others could see nothing but unrelenting economic gloom. He often reminded those around him how important it was to give people hope of a better economic future, lest they give up the fight to restore order to the public finances. Some of his more positive public comments about the future reflected this view.
NAMA
The third set of actions to repair the banking system involved recapitalising, shrinking and restructuring the banks. Lenihan wanted to ensure that the banks had enough capital to enable them to make loans to support the real economy. Lenihan also recognised that because of their large and risky loan books, the banks would constantly struggle to attract badly needed funding and capital. He also knew that a return to sustainable economic growth in the medium term would require a functioning banking system. In response, Lenihan set up the National Asset Management Agency (NAMA) to help to deleverage and de-risk the banks.
The establishment of NAMA was strongly supported inter- nationally by those with experience in resolving banking crises. When the plan for NAMA was outlined to visiting officials from the IMF in April 2009, they responded by saying: ‘If you hadn’t suggested NAMA to us, we would have suggested it to you.’ International support was hardly surprising, as a ‘bad bank’ was a standard tool to assist in the resolution of troubled banks.
The domestic reaction to the announcement of NAMA was more sceptical, however. Ireland had never experienced a systemic banking crisis, and few people here were familiar with the resolution toolkit employed by policymakers in such circumstances. Lenihan welcomed and encouraged constructive debate about NAMA, but despaired at the opportunism and cheap point-scoring that sometimes poisoned the political and wider debate. He remarked on how casual and ill-informed some of the media commentary was about banking issues. Lenihan had hoped to achieve political consensus around NAMA in order to improve international confidence, but to no avail. Nonetheless he was buoyed by the public support given to NAMA by people such as Alan Dukes, Garret FitzGerald and Ray Mac Sharry. Lenihan more than once called for a united national effort to confront the difficulties the country faced.
The charge that NAMA was a bailout for developers and bankers was politically potent. At this remove, the charge seems absurd. Nowadays, critics accuse NAMA of being overzealous in dealing with debtors and it would be difficult to find a banker or bank shareholder who would claim to have been enriched by NAMA. But critics made a populist appeal by misrepresenting NAMA as a novel construct established by a crooked government to protect narrow sectional interests. The debate intensified in the weeks and days before the internal Green Party vote on the policy on 14 September 2009. Opponents reckoned that if the Greens voted against NAMA, the coalition government would collapse. They made a big effort to affect the vote, but were unsuccessful.
Others had different reasons to oppose the setting up of NAMA. Lenihan was annoyed when he learned that some people at AIB were covertly briefing the media against NAMA. The NAMA process would force the banks to face up to the reality of their property losses; some at AIB would doubtlessly have preferred if the unpalatable truth about the state of that bank’s loan book had remained concealed. Lenihan was also exercised by an article critical of NAMA by financier Dermot Desmond published by The Irish Times on 16 September 2009, the same day the Dáil commenced second-stage debate on the NAMA bill. During that debate, Lenihan provided estimates of how much NAMA would pay for the loans. It was not clear how useful these high-level estimates would be, since under EU law the actual purchase price would be determined by detailed loan-by-loan valuations. But the Opposition had demanded estimates, and in any event Lenihan believed it was wrong to ask the Oireachtas to vote on a bill without some indication of the potential up-front cost involved.
Lenihan believed that effective rebuttal of critics’ arguments was the key to winning the debate over NAMA. Time has proved Lenihan right and the critics wrong. No serious commentator today could claim that investor confidence in our banks has not benefitted from the transfer of loans to NAMA. One shudders to think how the banks would have managed their development property loans had they remained on their books, given how slowly they have tackled mortgage arrears. The Spanish government three years later established a bad bank identical to NAMA to aid recovery from that county’s property crash, and Slovenia took NAMA as a model in late 2013. In both cases, the bad banks were set up with little or no controversy.
REFORMING BANKING REGULATION
The banks needed to be restructured, and so too did the system of banking regulation which had failed the country. Lenihan had no time for light-touch regulation of banks. He restructured the Central Bank and gave it new powers. He made an inspired choice in appointing Patrick Honohan as governor and brought in Matthew Elderfield from Bermuda as financial regulator to help restore much-needed credibility to the Central Bank. Honohan would later be central to securing a deal to restructure the IBRC promissory note. Lenihan also set up the Credit Review Office under John Trethowan to encourage more lending to the essential SME sector.
Lenihan was always eager to examine alternative policies and approaches. I recall a long conversation over the phone one weekend about a proposal by Citi Chief Economist Willem Buiter for a so-called ‘good bank/bad bank.’ Lenihan was open-minded about whether that model could be applied to Anglo. He eventually decided in autumn 2010 to wind down Anglo.
As the year 2009 drew toward a close, the cost of borrowing for the State declined and banks’ deposits stabilised. The global head- winds that were contributing to the recession began to abate, as world leaders delivered coordinated fiscal stimulus to the major economies. Ireland’s GNP bottomed out in the final quarter of 2009 and rose moderately in 2010. I recall Lenihan saying: ‘You know, I think this country has a future after all.’ But Lenihan knew that the improvements in sentiment were fragile. More gains in competitiveness were needed, the budget deficit was still large, and the economy was susceptible to international developments.
Moreover, bank losses were mounting, as the true extent of the reckless lending during the bubble was revealed. Lenihan wanted to spread the cost of the property crash over as long a period of time as possible. He recapitalised Anglo with a promissory note, not with cash borrowed on international markets. If he had injected cash, there would have been no scope at a later stage to renegotiate that arrangement.
He saw as a priority the need to reinforce international market confidence in the banking system, not least because the banks faced a funding cliff at the end of September 2010 when the blanket guarantee was due to expire. He introduced a scheme that guaranteed newly-issued (but not existing) bank debt for up to five years to help the banks to reduce this funding cliff as market sentiment gradually improved. Banks successfully issued new debt in the spring of 2010 and bank deposits began to rise again. In fact, during the first four months of 2010, funding to Irish banks rose around €500 million per week on average, compared with average weekly drops of €3,000 million during the first half of 2009.
EU/IMF BAILOUT
But events were conspiring against him. The scale of banks’ property-related losses continued to rise and rumours circulated in the markets that summer that the bailout of AIB could cost as much as Anglo. In a statement to the Dáil at the end of September 2010, Lenihan announced revised estimates of the cost of repairing the banking system. He wanted to provide reassurance to investors about the capacity of the Irish State to manage these costs. He began working on the four-year National Recovery Plan, which would later become the blueprint for the EU/IMF programme. He announced the first instalment of that plan would be a budgetary adjustment of €6 billion for 2011.
Abroad, fiscal stimulus was prematurely withdrawn from the world’s largest economies and analysts began to mark down their forecasts for global economic growth, including growth in Ireland. With slower growth forecast for the coming years, the task of closing the budget deficit began to look even more daunting. The euro area sovereign debt crisis exploded, with Greece entering a (failed) bailout programme in May, amid growing market anxiety about the prospects for peripheral euro-area economies. The country’s cost of borrowing rose to unsustainable levels, forcing the Government to withdraw from funding markets in September and rely on previously accumulated cash balances. The banks were unable to issue new bonds to address the funding cliff and relied instead on fresh borrowings from the ECB and the Central Bank of Ireland.
Angela