Sunday 20 October 2019

Plans were drawn up for collapse of euro

Central Bank examined scenarios for dealing with break-up

Central Bank governor Patrick Honohan
Central Bank governor Patrick Honohan
European Central Bank President Mario Draghi


GOVERNMENT contingency plans to replace the euro amid fears that the single currency would collapse are revealed today.

The Sunday Independent has learned that detailed measures were drawn up by Central Bank officials as fears of a break-up of the euro mounted in late 2011 and early 2012, despite a raft of official denials at the time.

The plans, devised under utmost secrecy, were deemed necessary to examine "all possible scenarios should the euro cease to exist".

Four separate sources have confirmed to the Sunday Independent that secret plans were developed to address the "increased likelihood" of a break-up of the currency between mid-2011 and August 2012, at the height of the continent-wide crisis.

As European leaders fretted about the possible exit of Greece from the euro and the knock-on effects on other countries, officials here met to discuss what they should do in the event of a complete melt-down of the currency.

In the summer of 2011, two teams of up to five officials from the Central Bank and the Department of Finance's banking division, headed by official Ann Nolan, worked together on "scenario testing" as to how Ireland could deal with a break-up of the single currency.

One source told this newspaper: "The euro would have to be replaced with something and what currency and how it could be floated would have been examined."

Amid growing fears about the stability of Spain, the "war room" was set up to examine what "legal, logistical, financial and economic obstacles" would have to be overcome.

According to sources, the Finance Minister Michael Noonan and the Central Bank governor Patrick Honohan were central to the plans.

Sources said it was "unlikely" that the Department of An Taoiseach was involved in any meaningful way, but it may have been informed that "contingency plans of some form" were under consideration.

However, the contingency arrangements were so covert that most other members of the Cabinet were unaware they were taking place.

The meetings between the two teams of officials are said to have taken place primarily at the Central Bank, according to sources.

The plans focused on two problems identified by the Government and the Central Bank. The first was whether Irish banks would be able to cope if the currency broke up. The second was what to do with cash already circulating in the country.

Most money only exists in bank computers, so the Central Bank held conversations with all major lenders to ensure that their computer systems were up to scratch and would be able to cope with the break-up of the currency.

When it came to notes and coins, the discussions focused on what to do if the single currency broke up. Among the issues examined by the teams were how customer deposits and securities held in euro would be handled under a new currency and what monetary rules would apply to any new currency.

The officials also examined if the new legal tender would be floated or "pegged" to another currency, such as sterling.

According to sources, the teams also held "some talks" about exploring the need for "additional currency printing" capacity in the event of the European single currency collapsing.

One of the options discussed was a possible return to the punt, but this was not progressed any further.

While there was no detailed discussions with the mint in Sandyford, south Dublin, or elsewhere about printing new notes or introducing a new currency, such as the punt, the discussions did examine the possibility of marking euro cash with some sort of perforation to distinguish Irish notes from non-Irish notes, or by over printing the notes.

There are some precedents from the collapse of other currencies and senior banking officials are familiar with the basic measures that have to be taken when a currency collapses. In fact, the Free State government did something similar after 1921, stamping English stamps to show that they were Irish.

Given the highly sensitive nature of the discussions, sources said the emergency measures were "far too delicate" to discuss at the time.

If news of the plans had been leaked, there would have been a massive outflow of cash, which could have forced the closure of banks and destroyed thousands of companies.

However, the single currency has since stabilised, largely thanks to European Central Bank (ECB) president Mario Draghi's mission to "save the euro" at all costs.

While initial fears were raised about the stability of the euro following the 2008 banking crisis, the first detailed contingency planning in Ireland began in late 2010, as Ireland's entry into the IMF-ECB-EU Troika bailout loomed large.

According to sources, the then minister of finance, the late Brian Lenihan, held "hypothetical" discussions with a select number of his top officials and advisors in October 2010. Sources said that these talks were "not progressed very far" by the time the Fianna Fail-led government fell.

However, in the summer of 2011, as the euro crisis escalated, the two teams of officials were "charged with devising the doomsday strategy", which primarily focused on what would replace the single currency.

The Sunday Independent sent a series of detailed questions to the Central Bank and the Department of Finance, relating to the currency break-up plans. Our queries related to the commencement of the discussions and who was involved in examining the "logistical, legal and economic" hurdles that would have to be overcome.

However, a spokeswoman for the Central Bank said it "would not be commenting". The Department of Finance also responded with a "no comment".

Sunday Independent

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