Trichet still denies he forced us to pick up bill
Claims that the ECB gave advice, not threats, over bondholder payments are a euro-porkie, says Colm McCarthy
Published 03/05/2015 | 02:30
Jean-Claude Trichet spoke in Dublin on Thursday about the Irish financial crash and the role he played before and after the bubble burst in September 2008. Members of the Oireachtas inquiry questioned the former ECB president at an event staged in the Royal Hospital in Kilmainham, an arrangement designed to avoid any appearance of direct accountability of current, or even former, ECB officials to elected members of national legislatures.
Mr Trichet was furnished with the committee's questions in advance. The format was wholly unsatisfactory and key questions about the ECB's dealings with Ireland went unasked and some more went unanswered.
The defenders of European policy through the crisis have had to shift position continuously as the disaster has unfolded, without conceding either that the euro experiment was poorly conceived or that the common currency has been mismanaged. That this is an impossible task was amply demonstrated by Trichet in Kilmainham.
The official euro-narrative initially identified the unique source of banking collapse as the United States, until it became untenable to pretend that the European banking system was sound. Budgetary excess in the peripheral countries was the next culprit, until it was pointed out that, with the exception of Greece, none had breached budget debt and deficit limits in the years before the crisis. The latest Trichet narrative points the finger at failing competitiveness in the countries that got into trouble, rather as if the countries concerned had consciously opted to weaken their competitive position. Fading competitiveness is nature's way of telling you that you are at the receiving end of a credit bubble. To admit that this might be the case raises the unmentionable prospect that creditor countries share responsibility for the financial imbalances which triggered the Great Recession.
Mr Trichet insisted on Thursday that any actions he took were undertaken with the knowledge and approval of the ECB's executive board and governing council, and there is no ground for doubting that this is the case. There were four distinct occasions where Jean-Claude Trichet's alleged interventions had consequences here in Ireland.
The first alleged intervention concerns the lead-up to the bank guarantee on September 29, 2008. Trichet insists that he had no foreknowledge of its terms, and there seems little doubt that he would have advised against a blanket guarantee had he been consulted. The second alleged intervention arises from a passage in Ray MacSharry's essay on Brian Lenihan in a book of tributes published in September 2014. From the context, it appears that the episode recounted by MacSharry occurred about four years earlier, in the summer or early autumn of 2010.
He wrote: "One morning I got a call about a quarter past eight and it was Brian. He told me that he was able to burn the bondholders and he was very happy because the European Central Bank President, Jean-Claude Trichet, had told him he could do it. This would have improved Ireland's position significantly and it was going to be a big story, but later that day a now despondent Brian rang me back. He said Trichet had changed his mind because he realised that the main casualty if the bondholders were burnt would be big German and French banks."
Asked about this episode on Thursday, Trichet described it as "absurd", which sounds like a straight denial. If these events never occurred there are just two possibilities.
The first is that Ray MacSharry, a former Tanaiste and EU commissioner, made it up, solemnly and for the written record, four years later. While Ray MacSharry's essay about Brian Lenihan is positive overall, it contains clear criticisms of Lenihan's, and the government's, decisions over the ill-fated bank guarantee. There is no glossing over mistakes. Why then would MacSharry gratuitously invent the tale about Trichet?
The second explanation, if Trichet's denial is to be accepted, is that Brian Lenihan played an elaborate ruse on MacSharry for no obvious reason. If neither of these explanations is plausible, one must conclude that Mr Trichet's response to the committee on Thursday was less than candid or his recollection failed him. Bear in mind that he would have had notice of the question.
The third alleged intervention by the then ECB president concerns the events leading up to the Irish entry into the Troika official lending programme in October 2010. If you accept Central Bank governor Honohan's assessment, and I do, that the game was up at this stage, the pressures from the ECB were a secondary issue. The tone of Mr Trichet's letter to Lenihan was inappropriate, but the Irish State was unable to borrow, and resort to official lenders could not have been avoided.
The final intervention arose after the February 2011 general election, when the new finance minister Michael Noonan again sought to avoid payments from the (empty) Irish Exchequer to unsecured and unguaranteed bondholders in bust banks. Trichet's evidence on Thursday was that no threats were made by the ECB about the withdrawal of liquidity support from the Irish banking system. The ECB merely offered advice not to burn the bondholders, which the Irish authorities, wisely in Trichet's view, chose freely to accept. This happy narrative does not accord with the recollections of those directly involved on the Irish side, who certainly perceived that credible threats were made.
Nor does it accord with the views of IMF officials, who have expressed repeatedly and indeed vehemently the view that these bondholders should not have been paid.
The most remarkable thread running through Trichet's evidence was the repeated assertion that the Irish government's decision, on the benign 'advice' of the ECB, to pay numerous billions to Anglo and other bondholders, assisted Ireland in returning to the sovereign bond market. You are being invited to believe the following proposition. A distressed sovereign, struggling to retain the confidence of its acknowledged creditors, decides to pay billions to people to whom it does not owe any money at all. Its creditors are, according to Mr Trichet, so encouraged by the generosity of this pauperised debtor that they become more, not less, willing to lend. This is nonsense, a euro-porkie.
The reason why IMF officials objected to these payments being forced on the Irish Exchequer is precisely because this weakened the capacity of the debtor to meet its legitimate obligations.
Of course, the payments to these unsecured and unguaranteed bondholders helped to achieve an important and understandable ECB objective, namely the reassurance of lenders to eurozone banks generally. No bombs went off in Dublin but the bill was presented in Dublin, and only in Dublin. It was entirely legitimate for Mr Trichet to be concerned, in the autumn of 2010 and subsequently, about the access of continental European banks to senior unsecured bond financing.
It was entirely inappropriate, and contrary to the advice of experienced IMF officials, to impose the cost in this instance on a single member state already shorn of its credit-worthiness and reliant on official lenders. It may also have been illegal. No power to allocate system-wide costs in this arbitrary fashion is contained in the ECB statute.
When the ECB's vice-president, Vitor Constancio, comes to Dublin in June, he should be quizzed in detail about the circumstances surrounding the payments to unsecured and unguaranteed bondholders in bust banks. Why did the ECB overrule two Irish governments and the IMF's officials and what was the legal basis for the ECB's actions?