Irish ministers tried to avoid Patrick Honohan’s office in the 1980s because of the plume of smoke spiraling from the economist’s pipe.
“We’d be reluctant to go in there,” said Michael Noonan, who served in government when Honohan was a prime ministerial adviser from 1981 to 1986.
Three decades later, Noonan, 67, has re-entered government as finance minister to work with Honohan, now the nation’s central bank governor, to lead Ireland’s effort to cut through a different haze and regain credibility in the markets after an 85 billion-euro ($117 billion) international bailout last year.
Honohan will take a step in that process this month when he provides details about the scope of losses incurred by Ireland’s banks and tries to convince investors that he has a plan to fix them without crippling the state with debt. Honohan, 61, was the first Irish official to tell the public that their country needed to be rescued when he let them know in November.
“He has an openness to him that is very rare in a central banker,” Garrett FitzGerald, 85, who Honohan advised during his two terms as premier in the 1980s, said in an interview in Dublin. “His handling of the bailout was very skillful. When the government went into a mess on this issue, he saved the day by revealing on his own account what was happening.”
The bailout continues to dominate Ireland. At a March 11 meeting in Brussels, euro-area leaders rejected Prime Minister Enda Kenny’s bid for lower borrowing costs and insisted that the government raise its company taxes in return.
Back in Dublin, Honohan, who has led the Central Bank of Ireland since September 2009, is walking a familiar tightrope when it comes to disclosing the state of the country.
The results of stress tests due this month will determine how much of the 35 billion euros of the bailout set aside for banks the government needs to draw down. Draw too little, and investors will continue to shun the lenders. Draw too much, and he risks imperiling the government’s ability to repay the loans. The banks may need the full 35 billion euros, the Sunday Independent reported yesterday, without citing anyone.
A year ago, Honohan and financial regulator Matthew Elderfield produced estimates of the banking losses and their capital needs. Six months later, the central bank increased the amount for Dublin-based Allied Irish Banks Plc by 3 billion euros, or 40 percent.
For Anglo Irish Bank Corp., the lender that bankrolled the lion’s share of the property boom that turned to bust in 2008, the sum had risen 56 percent to a worst-case scenario of 34.3 billion euros from about 22 billion euros. Authorities had been too optimistic about the value of loans transferred to the National Asset Management Agency set up to take on risky debt.
“They seriously underestimated the scale of the losses inside the banks,” said Karl Whelan, a professor at University College Dublin and a former economist at the Federal Reserve. “This time, the numbers need to be realistic and far more detail released. They will be believed if that’s the case.”
Honohan declined to comment for this story ahead of the results of the bank stress tests. He told national broadcaster RTE on March 1 that the country has had enough of footing the bill for the lenders who doled out money to property developers.
Yields on Ireland’s 10-year bonds have risen to 9.65 percent from 9.02 percent at the start of 2011. Investors demand a yield premium of 643 basis points to buy Irish debt rather than German bunds of similar maturity, compared with 680 two days after the November bailout.
‘Really Fed Up’
“I’m really fed up because I never thought I would get into the situation where I would announce a range of figures and get very soon overtaken by events,” Honohan said during the RTE interview. “People are fed up.”
Honohan, who keeps fit by weaving around Dublin traffic on a blue bike from the city’s rental scheme, entered a more public domain in November. For five days after it emerged that Ireland might need a bailout, the government declined to comment on the rescue talks.
Enterprise Minister Batt O’Keeffe said Nov. 14 that the government wouldn’t give up the country’s “hard-won” sovereignty 90 years after gaining independence from Britain. Four days later, Honohan appeared on Ireland’s biggest morning radio show from a phone line in Frankfurt to declare that Ireland would need a multi-billion euro financial rescue.
“The handling of the bailout by the government was a disaster,” said Whelan. “Patrick would have seen what was going on in terms of the needs for a bailout, and on the fifth day, told the public the truth.”
The bespectacled, bearded Honohan studied economics and mathematics at University College Dublin, where he graduated with first-class honors. He completed a doctorate at the London School of Economics before working at the International Monetary Fund and the Irish Central Bank.
Honohan worked for FitzGerald, who had taught him at university, in the 1980s, and spent a decade at the World Bank before returning to teach financial economics at Trinity College Dublin in 2007. Former Finance Minister Brian Lenihan conferred with Honohan on the banking crisis before Lenihan picked him to serve as the 10th governor of the central bank since its founding in 1943.
“Because Honohan wasn’t in charge during the boom, he has clean hands,” said Philip Lane, an economics professor at Trinity who has collaborated with Honohan on papers. “He has credibility that some other policy makers seem not to have.”
Within 18 months of his appointment, the Washington-based IMF and the European authorities had arrived to bail out Ireland, as deposits fled the banking system, investors shunned bank debt and soaring yields effectively locked the government out of the credit market.
After all that, Honohan, an opera lover and amateur astronomer, is someone people want to listen to.
In January, demand for seats for a Honohan speech forced the Institute of International and European Affairs to move an event from its Georgian headquarters in north inner city Dublin to a nearby hotel ballroom.
Previous guests include European Central Bank President Jean Claude Trichet, former U.K. Prime Minister Gordon Brown and former Soviet leader Mikhail Gorbachev.
“It seems as though he has become rather popular,” said Gerard Caprio, a friend of Honohan since they worked together at the World Bank who now teaches economics at Williams College in Williamstown, Massachusetts. “Whether he remains so is unclear, but I am willing to wager that he will rank at the top in terms of being the most effective governor ever.”
As he seeks to rebuild Ireland’s economic reputation, he will again work alongside Noonan, who was named last week as finance minister in the Fine Gael-Labour government. Fine Gael prevailed in Feb. 25 elections, ousting the 14-year-old Fianna Fail government as voters abandoned the party in record numbers.
The last time Honohan worked with a Fine Gael-led administration he told FitzGerald in 1985 to move quickly to cut spending as the budget deficit ballooned. That was blocked by the party’s Labour coalition partners, FitzGerald said.
“In the 1980s, his advice was ignored,” said Noonan. “In retrospect, it turned out to be right.”