How Ireland Charmed the Germans to Lead Nation Out of Bailout Wilderness
As a cold day last February turned to early evening twilight, Alan Dukes strode through the lobby of Dublin’s Merrion Hotel when a familiar figure lurking in the shadows stopped him.
Sean Kinsella, private secretary to Finance Minister Michael Noonan, told the banker that his boss wanted to see him. The pair scurried across the road to Noonan’s office. There, Dukes learned for the first time of the plan to close the bank he led, the former Anglo Irish Bank Corp., emblem of the financial boom and bust that had crippled Ireland.
“The first thing I said to him was: ‘Nos morituri te salutamus: We who are about to die salute you,’” said Dukes. “I was surprised by it. But there was no point arguing.”
Hours later, Noonan revealed at a raucous midnight sitting of parliament that shuttering Anglo formed the centerpiece of a plan to ease the burden of debt and lead Ireland toward ending reliance on aid. Three years after the bond market forced the nation to seek a 67.5 billion-euro ($93 billion) bailout, the country will become the first to exit the euro region’s rescue program and go back to investors for funding.
Noonan’s maneuvers since a change of government in 2011 capture the quintessentially Irish approach the nation took to win back its economic sovereignty, which will formally happen on Dec. 15.
While Athens burned and strikes paralyzed Lisbon, Dublin remained calm enough for politicians to take a different tack: stealth, deference and diplomacy in cozy chats over drinks in Victorian bars. There were Sunday afternoon crisis phone calls, successful efforts to charm the Germans who would ultimately decide the nation’s fate, and alliances with figures such as Mark Carney, now Bank of England governor.
A change of guard at the European Central Bank in Frankfurt and an endorsement from two U.S. investors aided that approach to dealing with the fallout from the euro region’s most toxic property bubble.
It looked a long road in 2010, when German officials in Berlin and the ECB pressed Ireland to accept the bailout as banks flirted with collapse.
“I remember going to Mass one Sunday morning and I was looking around at all the people and thinking, where are we all going to end up?” said Alan Ahearne, adviser to Noonan’s predecessor, Brian Lenihan, who oversaw Irish negotiations going into the rescue and died of pancreatic cancer in 2011. “I remember Lenihan saying to me: Will the economy stop shrinking at all?”
It’s a tale of twists and turns, where disaster often lurked and a prosperous future is far from assured.
Thousands of Irish are leaving the country each month to escape an economy still very much in trouble. Yet the troika of the ECB, European Union and International Monetary Fund, dubbed “kind of honorary Irish people” by Noonan, also have departed Dublin.
A 70-year-old political veteran, Noonan took over the economy four months after Lenihan sought the three-year aid program from the troika.
A former party leader who returned to frontline politics in 2010 after nursing his wife through Alzheimer’s disease, Noonan took over an economy that had shrunk about 10 percent. Irish morale was shredded by the property bust.
“Our European colleagues were looking at us in a strange way,” Noonan said in an interview on Dec. 6. “Our reputation was shot to bits. Lot of ministers on the continent were sick of listening to the boastful Irish talking about how you make a lot of money on property.”
While the Irish sought to restore their reputation in Berlin and other European capitals, the challenge facing Noonan deepened four months after he took office as Moody’s Investors Service cut the nation’s credit rating to junk.
Yields on the 10-year government securities shot up toward their peak of 14.1 percent from 4.9 percent in May 2010.
“We were now being met with the emerging-markets desks,” said John Corrigan, head of the Irish government debt agency. “That will tell you how far we had fallen.”
Before the new government could go on the offensive, it needed to play defense. It fended off an attack on Ireland’s 12.5 percent corporate tax rate, the cornerstone of an economic policy that transformed Ireland from a financial backwater into a European hub for companies such as Pfizer Inc., the maker of Viagra, and Google Inc.
Two days after commencing his premiership, Irish Prime Minister Enda Kenny, 62, became embroiled in what he called a Gallic spat with French President Nicolas Sarkozy after refusing to raise the tax rate in return for an interest-rate cut on aid.
“The attitude was: ‘You misbehaved and here’s what you have to do’,’” said Lucinda Creighton, who served as European Affairs Minister before leaving the government in July 2013. “There was no pretense at negotiation, but it was just political theater with no basis and without German support.”
On the contrary, the Germans were tough, yet helpful to Ireland, Creighton said.
“That’s the myth,” she said. “I tend to be very defensive of the German role, because the perception in Ireland about Germany is quite negative, but that has no basis.”
The Irish drew upon German support when the new government won its first big break, what Creighton refers to as a psychological turning point.
