LITMIR.BIZ

       5 BRIAN LENIHAN AND THE NATION’S FINANCES

      PATRICK HONOHAN

      The three years of Brian Lenihan’s tenure as Minister for Finance saw some of the most dramatic macroeconomic and financial developments in the history of the State. When appointed in May 2008 he seemed to have inherited robust public finances generated by a rapidly growing economy. But appearances had been deceptive. By the time he left office in March 2011 the landscape had changed utterly. Public debt was surging past 100 per cent of GDP, the unemployment rate had about tripled to almost 15 per cent and the banking system’s solvency had collapsed.

      As conditions rapidly deteriorated, it would no longer be enough to keep a steady hand on the tiller while deciding where the fruits of a growing economy should be distributed. Indeed, large parts of the economy of 2007 would prove to have been built on sand. The seemingly healthy public finances, with a low debt and deficit, had been achieved only thanks to unsustainable tax revenues coming from the property and construction bubble. Deflation of that bubble was by mid-2008 already well under way. It would bring down the banks with it, along with thousands of over-indebted borrowers.

      Unwittingly, Brian Lenihan had been handed the unenviable task of limiting the fall-out of an economic implosion, which had already been primed, and which would soon be detonated by the global financial crash.

      That detonation occurred at the height of the post-Lehman’s crisis in the chaotic days of late September 2008. Faced with the imminent inability of the Irish banks to meet their payment obligations, as the foreign funders on whom they so heavily relied declined to rollover their maturing deposits, the Irish Government and its advisers saw no alternative to providing a blanket guarantee to the banks. Though they recognised some weaknesses in the Irish banks, none of the policymakers dreamt that the loan-losses latently embedded in the banks could be so great, and that the guarantee therefore entailed such large risks as subsequently materialised.

      The primary responsibility for this miscalculation cannot be placed at Brian Lenihan’s door. He was entitled to rely on the advice proffered without dissent by all of the official advisers and buttressed by costly consultancy reports from the pens of elite investment banks.

      The alternative was not palatable either: the damaging effects of a default, whether of the banks in September 2008, or of the sovereign guarantee later, would have been felt not only in Ireland, but all over Europe and further afield. It is easy to exaggerate, as many have, the damage done to the Irish economy on the night of the guarantee. Still, by proceeding unilaterally and in such an expansive manner, the Irish Government weakened its legal and political ability to lever a greater degree of burden-sharing from bank creditors and from official European partners.

      It was largely to Brian Lenihan that the task fell of seeking to restore equilibrium, first by moving quickly to start the process of cleaning up the banks’ balance sheets; second, by planning and initiating the necessary fiscal adjustments; and third by being prepared to face up to the need for an international financial rescue package. It was characteristic of the man that, faced with a difficult challenge, he would act decisively, boldly, with an assured sense of confidence. The steps he was able to take in the two-and-a-half years that were left to him after the guarantee, helped the gradual process of rebuilding national and international confidence in the Irish economy.