ECB letter contains no real surprises
I have always believed that Ireland was forced to take one for Europe, and that is exactly what this letter reveals.
In the run up to this letter the Irish banking system would have folded but for the emergency funding provided by the ECB. At the time of the letter the ECB had already provided €50bn in emergency liquidity assistance (ELA) to the Irish banks. In the absence of this funding the Irish banks would have been forced to close their doors and this would have caused justifiable mayhem and panic among the Irish banking public and would have created an unprecedented and massive crisis in the economy.
In the letter, the ECB stated that it would only agree to provide further emergency funding to the banks if it received in writing a commitment to apply immediately for the troika bailout. It went on to specify that the Irish authorities would have to give a commitment to fiscal restructuring, in other words budget cutbacks, and a restructuring of the Irish financial system.
Under this restructuring, necessary capital would have to be provided to the Irish banking system and the ECB president was adamant that the Irish Government would have to agree to underwrite the repayment of the ELA to the European Central Bank.
In other words, the State would have to guarantee all of the money provided by the ECB to keep our banking system alive.
Despite some suggestions, it is not clear from the letter that the ECB warned that if the Irish Government failed to agree to the bailout, full and immediate payment by the Government of all loans already provided under the ELA would be necessary. This, of course, would not have been possible.
However, it is clear that without further emergency liquidity assistance assistance on top of the €50bn already received, the Irish banking system would not have survived and the funding already provided under the ELA would have been under serious threat.
In a sense this would have given Brian Lenihan a semblance of power in these negotiations, but in reality the then minister for finance was presented with ‘Hobson’s Choice’.
I believed it at the time, and in hindsight I am even more convinced, that Ireland had no choice other than to enter the troika programme, and that our participation in the programme has actually benefited the Irish economy and laid the basis for the long-awaited recovery that is now starting to take hold.
I am also not surprised by the four conditions laid down by Trichet in the letter because under the rules agreed in the setting up of the ECB, certain conditions are laid down about the conduct of monetary policy. Trichet was merely seeking to ensure that these rules would not be breached and that the integrity of the ECB’s monetary policy activities would be preserved.
If Ireland had not entered the troika mechanism at the end of 2010, the country would have run out of money needed to finance its large deficit by the middle of 2011.
Presumably this would have resulted in either a debt default at that stage or an elimination of the massive deficit, which would have necessitating a massive increase in taxes and a shutdown of vital public services. That would have created economic and social chaos.
The bailout deal put the funding in place to run the country for three years, and surprise, surprise, those who provided the funding wanted to ensure that they would eventually get repaid and hence insisted on many sensible conditions.
The condition in Trichet’s letter that many here in Ireland will take serious issue with is the fact that the Irish government was forced to guarantee all lending under the emergency liquidity assistance.
Ireland helped prevent contagion in the eurozone and should now get a retrospective deal on at least the €34bn that went into the two unmentionable financial institutions.
I wouldn’t hold my breath, however.
Jim
Power
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