TODAY, TAOISEACH MICHEÁL Martin said that the money provided by the Government to Irish banks in September 2008 was not a bailout.
In a debate with Solidarity-People Before Profit TD Richard Boyd-Barrett focused on the current situation for Debenhams workers, the Fianna Fáil leader said that the Irish government received shares in return for providing the banks with capital, suggesting that covering the banks in this way was an investment instead.
Is he right?
Taoiseach Micheál Martin made the claim in the Dáil today, as he answered questions from TDs on upcoming legislation.
He told the chamber in the Convention Centre that the government’s recapitalisation of banks during the financial crisis was not a bailout, saying:
I’ll talk to you about the banks. The banks were not bailed out. Shareholders in the banks were not bailed out; the State took equity. The shareholders were not bailed out. That’s not a popular thing to say, but it’s the facts.
We previously looked at what is meant by a “bailout” earlier this year, when then-Minister for Transport Shane Ross incorrectly claimed that a financial rescue package for the Football Association of Ireland was not a bailout.
As then, we started with the Collins English Dictionary’s definition of the term.
It says: “A bailout of an organisation or individual that has financial problems is the act of helping them by giving them money.”
Then we asked two economists to define what a bailout is and how they work.
Firstly Professor David Jacobsen, Emeritus Professor of Economics at Dublin City University, explained that a bailout is what happens when an organisation receives money because it is in such a perilous financial state that other forms of funding are not available.
“It’s a situation where special financial allowances are made because banks are not willing to continue to fund or lend to a borrower at ongoing interest rates, whether that’s a government, an agency, or even a corporation,” he said.
Jim Power, Chief Economist at Friends First, explained that the financial situation of a business or organisation being bailed out is important to defining what a ‘bailout’ is.
“A bailout is what happens when an organisation is in terminal trouble, and somebody steps in and injects the finance to keep it going,” he said.
“If an organisation is in terminal trouble to the point that it won’t be able to survive, but it receives money to keep it going, that is a bailout.”
Power specifically pointed to the government’s recapitalisation of Irish banks in 2008 as an example of a bailout, as well as Ireland’s economic bailout by the International Monetary Fund in 2011, when the State couldn’t access international bond markets.
The bank guarantee
Martin said two different things today – that the banks weren’t bailed out and that the banks’ shareholders weren’t bailed out.
Indeed, shareholders in the bank were not bailed out. Those investors – many ordinary members of the public – suffered financially as a result with portfolios totally wiped or reduced to a fraction of their former value. (In April of this year, the Anglo Irish Bank assessor ruled that former shareholders were not due any compensation.)
But it is the claim about the banks being bailed out that we are examining here.
So next, we’ll look at what happened in 2008, when the Irish government recapitalised the country’s banks.
In the years leading up to 2007, international bond borrowings by Ireland’s six main banks – Bank of Ireland, Allied Irish Bank, Anglo Irish Bank, Irish Life & Permanent, Irish Nationwide Building Society and Educational Building Society – skyrocketed.
This borrowing by the banks reflected huge increases in their lending into Ireland’s property market: by raising money via international bond markets, the banks were able to finance developers and househunters during the Celtic Tiger years.
One estimate by the economist Karl Whelan put this borrowing at €100 billion by 2007, more than half the country’s GDP at the time.
But in 2008, the Irish construction industry began to slow down, setting off a chain reaction of problems.
Bondholders became concerned about how exposed Ireland’s banks were to a falling demand for properties and the ongoing drop in property values, so the banks found it difficult to raise funds on international bond markets.
By not being able to raise funds, concerns about liquidity arose – that is, the banks worried that they would not have enough money to honour their customers’ requests to withdraw their deposits.
More significantly, the banks also had solvency problems.
Their over-reliance on property-related loans meant that a significant chunk of the banks’ assets (i.e. loans) fell in value as the country’s property market collapsed, to the point that their liabilities (i.e. deposits owed to customers) were significantly higher.
By late September, Anglo-Irish Bank in particular was reportedly days away from defaulting on its liabilities, which likely would have destroyed confidence in the other five banks too.
On 29 September 2008, representatives from the six banks went to the Government for help.
That night, the Irish government pledged to guarantee almost all of the banks’ liabilities for two years. It was decided that any default on bank liabilities that occurred during that time would be covered by the government.
There have been many debates in the years since about whether the government should have done this, or whether a guarantee of this nature was needed.
But there is almost universal agreement that the banks would have collapsed without the government’s intervention.
As economist Victor Duggan, who was an advisor to Joan Burton (Labour’s finance spokesperson) at the time, wrote for TheJournal.ie in 2018:
Doing nothing was not an option. There was no cost-free solution that would also restore confidence in the financial system and ensure ATMs didn’t run out of cash.
Later that year, the government also announced its intention to inject billions of Euro into Irish banks, due to the impact of the global financial crisis.
The move aimed to ensure that Irish banks were adequately capitalised to preserve their financial stability following a huge drop in their share prices.
In 2010, a further €64 billion was borrowed by the State from the European Union and the International Monetary Fund (IMF) to recapitalise Irish banks.
Without the government’s money, the banks – which had specifically asked for help to secure their future in the months beforehand – would have failed.
Although the government did take shares in the banks as part of the recapitalisation plan, State investment in a financial institution is not something that is done as a matter of course – nor was this done by the Irish government done for opportunistic reasons.
It’s very unlikely that the State will recoup the costs of the bank bailout let alone make any sort of profit out of it.
That’s because, among other reasons, the government had to take on debt in order to finance the bank guarantee: debt that has to be serviced every year. That means making interest payments, amounting to billions of euros each year.
Taking AIB as an example, the Comptroller and Auditor General explained in a report published in October 2019 that “projected outcomes that the State might recover the full investment do not appear to take account of the cost of servicing the debt associated with the investment”.
In the case of AIB, that figure stood at €6.2 billion by the end of 2018.
Verdict
Micheál Martin said that the money given by the Irish government to the banks in 2008 was not a bailout. He also noted in his remarks that bank shareholders were not bailed out.
In doing this, he appears to conflate two different things. However, while the first part is true (shareholders were not bailed out or compensated), the second part is not.
According to the standard dictionary definition and the opinions of two respected economists a bailout is a financial package that is given to an organisation, company or country which is in such a bad financial position that it requires an injection of capital to avoid bankruptcy.
The money is required because an organisation, company or country cannot secure finances from any other lender.
On 29 September 2008, Ireland’s main banks asked the government for help to save them from insolvency, and the Irish government recapitalised the banks in the following years.
Micheál Martin suggested that the money provided was an investment, rather than a bailout.
However, the government guaranteed the banks to prevent them defaulting on their deposits – the money was not simply used to buy shares for investment purposes – before also providing them with cash injections.
The government’s package prevented the banks from defaulting on their deposits and secured their future (for the time being).
Therefore, we rate the Taoiseach’s claim as: FALSE
As per our verdict guide, this means: The claim is inaccurate.
The Department of the Taoiseach was contacted for comment.
Additional reporting by Ian Curran.
Correction: After publishing, a line which said the bank guarantee in 2008 was popularly known as the ‘bank bailout’ and which put the cost of the guarantee at €64 billion was changed to reflect that this amount was loaned to the State by the European Union and the International Monetary Fund in 2010.
Lines in the introduction and when outlining the Taoiseach’s claim which suggested the bank guarantee and the recapitalisation of Irish banks happened at the same time – rather than one leading to the other – were also corrected.
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