The ECB's hawkish boss laid down the law to a broken and hapless Finance Minister, writes Daniel McConnell
ON December 9, 2010, two days after he had delivered his final-ever Budget, Brian Lenihan was at a low ebb. As the snow fell heavily outside his Merrion Street office window and people outside slipped on the icy pavements, Lenihan, isolated, defeated and in failing health, sat in his office and formally committed Ireland to the penal terms of the bank rescue. It had been ordered by the ECB but the Irish taxpayer would pay for it.
While the overriding narrative that the innocent citizens were screwed into bailing out our toxic banks has long been rehearsed since those dark days of November 2010, for the first time today we reveal how pathetic Lenihan's capitulation really was.
THE DECEMBER 9, 2010, LETTER
On that cold December day, following rounds and rounds of bruising meetings and negotiations, Lenihan wrote to the head of the European Central Bank, Jean-Claude Trichet, committing the Irish taxpayer to whatever future bailout of Irish banks would have to take place.
Today, for the first time, we reveal the contents of that letter, which has finally been released to the Sunday Independent and Gavin Sheridan, journalist with thestory.ie, under the Freedom of Information Act – two years after the fact.
Beaten and weary, Lenihan had had no success with his argument that Ireland, by issuing the blanket bank guarantee in September 2008, had come to the rescue of Europe and that – given Ireland's woes – Europe should now meet some of the cost of that bailout.
Trichet was not for turning. Only five weeks earlier, he had bullied the Finance Minister into the €85bn Troika bailout and he was not about to give an inch on sharing the burden of fixing the broken Irish banking system.
Lenihan's commitment, contained in the letter, that "any additional capital requirements for restructuring Anglo Irish Bank and Irish Nationwide must be covered with cash injections by the Government", along with a similar promise for the other "viable banks", ultimately cost the Irish taxpayer €24bn, as revealed by his successor, Michael Noonan, in late March 2011.
An initial reading of the letter would suggest that this was the Irish minister acting off his own steam, affirming commitments to the troika, when, in truth, the penal commitments signed up to by Lenihan had been agreed following intense dialogue over several weeks.
They illustrate how poorly the Irish team performed in those negotiations.
"The Irish authorities agree the following additional clarification regarding the implementation of the measures agreed [with the troika]," Lenihan wrote.
Paranoid about the impact this letter would have on the financial stability of the Irish State, Lenihan said it was not possible to make the contents of the letter public for fear that it would undermine government authority.
"These clarifications are being provided in respect of a limited number of specific issues, which it is not possible to disclose publicly on account of legal risks, commercial, market and financial-stability considerations, which would undermine the authorities' ability to implement those measures or render them more costly," he wrote.
The letter formally committed Ireland to a number of key measures, which have been followed rigidly by Lenihan's successor Michael Noonan. They include:
- The creation of the pillar-bank scenario. "Viable banks will undergo significant downsizing and operational restructuring," the letter stated.
- "The Irish authorities shall draw up a schedule of assets to progress early deleveraging by asset disposals and/or credit enhancement, to be achieved by end March 2011," he wrote.
- "Irish authorities will appoint external professional advisers to recommend the best structure that would achieve this timeline." This ultimately saw US consultants Blackrock engaged at huge cost to oversee the latest bailout.
- Under severe pressure from Trichet, Lenihan put the cost of that bailout on the shoulders of the Irish taxpayer. "It has been agreed that any additional capital requirements above the existing restructuring costs for Anglo Irish (€29.3bn) and INBS (€5.4bn) must be covered with cash injections by the Government." He added: "Similarly any additional capital requirements for other credit institutions which may be provided by the government will also be in cash and not as promissory notes."
- Crucially, in a further sign of how weak his position was, Lenihan consented to having to "consult with the ECB, the EC and IMF prior to agreeing on the final nature" of the bank recapitalisation and asset sales.
- Lenihan committed to consigning both Anglo Irish Bank and Irish Nationwide, the two most toxic banks left standing in the world after the 2008 crash, to history. He wrote: "Swift and decisive action will be taken to resolve the position of Anglo and INBS in a way that protects depositors and strengthens the banking system.
"Legislation will be introduced by end January 2011 to transfer assets and liabilities to viable institutions. Deposits and Nama bonds of Anglo and INBS will be transferred to other institutions, leaving the remaining loan books to be unwound in an orderly manner."
WHAT THIS LETTER MEANS
The most telling aspect of this letter is that it placed the future burden of bank bailouts on the Irish taxpayer – without any reference to any European institution or bank sharing any of the burden.
This is despite the latter's continued gamble on Ireland during the boom.
Lenihan, on the direct orders of Jean-Claude Trichet – and despite having saved Europe in 2008 by not allowing Anglo or Irish Nationwide to go to the wall – was at this point in 2010 having to accept the full cost of any future bailout. We later found out that this would be €24bn.
We know from Finance Minister Michael Noonan in early September that Lenihan was directly threatened by Trichet by way of letter that unless Ireland went into a bailout emergency funding from the ECB would be cut off.
Noonan said he had seen the "very direct" letter, which left Mr Lenihan with "little or no option" but to admit defeat.
Since leaving his post, Trichet has also insisted that this letter should remain confidential and not be released, despite the clamour in Ireland for its public disclosure. But whatever the contents of that letter, the contents of what we are publishing today represent the strongest supporting evidence as to why Ireland deserves a deal on its debt.
Following on from Greece's major debt-reduction deal last week – which amounts to its third default in less than 18 months – time is running out for Noonan and the Government to deliver a major debt reduction. Many are asking what does Greece have that Ireland doesn't?
The question now being asked is "What is the point in being the good boy in the class if it fails to deliver what we have been led to believe is coming?"
Noonan has insisted that the Greek deal would have no direct impact on Ireland, but the €44bn write-off – along with our revelations today – only strengthens the moral and political argument for a significant reduction in the debt, aside from any deal relating to the €31bn promissory note.
Remember, the Irish taxpayer – long forgotten and oft abused in this situation – has committed €64bn to rescue the banks, without any referendum or any form of direct consultation.
While Ireland continues to "bump along the bottom," the greatest obstacle to growth is the size of our debt. If we can get a deal, then Ireland's chances of recovery are strong. But if we don't, then we will be lost for over a decade.