[This subject has been covered on the irisheconomy.ie website. This entry adds the transcript of the programme to highlight the precise words spoken by the governor. Also part 2 of “Burning the bondholders” will now be published tomorrow]
The under-rated Vincent Browne broadcast a special edition of his week-night programme on Friday night last as a memoriam to former Minister for Finance, Brian Lenihan who died earlier on Friday after a 2-year battle with cancer. In the “pole” seat, that is the one nearest Vincent was Patrick Honohan, the governor of the Central Bank ofIreland. Other guests included Minister Joan Burton and journalist Fionnan Sheahan. Vincent started off gently discussing Brian Lenihan with the guests in the stall seats. And then about 17 minutes in he got to Governor Honohan. And Vincent gently probed the governor for his memories of his dealings with then-Minister Lenihan. And for about four minutes, Vincent tenderised the governor. And having covered the tittle-tattle about how nice Governor Honohan’s office was, we had the following:
Patrick Honohan: It was the end of August last year and I had to tell him [Brian Lenihan, BL] that the budgetary situation wasn’t going well. And I showed him a number of numbers that we had calculated and said that it is not going to come right unless the budget is tougher. And he said “Your numbers are wrong!” and we talked about it, but afterwards he told me that he had made up his mind at that point that the situation was quite serious and it had changed all his political calculations at that stage. That was at the end of August of last year.
VB: Tell us about how the EU/IMF thing emerged. There are two- as I understand it, there are two stories about this. One is that yourself, Kevin Cardiff who is the Secretary General at the Department of Finance and John Corrigan, Head of the National Treasury Management Agency simultaneously came to a view that we’re in desperate trouble and we’d better go an approach the EU and IMF for a rescue package and you went to Brian Lenihan and he agreed with you. The other [story] is that actually the initiative came from the ECB and Ireland/he was bounced into this thing by the ECB and he tried to resist it and didn’t want it, that’s why there were denials about the negotiations.
PH: Well there’s some truth in both these things and of course at the very end – At the very early stages we all saw “maybe this will get so bad that it has to be the IMF” and November the 4th [2010] was the date that I decided that the market situation had got so bad that we’d have to do it. And I talked to these officials and other people and it was clear that this was the way we’d have to be thinking –
VB: Did you go to BL at that time?
PH: I had talked to him about the possibility beforehand –
VB: Did the three of you go [presumably PH, John Corrigan and Kevin Cardiff to see BL]?
PH: No, no there was no set piece meeting.
VB: Was it made clear to him as far as you are aware, you made clear to him himself that a deal was necessary or rescue package was necessary – As far as you know did Kevin Cardiff or John Corrigan make –
PH: I’m sure they did, I’m sure they did, yes. No I’m sure that Kevin – I talked to Kevin all the time. So the momentum was there long before the famous arrival in the particular Thursday morning. I mean there had been very detailed conversations, very, very extensive –
VB: Did you contact the ECB and EU and IMF. Was it you, did contact come from you or was it them ringing up and saying “lads we’re coming and you better get ready”
PH: No, no contact came from our side, yeah, but there had been, I mean these organisations talk to each other all of the time, contact came from our side
VB: Did BL know of these contacts, did BL know that
PH: Oh yes
VB: Was it the three of you contacted – yourself, Kevin Cardiff and John Corrigan would have contacted the people?
PH: It doesn’t exactly work like that. I mean I meet with the ECB every two weeks. And I’m on the phone to the IMF people. Whats-his-name Olli Rehn was inDublinat a certain point. I was talking to all these people. So all these communications were – There were very intensive discussions going on. The weekend before they arrived, there were very intensive discussions involving lots of people. There was no ambiguity about this. This was, you know, a pre-negotiation phase. What I don’t know was exactly what BL in terms of domestic political management. I’m sure he had to talk to people to convince ministers, backbenchers. I’m sure that that was a process that was going on in parallel that I wouldn’t have any knowledge of.
VB: Morgan Kelly, the UCD economist who wrote that spectacular article in the Irish Times, a few weeks ago, giving an inside account of how that happened. It seemed that he had been talking to Brian Lenihan and BL had briefed him on this. That’s speculation on my part; but BL’s line seems to have been that he was bounced into this thing by the EU/IMF and maybe by you because you were in the pay of the ECB rather than ..
