To some extent, the Irish crisis is the result of hubris.WSJ has a long walkthrough of how the country got into its current mess, and obviously the story starts and ends with its oversized banking sector.
But it hints that the government didn’t need to go down with the ship. Back during the crisis, Ireland presumed that the issue with its banks was just one of liquidity (sound familiar?) and not one of fundamental solvency.
“Liquidity, not capital, is the main issue in the current crisis,” financial regulator Patrick Neary wrote to Kevin Cardiff, a top finance-department official, on Sept. 10. A week later, Anglo executives told government officials that the bank’s core business, despite the cash crunch, was healthy: “Loan book remains strong,” they said. And Merrill Lynch bankers working for the government advised that another lender, Irish Nationwide Building Society, could absorb any bad loans. (It has since needed €5.4 billion in bailout money.) Merrill and INBS declined to comment. Mr. Neary couldn’t be reached for comment.
The warnings grew louder at the end of September 2008. Anglo’s depositors were fleeing. At 8:40 p.m. on Sept. 29, a PricewaterhouseCoopers partner working for the government emailed Mr. Cardiff with bad news: Anglo “borrowed €0.9 billion from the Central Bank and do not have any reserves left.”
The next morning, Ireland launched the bailout Mr. Lenihan would dub the world’s cheapest, guaranteeing every deposit and nearly all debt issued by Irish banks. Dublin hoped that would free others to lend to Irish banks, and Ireland would muddle through without shelling out a dime.
If it had been a liquidity issue only then guaranteeing all bank debt might have worked out fine. Alas, this has proven pretty costly indeed.