Saving Ireland Becomes Lenihan’s Latin Lesson in Fight for Life

Saving Ireland, Lenihan’s Latin Lesson in Fight for Life
Ireland's finance minister Brian Lenihan became finance minister just as the Irish economy started to unravel after a decade of the fastest growth in the euro region. Photographer: Crispin Rodwell/Bloomberg

As a 12-year-old boy, Brian Lenihan learned Latin during the summer to win a place at James Joyce’s alma mater, Belvedere College in Dublin.

Almost four decades later, that 1971 spirit is evident as Ireland’s finance minister fights to save his country’s economy and its banks, while staving off pancreatic cancer.

“I don’t know how he kept going but he did,” said Mary O’Rourke, Lenihan’s aunt, Latin teacher and a former enterprise minister. “That goes back to the little boy of 12 learning Latin, a strange task and a strange language. If he sets himself a task, he’ll do it. The odyssey is beginning again.”

Lenihan laid out plans yesterday to split Anglo Irish Bank Corp., which lost 20 billion euros ($25.5 billion) in two years, within a month. Standard & Poor’s downgraded Ireland’s credit rating in August to its weakest since 1995, saying Dublin-based Anglo Irish might require as much as 35 billion euros of aid.

Few places in the world were mired more quickly and deeply by the financial crisis than Ireland and few finance ministers have faced a bigger challenge than the 51-year-old Lenihan.

After arriving in the post in May 2008, he guaranteed about 440 billion euros of Irish banking deposits and borrowings, a move he said helped avert a financial “nuclear winter” following the collapse of U.S. investment bank Lehman Brothers Holdings Inc. The cost of that decision now threatens to overshadow two years of budget reductions.

Holes in System

“The big problem is that nobody knows how big the holes still are in the Irish banking system,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt.

The government injected almost 33 billion euros into banks and building societies, with two-thirds of it going into Anglo Irish. It paid a further 13 billion euros for loans once worth 27.2 billion euros, part of a plan to cleanse banks of bad loans and allow them to boost lending.

The Finance Ministry said in yesterday’s statement that Anglo Irish will be broken up into a so-called good bank, which will retain the lender’s deposits, and an asset-recovery bank, which will shrink as loans are repaid. The central bank will determine by October how much new capital will be needed.

The spread, or difference in yield, between Irish 10-year bonds and the equivalent German bunds, Europe’s benchmark, widened to a record 377 basis points yesterday before narrowing to 371 points after the statement on Anglo Irish. That’s eight times higher than its average over the past decade.

Risk to Finances

Lenihan’s performance has been “not so great if you’re a holder of the sovereign debt or a taxpayer,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris. “He’s loaded the public finances with bank risk.”

A lawyer by training, Lenihan became finance minister just as the Irish economy started to unravel after a decade of the fastest growth in the euro region.

A founding member of the currency, Ireland’s economy grew 6 percent a year on average in the first half of the decade, as the country’s 12.5 percent corporate tax rate drew companies such as Round Rock, Texas-based Dell Inc., the world’s third-largest personal-computer maker, and Santa Clara, California-based Intel Corp., the largest maker of microchips.

The export boom morphed into a real-estate bonanza, with home prices quadrupling in the decade through 2007. Then came the bust as the property bubble burst, with prices plunging as much as 50 percent in the past three years.

Political Dynasty

Lenihan is a scion of one of Ireland’s political dynasties. His aunt Mary, the former minister, is still a member of parliament. His brother Conor is science minister. His father Brian, who died in 1995, was a deputy prime minister and a one-time presidential candidate.

After Belvedere, Lenihan studied law at Trinity College Dublin and then at Cambridge University.

“He strutted across the campus carrying himself with a style and panache,” said O’Hagan, who was at Trinity at the same time as Lenihan. “It was clear even then that he was destined for great things.”

Prime Minister Brian Cowen appointed Lenihan as finance minister in 2008, 12 years after he first won his seat in parliament. A month after his appointment, Lenihan said he had the “misfortune” to take the job as the economy slumped. The budget deficit spiraled to 14.3 percent last year, more than anywhere else in the euro region.

Slash Spending

His response was to slash spending and raise taxes even as he pumped 7 billion euros into Bank of Ireland Plc and Allied Irish Banks Plc. He also took over Anglo Irish, which bankrolled many of the country’s property developers mainly using cash borrowed on the international money markets.

“He’s done a good job on the fiscal correction, but his banking strategy is a disaster,” said Michael Noonan, finance spokesman for opposition party Fine Gael. “He made the mistake of believing the information coming to him from the banks.”

In the aftermath of Lehman’s collapse in September 2008, Lenihan drove to Killiney in the south of Dublin to meet David McWilliams, a former UBS AG banker who forecast the crash in the housing market.

Over tea, biscuits and garlic bulbs that the “nervous and fidgety” Lenihan ate to keep healthy and alert, McWilliams sketched a plan for the state to guarantee bank deposits and debts, the economist said in his 2009 book “Follow The Money.”

Key Decision

Lenihan, who declined to be interviewed for this story, has confirmed he met McWilliams as part of talks with advisers. The guarantee was introduced on Sept. 29, 2008.

“Everything flowed from the decision, though in fairness he was basing it on a totally false information,” said Noonan. “Far better would have been a much more limited guarantee, covering AIB and Bank of Ireland and letting Anglo go down, albeit protecting the deposit holders.”

Letting a bank collapse would have been “unthinkable,” Alan Ahearne, an adviser to Lenihan, said in an interview last week. Anglo was “of systematic importance,” central bank Governor Patrick Honohan said in a report commissioned by the government and published in June.

The guarantee came back into focus on Aug. 24 when S&P downgraded Ireland’s credit rating to AA- and said the state may have to inject as much as 35 billion euros into Anglo Irish, about 10 percent more than projected tax revenue for this year.

Lenihan, who said on Jan. 4 that he had been diagnosed with cancer, has to convince the world he is control of those costs while fighting the disease. He said Sept. 6 that his condition had stabilized and it isn’t “a clear and present danger.”

“He’s faced huge personal difficulties, but he keeps going,” said O’Rourke, his aunt. “I remember saying when he took over, ‘Imagine being finance minister and having no money,’ but he has broad shoulders.”

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