How bankers brought Ireland to its knees

The Abbey Theatre in Dublin is an august institution. It is Ireland’s national ­theatre, created by William Butler Yeats, Lady Augusta Gregory and John Millington Synge. Conceived more than a century ago in the heat of Ireland’s great cultural revival, an act of rebellion against English rule, its mission was “to bring upon the stage the deeper emotions of Ireland”.

That is what it plans to do next month, when it stages an unusual one-man show. Outsiders feature David McWilliams, economist, broadcaster, commentator and thorn in the paw of the Celtic Tiger. He was among the few to have spotted and called the credit and property bubbles that brought the tiger to its knees, and has pilloried and pickled the country’s political, financial and business elite in a stream of best-selling pop-economy polemics. Follow the Money is his latest, bursting with profane portraits lampooning the dramatis personae of the boom and bust who, as it were, talked themselves on to the stage. A stand-up economist is born.

“When the parliament of a country turns into a theatre, then the theatre must become the parliament,” says ­McWilliams, gleefully irreverent behind a shock of red hair as he sips coffee in his local café in Dalkey, south of Dublin. Excoriating Dublin’s bail-out of the banks last month, he retrieved the figure of the Gombeen – the loathed money-lenders who preyed on the peasantry after the great famine – for use against those who operate at the ­tawdriest intersections of politics and business. “The neo-gombeen,” McWilliams wrote in the Irish Independent, “is a traditional gombeen hiding behind the international lexicon of high finance. The neo-gombeen thinks that if he uses the language of the Financial Times, as opposed to the ­Skibbereen Eagle, he can get away with it.”

McWilliams used to be both an investment banker and an economist at Ireland’s central bank. Now he says Ireland has been brought low by “tabernacles of insiders, incapable of discerning the real interest of the state and its people”. In most countries, he goes on, “when you have a crisis, the insiders lose, but here they get stronger, they tighten their grip, and the outsiders are told to emigrate”.

What happened in Ireland, he says, is that “a small elite took a really golden opportunity and blew it.”

That is a widely held view. It goes like this. Encouraged by venal politicians who actively discouraged regulation and provided a phenomenal array of tax breaks to builders, and in an environment of cheap money and easy credit (partly created by the lower borrowing costs brought by membership of the eurozone, partly because risk disappeared from the international financial radar), Irish banks went on a reckless lending spree. They lent, above all, to property developers. When that bubble burst – and with devaluing the currency no longer an option – it all but bankrupted the country and triggered a painful sequence of tax rises and pay, pension and public spending cuts.

When the banks started to wobble, the government, led by the populist Fianna Fáil, insisted Ireland’s economic “fundamentals” were sound and such problems as there were had blown in across the Atlantic. But when the banks inevitably crashed and the state stepped in to rescue them, every Irish citizen got saddled with many thousands of euros in debts that will weigh the country down for years to come. The current generation – the first in Ireland’s history to know real wealth and success and, with it, international admiration – is very, very angry.

Whatever politicians say, moreover, Ireland knows this was almost entirely a home-made crisis, which happened to coincide with an international credit crunch. Colm McCarthy, who teaches economics at University College Dublin, is the author of last year’s comprehensive spending review of the public sector: “300 pages, and a cut on each page”, as he genially puts it. This one-man-International Monetary Fund is no populist. But he’s clear on what brought Ireland to this pass. “This was a very old-fashioned banking collapse, nothing to do with derivatives and US toxic assets,” he says. “Until a few years ago I thought AIB [Allied Irish Bank] and Bank of Ireland were dull, ­boring banks run by granite-faced bastards who wouldn’t lend money to their own relatives. It seems we were wrong.”

In its report on Ireland last year, the IMF concluded: “The Irish economy is in the midst of an unprecedented economic correction. The stress exceeds that being faced by any other advanced economy and matches episodes of the most severe economic distress in post-World War II history.”

At the height of the lunacy, around three-quarters of the total lending by Irish banks – €420bn or about two and a half times the size of the economy – got bound up in property, construction and land speculation of one sort or another, a sector which amounted to more than a fifth of economic output. It became what Ireland did for a living. By comparison, investment in real estate in Spain peaked at about a tenth of national income – half Ireland’s level.

