Remarkable recovery will be Michael Noonan’s legacy

When Michael Noonan took over as Minister for Finance in March 2011, the economy was on the floor, public debt and borrowing were dangerously high and it was widely expected that the State would need a second bailout programme, after the one it had entered the previous year.

As he leaves office next week, having indicated he does not want to be considered in the new cabinet, the economy is back growing strongly, the banking sector has stabilised and the public finances are much healthier.

If ministers for finance are ultimately judged on the numbers, Noonan’s time in Merrion Street will be seen as a success. And pretty much all assessments of his time in the department kick off with this basic fact – when he took over, we were on the ropes and things are now a lot better.

"It is easy to forget how precarious the situation we faced in 2011 actually was," says John McHale, economics professor at NUI Galway and former head of the Irish Fiscal Advisory Council. "That summer bond markets were pricing in a high likelihood of an Irish default.

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“Significant credit must go to Michael Noonan for restoring confidence in the Irish economy while steering through a difficult but phased adjustment in the public finances.”

According to Danny McCoy, chief executive of Ibec, the employers' organisation: “His contribution in guiding a demoralised country back out of international administration to become the international economic phenomenon it is today with approaching full employment will rightly be his historical legacy.”

Still, the nature of the budget adjustment and the failure of the Fine Gael-Labour coalition to deliver on its promise to burn senior bank bondholders were all hugely controversial.

And the coalition’s political failure to respond to the move against “austerity”, meant it got hit hard in the 2016 general election.

‘Burning’ the bondholders

It has been a long but steady climb out of the economic mire. It might be summed up as a tale of two announcements. The first, to the Dáil on March 31st, 2011, shortly after the government took office, was on bank restructuring and was designed, in part, to signal the intention to impose losses on senior bondholders in Anglo Irish Bank and Irish Nationwide.

The sum involved – about €4 billion – would have helped the public finances but not transformed them. Politically, however, it would have been a coup, meeting election campaign commitments to share the burden of the crash.

Noonan's officials had given the speech to the troika and word came from the European Central Bank in Frankfurt that this "burning" could not happen. Then ECB president Jean-Claude Trichet allegedly told Noonan that a "bomb would go off" in Dublin.

Noonan – and the coalition – felt they had no alternative but to back down. Sources say the key factor was that the ECB had extended significant so-called emergency funding to the Irish banks – above and beyond normal funding arrangements – and had wide powers to change the rules.

Hit with this knock back, Noonan and minister for public expenditure Brendan Howlin had to take the long road to redemption.

There was little that Noonan did himself independently that contributed to the recovery

The plan was simple, if not easy. It was to over-deliver on the budget targets, lobby for improvements in the bailout terms and hope for the best. Helped by an international upturn and budget discipline at home, the budget figures improved more quickly than expected and the economy started to bounce. Remarkably, by 2012, growth was back.

The second key announcement came on February 7th, 2013. Noonan felt he had political support for a deal to tear up the controversial promissory notes – the vehicle used to bail out Anglo and Irish Nationwide. While at least some in the ECB were not happy with the plan, which involved the liquidation of the Irish Bank Resolution Corporation, Noonan pushed ahead this time. It did not involve writing off debt, but pushing out repayments over a much longer period. It was a key staging post on the way to exiting the bailout programme at the end of that year.

“Michael Noonan’s finest hour was achieving the promissory notes deal with the European Central Bank in February 2013,” according to McCoy. “It is easy to underestimate the achievement, but it was a significant gamechanger.”

Former central bank governor Patrick Honohan says that Noonan's excellent relationships at European level were key to the promissory note deal and other improvements in the originally onerous bailout terms. In particular, Noonan struck up an understanding with the German finance minister, Wolfgang Schäuble, seen as vital to these deals.

“These relationships were very helpful to Ireland,” says Honohan.

The exit from the bailout at the end of that year was the high point for the coalition. Noonan and Howlin had done enough to convince the financial markets to lend to Ireland again. Noonan’s seeming unflappability, in particular, played well internationally as the State’s stock grew.

