Politics

Thursday 24 July 2014

Revealed: the secret story of how close we came to ditching the euro

The Government had a top-secret plan in 2011 to replace the euro, a plan that was officially denied at the time.

Daniel McConnell

Published 15/06/2014|02:30

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WAR ROOM CHIEFS: Eamon Gilmore, Enda Kenny, Michael Noonan, Brendan Howlin. Photo: Colin Keegan/Collins

IT'S November 2011, a year into our humiliating Troika bailout, and the most senior figures in the new Fine Gael/ Labour Government are in full crisis mode.

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In the Department of Finance, Ministers Michael Noonan and Brendan Howlin and a handful of their most senior officials are awaiting word from the European Central Bank and the International Monetary Fund as to whether Italy will survive the next 24 hours.

"We came very close, there was real concern Italy was about to go under," one source told the Sunday Independent.

Since that summer, rumours had circulated through Dublin about the return of the punt, rumours which were at the time officially strongly denied. "We had to deny it, the country was on the brink of having its currency collapse."

Direct lines of contact between Dublin and the continent remained open as the crisis reached tipping point. Noonan, Howlin, Central Bank Governor Patrick Honohan and a small team had since that summer developed a plan as to what to do should the euro collapse.

Such was the secrecy, those in the know began speaking in code to avoid being detected by their colleagues.

"It was very hush-hush," said one source.

The Irish plan, which was kept secret from most members of the Cabinet, involved a number of key elements including: emergency legislation concerning the legal transfer of authority from the euro currency; ordering the closure of all high street banks and other financial institutions for at least three days in order to prevent an outflow of monies, largely held electronically; a temporary suspension of the Dublin stock market to facilitate the transition from the euro; the roll-out of a new workable currency across the country.

During the summer of 2011, the euro crisis escalated and in capitals all over Europe, contingency plans were being readied.

The plans were deemed necessary to examine "all possible scenarios should the euro cease to exist".

Two teams of up to five officials from the Central Bank and the Department of Finance's banking division, headed by official Ann Nolan, worked together on "doomsday scenario testing" as to how Ireland could deal with a break-up of the single currency. The "war room" was set up to examine what "legal, logistical, financial and economic obstacles" would have to be overcome.

Five separate sources have now confirmed details of the Irish plans, devised between Michael Noonan, Brendan Howlin, Central Bank Governor Patrick Honohan, and a small select group of officials

For the first time, it has emerged that plans were discussed and progressed by the four-man Cabinet sub-committee, the Economic Management Council. This is made up of Ministers Noonan and Howlin as well as the Taoiseach Enda Kenny and Tanaiste Eamon Gilmore.

According to sources, the Italian crisis saw concern spike in Dublin and they geared up to implement the doomsday plan here. The crisis was caused by a sharp increase in Italy's 10-year borrowing rates, which had pushed up to over 7 per cent. Spain was in a similar position to Italy.

This was not sustainable but Europe did not have enough financial firepower to bail out Italy or Spain, as it had with Ireland, Greece and Portugal. It has been confirmed that because most money only exists in bank computers, the Central Bank held conversations with all major lenders to ensure that their computer systems were up to scratch and would be able to cope with the break-up of the currency.

The plans focused on two problems identified by the Government and the Central Bank. The first was whether Irish banks would be able to cope if the currency broke up. The second was what to do with cash already circulating in the country.

When it came to notes and coins, the discussions had focused on what to do if the single currency broke up. Among the issues examined by the teams were how customer deposits and securities held in euro would be handled under a new currency and what monetary rules would apply to any new currency.

The officials also examined if the new legal tender would be floated or "pegged" to another currency, such as sterling. According to sources, the teams also held "some talks" about exploring the need for "additional currency printing" capacity in the event of the European single currency collapsing.

One of the options discussed was a possible return to the Punt. Sources have confirmed discussions examined marking euro cash with some sort of perforation to distinguish Irish notes from non-Irish notes, or by overprinting the notes.

While the November crisis abated and the nuclear button wasn't pressed that night, contingency planning in Dublin continued until the summer of 2012, when new ECB boss Mario Draghi announced his ambitious plan to support the euro currency at all costs.

The Sunday Independent this weekend sent a series of detailed questions to the Departments of Finance and Public Expenditure and Reform.

Both departments responded with a "no comment".

 

HOW THE PLAN WOULD HAVE WORKED ON THE GROUND

The Irish plan, which was kept secret from most members of the Cabinet, involved a number of key elements including:

• Emergency legislation concerning the legal transfer of authority from the euro currency.

• Ordering the closure of all high street banks and other financial institutions for at least three days in order to prevent an outflow of monies, largely held electronically.

• A temporary suspension of the Dublin stock market to facilitate the transition from the euro.

• he roll-out of a new workable currency across the country.

Sunday Independent

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