Central Bank of Ireland governor Patrick Honohan delivered a short speech at the annual meeting of the Irish Economic Association a few hours ago. In Ireland’s strange political dynamic, what initially made news was that he endorsed the fiscal compact, because the Irish judicial class has prescribed a narrow role for the government of the day in advocating for constitutional questions that it puts to the people. Anyway, a few paragraphs after telling people that they are too focused on the costs of Ireland’s infamous blanket bank liability guarantee (on the grounds that our “partners” would have insisted on all senior unsecured bank debt being serviced anyway), he drops in this bit of historical interpretation:
Restructuring of the banks as long as the guarantee was in effect was inhibited by the fact that any significant restructuring was likely to trigger an immediate entitlement for immediate payment in cash of all bondholders under the terms of the guarantee. This reason alone can explain why steps to deal definitively with even the two weakest banks were deferred to the end of the guarantee period.
In other words, the guarantee amounted to one giant cross-default clause in every single bank bond, with a default on one triggering default on all. Given the amount of fuss that went into Greece’s insertion of retroactive clauses into its sovereign debt, it’s strange to consider that Ireland took what Honohan now sees as radical step with such little thought.
Note incidentally the timeline implied by his interpretation. The guarantee went into effect at the end of September 2008. Because of the cascade problem, the banks couldn’t be restructured until after September 2010. Two months later, Ireland was in an IMF program. This is a very different sequence from one which holds wide sway in Ireland, that the country was doing OK during 2010 and was done in first by acceleration of the Greek crisis and then a threat from the ECB to pull the liquidity funding for Irish banks unless a program was in place. In short, it seems that even now, the history of Ireland’s descent into dependence on the aforementioned partners is not yet complete.
The rest of the speech is also worth a look, as the Governor explains how the country’s adjustment of residential mortgages and of the overall fiscal deficit could and should have been faster. It’s now at the point where the protracted nature of the process has become a problem in its own right.