Friday 19 April 2019

Bristling ECB chief strikes back over flood of complaints

New funding facility off the cards as economist insists central bank policy cannot be tailored to suit one member state, writes Laura Noonan

European Central Bank (ECB) policymaker Jürgen Stark
European Central Bank (ECB) policymaker Jürgen Stark

THE European Central Bank's chief economist and executive board member Jürgen Stark doesn't strike you as one of life's sensitive souls. But even he bristles at the flood of complaints about what the ECB is doing in, and to, Ireland.

Since the crisis hit, the ECB has been blamed for steering the Government toward a €500bn bank guarantee scheme that protected big investors across the continent and nearly bankrupted the State.

More recently, the ECB allegedly "bounced" Ireland into the EU/IMF bailout deal, banned the Government from forcing losses on senior bondholders and failed our stricken banks by not delivering on a €60bn medium-term funding solution.

And as if that wasn't enough, last Thursday the Frankfurt supremos upped Europe's core interest rate for the first time in three years, increasing monthly mortgage repayments for about 75pc of Irish homeowners.

With the ECB's popularity languishing at an all-time low, the aptly-named Stark is in the mood to set the record straight, and so we sit down in his 34th-floor office in the ECB's imposing euro tower a few hours after the rate increase announcement.

The economist has a lot of ground to cover, but the developments of the past few weeks demand the most immediate attention.

A fortnight ago, on Black Thursday, the Government hoped the announcement of another €24bn banking bailout could be cushioned with some good news -- namely that the banks had gotten a new medium-term funding facility from the ECB.

The hope was that Irish banks could tap a new 'facility for bank restructuring' for as much as €60bn, removing their demand for expensive 'emergency' liquidity and giving the market greater certainty about their future funding.

Despite reports a deal was as good as done, the much-mooted facility was conspicuously absent from the ECB's statement on D-Day and Ireland's Central Bank Governor Patrick Honohan admitted there was nothing "imminent".

Stark has signalled already that all this talk was based on rumours.

Stark bristles at the suggestion the ECB could have done more to help Irish banks out of the crisis they find themselves in, a crisis that he insists was not of the ECB's making.

All banks, including Irish banks, provided they are solvent and have eligible collateral, have access to the ECB's refinancing operations at extremely low interest rates.

At the end of February, the six big Irish banks had almost €90bn drawn down from the ECB's 'regular' lending operations, plus another €67bn of 'emergency' money channelled through the Central Bank of Ireland.


It's a scale of borrowing unrivalled by any other eurozone country. "This is a very unusual situation," says Stark. "You can see that we have already taken quite a lot of risk on to our balance sheet."

The ECB has considered the situation of Irish banks along the way, he says.

As part of the IMF/EU programme, Irish banks could issue themselves government-guaranteed bonds and pledge these for cash with the ECB, in a marked departure from the ECB's normal collateral rules.

After the latest banking bailout and based on the EU/IMF programme, the ECB agreed to continue to accept Irish government bonds and government-guaranteed bonds as collateral, even if the country's credit rating takes another hit.

A new funding facility seems to be off the cards because, as Stark says repeatedly, the ECB cannot "tailor-make" its policy for any one member state or mete out "special treatment" to one country over another.

Far from not giving the Irish banks an extra facility, the ECB's grand plan is to exit from the crisis mode by no longer offering unlimited cash at its regular auctions for weekly and 90-day money.

The position comes up for review again in early June; Stark insists the decision taken will be one that best fits the whole euro area.

"We cannot have tailor-made solutions for individual banking systems or economies, otherwise we risk re-nationalisation of monetary policy," he says. "That, by definition, is not compatible with monetary union."

He is similarly reluctant to make any guarantees about the €70bn or so of Frankfurt funding channelled through the Central Bank of Ireland to banks that have run out of high-quality collateral and can no longer tap the ECB directly.

The €70bn facility is known as ELA, or emergency liquidity assistance. Stark interprets its name literally.

"An emergency case cannot last permanently," he says. "It cannot last for years."

Ireland's 'emergency' funding has already been in place for well over a year; the latest bailout envisages it staying in place until the end of 2013 under similar conditions.

