the true state of affairs could have been established by examining a tiny fraction of the loans? You didn’t have to actually count up all the estimated losses.

Why has no statistician piped up and confirm this? Do they suffer from the same selective mutism that bedevilled the economics profession?

Why would Europe have offered to share the risk ? And how…via fiscal transfer, monetary printing press ?

I do think we could have potentially tapped them for ELA…but we’d have been left with the solvency issue.

And lest anyone forget…the solvency issue represents money spent in Ireland. There were winners, chief among them the beneficiaries of bubble funded increases in public expenditure.

sampling the developer loans would not have been valid. This is as terms varied widely, for a small pool of loans, which were quite inter connected.

And the loan information, was far from of homogenous format, with standards varying wildly from loan file to file. (and wholly inadequate standard fields filled in per loan)

Understanding the loans would have required a multi disciplinary team per loan:
– solicitor
– senior lender with development experience
– credit analyst
– admin staff

and some overall staff for econometric models etc

The banks lost the run of themselves 2006-2008…and didn’t properly ‘operationally process’ the loans. Some AIB loans in particular, lacked very basic documentation (as you’ll recall Justice Kelly giving out about)…and some INBS ‘loans’…were as far from vanilla loans as could reasonably be imagined (profit shares etc)


One view or reason why they couldn’t see the scale of the losses may be that the people involved had so much of their personal credibility on the line.

If the stories of potentially huge losses were true, (flowing from a collapsing property market), then the people who had been in charge were guilty of gross negligence in at least one and perhaps two ways. First, they ought to have “seen it coming”. But second, and more importantly, they ought to have made contingency plans or included contingency planning in all their major decisions in the years running up to the crisis so as to backstop the scale of any collapse. They hadn’t done this.

Therefore when the crisis developed they couldn’t bring themselves to accept that they had been trusted with key positions of influence and power and had performed awfully and that this poor performance was a contributing factor to a disaster for the country.

Instead they bought in to the confidence fairy – that what was under way was merely a crisis of faith or confidence – (perhaps similar to what they themselves were experiencing – or at least they ought to have been) and what was needed was resolve and gestures that convinced people (and themselves) and restored confidence in the substance or reality of the previous years performance.

The story of Sean Quinn’s Anglo debacle is in my view perhaps the most amazing story of the bubble and the bust.

Why in god’s name did a man worth billions lose it all betting on the equity (THE EQUITY!) in one bank that has turned out to have lost its equity many many times over.

(and apparently he lost the money to London finance houses… perfect)

What the hell did this guy even really know about banking? (Ok, sure, he probably knew quite a bit – but i mean, had he seriously analyzed banking collapses from the past? did he have a deep understanding of global financial markets?)

In my view he must have bought in to the Anglo charade to an unimaginable degree – he must have seen the way they did business and been supremely confident that this was a business model that worked.

Anglo and its fast tracked personal relationship loans – its big risks and fast growth – mirrored his own business success.

But nobody seems to have told him that alot of being very successful is good luck – and, in particular, taking big risks and then enjoying lucky timing. And if he had recognized this, he might have understood that there was at least a good chance that his own judgment on Anglo was not actually worth that much – that he had no insight into the situation that others didn’t have

There was no conceivable basis for risking it all on Anglo – it was foolishness of the highest order – and in my view it ought to be understood as hubris.

Instead of saying (or considering whether) , Jesus i was lucky, i totally bought into that whole bubble and made a killing – now it turns out that it might have all been built on sand just like the begrudgers said – i better get out now or at least limit my exposure – Sean Quinn put everything on the line and bet on a company that is rightly seen as a symbol of the bubble

Sean Quinn was held in high esteem – he was considered to be a great businessman – (I remember stories that he played poker for pennies and dimes with his mates – and this being said in a sort of way that was meant to let you know that he very wise and shrewd with his money and didn’t take unjustifiable risks) – and he probably was and is very good businessman.

But what a huge call – (i mean risk it all! all eggs in one basket!)

But what a bad call. It like a Greek tragedy or something – Icarus’s waxy wings got too close to the sun


but surely the regulator was aware what the likely effect of collapsing property prices would be in the future on development land prices. For sure there were at the time there was only “certain impairments” but surely the regulator examined international evidence on the effect of collapsing property prices on development land prices and therefore must have been in a position to tell the government that if property prices continued to fall that the banks were potentially seriously bust

With INBS known to have been feeding out of Anglo’s dustbin, why were they included in the guarantee at all? The inclusion of Anglo, let alone INBS, rendered the guarantee decision immediately suspect, regardless of subsequent discoveries about the state of the other lenders’ loan books.