At a euro-region summit in July 2011, German Chancellor Angela Merkel gave Ireland and Portugal lower interest rates on their aid and more time to repay the bailout loans. They had been paying a premium on the cost of funds “so that we wouldn’t do it again,” Noonan said.
“I’d be jokey about it,” said Noonan. “I’d say ‘look, lads, you should only come canvassing with me, you’ll see we don’t need this 3 percent to make us be good in the future.”
That month proved to be a defining moment, as two U.S. investors prepared to enter the fray. U.S. billionaire Wilbur Ross, 76, had been watching events unfold in Ireland for 18 months, when Prem Watsa rang. Watsa, head of investment company Fairfax Financial Holdings Ltd., had an idea: what about buying part of Bank of Ireland Plc, the country’s biggest lender?
While other potential buyers wanted guarantees and rising mortgages losses spooked others, the North American investors rolled the dice. They paid about $1.5 billion for a stake in the bank, the Irish Free State’s banker when it gained independence from Britain in 1922. The resilience of the Irish, coupled with the government’s determination, drew Ross, he said.
“We concluded Ireland would be the first country to emerge from a bailout,” said Ross. “We also immodestly believed that a big investment by ourselves and other internationally known investors would help to accelerate the recovery.”
At around the same time, 5,000 miles from Dublin in California, a bespectacled curly-haired fund manager took a decision that probably saved Ireland from a second bailout.
Michael Hasenstab joined Franklin Resources straight from college in 1995 and has been managing the Templeton Global Bond Fund since 2001.
“The markets turned overly pessimistic and thought the world was going to end and Ireland was going to default,” Hasenstab said in an interview with Irish broadcaster RTE aired on Dec. 9. “Pessimism grew disproportionate to what was going on in Ireland, so we looked carefully to see if there was fundamental value that was being disregarded because of the panic.”
Hasenstab, who didn’t respond to interview requests for this story, bought about 8 billion euros of Irish bonds. As details of his wager on Ireland emerged, it added to the momentum pushing yields down, fueled originally by the cut in rates of the aid and Ross.
By Aug. 31, 2011, the yield of Irish 10-year bonds had sunk to 8.4 percent from 14 percent six weeks earlier.
Noonan had courted both Ross and Hasenstab, reflecting the Irish strategy of combining access and stars to woo investors. Dubliner and U2 star Bono talked to Google executives as they mulled expanding in Dublin, and in 2011 they bought the 15-story Montevetro building in the heart of Dublin’s Silicon Docklands.
“We spent an inordinate amount of time giving presentations to international investors, selling the Irish story, playing any card we could, green scarf or whatever you want to call it,” John Mulcahy, head of asset management at the National Asset Management Agency, which brokered the sale, told an audience of accountants in Dublin in October. “American companies rather liked the fact that we, in a kind of a plucky sort of way, stood up and took our medicine.”
In Frankfurt, Mario Draghi took over from Jean-Claude Trichet as ECB president. Within months, the central bank injected more than 1 trillion euros of three-year loans into the region’s banking system. Banks used the cash to buy sovereign debt, helping push down yields across Europe.
Draghi declared in July last year “the ECB is ready to do whatever it takes to preserve the euro” before sketching out the bond-buying Outright Monetary Transaction program.
Now on the Irish central bank board, former finance ministry adviser Ahearne contrasts the stance with the ECB’s inaction in 2010.
“It’s just chalk and cheese now with the ECB, which is so supportive,” Ahearne said. “The euro area just wouldn’t be here now without OMT.”
The stage was set for Noonan to move on to the next act of his campaign: relieving the nation’s bank bailout bill. The state had committed 64 billion euros to save its financial system, placing it among the costliest bailouts in history, after guaranteeing most of the banks’ borrowings in 2008.
In June 2012, European leaders pledged to break the link between governments and the financial industry by allowing the euro region’s new rescue funds to directly recapitalize European banks. In Dublin, government officials proclaimed the accord as a game changer that would allow Ireland to get its money back.
Yet the potential for disaster never was far away. Within months, the deal was close to unraveling. On Oct. 19, after a European summit, Merkel appeared to torpedo Irish hopes, suggesting that there could be no retrospective help for countries that had already agreed to bailout terms.
As the government jet landed at the airfield in Baldonnel, southwest Dublin, mobile phones began to buzz with text messages.
“We were at a European Council, everything was fine as far as we were concerned, we got on board the government jet,” Creighton remembers. “We got back to Dublin and found some answer she had given had been construed in a certain way.”
