ECB ‘was right to not burn bond holders’, says European Commission

The decision not to burn senior bondholders has been proven right, the European Commission has said, confirming it agreed with the ECB’s decision at the time of Ireland’s €62bn bailout.

However, it did not receive detailed explanations from the ECB about why those who had invested in Anglo Irish Bank should be repaid by the Irish taxpayer, rather than losing their money as is the usual procedure.

The information is part of the European Court of Auditors report into how the commission managed its role in the austerity programme. It says co-operation between the troika members — the commission, ECB, and IMF — was informal only.

For example, the ECB provided advice but this did not mean it provided the commission and IMF with the details, including its thinking on burden-sharing by senior debt holders in the restructuring of Irish banks.

The auditors noted that since Ireland was dependent on the ECB providing financing of close to 100% of the country’s GDP, it was essential that the ECB did not withdraw it. As a result, “the other troika partners accepted no burden-sharing by senior debt holders”, the report notes. It adds says the IMF, evaluating the programme when it was finished, suggested there were alternatives “but they were not pursued”.

Responding to the report, the commission said because the ECB is independent, it could not demand information on its decision on burden-sharing, and accepted the decision since continued ECB financing was essential for Ireland.

“Developments since then have justified the choice not to bail in senior bondholders. Irish debt is clearly sustainable, credit default swap spreads are down to the levels of France, Belgium, and Slovakia, Ireland’s credit rating was upgraded, and Irish banks repaid most of the ECB funding,” it said.

The decision also needed to be considered in light of the government giving a blanket guarantee for all bank deposits. The benefits “also had to be weighed against the costs in terms of the spillovers to other banks and the litigation risks”.

The report is broadly in line with what the Oireachtas banking inquiry was told last year by the commission’s economic and financial affairs director general, Marco Buti, that the ECB was forceful on the bondholder issue, that Ireland and the eurozone was “in a life-threatening situation”, and anything else would have been too risky.

The ECB made this decision for a second time in March 2011 on foot of a government request, strongly supported by the central bank governors of Spain, Italy, France, and Cyprus, which all feared Ireland’s effect on the euro.

The then secretary general of the Department of Finance, Kevin Cardiff, told the banking inquiry that one of Germany’s two ECB governing council members, Axel Weber, issued a statement that same March day favouring the burning of bondholders but was not at the board meeting.

Mr Cardiff, who is now a member of the European Court of Auditors, played no role in the drawing up of the report because of his previous role in the department.

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