The behaviour of European bank share prices in the last 8 months or so bears an uncanny resemblance to that of Irish banks’ share prices in 2008, by the way. Those of many of the larger banks – Deutsche, UBS, and the like – have fallen by 50% or so ytd. The interbank market, which has been pretty much illiquid for the last while, has seized up again, and the FT is reporting that US money funds (a large source of short-term funds to the banking system) are now shunning European banks in general. There is a mountain of sub debt to be raised by the European banking system sooner rather than later and, to date this year, covered bonds have been the only significant source of funds for them.

While scarcely planned, given the lack of analysis, knowledge or foresight on the granting of the Irish guarantee, developments here may perversely have left the remains of the Irish banking system ahead of the European curve in terms of capital adequacy.

Unless my memory of the sequence of events has failed me hadn’t PWC conducted a review of Anglo’s loan book several months before the blanket guarantee?

If even close to competently conducted should that not have given those who made the decision an insight into the scale of the potential losses ?


just watched the video

its amazing – “certain impairments” –

you cant speculate about losses – BUT- they are adequately capitalized


Id say there is no pint in funding a bank at 4% if that bank’s solvency depends on the solvency of states whose bonds pay 6%

@paul mccarville
Nope…the PWC review was performed in the months after the guaruntee

As to why anyone thought accountants were the requisite profession for doing same…well I suppose Neary was used to asking them to do his work.

My offering to one of Partick’s previous Speeches!

November 23rd, 2010 at 3:30 pm
@ Joseph Ryan

Well dug out!

Is it my imagination or did we not hear time and time again from Mr. Honohan that the banks were “well capitalised” Elderfeld too, why then are we putting another 40bn into them? Why the need for Alan Dukes to say we should put every cent we borrow into them?

What does this tell us about the EU stress testing of European banks. It tells us it was bogus.

Roubini says that Ireland has a liquidity problem that may be “solved’” temporarily be IMF money but that ultimately we have an insolvency issue. Of course we have an insolvency issue any country borrowing 6 times what it takes in, by way of taxes is insolvent. Especially when all measures being taken are shrinking the economy and its ability to service debt. We need debt restructuring. As for Mr. Dukes idea of putting every cent we can borrow into our banks so that we can sell them off for 1 Euro? Sounds like he has gone native! Count me out on that one Mr. Dukes and count my children out also.

The Ice lady, Meredith Whitney says she would not touch “them” (European banks) with a barge pole? Why? Because she knows European banks have not even begun to face up to their write downs and wind up’s. She will be proven right and the well capitalised brigade will be reduced to mumbling about contagion effects, removal of moral hazard and the Euro being prematurely introduced.

The contagion effect feared is that other European banks will again be looked at in terms of their exposures to sovereign debt and in Spain’s case its exposure to it’s property boom. There is a 900b exposure from the Pigs leaving aside Italy. There is bigger things happening than the IMF in Ireland.

@ All

This discussion leaves me totally perplexed. Is not the error in the Governor’s analysis to be found in the following sentences.

“This is quite a big and unknown risk; it may be too big to take on our books. We need to get the European tie in”, which would not have been easy. We know that the message from Europe at that time was that everybody had to solve their own banking issues because each country had problems. However, our problems were much larger proportionately than those in any other eurozone state. If that had been brought to the European table with an acknowledgement and a sharing of the risks involved, we would not be in the position we are today”.

In the interim since the monumentally ill considered decision by the Irish government to grant a blanket guarantee was made, where is there an acknowledgment in Europe of any willingness to participate in “a sharing of the risks involved”?

There was quite some other material in the hearing of interest
First Senator Seán Barrett had this to say, before the Governor replied (as per the text above)…
What is the concept of pillar banks? The worry we had was that our banks were too big to fail. We should not have rescued them on 29/30 September 2008. I want to inquire from the Governor if the Central Bank had involvement in that. Would it matter to any of us if the banks in the high street were run by Canadians, or people from the Gulf or India. They might be better at banking than Irish people. Was this the last throes of a daft form of protectionism, to rescue obviously incompetent banks once we guaranteed the deposits?
The Governor referred to the Europeanisation of this. My reading of the memorandum of understanding to which the Central Bank was a party on 1 June 2008, three months before the collapse, is that it applied. We could have put all those bankers on the plane to Frankfurt stating that it was its problem. It was not an Irish problem. The nationalisation of the problem by the then Government caused us serious problems in Europe. What is the point in pillar banks if the problem is that they were too big to fail?
Why are we not aiming for utility banks or Captain Mainwaring banks? … As the Governor wrote in his letter, with the then Minister, to the IMF, we tried to rescue a banking system which was five times the size of the economy. That was an impossible task and it has done serious damage to this country.
We must look at the accountancy problem. We are entitled, as a State, to sue accountants who prepared books for banks ignoring the warehouse money moved in at five to midnight and moved out again. There are cases in the private sector where people bought companies and found that the accounts were not a true and accurate statement of the affairs. Two accountancy firms, in particular, need to be investigated and I am worried that we are three years into this and no accountants have been made accountable.
While it is not the direct responsibility of the Regulator, I also worry that NAMA is in GNP terms the biggest bad bank in the world. It should be abolished as quickly as possible in order that the floor price is found and property prices are reduced. That is how the economy will move on. Having such a large agency, much larger than the Swedish one on which it was supposed to be modelled, has become a disadvantage.

