Friday 23 March 2018

ECB did not order Ireland to protect bondholders - Mario Draghi

Mario Draghi, president of the European Central Bank (ECB). Photographer: Martin Leissl/Bloomberg
Mario Draghi, president of the European Central Bank (ECB). Photographer: Martin Leissl/Bloomberg

Donal O’Donovan

The European Central Bank (ECB) has claimed it did not block Ireland from burning bondholders in the wake of the financial crash – a decision that helped heap €64bn of bank debt onto the shoulders of taxpayers here.

In a letter to Irish MEP Matt Carthy (SF)  the President of the ECB Mario Draghi said his bank’s role in the area of so called “burden sharing” with bondholders had been “frequently misunderstood and, at times, misrepresented.”

Mario Draghi said senior bondholders who had invested in Irish banks were protected primarily as a result of the Irish bank guarantee, which was introduced by the then Fianna Fail-Green coalition in September 2008.

The ECB was not consulted about the guarantee, he said.

“The ECB was neither made aware of nor consulted before hand on the implementation of the Credit Institutions Financial Support Scheme (the bank guarantee), and took a critical view of the two year guarantee of bank liabilities,”  Mr Draghi said in a letter to Matt Carthy dated February 17 this year.

The letter was published by the ECB.

Read more: Banking Inquiry: 'IMF did not give enough timely professional advice to Irish authorities'

The ECB had no power to order Ireland to protect bondholders, Mr Draghi wrote in the letter. However, in the same letter Mario Draghi said the ECB is still of the view that it was the right decision not to burn senior bondholders  in the Irish bank after the bailout programme was put in place.

Given the state of Anglo Irish Bank the Irish government could have taken the initiative to “bail in” some senior bondholders “well before” the national bailout in 2010, he said.

“However, this option was not pursued by the Irish authorities.”

By the time of the bailout in November 2010 the potential savings from such a move were small, while the risks would have been significant, he said.

The ECB has been frequently blamed for exerting pressure on Irish authorities during the worst period of the financial crisis, including to avoid so called burden sharing with senior bank investors, and ultimately for pressing the then government to accept an EU/IMF bailout at the risk of banks losing access to emergency central bank funds. 

However, Mr Draghi said the ECB never issued instructions to the Irish government.

Read more: Banking inquiry: 'Government ignored critical European warning on heating economy'

“First, I must be absolutely that the ECB does not have any authority to issue instructions to any euro area government or its ministers, in the same way as euro area governments and EU institutions are not in a position to issue instruction to the ECB,” the letter states.

“The decision on the modalities of the Irish credit institutions was taken by the Irish authorities, in accordance with the EU/IMF,” he said.

The guarantee “did nothing” to address the weakness of Irish bank assets, in the wake of the crash, Mr Draghi noted.

However, once the bank guarantee schemes were in place from September 2008 the ability to allow losses to fall on bondholders, and the potential savings, became more limited, according to the letter.

Bank shareholders and junior bondholders in the Irish banks lost a combined €43bn as a result of the crash, according to Mr Draghi’s letter.

The ECB cannot particulate directly in the Banking Inquiry here, but Mr Draghi said his bank is prepared to work with members of the Dail on an informal basis.

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