Case against ECB 'not proven' as Trichet mounts defence of Ireland's treatment
Published 01/05/2015 | 02:30
And that, m'Lud, is the case for the defence. It has to be admitted that in Ireland, we have generally heard the case for the prosecution when it comes to the European Central Bank (ECB). Yesterday, its former head Jean-Claude Trichet gave a spirited rebuttal of the charges against it.
Mr Trichet, of course, had refused to recognise the court. He insisted that the ECB answers only to the European Parliament and could not be questioned by national politicians. So we had a unique occasion where a planned address to the Institute for International and European Affairs (IIEA) doubled as a session of the Oireachtas Banking Inquiry.
It seemed to work quite well, even if it meant a long afternoon, as the IIEA went through its procedures alongside the TDs and senators on the inquiry.
The politicians did a pretty good job even if, as with so much of the inquiry, little emerged that was not already known.
The case against the ECB is that it forced Ireland to repay loans to senior bondholders from what were busted banks and that it exceeded its mandate by insisting, not only on Ireland going into the bailout, but on its precise terms.
As often happens, that useful Scottish verdict, 'not proven' best sums up the afternoon's events.
It is not so much that Mr Trichet denied the charges, as that he claimed there was no offence. He made very clear his frustration, and that of ECB officials and other central bankers, that there is not sufficient recognition in Ireland of the efforts Frankfurt made to rescue the Irish banking system. They were extraordinary.
The great difficulty with banking is distinguishing between 'liquidity' - the huge amount of lending flowing through any bank's books - and 'solvency' - whether a bank has enough capital to cover losses on its loans.
At its peak, the ECB had used its infinite cheque book to lend €150bn to the Irish banks - equal to an entire year's economic output. It reached such enormous proportions because, as Mr Trichet said, lenders had lost all confidence in Ireland.
There can be no doubt that, without that liquidity, the entire Irish banking system would have collapsed. But terms and conditions always apply. The former ECB boss stressed that such liquidity can be supplied only to banks that are solvent.
He argued that, not only do his critics not take account of this enormous assistance, they fail to recognise that it gave the ECB the right and the duty to ensure that the Irish banking system was made solvent.
The prosecution case centres on the way this was done.
The main charge was laid by Fianna Fáil's Michael McGrath and socialist Joe Higgins, about the letter from Mr Trichet to the Irish Government that set out detailed conditions for the bailout. Wasn't this "blackmail"?
Mr Trichet quoted the ECB's constitution at some length. It does appear to permit the ECB to restrict emergency liquidity if it perceives dangers to the overall single currency. There were certainly such dangers and only a bailout programme could have provided the funds to save the Irish banks.
He argued that the ECB was entitled to ask that the country return to EU permitted deficits and to suggest how this should be done.
But he agreed with Mr Higgins that it was not "moral, just or right" that citizens bore most of the cost - only that there was no alternative at the time. Or rather, only one alternative - a 1930s great depression as the European banking system crumbled. He remains convinced that, had senior bondholders not been repaid, this is what would have happened and that the eventual cost to Ireland would have far outweighed the money saved by not repaying the senior bondholders.
He was on shakier ground when it came to later events and the repayment of unguaranteed bondholders by then defunct Anglo Irish Bank.
Mr Trichet agreed that the ECB told the new Coalition it thought it would be "most unwise" to burn these bondholders.
Mr Trichet grew quite animated as he insisted there was no threat to withdraw the emergency loans.
The ECB could only advise, of course, he said, but the view was that there would be "very adverse consequences" if the bondholders were not repaid.
Few will think the Government had much choice as regards rejecting that advice in the middle of a bailout. Everyone keeps coming back to the night of the guarantee, although one of the few certainties is that the ECB did not know a blanket guarantee was on the way. He confirmed that the ECB wanted governments to stand behind their banks in this enormous crisis but drew a distinction between "political" guarantees and the formal one issued by Ireland.
Much of the juicy stuff remained unresolved. Mr Trichet had no recollection of a fringe meeting at the G20 summit in Seoul deciding that Ireland must have a bailout. He doubted that he would ever use a phrase like "an economic bomb would go off" and would have needed prior notice of questions about some other rumours and allegations.
Whatever the details, the same picture emerges as in previous hearings. Not surprisingly, the ECB's priority was to save the banking system. But neither did the Irish Government want the system to fail either, and so had no choice but to accept the ECB's terms, harsh though they may have been.
Mr Trichet told of warning governments about growing problems at every monthly meeting since 2005. He was not asked whether he thought that was enough.