Truth behind the debt deal with the European Central Bank on Anglo Irish

Finance Minister Michael Noonan and Minister for 
Public Expenditure Brendan Howlin at a press conference last Thursday 

What a week!  You will have read about the dramatic events in Ireland last week, culminating in a deal with the European Central Bank that the government claims is a significant victory in our battle to get some of the massive debt burden we carry lifted off the nation's shoulders. 

The deal means that our borrowing will be cut by €20 billion, the headlines said.  

The hated annual €3 billion promissory note payments over 10 years are being replaced by a much longer 25 to 40 year repayment schedule which will significantly lessen the amount we have to repay every year.  That is a big relief because these promissory notes were a noose around our necks. 

Last year the government did a financial three card trick by taking the money from one of the banks here to make the payment. But that has to be replaced this year, so as well as the €3 billion payment for 2013 due at the end of March we were also facing last year's €3 billion payment a couple of months later.  

That adds up to an incredible €6 billion we were supposed to cough up on the promissory note debt in 2013.  Our total deficit this year will be around €13 billion, which gives you some idea of the scale of this.

It simply was not possible which is why, as the March deadline drew near, the government was getting frantic in its negotiations with the ECB to find a way out.

Of course, these promissory notes are only around half of our total bank debt.  But they were the immediate problem and they were so huge that there was no way we could pay them.  

So it's worth remembering where they came from -- Anglo Irish Bank and the Irish Nationwide Building Society, the two small rogue banks that played lead roles in the toxic boom and bust that crippled Ireland. 

The drama last week included a late night sitting of the Dail (Parliament) to rush through legislation to liquidate what was left of Anglo and Nationwide.   No one is sorry to see them finally removed from the financial landscape here.  

They were already in wind-down mode and it's good they are gone for good.  But they have left a poisonous legacy in their wake, the bad debts of €30 billion, which the last government covered by issuing the promissory notes. 

It's incredible to think that these two small institutions are responsible for around half of the total mountain of bank debts here, including those in the two main banks, the much bigger Bank of Ireland and Allied Irish Banks.  

That the regulator allowed these minnows to swim so far out of control is a disgrace, but that is what happened.  They achieved their infamy by a record of reckless lending to fuel the property boom that was not just outrageous, but stupid.

The money they were lending out was, of course, all borrowed from European banks and the money market players who piled in here in search of the higher returns that were on offer.  They all wanted a slice of the boom in Ireland.

When it all started to go belly-up in 2008, the then minister for finance stepped in with the blanket state guarantee for the Irish banks.  The Irish banks were the first in Europe to go broke as the crisis as developed across the continent. 

Terrified of what any default by Irish banks would do to confidence in the financial sector across Europe, the EU put the muscle on the Irish government to shore up our banks here. 

We were told initially that it was a temporary liquidity problem, that the Irish banks were solvent and that the state would only have to put in a few billion to keep the show on the road until the banks could sort out their problems.  

Little did we know. 

The "temporary" crisis turned into a catastrophe for the Irish economy and the Irish taxpayer who was left holding the can as billions and billions were poured into the banks.   Within a year or so, the depth of the €30 billion hole in Anglo and Nationwide was being exposed.  

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