Political opponents called Merkel’s comments a massive setback. Irish officials e-mailed links of media coverage of the comments to Merkel’s office late on Friday evening, and again the next day. German officials responded that, while her words were inadvertent and hadn’t been targeted at the Irish, they could understand Kenny’s point.
With Merkel herself initially incommunicado, the sticking point for German officials was how to aid the Irish without creating a precedent for other countries in the euro region that had poured money into their banks.
Kenny counted on the relationship he had built with Merkel through their shared membership of the European’s People Party. By Sunday evening they had released a statement calling Ireland a “special case.”
Noonan then ramped up his efforts to broker a deal on banking debt. He had a consistent line: it was payback time. The government hadn’t imposed losses on senior bank bondholders, preventing contagion spreading across the euro region from the Irish banking crisis.
“So, like, lads, we took one for the team,” Noonan said he told his European colleagues. “Some of them are horrified. More of them smile.”
Noonan focused on Anglo Irish, the bank that more than any other had ruined the state’s finances. In 2009, the government took over the failing lender, and asked Alan Dukes to help salvage what he could. A former finance minister and opposition leader, Dukes told a finance ministry official the lender would need about 4.5 billion euros.
His “first reaction was to look at us clearly thinking here’s a bunch of guys who want a nice big comfortable cushion of cash so they can be at ease,” said Dukes. “I said, that’s not the way it’s going.”
Noonan was left with a 35 billion-euro bill for Anglo and a smaller rival, and he needed help. He started his charm offensive with IMF Managing Director Christine Lagarde, taking her to Doheny & Nesbitts, a Victorian-era bar around his corner from his office.
“Christine, we’re doing great,” Noonan told her. “We’re fulfilling all the obligations that you’ve asked us to fulfill, and we’ll continue to do that, but we still won’t fix the Irish problem, and consequently, there’ll be a problem in Europe as well, because our debt numbers are going be too high.”
He moved next to German Finance Minister Wolfgang Schaeuble, who introduced Noonan to his former chief of staff, Joerg Asmussen. Asmussen had become a member of the ECB’s executive board, which controls the day-to-day operations of the organization, in 2012.
“Draghi had given him the job of seeing what could be done,” Noonan said. “So we shared a lot of ideas for a couple of hours. Things began to move from then.”
The government had been due to pay off the cash Anglo owed to the ECB, via the Irish central bank, in 3 billion euro a year installments. Instead, Noonan wanted to shutter Anglo, and swap government bonds for the debt owed to central banks. That allows the state to sidestep paying down the bank’s bill immediately and defers capital payment until 2038.
A new roadblock emerged, in the shape of German Bundesbank President Jens Weidmann, who opposed the deal at a time when Draghi wanted to avoid a confrontation.
Here again, Ireland drew on its diaspora, looking to Mark Carney, who has held an Irish passport since 1988.
Then at the Bank of Canada, Carney spoke with Weidmann, stating the Irish case, according to a person familiar with the matter, who asked not to be named because the talks weren’t public. Ireland and Canada are grouped together at the IMF. A spokesman for Carney declined to comment on his part.
Though Weidmann later publicly spoke against the deal, he didn’t block it. On Feb. 7, Kenny declared Anglo dead.
A month later, Ireland laid the foundation to exit the bailout with its biggest bond sale since 2010.
In November, the troika left Dublin after a final review of the program, with the European Commission’s Istvan Szekely, leaving a bottle of plum palinka, a specialty brandy from his native Hungary, for Noonan.
As the troika departed, they left a country still wrestling with its finances, though with hopeful signs.
The economy emerged from recession in the second quarter, unemployment dropped for six months in a row, and house prices in Dublin are rising again. The yield on 10-year bonds is down to 3.5 percent, lower than Italy and Spain. Voters largely continue to back austerity, with polls suggesting the Fine Gael of Kenny and Noonan is still the biggest party.
Though still troubled, the banking system is at least on the way to repair. Anglo is being liquidated and former chairman Dukes remembers his final days at the helm as he returned to his office to find the liquidator in place.
“I said I’m just here to collect my stuff,” Dukes said. “He said, ‘well we need you to be out of there quite soon. You can come tomorrow.’ So I went.”
Noonan meanwhile plots his next campaign, seeking more European help for the country’s bank debt, undaunted by his “good friend” Schaeuble’s opposition.
“The Germans disagree all the time until the very end, and then they agree,” he said. “Once you realize that, you keep talking, you keep chipping away.”
To contact the editor responsible for this story: Heather Harris at firstname.lastname@example.org