The European Central Bank’s controversial stewardship of Ireland’s bailout has been attack ed by former International Monetary Fund mission chief to Ireland Ajai Chopra,who worked closely with the bank during the rescue.
In a report for the committee on economic and monetary affairs of the European Parliament, Mr Chopra accused the ECB of putting the protection of its own balance sheet before costs imposed on the Irish taxpayer.
Mr Chopra’s intervention came as ECB president Mario Draghi defended the bank’s actions during the bailout. The Irish crisis was “homemade” and exacerbated by decisions taken in Dublin before the ECB became involved, he said.
“Don’t blame the fire damage on the fire brigade,” Mr Draghi told MEPs in response to questions about the bank’s Irish interventions. MEPs later said the exchanges with the ECB chief were unsatisfactory.
The IMF and the ECB worked alongside the EU Commission in the “troika” of institutions which oversaw the bailout for European and international lenders.
At the time of the bailout Mr Chopra was lead official for the IMF in talks with Dublin and the other troika bodies. He is now with the Peterson Institute for International Economics in Washington.
In his report, Mr Chopra took particular issue with the threat issued by Mr Draghi’s predecessor, Jean-Claude Trichet, to cut emergency support for Irish banks if the State did not seek a bailout. He described Mr Trichet’s letter on the eve of the 2010 bailout to the late Brian Lenihan, then finance minister, as a “gratuitous” measure.
“The letter also made demands in the areas of fiscal austerity and structural reform that were not only beyond the ECB’s remit but were also wrong for Ireland’s circumstances,” Mr Chopra said.
Senior bondholders
“The ECB opposed imposing losses on Irish banks’ senior bondholders and made it clear that it would not support a program that included this feature. Even if the ECB believed that spillover risks dominated at the time, why should Irish taxpayers bear a disproportionate burden to address wider euro area concerns?
“Furthermore, why was the ECB unwilling to consider forceful liquidity support for euro area banks at the time to mitigate potential contagion in bank funding markets?
“The ECB initially pressed for swift deleveraging of Ireland’s banking sector through front-loaded and large-scale asset sales to reduce quickly its large exposure to Ireland. In doing so, it put protection of its own balance sheet before the cost to the Irish taxpayer.
“Later the ECB accepted that fire sales of assets would be counterproductive, but by then trust in the institution and its legitimacy had been damaged. Even though ECB liquidity support for the Irish banking system was a critical component of the programme, the ECB was unwilling to make an ex-ante commitment on this front.”
In his appearance before the committee, Mr Draghi said all the bank’s actions at the time were in line with its mandate and powers. “At times, this meant that risk-management considerations made it necessary for us to consider the progress of programme implementation when deciding on provision of further liquidity if the soundness of the domestic financial sector was intimately linked to programme success.”
