The belated release by the European Central Bank (ECB), of the November 19th, 2010 letter (as well as earlier letters) from then ECB president, Jean Claude Trichet, to then minister of finance Brian Lenihan has not proved to be the “smoking gun” anticipated by many. Undoubtedly, the letter’s content – which was already largely known – represented a further intensification of ECB pressures on the Government to agree to a bailout from the EU/IMF/ECB troika.
It is thus tempting to portray the ECB as the bullying “villain of the piece”. However, this ignores the fact that the ECB’s conclusion that Ireland had no alternative but to seek a bailout was also shared by Ireland’s key international financial partners at the time, including the finance ministers of the EU and of the G-20, who had met a few days previously in South Korea.
The Trichet letter forcefully highlighted the ECB’s unprecedented exceptional financing (including Emergency Liquidity Assistance) of the Irish banking system, amounting to around €120 billion at end- October 2010; this was equivalent to about 25 per cent of the ECB’s balance sheet, although Ireland contributed less than one per cent of ECB share capital. As Trichet made clear, the ECB was responsible for safeguarding its own financial integrity and that of the Eurosystem. The assertion by some high-profile commentators that the ECB somehow was acting “illegally” lacks substantive foundation.
Apart from major concerns about the precarious state of the Irish banks, the ECB aimed to avoid creating precedents for other euro members. Using an Irish analogy, the ECB sought to achieve for its own balance sheet what the Irish Central Bank and the Financial Regulator were rightly lambasted for failing to do, ie, preventing an enormous concentration of property-related lending by Irish banks.
Deteriorating situation
Undoubtedly, in the run-up to November 2010, the rapidly deteriorating Irish situation would have been discussed by the ECB’s governing council, which includes the governor of the Central Bank of Ireland. Governor Patrick Honohan would surely have conveyed these ECB preoccupations to Brian Lenihan.
Despite the increasingly pressing nature of the series of letters as well as (unconfirmed) reports of contacts between the two men on November 13th, both taoiseach Brian Cowen and Brian Lenihan had refused to countenance the possibility of Ireland needing a bailout. Even after the arrival of the troika in Dublin on November 18th, the government appeared to continue to hesitate.
The uncompromising tone of Trichet’s letter was consistent with other exchanges in similar circumstances of an accelerating major financial crisis. It undoubtedly reflected ECB frustration with the Government’s unwillingness to face up to what the international financial community had concluded was the only feasible option.
It could be argued that the ECB démarche was something of an idle threat, since a refusal to provide further financing could have led to a collapse of the Irish banks, an outcome that the ECB presumably was trying to avoid at all costs. However, in the absence of sufficient Irish "co-operation", the ECB might well have taken other measures, for example, instituting a penal financial surcharge on "exceptional" lending that would have been impossible to sustain. When coupled with other external pressures, including the need to finance a massive budget deficit in the absence of market financing, Irish attempts to call Trichet's bluff (if it had been seen as such), would probably have been futile.
In sum, the by now infamous Trichet letter of November 19th should come as no surprise as it only stated explicitly what was by then the consensus view of external partners and the financial markets. The Irish situation had simply become unsustainable and a fully-fledged rescue was unavoidable. While the ECB’s actions played a key role in determining the precise timing of the bailout request, the die had been cast some time previously.
That said, the resistance displayed up to now by the ECB to releasing the letters has been a mistake. As recognised recently by the EU ombudsman, Emily O’Reilly, communications of this nature had to be kept strictly confidential at the time of issuance to avoid a massive run on the Irish banks. Unease at setting a precedent for releasing letters between the ECB and member governments may have been a factor.
Unnecessary delay
Nevertheless, the unnecessary delay by the ECB has done more harm than good. Several ECB letters to governments, for example an exceptionally forceful communication from Mr Trichet to the president of Cyprus in 2011, have ended up in the public domain.
Over four years have elapsed since the 2010 Irish crisis and market confidence issues have long since become irrelevant. Moreover, the ECB’s reluctance has helped fuel unfounded conspiracy theories and provided ammunition to those seeking to scapegoat it as an unduly secretive organisation that was not serving Ireland’s interests.
Most important, the ECB resistance only served to divert attention away from a balanced assessment of the dramatic events in November 2010, of which the letter from ECB President Trichet was only one – and not necessarily the most important – part.
Donal Donovan is a former deputy director of the IMF. A member of the Irish Fiscal Advisory Council, he wrote this article in his personal capacity. He is joint author, with Antoin E Murphy, of The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis (Oxford University Press, 2014).
