Friday 9 December 2016

The Trichet letter forced, and shaped, the Irish bailout

Published 18/04/2015 | 02:30

The so-called "Trichet letter", sent by the then-head of the European Central Bank (ECB) to the late Brian Lenihan, has long been controversial, not least because it kept secret. When the contents were revealed to the public last year, it was described as "a loaded gun" by Paul McCulley, chief economist of the world's largest bond-trading firm Pimco.

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The letter - sent from Frankfurt to Dublin on November 19, 2010 - is in fact part of a series of correspondence between the two men in the weeks leading up the EU/IMF bailout.

The November 19 letter is regarded as pivotal because it includes an explicit threat by the then-ECB chief Jean Claude Trichet to cut off emergency funding to the Irish banks unless Ireland immediately signed up to a bailout.

At the time, the Irish banks - like Greek lenders today - were dependent on billions of euro of short-term loans known as emergency liquidity assistance (ELA) from the central bank.

It was knife-edge stuff. If the ECB had carried through with its threat and pulled the plug on ELA, the Irish banks would have collapsed, sending the already crisis-wracked economy into meltdown.

The Trichet letter demanded that in return for the ECB keeping the banks alive, the Irish government had to commit to a bailout featuring austerity policies, vague "structural reforms" and to clean up the banks.

Mr Trichet also sought, and got, a guarantee that Irish taxpayers were on the hook for the loans made by his bank to the Irish lenders. By the time the bailout was in place, taxpayers were also on the hook for all of the senior debts of the rescued banks, debts that would otherwise only have been paid if individual banks had the financial means themselves.

Insisting on terms and conditions for loans is normal, but a central bank forcing an elected government to sign up to economic and fiscal policies before a loan had even been signed is highly unusual. It remains controversial.

Policies on tax and spending are a long way outside the ECB's role as a central bank, but the pressure was on.

When the Trichet correspondence was finally published last year, the ECB denied the letters had forced Ireland into the bailout.

It blamed a combination of the domestic debt crisis and the global financial situation.

"As the letters and all the documentation aim to show, it was not the letter that 'pushed Ireland into a programme', as is sometimes claimed, but it was the scale of the domestic crisis that made it necessary for Ireland to apply for an EU/IMF adjustment programme," the ECB said.

The scale of ECB support for the Irish banking system and economy in the run-up to the bailout was "unprecedented", officials in Frankfurt pointed out.

Either way there is no doubt that the Trichet letter was critical in shaping the type of rescue deal we got, and the timing.

"I am sure you are aware that a swift response is needed before markets open next week," Mr Trichet wrote. Two days later Ireland formally signed up to the bailout.

Irish Independent

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