"That is the plan of the Irish authorities, we haven't said that is possible," says Stark. "We will see what is going to happen."

He makes no apologies for the fact that the ECB ultimately wants to cut back on its Irish funding. "The role of the ECB is to provide liquidity," he says, "but you cannot say, okay, it is all up to the ECB to fund the Irish banks. It is not a healthy situation that we are providing liquidity of up to 100pc of GPD to the Irish banks.

"In the interests of taxpayers all over Europe, we have to limit our risk and reduce the risk we have on our books over time. I think that's a legitimate approach."

The other big ECB talking point of late -- aside from the interest rate hike -- is the role Frankfurt played in deciding the way Ireland could treat investors who bought senior bonds in Irish banks.

The Government here seems keen on the idea of forcing losses on those who bought about €16bn of senior debt from the major bailed-out banks, so those investors can share the banks' losses.


The ECB have responded with an unequivocal 'No'; the senior bondholders have survived untouched, and public outrage has been aired in chat shows, pubs and hairdressing salons across the country.

Stark is emphatic in his belief that the bondholders should not be hit.

His first argument is that the move would play out badly for Ireland. The latest banking bailout has finally inspired some "confidence" in our banks -- Stark believes that if we go after the bondholders, then we risk "destroying" that confidence.

His second response is more telling. "This will have an impact on other financial market segments in the country, but this will not stop at the border of Ireland, there will be spill over to other countries, to Europe as a whole," he says.

"There will be uncertainty, there will be higher risk premiums, the markets will demand higher interest rates, in the end all will be punished.

"I can understand the short-term view, to signal to taxpayers that all must share the burden. But in the medium term it would be really damaging, for the country itself, for the continent, and maybe even for global markets."

The question of whether the ECB can actually tell Ireland not to burn the bondholders is one that's been exercising a lot of people here.

Frankfurt already has more than €150bn tied up in the banks; it's not as if they can just walk away, so how can they compel the Government to do anything?

"The EU/IMF programme has to be implemented," Stark replies. "The senior bond issue is not addressed in the programme the way the Government wanted it addressed."

What happens if Ireland deviates from the programme?

"This is not the underlying assumption. Ireland has to stick to the EU/IMF programme and to implement it one to one," replies Stark.

He's vague on what the ECB's exit strategy would be. The institution holds tens of billions worth of loans and other assets pledged as collateral by the banks, and tens of billions of the cash is also covered by a government guarantee.

Enforcing either the collateral or the guarantee would be messy and value destructive. "We are not trapped," Stark insists. "We should not overstretch the argument of contagion, that the ECB has no choice."

But he refuses to be drawn on what would happen if the Government came up short on the guarantee.

"That is really a horror scenario for Ireland you are making," he says. "I am not going to discuss this horror scenario. I trust in the legally binding commitments of the Government."

A horror scenario is exactly what sprang to mind for many Irish people a few hours earlier when Stark's boss -- ECB president Jean-Claude Trichet -- unveiled plans to up the core eurozone interest rate by 0.25pc.

At a press conference afterwards, Trichet stressed that the ECB had to cater for all 331 million people in the monetary union, not just the periphery countries, and he insisted low inflation was good for everyone in the long term.

Stark takes the argument a few steps further, positing that the interest rates people in Ireland actually pay would have gone up even if the ECB hadn't hiked its rate.

The ECB's action was taken to curb inflation. Stark says if inflation continued unchecked, the markets would have priced in an "inflation risk premium" since money would have less purchasing power in the future.

"Then you would have higher interest rate for sovereign debt and higher interest rates for your mortgage anyway," he says.

Stark is determined in his views, but the Irish public will take a lot of convincing, given all that has come to pass.

Even if the ECB was better appreciated, the high-profile persona IMF mission boss Ajai Chopra has cultivated holds little allure for the decidedly low-key Stark.

"I'm not convinced that it is appropriate to play a popular role as a representative of an international or European institution, or to be celebrated," he says.

"You have to do your job to the best of your knowledge, to the benefit of the countries concerned and the benefit of the institution."

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