Who is going to hold the ECB accountable for this mess?
At the Banking Inquiry Ajai Chopra agreed that our debt burden was unfair, but is there any kickback, asks Colm McCarthy
Published 13/09/2015 | 02:30
Ireland's two-year bank guarantee introduced at the end of September 2008 was meant to cost nothing at all. The banks were solvent, people were assured. They were just temporarily short of liquidity due to some incomprehensible snafu at banks in New York. This was not credible at the time and was not widely believed. Every single domestic bank duly went down in one of the biggest bank busts ever recorded anywhere. Through 2009 and into 2010, the Government scrambled to keep the system functioning, principally through injecting vast quantities of taxpayer's cash. Meanwhile, the Government's own deficit soared, adding to the State debt. Several other governments around the eurozone struggled to borrow on the bond market.
The first country to go under was Greece, the recipient of a 'bailout' in May 2010 as the troika of European Commission, European Central Bank and International Monetary Fund made its inauspicious debut. The IMF, a credit union for governments, had never before accepted a junior role with regional bodies in mounting financial rescues of members in trouble. It is unlikely ever to do so again given the bruising (third) re-run of the Greek crisis, and some of the reasons were in plain view at the Banking Inquiry last week.
On Monday, it was announced that the ECB had declined to attend the inquiry. Its retired former president, Jean-Claude Trichet, turned up for a curious performance, not at the inquiry proper but at a contrived meeting in Kilmainham on April 30 last. Trichet was questioned by inquiry members but was conceded the bizarre privilege of vetting the questions in advance, which did not inspire him to offer candid or informative answers.
On Thursday, Ajai Chopra, who headed the IMF team on the Irish programme, turned up at the inquiry proper and performed as an international civil servant (retired) might be expected to do. He explained, he was candid and he answered questions sight unseen. The contrast with Trichet was impossible to miss.
Trichet's ECB was a less than sure-footed practitioner of the delicate art of the financial rescue programme. By the summer of 2010, the botched troika surgery in Greece, pushed through against opposition from many IMF staff, was creating nervousness in the next batch of potential patients.
The next patient was Ireland and the outcome very different. Had the Irish programme failed, and it could easily have done, Chopra's evidence on Thursday makes it clear that it could very well have been the ECB's fault; not Jean-Claude Trichet's personal fault, to be fair: it appears that Trichet operated throughout in accordance with the policies of the ECB's governing council.
Most of the eventual debt load in Ireland arose from the accumulation of budget deficits, but the extra costs of bank rescue made a bad situation desperate.
The expiry of the guarantee in October 2010, provided the opportunity to impose losses on rash investors in unsecured bonds issued by Irish banks, all of which had to be rescued and some of which were in process of closure.
For the record, Anglo lost about eight times its capital, Nationwide even more. The ECB (for practical purposes Ireland's central bank) insisted that these investors be paid in full, courtesy of the (bust) Irish exchequer. This was done, incredibly, subsequent to the country's resort to official lenders. A country whose debt was admitted to be unsustainable without official financing was required (by its own central bank) to pay unsecured and unguaranteed creditors of bust banks to whom it did not legally owe any money.
This additional debt burden made the success of the programme less likely and was naturally opposed by the IMF team. In all of its history I am not aware of a single instance in which the IMF extended loans to a troubled member only on condition that the country should borrow some extra funds to pass along to unsecured creditors of failed private institutions.
The ECB's insistence on this unprecedented condition, apparently motivated by concerns about the fragility of continental European banks, was opposed without success by the IMF team, who were over-ruled at political level. It threatened the programme directly, through the imposition of extra exchequer debt, but also indirectly.
Public acceptance of fiscal consolidation - tax increases and expenditure cuts over a period of years - is weakened through any perception of unfairness in the distribution of the burden of adjustment.
The public saw the payouts to bondholders in zombie banks as unfair and so did the IMF. Ajai Chopra described the imposition in precisely those terms on Thursday and questioned why the Irish taxpayer should have picked up the bill for reassuring lenders to banks in the broader eurozone.
The ECB has never answered this question, relying instead on a far-fetched argument, for which there is no empirical support, that a bust state which adds to its debt by paying billions to people to whom it does not owe any money thereby becomes a better credit risk.
If Ireland had declined to pay these creditors of failed private banks, its sovereign creditors would have been discouraged, according to this intriguing doctrine. The country owes you money, you are nervous, they borrow more to dish out to people with no claim, and you are emboldened to lend to them again, apparently. It is sobering to think that this remarkable notion has been promulgated by both the ECB and the European Commission, and given a hearing in Ireland by numerate people.
The ECB and the European Commission hampered the prospects for a successful Irish programme in other ways. At no stage, even after its agitation for a programme had succeeded, did the ECB indicate a longer-term commitment to funding the Irish banks, which could have mitigated the need for such funding. Both institutions proceeded as if the Irish problem was essentially one of fiscal excess, as in Greece, rather than a monster banking bust, which it clearly was.
At times, the ECB seemed to be thinking like a private bank, more concerned about its own balance sheet than it was about its role in promoting financial stability in Ireland. It did not even offer costless verbal support to the Irish banking system after the programme was in place. Both institutions appeared content with initial interest costs on the European loans well ahead of what looked to be sustainable.
In November 2010, IMF officials viewed the Irish programme as not being assured of success and their assessment was shared. A sharp recovery would have turned things round, but that did not happen. What did happen was Trichet's replacement with Mario Draghi at the helm in Frankfurt and the first piece of good luck Ireland enjoyed - Spain and Italy got into trouble in 2012. This was an existential crisis for the eurozone and serious measures were finally taken, resulting in an ECB backstop for eurozone sovereign bond markets.
The banking inquiry will report in January about the performance of the troika and its components in the management of the fallout from the Great Irish Banking Bust. If there are medals for accountability, I fancy the ECB for the bronze.