Irish Banks

In 1997, Irish banks were funded entirely by Irish deposits, but by 2005, most of their funding came from abroad and could be easily removed. From 2000 to the collapse in 2008, lending for construction and real estate rose from 8% to 28% and banks loaned in the region of $100 billion to speculators to essentially gamble with. The acclaimed American financial journalist Michael Lewis characterised what was going on as in effect ‘a Ponzi scheme’. Much that was built was simply not needed; between 2000 and 2004, for example, an extra 987 hotels were built with a tax subsidy of  €196 million. Non-resident companies in the Irish Financial Services Centre found that they would be facilitated in what was in effect a low tax enclave. In April 2005 The New York Times remarked on the ‘light hand’ of corporate regulation that made Dublin ‘the wild west of European finance’. The Office of Director of Corporate Enforcement set up in 2001 was not believed to have been adequately staffed (it had only 36 employees in 2006) not taken seriously enough. Journalist Gene Kerrigan concluded that those in government “just wanted something that would pass for a regulatory system if you didn’t look too closely at it” and the European Central Bank (ECB) appeared to look the other way.

Lehman Brothers collapsed and filed for bankruptcy in the US in September 2008 owing €440 billion, and the first stage of the Irish crisis also came to a head that month when Anglo Irish Bank suffered a run in wholesale funding markets. While it is true that Lehman’s collapse precipitated the Irish crisis, it did not cause it; the reckless loans by Irish banks had been made well before this. Anglo had used lending to developers to dramatically transform its market share and was left woefully exposed. Minister for Finance Brian Lenihan was put under considerable pressure to guarantee the Irish banks and their bondholders. The bank guarantee that was then agreed sank Ireland as bondholders were protected. From November 2007 to October 2010 Irish banks borrowed € 97 billion euros from the ECB to repay private creditors, many of whom had not even expected to get back all their money. All public deposits in banks were guaranteed as well as most existing bonds issued to other financial institutions. Private debts became public debts with devastating consequences.