Professor Patrick Honohan:
… (part of reply is above)
Depositors and bondholders have been repaid tens of billions of euro over the past two and a half years by the banks out of their own resources and by additional borrowing from the Central Bank of Ireland and the euro system. In a sense, the debt of the banking system has been shifted from those in the private sector – they have been repaid – to the European public sector, and it is substantial. There have been private losses; shareholders were mentioned earlier. If we include the shareholders of Irish banks, who have been more or less wiped out, and the shareholders of foreign-owned banks, who have made significant capital injections – although I do not expect to hear much sympathy for them – the fact of the matter is that a substantial part of the loss allocation has gone to shareholders. A not insignificant part has gone to subordinated bondholders. There was not much hesitation or opposition from international partners in dealing aggressively with them and they have been dealt with. The numbers shift around, but the total losses in Irish banking, including in the foreign owned banks, amount to half and half. One half has been borne by the private sector and the other by the public sector. That is a rough calculation.

Interesting. And a lot more still to be learnt and recorded for posterity.

@Ciaran O’Hagan
Accountants follow legalistic accounting rules, these tell little about the health of banks. Indeed, if a bank even tried to do fair accounting…the ‘big 4’ would batter them over the head with IFRS rules to stop them.

Also the ‘big 4’ took on stuff they simply were not qualified to do. For example they supervised much of the Basel II implementation in Dublin…yet they understood shockingly little about credit risk. One bank in particular wanted to use true stochastic models in their IRB…the entire ‘big 4’ staff at the meeting had never heard of ‘Monte Carlo’ etc, and subsequent to the meeting, the big 4 partner threatened the bank. The threat was that their regular auditors would refuse to sign off an accounts that had any weird ‘monte carlo’ stuff to it…and not to rock the boat as no one else in Dublin was up to that nonsense.

The Big 4 have poor understanding of finance, banking and economics…and it was the likes of Neary et al who elevated them to a wholly inappropriate position in the Irish Banking Syste, (for example hiring them to do _prudential_ audits)

Neary et al are the folks who bear the vast proportion of the oversight blame, as it was they who chartered , approved, and oversaw inappropriate and ineffectual oversight methods

I repeat – the senior management of NTMA were fully aware of the extent of Irish bank borrowings in 2007 – they adjudged that it was none of their business – though they would not put money into ANGLO – how can Honohan say that ‘the information was not there’?
No sophistry please!

Michael Sommers (Ntma) admits he had no concrete info, just suspicions

The only people with access to private info were the then IFRSA (Neary et al), but as you’ll see from the Honohan report…they had nobody good at ‘figures’…and instead focused on qualitative stuff

The high state of panic on Sept 29 was linked to Anglo’s year end on the following day and IL&P’s agreement to provide €4.5bn to enable the builders’ bank to dress up its balance sheet. IL&P would only release the funds if it was given a Central Bank guarantee.

Strange or not, the panicking Anglo duo, following the cold shoulder from BoI, were told to vamoose from Government Buildings – – presumably to avoid the impression that the banking arm of the Fianna Fáil family would get special favours.

What is strange that 13 months after the onset of the credit crunch with Irish banks dependent on the ECB to provide wholesale funds and developers in breach of loan commitments, that others would have accepted the Neary delusions about the banking system, encapsulated in those terms that should be on his epitaph: ‘resilience’ and ‘good shock absorption capacity.’

Two weeks after the Lehman crash, there was no prospect of a medium-term recovery in the property market.

As for NTMA, of course the state of the banking system was known. Many below their pay grades had long twigged to this reality.

These folks had a charmed existence for many years and had plenty time to ponder on banking issues.

On the third week of July 2007, the yield on the Irish 10-year bond had slipped below that of the equivalent German bund! The swan-song for the Boston or Berlin arrogantistas?

As the ECB raised rates, developers with expensive undeveloped sites were paying over €5m in interest charges on every €100m borrowed.

@desmond brennan
Michael Somers and his senior management had far more than suspicions – they had concrete figures – read the I.T and Pat Kenny transcripts!
Typical’silo government’ practices in play!

Classic stuff, Flann O’Brien would be proud. You couldn’t make it up. The best paid civil servants in the western world and they didn’t have the right information, couldn’t do the numbers, didn’t understand the risks, outsourced all the hard work to the big 4 and then didn’t supervise or understand its limitations. Too busy playing snakes and ladders with FF, grovelling to Anglo and “fingers” leaving at 5 o’clock every day. Never mind at least best pensions in the developed world to look forward to and zero accountability or consequences for any of it. Great little country.

Comments are closed.