Revenue from property taxes, meanwhile, fuelled runaway public spending and public sector wage growth, which spread into the overall economy and blunted its competitive edge. Furthermore, whereas Irish banks were almost entirely funded by deposits until the late 1990s, in the next decade their business model was to borrow in the international wholesale markets and lend on to property developers and house-buyers – a sort of Northern Rock on steroids.

Long before Ireland’s banks became too big to fail they became – in the words of Morgan Kelly, a University ­College Dublin economist who saw the property bubble coming – “too connected to fail”. Shane Ross, business ­commentator, shareholder activist and independent senator, in his book, The ­Bankers: How the Banks Brought Ireland to its Knees, paints a cosy picture of builders, bankers and cabinet members rubbing shoulders in the Fianna Fáil tent at the Galway races.

At the heart of the crisis was Anglo Irish Bank, the domain of Sean FitzPatrick, its chief executive for 18 years and chairman from 2005. FitzPatrick and Anglo streaked across the dull firmament of Irish banking like meteors, igniting a frenzied battle for size and market share. Between 1998 and 2008, Anglo’s loan book swelled from €3bn to €73bn. Almost all of this was to builders and property developers. Bertie Ahern, the Taoiseach who presided over the alchemical prolongation of the boom and hides his shrewdnesss behind a blokeish bonhomie and mangled syntax, saw it differently in 2006 when, as he put it, “the boom was getting more boomier”.

Sean FitzPatrick, it would later transpire, used Irish Nationwide, the building society, to warehouse an undeclared personal loan from his own bank of €87m during the end-of-year reporting season – every year for eight years until it was detected in 2008. As the Anglo share price started to crumble and it and other banks started to haemorrhage deposits, another building society, Irish Life & Permanent, lent the bank €7.5bn to tide it over another sticky reporting season. This was presented in the accounts as part of Anglo’s customer deposit base. Anglo also lent money to a select group of 10, mainly builders, clients to buy stock in the bank and prop up its share price. This is a bank into which the government has already had to inject €14bn.

Even after the nationalisation of Anglo Irish and the state’s rescue of its rivals through the establishment of a “bad bank”, the National Asset Management Agency (Nama), to manage nearly €80bn in toxic property assets, some bankers’ purchase on reality was negligible. FitzPatrick, less than a week after Anglo was bailed out by the taxpayer, called for cuts in child and pensioner benefits. He and his peers were not operating in the penumbra, they were hiding in plain sight, protected by what Fintan O’Toole, The Irish Times columnist, has called “the Celtic informational twilight of things that are known but not known”. They have helped turn Ireland upside down.

Twenty years ago, any Irish man or woman would be fluent in EU lore, from the number of scholarships available to the precise value of Brussels regional aid. Ten years ago they became encyclopaedic on property prices, and a storehouse of tips for buzzy holidays from Barcelona to Bangkok. Now, they enumerate toxic assets like a loss adjuster. “That building there, it’s just been Nama-ed,” said one resident, pointing to one of Dublin’s best-known hotels. As a barman in that same hotel had it: “We’re all economists now.” And as Yeats put it in a different context: “all changed, changed utterly”.

At the entrance to the Central Bank of Ireland in ­Dublin, there stands a remarkable sculpture. It is called Crann an Óir (The Tree of Gold), with a woven globe of golden leaves attached to a granite plinth. It was completed in 1991 as Ireland embarked on its journey to Celtic Tiger-dom. But it turned out sand, not granite, was supporting the tree’s dense golden web of wealth. As the Irish credit bubble swelled, neither the central bank nor the financial regulator regulated. No one, in or out of government, troubles any longer to deny this.

Patrick Honohan, the new governor of the central bank, veteran of the IMF and – when at the World Bank – of the Asian financial crisis, is widely considered the most respected economist of his generation. In his office on the sun-lit top floor of the bank, he says openly: “We put our hands up and admit it: the regulator simply didn’t do the job.” Now, he says, the central bank must “overcome the reality and the perception of light-touch regulation. Promotion of financial services is no longer part of the mandate.”

Matthew Elderfield, the new head of financial regulation – now brought back into the central bank – is a Briton head-hunted from the Bermuda Monetary Authority. He says that aside from governance failures, regulation was crippled by gaps in the rule book, thin resourcing and no enforcement. He has raised sharply banks’ capital requirements and plans a forensic approach to regulation, based on “action to mitigate the risk”. Already he has ruffled powerful feathers by placing Quinn Insurance, flagship of Sean Quinn, once Ireland’s second-richest man, in administration.

