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22nd Mar 2019

Letter shows ECB threat ahead of Ireland bailout

  • Jean-Claude Trichet was ECB chief from 2003 to 2011 (Photo: Council of European Union)

The European Central Bank on Thursday (6 November) formally made public a letter showing that the eurozone bank threatened to pull emergency bank funding if Ireland did not enter a bailout and undertake austerity measures in 2010.

The letter, signed by the then ECB president, Jean-Claude Trichet, speaks of “great concern” about the solvency of Irish lenders - which had loaned heavily to the over-heated construction sector - and the extent to which the whole eurosystem was exposed.

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It then says that the ECB would cut off emergency funding to Irish banks unless Ireland meets four conditions including getting a bailout and undertaking “fiscal consolidation, structural reforms and financial sector consolidation”.

The letter, sent 19 November 2010 and first published by the Irish Times early on Thursday morning, was part of an exchange of four between Trichet and the then Irish finance minister Brian Lenihan.

Other conditions laid out by the bank for the Dublin government was that it should put new capital into Irish banks and that the government was to underwrite the money already given to lenders and guarantee its repayment.

Commentators in Ireland have expressed surprise at the tone of the letter, particularly as it was clear that the country was heading towards a bailout.

Two days later, on 21 November, Ireland formally applied for a €67bn loan funded by the European Commission, the European Central Bank and the International Monetary Fund.

“I think the letters speak for themselves” says finance minister Michael Noonan when asked if Ireland was bullied into a bailout.

But others were more blunt.

“It’s about as threatening as can be,” Stephen Donnelly, an Independent member of Irish parliament, told state broadcaster RTE.

Donnelly said it was possible to “understand” the first request that Ireland take a bailout because a lot of money had been lent to Irish banks but requiring Ireland to put in place austerity measures was of a different order.

“The second point very seriously exceeds the mandate of any central bank. The ECB is now directly interfering in the operation of a sovereign state.”

Dublin initiated a series of harsh reforms, raising taxes, cutting pay and slashing public spending to meet the terms of the loans. The latest move, to introduce water charges, has led thousands to take to the streets to protest in recent days.

The ECB, for its part, laid the blame squarely at the government's door.

"While it is fully understandable that Irish citizens feel acutely aggrieved by the legacy of the crisis, it was domestic policy-makers who were responsible for the inadequate polices relating to ... banking supervision, public finances and the loss of competitiveness," the bank said in a statement.

ECB chief Mario Draghi on Thursday said "it is a very big mistake to look at past events with today's eyes" and noted that Ireland, which successfully completed its programme last December, is projected to have the fastest growing EU economy in 2015.

Asked whether his predecessor Trichet should appear at national banking enquiry, Draghi noted that the ECB is accountable to the European Parliament rather than national ones.

Meanwhile some Irish politicians says the release of the letter should spur the government to ask for a debt writedown.

Independent MP Catherine Murphy said Ireland took on 43 percent of the European banking crisis but the government “never even asked for that debt to be written down”.

“Will you ask them to write that debt off now?” she said, according to the Irish Times.

Irish national debt hit 123 percent of GDP in 2013 and is expected to stay above 100 percent of GDP until 2018.

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