“The personality of Michael Noonan and his ability to form relationships with key allies in a European and global sense should not be underestimated in explaining the reasons for Ireland’s successful exit from its bailout programme,” according to Dermot O’Leary, chief economist at Goodbody Stockbrokers.

“The original programme was doomed to fail, with interest rates on the loans of close to 6 per cent and a crippling debt burden from IBRC to boot.”

Most commentators agree that Noonan and that government deserve credit for sticking the course. But views on how they did it are, predictably, varied.

Economist Jim Power says Noonan did a good job of reassuring international investors and rebuilding confidence. But he says that "basically, the government elected in 2011 just implemented most of the policy platform that the late Brian Lenihan put in train, with all of the inherent flaws in that platform from day one".

Noonan also got lucky, he claims, with a weak euro and strong US and UK growth benefiting the economy.

“Ireland was a beneficiary of very benign external developments and this pushed the economy and the public finances into a much better place. There was little that Noonan did himself independently that contributed to the recovery,” says Power.

Megan Greene, chief economist at John Hancock Financial Services – who has written widely on the euro zone crisis – says that Noonan had achieved the goal of rescuing the State's broken banking system, but adds: "Mr Noonan may have felt he had no choice but to make unguaranteed senior bondholders of Anglo Irish and Irish Nationwide whole, but the cost of bailing out these banks were foisted on to the shoulders of Irish taxpayers."

This, in turn, contributed to the need for a string of difficult budgets.

Greene thinks Noonan won significant respect as a senior figure in the Eurogroup of finance ministers, but missed the opportunity “to band with the other peripheral countries to resist the German economic orthodoxy that continues to dictate the response to the euro zone crisis today”.

Ironically, these strong relationships may have helped improve the bailout terms, but “sticking to the programme” was surely a factor which hurt the coalition politically, as the voters kicked back against austerity.

Lose direction

Had anyone said in 2011 that the economy would be growing strongly by 2016 with the unemployment rate heading down to 8 per cent and the budget stabilised, the expectation would have been that the coalition would sweep back into power. Why it did so poorly will be discussed by political analysts for years to come.

After the exit from the bailout, the coalition seemed to lose some direction, getting blindsided by the row on water charges and mired in debate on a series of deals undertaken by the IBRC, now the subject of a commission of investigation.

Its election theme, “keep the recovery going”, did not chime with an austerity-fatigued electorate and nor did the promise to phase out the Universal Social Charge (USC), championed by Noonan.

Perhaps the 2016 election was always going to see the electorate kicking back against whoever was in power. Honohan says Noonan and Howlin did a good job stabilising the public finances, and, vitally, “delivered the required adjustment”, but perhaps they could have more clearly explained the strategy to the public, rather than giving the impression that some of the new impositions via taxes and spending cuts were temporary.

“This may have rebounded on them in the election,” he said.

McCoy, while laudatory of Noonan’s achievements, also argues that economic strategy should have evolved more.

“He was the colloquial face of Ireland during the troika’s period of economic control; implementing the plan by under-promising and over-delivering. His strategy boosted confidence in Ireland but remained the game plan long after it was appropriate,” he said.

Power argues that Noonan’s recent budgets have shown “a populist scattergun approach to fiscal policy, with money being thrown at lots of different areas, while having no meaningful impact on any.”

He is also critical of Noonan’s move to order Nama to sell down its assets quickly, arguing that, had it held on, better value could have been delivered. This is a controversial point, with Government sources pointing to the fact that Nama will deliver a surplus of some €3 billion, a vastly better outcome than expected when it was established.

Nama’s sale of its Northern Ireland loan book to Cerberus, however, was a low point and Noonan has been criticised for his decision to meet the winning bidder in Dublin just before the deal was done. He has insisted that the sale was not discussed at the meeting, but with the deal about to be inked, the optics were all wrong.

The bottom line is that Noonan himself heads off into retirement leaving the economy in a vastly better shape than when he took it over, now facing some of the problems of success, as opposed to the catastrophic failure threatened when he took over. How Ireland got through the fire will forever prove controversial. But it did.