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Mocking Germans Adds Irish Insult to Banking Injury: Euro Credit

June 28, 2013

Mocking Germans Adds Irish Insult to Banking Injury

John Bowe, a former executive at the now defunct Anglo Irish Bank Corp., sang “Deutschland Ueber Alles” as the lender won German deposits on the back of a government guarantee, according to recordings of 2008 conversations that were published this week by the Irish Independent newspaper. Photographer: Aidan Crawley/Bloomberg

Irish politicians say jibes at Germans by some of the country’s former bankers undermine their case for securing help to cut the 64 billion-euro ($83 billion) bill for saving the financial system.

John Bowe, a former executive at the now defunct Anglo Irish Bank Corp., sang “Deutschland Ueber Alles” as the lender won German deposits on the back of a government guarantee, according to recordings of 2008 conversations that were published this week by the Irish Independent newspaper.

Irish borrowing costs surged in 2010 as investors grew concerned about the mounting burden on the taxpayer of the euro region’s biggest banking crisis. With Ireland now planning to fully re-enter the international credit markets by the end of December and with 10-year benchmark rates near 4 percent, the government is trying to persuade German Chancellor Angela Merkel and other euro-region leaders to refund part of what was spent on saving the country’s lenders.

“The tone seems to be the same across the banking industry, and it’s very hard to take for people who go to work every day and earn money,” Merkel told reporters today in Brussels where European leaders are meeting. “I have nothing but contempt for this.”

Causing Damage

The revelations are “very damaging,” Irish Transport Minister Leo Varadkar said in an interview with RTE radio today, adding he largely agreed with Merkel’s comments.

Prime Minister Enda Kenny is scheduled to visit Merkel in Berlin on July 3 for a European summit to promote youth employment. Eamon Gilmore, his deputy premier, told reporters in Luxembourg on June 25 he was angry about what was on the tapes and that they make the government’s job more difficult.

The yield on 10-year Irish bonds fell four basis points today to 4.06 percent. While it’s up from a low of 3.42 percent in May, it was above 9 percent when Ireland requested an international bailout in November 2010. The premium the nation pays to borrow for that time compared with Germany was 2.35 percentage points, down three basis points from a week ago.

Five-year bond yields have fallen to 3.06 percent after peaking at more than 17 percent in 2011. The spread over Germany narrowed to 2.34 points from 15.4 points in July 2011.

Bailout Bill

While the decline in the cost of borrowing was driven by European Central Bank President Mario Draghi’s pledge to defend the euro, it also reflects Irish Finance Minister Michael Noonan’s success in reducing the bank bailout bill.

Noonan first helped persuade the ECB not to block a swap of so-called promissory notes used to rescue Dublin-based Anglo Irish with 25 billion euros of long-term government bonds held on the national central bank’s balance sheet.

The second part of Noonan’s strategy involves accessing the European Stability Mechanism to refund as much as 30 billion euros the state spent on saving banks. Winning retroactive recapitalization would reduce Ireland’s debt to gross domestic product, due to peak at 123.3 percent this year, and add momentum as Noonan heads back into bond markets.

At a June 20 meeting of euro-region finance chiefs in Luxembourg, German Finance Minister Wolfgang Schaeuble said there’s “no great leeway” for refunds because the ESM fund is capped at 60 billion euros for bank rescues.

Alternatives

Noonan was already preparing people at home for that response. He said the nation is “not solely tied” to trying to access the ESM to recoup money because its two largest banks have a “value in the market” as they return to profit.

Allied Irish Banks Plc (ALBK), 99.8 percent state-owned after a 21 billion-euro taxpayer rescue, plans to return to profit during 2014, Chairman David Hodgkinson told shareholders last week. Chief Executive Officer David Duffy said in February the bank had already started talks with potential investors.

“It’s unlikely, regardless of what’s emerged in the last few days, that Ireland will be able to use the ESM for retroactive recapitalizations,” said Juliet Tennent, an economist at Goodbody Stockbrokers in Dublin. “The 60 billion-euro cap puts paid to anything.”

The tapes have reverberated around Europe. They also suggest executives at the bank downplayed how much financial support the lender might need to win central bank money.

Bild, the largest German newspaper, headlined a story on tapes as “Failed Irish Bankers Scoffed at German Clients,” while Frankfurter Allgemeine Zeitung described the Irish bankers as “laughing into the abyss.”

German Hand

“We are offended,” Michael Fuchs, deputy parliamentary leader of Merkel’s Christian Democratic Union told Irish state broadcaster RTE radio in an interview on June 26. “If you have a feeding hand, you shouldn’t bite into it.”

Fuchs said “it’s really dangerous” language as German lawmakers try to convince local taxpayers to support ailing European countries such as Ireland. “It’s absolutely unbearable that somebody is talking like this.”

At one point during the recorded conversations with Bowe at Anglo Irish, David Drumm, then chief executive officer of the bank, jokes that Bowe was “abusing” the government guarantee and dismissed the regulator’s concern about how it was viewed in Germany and the U.K. In another, Drumm outlines a plan to pressure the central bank for an initial 7 billion euros.

Give Us Money

The lender would tell the central bank “we need the moolah, you have it, so you’re going to give it to us and when would that be? We start from there,” Drumm said on Friday, Sept. 19, 2008, according to tapes uploaded onto the Irish Independent’s website. “Because if they don’t give it to us on Monday, they have a bank collapse.”

While Bowe said this week he deeply regretted the language and tone he used in the calls, Drumm has made no public comment. Calls and an e-mail to Drumm’s bankruptcy lawyer, Francis C. Morrissey, weren’t responded to.

The central bank said in a June 27 statement that it is taking the transcripts of the tapes “very seriously” and will liaise with police after studying them. Conall Mac Coille, chief economist at Dublin-based securities firm Davy, is more sanguine about the controversy’s longer-term effect.

“Ireland at the time had no credibility with Europe,” Mac Coille said. “It’s not news to the Europeans that Irish regulation of the banks was a shambles at that point.”

To contact the reporters on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net; Dara Doyle in Dublin at ddoyle1@bloomberg.net.

To contact the editors responsible for this story: Mark Gilbert at magilbert@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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