Honohan report highlights key inactions

The government used its advance access to the Honohan and Regling/Watson reports to get its retaliation in first.  But the reports reward in-depth reading.  Central Bank governor Patrick Honohan in particular has written something approaching a dissertation on Ireland’s financial crisis.  Since Messrs Cowen and Lenihan clearly intend to emphasize his supposed sanguine view of the September 2008 bank guarantee scheme, two of his observations about that period need particular emphasis.

First, the origins of the guarantee –

8.18 A detailed review of the ensuing discussions is hampered by the absence of an extensive written record of what transpired.150 Although the minutes of meetings of the CBFSAI Board and the Authority during the period contain references to various options, there is an absence of documentation setting forth the advantages and disadvantages of possible alternatives and their quantitative implications. While CBFSAI Board members expressed some broad views on possible approaches, no decisions were taken, as the solutions would need to be found at Governmental level. The key discussions took place via the very many informal contacts and meetings between senior officials of the DSG agencies, the NTMA, and consultants; what follows relies to a very large extent on the personal recollections of participants.

So there are no files, no notes, and it’s all what people remember.  It’s in this respect that Mr Lenihan’s fulsome offer (in the true sense of that word) to appear before the Commission to discuss the guarantee is meaningless.

Second, there is the critical question of alternative options to the guarantee, at least until more was known about Anglo’s position.  One option under consideration was Emergency Lending Assistance (ELA), which  would have come from the Central Bank –

8.51 In addition to influencing financial stability policy, a key role of the Central Bank in a crisis is to ensure adequate provision of liquidity. It was prepared on the night of 29/30September to extend a modest amount of ELA, but not enough to ensure that Anglo would get through the week. Thus back-up liquidity provision was instead hastily secured from the two largest commercial banks, and, crucially, backed by Government guarantee. In effect, the commercial banks were stepping in to provide the lender of last resort facility – which of course was in their own interest to do. The reluctance to deploy more significant ELA facilities from the Central Bank is open to question: such facilities were being used elsewhere and too much was likely made of the reputational risks involved (especially given that the guarantee was about to be announced). It is unlikely that even extensive use of the facility to buy time to facilitate nationalisation the following weekend would have been viewed negatively by partner central banks under the circumstances. While use of ELA would only have been a temporary solution, it might have bought some breathing space while other possibilities were being explored to address the unprecedented situation that many – not only in Ireland –  were facing.

Here’s the thing.  The government, as Honohan explains, was heavily influenced by the UK experience during this period, especially in the wake of Northern Rock.   And as he says above, they were concerned about the reputation effects of ELA.  But we now know that the UK Treasury (with the analogous role to DoF) did ELA during October 2008 — just one month later — and invoked a special provision to keep it secret.   And Honohan notes that the EU and ECB were in a forgiving mood during this period — much more so than they were over the blanket guarantee which caught them on the hop. 

There’s an alternative scenario where the government had the guts to do an ELA program and get the banks through one more week — across Anglo’s accounting deadline — and have a better sense of the 25 billion euro pit that they got us into with Anglo and INBS.   But instead, driven by a “no failure” policy (whose origin Honohan doesn’t explicitly explain), the rest is history.