Monday 26 September 2016

Trichet must tell if he threatened Ireland into paying bondholders

Banking Inquiry needs to find out if ECB exceeded its powers by imposing costs on Irish taxpayers, writes Colm McCarthy

Published 26/04/2015 | 02:30

FRANKFURT’S WAY: Finance Minister Michael Noonan and former president of the European Central Bank Jean-Claude Trichet
FRANKFURT’S WAY: Finance Minister Michael Noonan and former president of the European Central Bank Jean-Claude Trichet

The Oireachtas banking inquiry is finally reaching the interesting part of its deliberations. From about the year 2000 until the balloon went up in September 2008, the Irish banks engaged in an extraordinary, and out-of-character, lending splurge which resulted in one of the most damaging banking busts ever to occur anywhere.

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More than seven years later the systemic collapse of a traditionally conservative banking system has not been satisfactorily explained. A banking collapse on this scale requires imprudent borrowers. It also requires that the three lines of defence against an unsustainable credit bubble fail simultaneously.

The first line of defence consists of the boards and managers of the banks themselves, the second of the bank regulators and supervisors, and the third of the public officials, including elected officials, charged with the ultimate oversight of the financial system. Only this last line of defence, which failed, has been brought properly to account, inescapably through the ballot box in February 2011.

While much remains to be clarified about the roles of politicians and civil servants, and indeed of regulators and supervisors, the yawning gap in public knowledge concerns the following simple question: What was the train of events within each individual bank, starting at the beginning of the credit bubble, which led to the lending disaster which saw every single Irish bank being rescued by the taxpayer? It is remarkable that not one of the banks has offered a narrative, even to their own shareholders, explaining the disaster and allocating responsibility.

It is surely the case that each bank conducted an inquest into how they went bust - recall that the boards of all banks were replaced in 2009 - and that these documents were thorough and detailed. It is inconceivable that the new directors appointed to manage the wreckage did not insist that such inquests be conducted. These documents, along with the minutes of board and credit committee meetings, must now be in the possession of the inquiry, which has statutory powers to require their production.

The inquiry's team of accounting, economic and financial experts must already have discovered enough material to fill most of the final report on this central issue. You cannot have a banking bust on the Irish scale without a collapse in lending standards. When did it start? On whose watch? And how did it propagate throughout a system in which, remarkably, every single bank required rescue? Were there dissenting voices within the banks?

Remember that there were plenty of public warnings about the credit and house-price bubbles from outsiders, and it is hard to believe that not a single worry-wart objected inside the banks themselves. The inquiry is doubtless seeking out these people.

The failings of the regulatory and supervisory system have been documented in the Honohan report, but some aspects remain unclear, particularly surrounding the complacency of the Central Bank's financial stability reports prior to the bust. The authorities faced a dilemma in the years leading up to the collapse, in that public expressions of worry would accelerate liquidity pressures and the decline in bank share prices already under way.

At what point did the Central Bank opt for prayer rather than policy action? Were there internal dissenters in Dame Street too? Recall that a former Central Bank governor, Maurice O'Connell, had been making noises about the rate of credit expansion as far back as the late 1990s. As early as the year 2000, a former (and quite senior) Central Bank official, Willie Slattery, committed his worries to the public record. All of those who held senior positions in the Central Bank and the Financial Regulator's office will no doubt be giving evidence, and their questioning should shed new light on the apparent lethargy in both institutions.

Some of the inquiry's deliberations to date have displayed a curious sense of priorities. Several days were devoted to quizzing newspaper editors and broadcasters. If the stewards at a race meeting suspect something untoward has been going on, they interview the jockeys and trainers, not the crowd at the back of the stand. Scarce time has also been expended on people who have written reports and books about the banking crash. Not surprisingly they have had little to add to their published accounts.

There is also a tendency for both the inquiry and the media to focus on the role of elected politicians and the famous meeting on September 29, 2008, which yielded the bank guarantee. This is important and there will be more revelations no doubt. But there is a kind of Leinster House parochialism at work here. The public knows far less about what was going on in the banks as the crisis fermented from 2000 onwards than they do about this single meeting, which would never have taken place if banks and their regulators had been prudent. If the inquiry continues in this vein there will be considerable relief in the obvious quarters.

Former ECB president Jean-Claude Trichet will appear, not at the banking inquiry in Leinster House, but at the Institute for International and European Affairs (IIEA) in Dublin on Thursday next, where he has agreed to answer questions from the members of the Oireachtas committee. This rather constipated arrangement is designed, it would appear, to preserve the sacred principle that ECB officers, even in retirement, are not to make themselves accountable to elected parliaments in member states.

There are just four counts against Monsieur Trichet and the committee members should focus carefully. The four counts are:

Count number 1: That in or about September 2008, Trichet pushed the Irish government into the bank guarantee.

Count number 2: That on dates unknown, but probably during the spring or early summer of 2010, Trichet threatened punitive financial measures against Ireland, in the person of then Finance minister the late Brian Lenihan, unless unsecured and unguaranteed bondholders in bust banks be paid in full.

Count number 3: That in October/November 2010, he used threats ("...the bombs will go off in Dublin...") to force the Irish authorities into the troika programme.

Count Number 4: That in March 2011, he again insisted on payment in full to unsecured and unguaranteed bondholders, this time with current Finance minister Michael Noonan as his interlocutor.

There appears to be no evidence supporting count number 1, and count number 3 is potentially a red herring. The game was up, the State could not borrow in the markets and an official lending programme was inevitable. It is clear from recent statements from Ashoka Mody and Ajai Chopra, both then senior IMF officials, that they sought haircuts for bust-bank bondholders but were over-ruled by senior management at the IMF who concurred with the ECB policy of bank creditor impunity.

Counts numbers 2 and 4 are the serious ones. It is not clear that the ECB statute confers on that body the power to impose on the taxpayers of a single eurozone member-state the costs of stabilising the access of European banks generally to bond markets. Trichet was not wrong to be concerned about this issue given the circumstances of the time, but there is an arguable case that the ECB exceeded its statutory powers (broke the law) in imposing these costs on Irish taxpayers.

The ECB has not been challenged by the Irish government at the European Court. Trichet should be challenged next Thursday at the IIEA.

Sunday Independent

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