Even the most cursory examination of Irish business governance reveals a cat’s cradle of cross-directorships, the same names recurring across the private and public sectors, which one Irish minister admits has as much to do with “political incest” as a shallow gene pool. In Honohan’s view, “a property bubble is always associated with rich and powerful people talking to other powerful people; that’s my experience.”

Sean FitzPatrick, for instance, was a key figure on the board of the Dublin Docklands Development Authority. This strategic body has redeveloped a wasteland into a glittering new business and finance district, a Canary Wharf on the Liffey, where the resplendent Grand Canal Theatre opened in March with dancers from the Bolshoi Ballet. But with no monitoring to speak of, its reckless land deals have left the exchequer with yet more liabilities. This was a cosy culture of common purpose in which the imperative was to keep the boom going, with the government chivvying businessmen to “pull on the green jersey”. Politics was a catalyst of the crisis, not a restraint.

There is, furthermore, little ideological difference between Ireland’s two big parties, Fianna Fáil and Fine Gael, whose rivalry dates back to the 1922-23 civil war. Both are populist, ­centre-right and run like family firms. As one of Ahern’s predecessors put it when asked to define the difference between the two: “We’re in – they’re out.” Little wonder that Ireland, in local parlance, lost the run of itself.

It is important to realise that there was a real boom from about 1990 to roughly 2002 – and that this was in the traded goods and services sector. Once noted mainly for the export of people, ­Ireland became one of Europe’s wealthiest countries, overtaking its former colonial master. It used EU regional aid to modernise, above all in education and infrastructure, and then it put in place low-tax, business-friendly policies that became a magnet for investors. After a century of haemorrhaging people, Ireland started to import labour.

Brian Lenihan, the finance minister with the job of cleaning up the present mess, reflects that “the EU provided Ireland with a very good transition out of an agriculture-dependent economy. This country lived with a huge structural constraint from about 1845 to 1990 – and it was called rural Ireland.”

Lenihan has taken bold steps. He has ripped six ­percentage points of gross domestic product out of the budget. The fiscal deficit, though still 12 per cent of GDP, has stopped rising. Nama – the “bad bank” – has started drawing the first buckets of toxic property loans out of the banks, but at dramatically higher discounts than initially signalled, with new capital adequacy rules, which will in practice mean the state taking over the bulk of Irish banking.

While no one is enamoured of Nama, it has, says Lenihan, “let us go in and make a real evaluation of where the real holes are”. The hope is that by taking out the biggest losses from the banks and recapitalising them, they can resume lending and Ireland’s cost of borrowing will eventually go down. The economic and social cost has been huge. Last year alone, gross national product – a more indicative measure of economic activity than GDP, which includes multinational profits booked in Ireland – shrank by 11.3 per cent. Ghost estates of unsaleable housing haunt the land. Unemployment is now at 13 per cent and rising. One civil servant says his take-home pay has shrunk by 27 per cent.

Shock though this is, Ireland appears to be managing it and doing so with an informed public debate. “Ireland does adversity well,” says Maire Geoghegan-Quinn, Dublin’s ­current European Commissioner. So far, there have been go-slows rather than strikes; government and unions have struck a deal on public sector pay and reform. The boards of the banks have been cleared out and targets for pent-up public anger have appeared on cue, with Sean FitzPatrick and his former finance director at Anglo arrested and questioned by the Gardaí. No banks are ablaze in Dublin; it is not Athens.

Not everyone is sanguine. Karl Whelan, professor of economics at University College Dublin, has been a stern critic of Nama. “We seem to be wedded to the most expensive ways of doing this and it does drive people crazy.” Nama only crystallises the worst losses. Even if that works, most Irish mortgages (about €100bn worth) track currently low European Central Bank rates and will foreseeably diverge from the real cost of borrowing. The cost of bankruptcies, rising joblessness, credit card debts and pension holes at the big banks is all still to come. In the febrile state of the bond markets and with the crisis in the eurozone, there will surely be calls for bondholders to share the pain as the nation shrinks its balance sheet along with the banks, funded by the taxpayer.

