ECB ‘held all the cards’ on bondholder issue

THE ECB had “the means to prevail” on the bondholder issue because they were providing the funding to keep the Irish banks going, the secretary general of the European Commission has said.

The Government has been heavily criticised after reneging on election promises to make senior bondholders in the banks share some of the losses.

But Catherine Day, who is Irish, indicated yesterday that the ECB effectively had all the cards.

“They are providing the liquidity to keep the Irish banks going, so if they say that they would not be happy if the bondholders were asked to be part of the deal, then they have all the means to prevail with their arguments,” she said during a visit to Dublin.

Asked if the Commission itself had an opinion on whether the Government should have been allowed to burn the bondholders, Ms Day replied: “We don’t, no. We don’t say something different from the ECB.”

She said the Commission supported the Government on the issue of getting a lower interest rate on the bailout loans, and that a reduction was likely to materialise.

“We have been supportive of a lower interest rate for Ireland, and we’ll go on supporting that, and I think there are good prospects of getting that,” she said.

“We’ve also been supportive of a slower rate of (bank) deleveraging so as to realise more funds for the assets.

“But the question of the bondholders is very much an ECB issue, and they have explained themselves and I think you can understand that the concern they have is about contagion.

“While we work very closely together, the ECB is the independent central bank of the EU and they don’t take instructions from government, so they decide their own policy.”

Ms Day said the Commission shared with the ECB the belief that the additional €24 billion recapitalisation announced for the banks this week would be sufficient.

“There is so much conservatism built into the estimates that it should be more than enough,” she said, adding that it needed to be seen “as a turning point that starts putting Ireland back on admittedly a very long and tough road to recovery”.

She also said it was “important to understand” how other member states look at Ireland’s demands for them to share the burden of the bailout. It was “not easy” for a country like Germany to agree to the amount of assistance already being provided, she added.

“There is a bit of disconnect. Here we feel very hard pressed, and life would be easier if we didn’t have to face up to these enormous liabilities,” Ms Day said.

“But the others feel equally hard pressed that over the years they’ve provided a lot of support to Ireland and other countries in the form of structural funds, and now they have to go back to their taxpayers again to get yet more money to support the countries that are experiencing difficulties.

“Our job is try and bring all of these expectations together and make the system work.”

Some critics believe the rigid nature of the bailout has been designed so that losses are not inflicted on German and French banks which lent heavily to their Irish counterparts during the boom.

Ms Day acknowledged the argument, but in words that may further irritate critics of EU policy on the issue, suggested it was ultimately Irish people who sought the money and therefore bore the responsibility for paying it back.

“There must be some objective merit in looking at who holds the loans — and it’s true that it wasn’t only Irish banks that were involved in lending. But what is also undeniably true, even if it’s uncomfortable, is that it was Irish people and Irish organisations that took the loans, and nobody made us take the loans. We did it.

“Maybe we did it in a climate of euphoria and enthusiasm, but the bottom line is when you take out a loan, you take out a liability to pay it back. And that’s part of the credibility of a country.”

The EU has just agreed new bailout mechanisms to assist member states who find themselves in trouble in the future.

But it is also endeavouring to ensure that member states work in harmony to help the union as a whole rebound economically.

Beginning this month, there will be a significant shift towards greater economic coordination at central level.

Member states will each have to submit “national reform programmes” to the European Commission by the end of the month, outlining proposals to improve economic growth and increase employment, productivity and social cohesion.

Ms Day admitted this would represent a very significant expansion of the EU’s economic oversight.

“Yes, it is. It’s facing up to the fact that we’re in a common currency, which we didn’t do enough (in) the last 10 years,” she said.

“I think everybody felt, or a lot of people felt, that just having a common currency would be enough of a straitjacket to keep everybody on the right path — that didn’t turn out to be the case, as we know.

“A lot of people were surprised to see that a country like Greece with 2.5% of the EU’s GDP could threaten to bring down the whole edifice.

“So I think member states have learned the lesson that they have to be interested in what goes on in each other’s economy, and they have to get ahead of the curve, and make sure that they coordinate policies for the good of the whole currency area.”

She also made clear that Taoiseach Enda Kenny’s vow to launch a “diplomatic onslaught” in a bid to repair strained relations with EU colleagues was both necessary and welcome.

“The perception in Brussels was the more prosperous Ireland became, the more arrogant Ireland became, and the less it felt it needed to invest (in the relationship with the EU),” she said.

“People don’t believe that we’re good Europeans anymore, and in recent years I think they see us as being the people who are only prepared to take, but not to give back.”