Business Irish

Sunday 25 February 2018

Exclusive: Chopra says ECB's threats to Ireland were 'outrageous'

Colm Kelpie

Colm Kelpie

THE European Central Bank acted in an "outrageous" manner and went beyond its remit when it pressured Ireland to commit to years of austerity, according to Ajai Chopra.

The International Monetary Fund's former Ireland mission chief made the damning assessment during an address at Oxford University.

The IMF’s former Ireland mission chief Ajai Chopra
The IMF’s former Ireland mission chief Ajai Chopra

A recording of his speech uncovered by the Irish Independent reveals Mr Chopra telling an audience that the so-called 'Trichet letters' were an "outrageous overreach" of the ECB's mandate.

In a stinging criticism of the bank, Mr Chopra says he isn't surprised people in Ireland were upset about the letters between the former ECB President Jean-Claude Trichet and the late Brian Lenihan in 2010 in which Mr Trichet threatened to cut off funds for the Irish banks if the Government did not apply for a bailout.

"The letters actually pressed Ireland to do fiscal consolidation, it pressed them to undertake vague structural reforms without specifying what these were, and that, in my view, is an outrageous overreach by a central bank," Mr Chopra said.

And he also claimed that the possible effects of burning the bondholders that were put forward by Europe were "exaggerated."

Former European Central Bank chief Jean-Claude Trichet
Former European Central Bank chief Jean-Claude Trichet

He told the Irish Independent last night that he had nothing further to add beyond the comments in his address.

Read more: An unlikely champion has laid bare the failings of 'inexperienced' ECB

The blunt intervention by the man considered the public face of the Irish bailout will cause ructions in the ECB and will pile pressure on the Banking Inquiry here to get answers from the Frankfurt body on its controversial role in the bailout.

The ECB eventually released the letters last November, giving a fresh insight into the build-up to Ireland's entry into the IMF/EU programme in late 2010.

The letters urged the then-government to commit to structural reforms and restructuring of the financial sector.

"That is not their job," Mr Chopra said. "Their mandate is to meet inflation. And if you lecture the ECB as to how they might go about that, they talk about their independence.

"But when it comes to lecturing others about fiscal policy or structural policy, they're not at all hesitant. I'm not surprised that the people in Ireland were very upset about these letters from [Jean-Claude] Trichet."

Mr Trichet has refused to appear before the Banking Inquiry but he has said he is prepared to speak to Irish politicians at an event in Dublin at the end of the month.

There had been a long dispute between the Inquiry and the ECB over the attendance of Mr Trichet before the committee, which aims to establish the events leading up to the bailout.

Mr Chopra accepted that if you are the lender of last resort, such as the ECB was, it was reasonable for it to ask Ireland about the condition of its banks, and to say that if it isn't possible to have them recapitalised via the markets, an international rescue package should be sought.

"My reading of the letters is that, if you're the lender of last resort and you see this [a spike] happening with your liquidity support, I think it's perfectly reasonable for you to ask the borrower, 'what is the condition of your banks, are they solvent and do you have a plan to make these banks viable?'

"Every lender of last resort has to be asking these questions and also be saying, 'look if you can't recapitalise these banks by borrowing on the market, you'd better get an international rescue loan to recapitalise your banks'."

Read more: The Trichet letter forced, and shaped, the Irish bailout

During Mr Chopra's address at the Political Economy of Financial Markets event at Oxford, the former IMF senior official, who is now a visiting fellow at the Peterson Institute for International Economics in Washington DC, also alluded to a number of disagreements between the IMF and Europe concerning Ireland. He said the two sides had "fairly good working relations" but that "it took a lot of effort".

"A lot of things had to be first negotiated with the Europeans before we could negotiate them with the Irish.

"And that took time. And also, to be honest, they didn't have the experience or the technology at the beginning of this process," he said.

Mr Chopra recalled being at a meeting with an Irish official during which one of the European negotiators said something that was "very stupid".

"At that time, the Irish went out and hired foreigners, including Brits, to help them with what they were doing. And this person just shot them down," Mr Chopra recalled.

"The person who made the stupid comment made the comment and ended it by saying, 'I'm not a bank supervisor or bank restructuring expert'. And the person from the Irish side, who happened to be British, said, 'It shows'."

Mr Chopra reiterated that it was unfair for Irish taxpayers to suffer the cost of bailing out the banks when senior bondholders got their money back.

"The IMF staff right from the beginning was very much in favour of imposing losses on senior bondholders. The EU partners were dead against it, especially the ECB," he said.

"The reason given by the Europeans was exaggerated. Yes, there would have been spill-overs. It would not have been so much of a disaster, but the Europeans were just terrified about the implications for bank funding markets."

Mr Chopra also accused the ECB of being "gung-ho" in terms of imposing lots of austerity early, and he said the Irish Government was also "quite aggressive" on the fiscal front.

Read more: Ajai's April Fool about Bono's concert to burn the bondholders

Profiles: Ajai Chopra

He gained celebrity status among a downbeat populace who were attracted to his charisma but concerned at the policies he advocated.

Ajai Chopra was the public face of the austerity programme in Ireland, which was perceived as being imposed by unsympathetic foreigners more concerned with economic theory than the people whose lives were being ravaged by the recession.

The iconic photograph at the outset of the bailout negotiations captured a sharp-suited Chopra walking past the Shelbourne Hotel with his entourage, as a homeless man with a cup begged for change.

That image travelled around the world and became synonymous with the plight of this country during that fateful period.

Fast-forward three years and Chopra was portrayed in a very different image as he donned a vintage costume during a visit to Bunratty Castle, Co Clare.

It was that of a 19th century banker, and by all accounts, he graciously agreed to the request from the photographer to wear it, and could see the humour.

Chopra became a household name for that very reason. He didn't shy away from publicity - unlike other technocrats.

Jean-Claude Trichet

Jean-Claude Trichet's involvement with Ireland has long been controversial, for his alleged role in bumping the country into a bailout.

The Frenchman has held firm to his claim that Ireland's decision to ask for international funding was one solely taken by the Government, and he never accepted that pressure may have been brought to bear.

But it's not just in Ireland that he's stoked controversy.

The former European Central Bank chief headed up the Frankfurt-based body during the early years of the global financial meltdown and his management of that crisis has swung between praise and deep criticism.

He has been quick to point out that he saw the crisis coming before it struck, but claimed his warnings fell on deaf ears.

As far back as 2005, the Frenchman was warning of a looming financial disaster triggered by credit deals that few people understood.

And when the crisis did break out, he won praise for managing to avert a greater meltdown by issuing emergency loans to banks.

But that praise turned to impatience and head-scratching after he refused to follow the lead of other central bankers and cut interest rates.

That has been viewed as one of his biggest mistakes.

Irish Independent

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