The government insists it will stand behind the banks’ obligations, equating their debts with sovereign debt. In the eyes of many, this means zombie banks with the state reduced to a debt-service agency. “While the country needs a banking system, what it does not need is this banking system,” says David McWilliams. As things stand, how to stabilise while resuming growth remains a conundrum. David Begg, general secretary of the Irish Congress of Trade Unions (ICTU), says they lost the battle to stretch out fiscal consolidation to ease pressure on wages and maintain some demand. “We said 2017 was the right time to get [the budget deficit back] to 3 per cent but they said 2013. The compromise was 2014. But that could cast us into a Japan-style debt deflation for a decade.”

Yet Ireland’s modern economy – based on exports of processed and fresh food, IT services and software, ­pharmaceuticals and medical equipment – is holding up well. “People know there’s something you can get back to,” says Honohan. New jobs are starting to come in. Most of the positive features that predate the property bubble are still in place: a small, open, low-tax economy with an educated workforce; strong ­European and Atlantic links; and an Irish diaspora acting as an enabling network.

Is Ireland heading back to the Tiger-ish 1990s or the long recession of the 1980s? Government literature on Innovation, or “The Smart Economy”, a numbing staccato of hollow buzzwords, is a poor guide. “All that was a late boom idea that has suddenly morphed into a recovery idea,” says Whelan. “It’s suddenly become: ‘This is what is going to save the country.’” It falls somewhat short of reimagining Ireland.

One attempt to do just that took place last September at Farmleigh, a government guesthouse formerly owned by the Guinness family near Phoenix Park. This gathered some 250 CEOs from the diaspora to look at Ireland’s current state and come up with solutions. A bruising critique of the country’s complacency about its education excellence, from Craig ­Barrett, former CEO of Intel, triggered an inquiry into ­examinations grade inflation. ­Prodded by this meeting, a budget-slashing government has ringfenced research and capital spending. Formal global Irish networks have been set up to generate feedback, intelligence and critical advice.

“We are seeking to influence influencers,” says Dermot McCarthy, Ireland’s leading civil servant during the past ­decade. “We are talking about the extent to which – at the margin – key people operating in target markets can be swayed to give favourable consideration to Irish enterprises. It does make a difference.” Those at the meeting also insisted that, beyond Ireland Inc, the country’s “best calling card is its ­culture”. New arts centres, in New York, for example, will be one result.

The government is working hard on Brand Ireland. According to Micheál Martin, foreign minister, “We only have to get a relatively small slice of the pie to do really well.” Just back from Paris and meeting French project management, pharmaceuticals and games companies lifting their investment in Ireland, he says that “there’s no alternative for ­Ireland but to get out there and mix it.” The universities are pitching in, too. Hugh Brady is a professor of medicine who returned from Harvard to head University College Dublin, aiming to transform it into a research centre of international renown. “Ireland has developed a truly world-class R&D ecosystem catalysed by the diaspora,” he says. But “the most valuable product that we produce is highly skilled graduates.”

Set against this is the shock of renewed emigration, “a very big psychological blow”, in the words of David Begg of the ICTU, who says that “we thought we had it cracked.” Even ­Dermot McCarthy at the Taoiseach’s office concurs: “People of my generation and older, who had gone through a sustained period of underdevelopment, low ambition, short horizons and emigration suddenly had a decade or more of real success. To find that was all built on shaky foundations, that people who should have done better by us didn’t, was all a huge shock.”

Yet the journey to seek work abroad now is not the one-way trip it used to be. “There isn’t that sense of hopelessness and despair,” says John FitzGerald of the Economic and Social Research Institute, the respected Dublin think-tank. “Now it’s one of anger, but focused anger. Even in the boom a quarter of all Irish young people emigrated. My suspicion is that the bulk of successful companies here are run by people who have been abroad.”

Neil O’Leary, who heads Ion Equity, a private equity house, goes further. “The 1980s émigré phenomenon was really part of the boom: yes, you had this drift of brainpower to the wider world but then they came back fizzing with ideas.” Pooh-poohing the hype about the smart economy, he says Ireland should be more like Holland, “trading on our wits”.

“The core resource that Ireland has to offer is an English-speaking, highly adaptable and well-educated young workforce; we shouldn’t pretend we have more,” says O’Leary. “The key thing for Ireland is to keep abreast of that resource, keep tweaking it. It may not be as tangible as oil or gold but it’s real.

“The real smart economy is about understanding the exact nature of the Irish resource,” he concludes. “You have much more ordinary magic lying all around you.”

David Gardner is the FT’s international affairs editor

His last piece for the magazine was about democracy in the Arab world. Read it at

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