PH: Well I’m not in the pay of the ECB. The timing may not have been right for his domestic political thing. I am sure he was slightly annoyed by that, but I had my job to do. In terms of the relations with the IMF, the negotiations with the IMF, that was all over, already in full swing so that wasn’t influenced by this. That’s just a nonsense. (It was) all happening but for whatever reason this didn’t suit (for) domestic political reasons for Brian to have announced it at that point but it certainly didn’t suit the stability of the financial markets, the outflow of capital, the interest rate spreads, there had to be a response to stabilise the markets and that’s why I did it
VB: You, off your own bat, you intervened, you rang Morning Ireland
PH: Of course that’s my job. But you mentioned that article which caused a certain amount of controversy. But I got a phone- last time I spoke to Brian. He called me that day or the following day. He called me to see “should I go on the radio to put the record straight here. To say some supportive words that you were always working forIreland” So there was no .. that’s a misreading of the situation
VB: After you’d let the cat out of the bag, or the tiger
PH: [gesturing, pushing the tiger out of the bag]
VB: Was he [BL] annoyed that you had really gazumped him. You had come out and said “Lookit the negotiations are going on and the people including BL saying nothing is happening are not telling the truth”
PH: Well I didn’t say that
VB: I know you didn’t say that but you gave that indication
PH: Well I mean I can’t be responsible for what he told other people to say but I had to represent the facts of the matter, that I was also in discussion and that these people were on the ground. I think he was slightly inconvenienced by the timing of it in terms of communication of it to the Dail and that. But other than that, but not in terms of managing the negotiations
VB: Coming back to the negotiations themselves, was he much involved in the negotiations, I know he wasn’t personally – didn’t take part in the negotiations; it was yourself and your two comrades that I have been mentioning. And others that were involved in it.
PH: There were many people involved in it. Dozens! At crucial points the three people from the troika went and had lengthy conversations [presumably with BL] which I didn’t participate in. Because eventually government decisions with Brian in the late part of the negotiations. Some crucial issues [he] talked for a couple of hours. Lengthy conversations.
VB: Who signed off on, for instance on the interest rate? Was it he or you that signed off on the interest rate?
PH: There was no negotiation of interest rates. This was handed down from Brussels. All of these things- I’m not trying to dodge it. I signed the document as a counter signatory but all these things are decisions of government. I can’t take any decisions like that.
VB: But you could have said to him “No”
PH: I could have said “Don’t sign it” but I don’t think that would have been a good move and he didn’t think it was a good move. He didn’t understand interest rates same as anybody else. You can see how difficult-
VB: When you read the detail of this, did you have a sense that this is a really important and maybe shameful historic moment. That here we’re signing away a significant part of our sovereignty, giving these people the right-
PH: On the contrary, this was a step, a prompt step. Contrary to so many countries that wait until the last moment, they run out of every bit of cash. Brian was fond of saying “we’re fully funded for six months”. It was a matter of great strength, great political strength that he said “yes you are right, we must go and talk to these people, get a deal to ensure that we’re financed for much longer than six months” and not end up in the situation of most countries who are down to their last penny before they go to the IMF and have no negotiating position. Instead he got full sign-up by the IMF and the EU and the ECB to the entire budgetary programme for whatever it was, four years that he had laid out. Got that agreed and through government and published before, the IMF had any influence before this was- the deal, they said “this will work”. So that wasn’t something that was imposed. That was something- and I think it was to his credit, very much to his credit that as with very many other decisions, he did not shy away from the tough decisions even though he knew they would be politically difficult.
VB: You said this was done before, while we still had a negotiation position. But did you – Did we have a negotiation, what amelioration of the deal did we get in the negotiation, what were they proposing that we persuaded them not to impose on us?
