There was no smoking gun in the ECB letters released yesterday that would strengthen the Government’s hand in looking for a bank recapitalisation.
That is not to say that the ECB will be winning any popularity contests in this country in the near future.
The tone of the letters made it absolutely clear that the Government would have to accept an EU/IMF bailout.
There was a huge amount at stake for the Frankfurt- headquartered institution. Irish banks had borrowed €50bn in emergency liquidity assistance to fund day-to-day operations. If the Irish banks had failed, it would have inflicted massive losses on the ECB and created a capital hole in its balance sheet.
The ECB would have then had to go to member states to stump up cash to cover these losses. This would have violated every EU law in existence. To the then head of the ECB, Jean Claude Trichet, it was the doomsday scenario that had to be avoided at all costs.
The suspicion has been that the ECB bounced that government into a bailout in order to save senior bondholders of European banks and stave off a wider collapse of the banking system. If there had been any reference to senior bondholders in any of these letters, then it would have given the current Government more bargaining chips as it seeks to recoup some of the €64bn it used to bail out the banking system.
As it stands, there is very little chance that the Government will secure any relief from any EU source. The EU/IMF bailout worked in the sense that the domestic banks have paid back a good chunk of the €50bn in ELA.
Moreover, the €27bn in promissory notes relating to the rescue of Anglo Irish Bank have been rolled up into long term bonds with an average maturity of 36 years.
And as ECB president Mario Draghi pointed out, Ireland will be the fastest growth economy in the eurozone next year.
Responsibility for supervising the Irish banking system passed to the ECB last Tuesday. There is a completely new rulebook in the event a bank collapses in the future. Shareholders and investors will shoulder losses in future. The release of these letters bookends the most painful financial crash in the history of the State.
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