THE US AMBASSADOR to Ireland had warned his superiors in Washington that Ireland was “being a bit optimistic” in its opinions of its banking sector, and worried that the banking sector was about to collapse in 2008.

A message to the State Department in Washington, written in October 2008 by then-ambassador Thomas C Foley and published by the Guardian after being sent to WikiLeaks, said Irish government officials believed the level of impaired assets on the books of its banks was “relatively insignificant”.

The government had also decided to introduce its wide-ranging bank guarantee the previous month simply to remedy the “drying up of credit to Irish banks”, the confidential note claims.

Even the chief civil servant at the Department of Finance, secretary general Kevin Cardiff, had had a “favourable impression of the loan books” of two major banks after his department hired auditors to examine their loan portfolios.

His advice had echoed the reports of the Central Bank and the Financial Regulator, who said the level of impaired assets on the books of the banks “stood at between 0.5 and 0.8%”.

One Central Bank figure, Gordon Barham, said the media “had exaggerated the level of problem assets” and said any impaired loans could “be managed”.

Foley wrote, however, that anecdotal evidence picked up by his embassy suggested government officials were “being a bit optimistic in their assessment of the level of impaired assets”, and posted the question: “If the level of impaired assets is not the problem, why the sudden pressure on Irish banks?”

Foley said the government had “its work cut out” in trying to “stop the bleeding” of the financial sector, and said economic policymakers in Ireland would face “their most significant challenge in decades”.

The leaked cable was written just a few days before Brian Lenihan introduced the first of his four austere Budgets in the Dáil.