Dan O’Brien: Our great recession was made right here in Ireland
THE decision to guarantee the Irish banks debts, taken exactly a decade ago, resulted in mass unemployment, austerity and debt enslavement. A subsequent decision by a foreigner in a skyscraper in Frankfurt made matters much worse by heaping even more bankers’ debt on ordinary people.
There is a grain of truth, or, more accurately, a possible grain of truth, to these assertions, both of which are widely held. But they are at best reductionist and simplistic.
In the early days of October 2008, Ireland and much of the world was in a state of deepening panic. The entire financial system was on the brink of shutting down.
From Washington and New York to London and Frankfurt, those who ran the biggest economies in the world, and who had thought they knew what they were doing, were at a loss.
Nobody had ever experienced anything like it and nobody was sure what could be done to avoid a collapse. Measures were taken – including the guaranteeing of Irish banks – more in hope than in expectation.
In Ireland the situation was worse than almost anywhere else. It is often forgotten now, but the Irish economy was already deep in recession when the collapse of Lehman Brothers bank in the US in mid-September triggered a global financial earthquake.
Unemployment had been soaring for a year, with job losses in the construction industry alone already numbering in the tens of thousands. In October 2008 the number of people claiming unemployment benefit passed a quarter of million, up by 100,000 on 2007.
The public finances had been in an accelerating state of collapse since the turn of the year and the Government was deep in the red (a position from which, a decade on, it has yet to emerge).
House prices had peaked more than a year earlier and were falling fast. The bottom had long fallen out of the commercial property market.
Any claim that all Ireland’s woes were all down to a bad decision taken on one “fateful night” a decade ago is – frankly – nonsense.
But that is not to say the decision to grant bank guarantees didn’t make a difference.
Had the banks not been guaranteed they would have collapsed. People, businesses and not-for-profit organisations would have lost access to their accounts. Some would have lost money they had on deposit.
Organisations would not have been able to pay their workers and suppliers. That would have accelerated the already on-going collapse in economic activity. In the short term at least, things would have been even worse than they turned out.
Over the longer term, however, allowing the banks to fail might have been worth it. When it all washes out at a still distant point in the future, the cost of bailing out the banks’ depositors and many of their bondholders (some bondholders were burnt), will probably come to around €40bn. A lot of that money could have been saved if no guarantee had been given.
But if the direct costs of the banks for taxpayers would have been lessened, deeper recession would have led to higher indirect costs – more people on welfare and fewer contributing to the State’s coffers as the result of an even deeper slump.
Nobody will ever know if letting the banks fail would have led to more or less misery for the country as a whole.
What of the argument that the European Central Bank forced the Irish authorities to bail out the banks?
After Lehman Brothers bank collapsed in mid-September 2008, governments everywhere arrived at the conclusion that the system could not withstand more dominoes falling.
The Irish Government was no different and there is not a shred of evidence Ireland was instructed to issue the guarantee. All the evidence points to that being a made-in-Ireland decision. So the notion the guarantee was imposed on Ireland is as wide of the mark as claims that everything was hunky dory until it was issued.
Later, however, things changed. Both before and after the February 2011 General Election, governments sought to burn some bondholders. On both occasions, the ECB made it clear that if that happened Ireland would be cut off from bank funding, as both Cyprus and Greece were to be subsequently.
The then head of the ECB, Jean Claude Trichet, was famously reported as warning that a “bomb would go off in Dublin”.
While the ECB was not wrong about the risks to the entire eurozone of burning bondholders, there are very serious and still unresolved issues around how that institution functions.
There is clearly a democratic deficit when unelected officials are able to dictate to governments in the way that happened in 2010-11 with little or no transparency or accountability.
But it is important to measure the amounts of money Irish taxpayers would have been saved if the bondholders had been burned.
Fianna Fáil and Fine Gael-led governments felt some bonds in the defunct banks could be burnt without triggering a panic. The savings to taxpayers would have been around €3bn – a very significant sum of money, and in no way should it be downplayed.
But with a Government debt burden of €200bn the saving of €3bn would not have been transformative and it would not have prevented Ireland ending up in a bailout in November 2010.
The sad truth is that Ireland’s fate was sealed long before September 2008. The bubble burst in 2007 and the economy slid into recession. The contraction deepened quickly over the course of 2008.
Even if Lehman Brothers had not failed and the international financial crisis had been averted, Ireland would still have had a banking crisis.
The international financial crisis, the great recession and the eurozone crisis that followed certainly made things much worse. But the property bubble and lending frenzy that inflated it were mostly the result of decisions made – and not made – by Irish bankers, Irish politicians and Irish officials.
Even if Lehman Brothers had not failed and the international financial crisis had been averted, Ireland would still have had a banking crisis