PH: We gave them, or he produced the government’s proposal for spending and they said “okay, that will do” Now previously, of course there had been discussions at the European Union level because there’s a European Union obligation to [gestures karate chop] excessive deficit procedure, to get your deficit down. So the overall amount of the deficit reduction was already negotiated at European level before the IMF even arrived. So, in fact our sense at the negotiations was “they’ve come, they’ve said “yes you can have the money, you just carry on with what you’re doing, but only do it more intensively”” And then we discovered, and they said the interest rate will be the standard interest rate and since this is the first case, we have to do this technical work, we have to work how the spreads on the thing [gestures fluctuation] We didn’t like the interest rate, but you don’t discuss traditionally the interest rate in an IMF programme, you don’t discuss their interest rate, it’s written down on their website. And that was the interest rate.
VB: You said they said “carry on with what you are doing” but my understanding was that prior to then, there was some toing-and-froing over who’s going to decide what the budgetary strategy was going to be and the ECB, EU and IMF made it pretty clear what the budgetary strategy would have to be for them to agree. And whereas yes, the Department of Finance did the document, what was it
Joan Burton (waking up): The memorandum of understanding
VB: No, no the document they published before that, the budgetary document they published
Fionnan Sheahan: The four year plan
VB: The four year plan, yeah. Yes that was done by the Department of Finance, Brian Lenihan, and approved by the government I assume. But it was very much done- [smiling]
PH: Yeah, let me make that clear. It was, the magnitude of the cutbacks was negotiated inBrussels[beforehand], but not in the context of the programme. It was negotiated, I can’t remember precisely the date, it was sometime in September I would think, probably September. When they said “this will do it, this will allow you to be compliant with the excessive deficit procedure” It wasn’t in terms of the programme but that was negotiated. And by the time the EU/IMF discussions were held, there was a question “oh, well maybe it should be tougher” but the answer was “no, that’s what’s been agreed”. We just stay with that.
VB: He seemed to me that he was crestfallen after that thing had happened.
PH: Yes. I think he had expectations. I think we all had expectations that we would discuss this over a longer period of time, that we would come up with something more sophisticated in terms of a financing programme that would have more of a risk-sharing element. But instead it was a sort of plain vanilla, “yeah, continue what you’re doing, we’ll give you money for two years, and you’ll convince the market”
VB: And then of course that- On top of the EU/IMF deal they said to you that in addition to that you cannot default on even the unguaranteed debts of the banks.
PH: I think that’s the main reason he was crestfallen.
[moment of silence]
VB: And why did that –
PH: It wasn’t part of the negotiations as such. There was no deal. There was no agreement on that. But there was talk around, about that [gestures circular movement with hands] And eventually the decision was [resolute tone] “No”. I think he was quite discouraged by that.
VB: Was there no room for us to say “Well sorry, we’re not going to finance the unguaranteed debts”
PH: It’s not in the agreement. It’s not in the agreement. I mean you know the way the world works. There’s political room. There’s no political room. No political room was offered to him by the people.
VB: What political room did he need? The deal was there. The EU/IMF deal was there. You were guaranteed the funds for three years and that was it. And you could have said “No, this isn’t part of the deal, there was no legal or moral or any other obligation, political obligation on us to do this. We won’t do it”
PH: I think, well, I mean as I say that’s not really part of the deal. That’s part of the discussion, that’s the reason he was crestfallen. I think this is a matter that remains part of current policy discussion.
VB: But why was it agreed though?
PH: This was not an agreement which I was party to. This was not an agreement. It was influence [nods head] and I think definitely –
VB: Were you asked your own opinion on this?
PH: Aam, well I offered to [indistinct, put in?] a lot of opinion and my views here. I think we’ll- Let’s talk about the man.
VB: Did you advise?
PH: We’re talking now about all sorts of current policy issues and what’s my view on this and what’s my view on that.
VB: You’re a very confident and crucial person.
PH: Yeah [signalling he has no more to say]
The obvious question that will presumably now be raised in the Dail is what was the quid pro quo (or consideration) offered in return for the agreement not to impose burden-sharing on senior unguaranteed bondholders. Or to ask the question in a more loaded manner “What “influence” was Governor Honohan referring to. Did the ECB threaten to withdraw liquidity to Irish banks unless the sovereign agreed to repay unguaranteed senior bondholders in insolvent banks in full?” If the ECB did adopt that stance, or that threat, then presumably there are now valid grounds forIrelandto adopt a hostile position towards the terms of the Maastricht Treaty which introduced the euro system. This may be an interesting week, as this stray thread gets pulled.