Thursday 23 May 2019

Lenihan's tale of the bailout remains truest

Serious questions are still unanswered over the manner in which the ECB had Ireland accept a bailout in November 2010

Minister for Finance Brian Lenihan (left) holds a joint press conference with EU Commissioner Olli Rehn at the Department of Finance on Monday November 8, 2010
Minister for Finance Brian Lenihan (left) holds a joint press conference with EU Commissioner Olli Rehn at the Department of Finance on Monday November 8, 2010
Dan O'Brien

Dan O'Brien

There has been a great deal of discussion about the recently-published letter of November 19 2010 that the European Central Bank sent to the late Brian Lenihan. That there has been so much talk about it is somewhat perplexing, for a number of reasons.

The letter was exactly as anticipated. Its tone was no more or less harsh than might have been expected. In its substance, it set out what the bailout would look like, something that, in any case, had been known since the template for eurozone bailouts was set when Greece became the first country to be rescued six months earlier.

Given that International Monetary Fund representatives were already in Dublin by November 19 and that the ECB was one of the three organisations that formed part of the troika, it is no surprise that Frankfurt would have set down on paper the terms it wanted in order for the bailout to happen.

The real question around Ireland's bailout relates to whether the ECB acted beyond its mandate or in a way that it should not have acted at all. Before attempting to answer those questions, it is necessary to sketch the broader backdrop.

The Irish economy began to crash in the first half of 2007. The international financial crisis, which broke out in September 2008, deepened the Irish crisis. It also pushed all of Europe into the worst recession in living memory.

But just as a very modest recovery was taking hold in late 2009, Greece was found to be cooking its books. The choice was stark: either Greece would default, very possibly triggering another Lehman Brothers moment, or the eurozone's no-bailout clause would have to be abandoned.

It took until May 2010 for Europe to agree collectively that a bailout was the least risky course of action. But the messiness and slowness of the collective response, combined with the underlying economic weaknesses as a result of the recession, caused financial markets to panic. Money began flooding out of the weakest countries.

This loss of confidence had two major manifestations. One was to be seen in real time in the government bond market. As more investors sold off their holdings of peripheral sovereign bonds, the interest rates (or "yields") on those bonds rose. That made new borrowing more expensive.

The increase in yields went on throughout the summer of 2010 and into the autumn. Ireland and other peripheral eurozone economies were the most seriously affected. By the end of that month, the Irish government formally announced that it would stop borrowing money for the rest of the year.

The second manifestation of the panic and loss of confidence in the periphery was the withdrawal of money on deposit in peripheral banking systems. Ireland was particularly badly affected because of the amount its banks had lost on bad property loans and because of the huge size of the Irish banking system (Dublin's International Financial Services Centre accounted for a large proportion of the deposit base and most of the depletion in deposits). In September 2010, the withdrawal of deposits reached tens of billions per week.

It should be said that just how bad the erosion of the deposit base was, was not clear at the time because figures were published with a delay - this is unlike bond market data, which can be seen in real time. But it is clear that the amounts Ireland-based banks needed to borrow from the central banking system to replace deposits was huge.

News began breaking from Frankfurt on Friday November 12 that Ireland was being told to accept a bailout and that all the pressure was coming from the ECB. This was surprising for two reasons. First, the Irish government had six months of cash on hand. Even though it had already lost the capacity to borrow money from the markets, the hope was that the wider financial panic would calm before its coffers were depleted.

The second reason it was surprising is because none of the external actors had given any public indication that they were seeking a bailout, including the ECB.

Earlier that week, on November 9, Olli Rehn, the then European Commissioner for Economic and Monetary Affairs and the Euro, had visited Ireland. It was very clear that the chances of Ireland having to seek a bailout were rising fast, but nothing he said at the time made it appear imminent, or that he believed getting Ireland into a programme within days was necessary. On the contrary, having another country enter a bailout, and raising more money from other eurozone governments and the IMF, was seen as a last resort. Avoiding further bailouts seemed to be what everyone wanted.

How and why that changed, seemingly so suddenly, was perhaps the most important question I focused on when interviewing the main players for a BBC documentary on the events leading up to the bailout in 2011. Most of those interviewed were still in office at the time the programme was being made. Disappointingly, if unsurprisingly, they stuck to the official script that the bailout had been entered into following a request for assistance from Ireland.

Brian Lenihan tore up that script. The last person to be interview for the documentary, he had been out of office for two months and had less time than that to live. Much of the two-hour interview focused on how quickly things changed in early November 2010.

Referring to the visit of a delegation from the European Commission just days before the bailout, he said: "Rehn had just visited Ireland. There was no question of our entering the facility raised by him. In fact, quite the contrary: he suggested it wasn't essential for Ireland to access funds from any European facility. So he'd actually said that."

That is fully consistent with what others who met Rehn on his visit have told me of their meetings with him. It is also consistent with what Rehn said (and did not say) at a press conference on the visit.

But if Brussels did not see an urgent need for a bailout, things were changing in Frankfurt, home to what is arguably the EU's most powerful institution - the ECB. The decisive moment appears to have taken place a full week before the letter of November 19, 2010.

This is what Lenihan said in the BBC interview "…but specifically in relation to the bank [ECB], you're quite right to focus on Friday 12th November because Mr Trichet wrote to me in that period as well, on the Thursday or the Friday. I'm sorry I don't have the date, but he did write to me and conveyed the concern of the bank about the amount of collateral dependence and funding dependence the Irish banking system had on the European banks and on the European Central Bank. And he also looked for assurances in relation to the security attaching to that funding, and he also raised the question about whether Ireland would be participating in a programme at that stage".

This all happened very suddenly. Up to that point, Frankfurt had been increasingly concerned, but there is no evidence it was setting time lines for a bailout or targets for the reduction of the amounts the Ireland-based banks were tapping the euro system for. Instead, it had appeared most interested in Dublin getting its budget deficit under control.

Lenihan put it thus "the bank's [ECB] read of this particular problem was that Ireland simply had to get its fiscal act in order and that that would somehow solve the banking problem".

The bigger picture of all of this is how the great power of the ECB is check and balance, and how it is held to account. Frankfurt has had to act quickly at times during the crisis and one could plausibly argue that having Ireland enter a programme in November 2010 was warranted in the interests of stabilising the wider eurozone. But the manner in which it did it had an arbitrariness and suddenness that smacks of an institution that is subject to insufficient democratic controls. That is a serious matter for Ireland and for Europe.

Sunday Independent

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