Thursday 27 October 2016

Taking the ECB to court would be risky business

The ECB imposed €2.3bn bill on taxpayers. Will the next government take a legal challenge to get it back, asks Dan O'Brien

Published 31/01/2016 | 02:30

Pat Rabbitte. Photo: Tom Burke
Pat Rabbitte. Photo: Tom Burke

The next government should consider taking the European Central Bank (ECB) to court over its role in Ireland's banking crisis. So urged Pat Rabbitte in his valedictory speech to the Dail on Thursday.

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The call came a day after the Banking Inquiry report was published. With what has been learnt over the past week, how strong is the case for legal action and is it likely to happen?

The Banking Inquiry implicitly concluded that the denials of Jean-Claude Trichet, the president of the ECB during the depths of the crisis, about forcing two Irish administrations to repay private banking debts were not credible.

Instead, it found contradictory evidence presented by multiple witness more plausible. That evidence showed that the ECB had, in late 2010 and again in the spring of 2011, demanded the repayment in full by the Irish state of all outstanding senior bank bonds.

The ECB is a uniquely unaccountable central bank. While it reports to the European Parliament, that assembly has no real influence over it. One reason for that is the nature of the oversight procedures, which are weak, but more important is the fact that MEPs cannot bring about any real change to the relationship even if they wished.

That is very different from arrangements in countries with their own currencies where parliaments are ultimately more powerful than central banks. The British parliament, for instance, could go as far as abolishing the Bank of England simply by enacting legislation.

But because the ECB's structures and most of its rules are set out in EU treaties, rather than in secondary legislation, it would require all 28 member states to go through the massively arduous process of changing the treaties in order to make any real change to the way the ECB is held accountable (and treaty changes usually results referendums, not least in Ireland).

All this means that the ECB is effectively accountable to no one, and is unlikely to become more accountable in the foreseeable future.

It is not uncommon for the high handedness that comes with unaccountable power to be observed in the actions of the ECB and some of its top people.

The manner in which it shut down the banking systems of both Cyprus and Greece showed just how ruthless it can be. The weeks-long closure of the banking systems in those countries show how little power member states have vis-a-vis Frankfurt when clashes occurs. This is a serious, long-term problem.

Last week, the EU's equivalent of Ireland's Comptroller and Auditor General published a report on the bailouts of member countries.

It noted that the ECB did not communicate to the European Commission the reasons why it forced Ireland to repay senior bank bonds.

While it appears that nothing was ever put in writing on the issue, the rational of the ECB for not allowing senior bank bondholders anywhere in the eurozone to be burnt was well known and available to anyone who cared to understand it (the passages highlighted from a column I wrote in 2011, above right, set out the thinking).

The rational was well understood by those making decisions in Dublin.

Among the most revelatory pieces of information to emerge from the inquiry last week was an analysis prepared by the National Treasury Management Agency (NTMA) for the new government in March 2011.

It looked at the costs, benefits and risks of burning bank bondholders (no documents have emerged on any similar exercise done in the run-up to the bailout a few months earlier, even though Brian Lenihan had begun thinking about bailing in senior bondholders as early as the summer of 2010 as the expiry of the 2008 bank guarantee loomed in the coming September).

The NTMA understood the contagion issue at a time when the euro and the entire European financial system were are risk of crashing.

Among the risks of burning bondholders was, it noted, that "there could be a wider European impact, including possible ratings downgrades and adverse funding issues for the European banks".

But what is most relevant in terms of whether the next Irish government should consider suing the ECB is how much that state could in theory be awarded if the European courts were to find against Frankfurt.

That, in turn, depends on exactly how much of the banking debt was imposed by the ECB, and how much came about as a result of decisions taken purely by the Irish authorities.

Starting from the beginning: there is no evidence - from the Banking Inquiry or any other source - that the ECB had any hand, act or part in the bank guarantee.

On the contrary, the inquiry report cites a letter from the ECB in October 2008 that was critical of the guarantee. It is clear that the guarantee was decided upon solely by elected Irish politicians and voted through the Oireachtas.

So were the two other landmark decisions of the time: the creation of Nama and the issuing of €31bn in promissory notes.

So, between the outbreak of the crisis and late 2010, there is no evidence that decisions with implications for Irish taxpayers were forced on the Irish authorities against their wishes.

Things began to change when the situation became desperate in the late summer and autumn of 2010.

Then the full scale of the losses in the banking system became apparent, the economy was showing no signs of recovery, the fiscal position continued to slide and the euro crisis deteriorated to the point that the continued existence of the single currency was in question.

By the time of the EU-IMF bailout in November, the then government was looking at "burden sharing" with bondholders.

The ECB rejected that. The new government tried again after taking office in spring of 2011 and the ECB again said no.

What emerged for the first time last week were the NTMA's exact estimates on how much could have been saved by burden sharing.

At that time, the agency had added up the value of all outstanding bonds in covered banks and applied its estimated haircuts to different bonds in different banks.

There was much media coverage of the NTMA figure of €9bn last week, the amount that would have been saved if senior bondholders in all the bailed-out banks had been burnt.

But - and this is crucial - neither this government nor its predecessor ever sought to burn all seniors.

Both governments pulled back from burning seniors in the banks they hoped could continue to function.

Both administrations concluded that the savings (estimated by the NTMA of €6.9bn) would have been offset by the risks to the continued functioning of those banks.

These risks are set out succinctly in NTMA documents and include possible legal challenges which, had any challenges been successful, would have meant that the taxpayer would have been on the hook anyway.

Regarding the risks to credit unions and other Irish financial institutions (presumably insurance companies) the NTMA said there was uncertainty around their exposure to senior bank bonds but that the effect "could be material at an individual level for a particular credit union or institution".

It was when all these risks were weighed up that neither government sought burden sharing for the bondholders in the functioning banks, but concluded that it was worth the risk to burn the senior bondholders in Anglo and INBS which were being wound down.

Haircutting senior bondholders in the defunct banks, the NTMA estimated in March 2011, would have saved taxpayers almost €2.3b.

It is this sum alone, not this sum plus the €6.9bn in functioning bank bonds, that was imposed by the ECB.

A sum of €2.3bn is not small change and it is certainly worth seeking legal advice on the chances of taking the ECB to the European courts. But it is far from certain that a case would be successful.

On the other hand, it is very certain that Frankfurt would view such a case as hostile.

Given that the ECB still has Ireland over a barrel in relation to the restructured promissory notes - if it played hardball on these it could plunge Ireland back into a debt crisis - there is a considerable downside risk involved in trying to recoup the €2.3bn.

Given this risk-reward calculus it looks very certain that the next government, whatever its composition, will not be following Pat Rabbitte's advice to take the ECB to court.

Sunday Independent

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