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The ECB letters

Posted on by Sean Whelan


Former finance minister, the late Brian Lenihan

by Sean Whelan Economics Correspondent

The ECB is today examining the release for publication of four letters between Jean Claude Trichet and Brian Lenihan.  The letters are from the period October – November 2010, a particularly fraught time for the Euro area in general, and the Irish government in particular.

One of these letters contained an overt threat from the ECB governing council that it would stop funding the Irish banking system if the government refused to go into an EU-ECB-IMF organised bailout.

The other letters are dated 15 October 2010, from Trichet to Lenihan.  A reply from Lenihan on 4 November 2010, the 19 November Trichet letter and a response from Lenihan on 21 November, confirming the government’s decision to accept the bailout deal.

That last letter begins “Dear Jean Claude, First let me say that I fully understand your concerns and that of the governing council….”

We know this because it has already been released under Freedom of Information and published by Journalist Gavin Sheridan, who has waged a long running FOI campaign to get these letters into the public domain – a campaign that included an (unsuccessful) appeal to the European Ombudsman, Emily O’Reilly.

In turning down his request for the documents in November 2012, the ECB did give some indication of the contents of the letters:

The letter from Trichet on October 15th “expressed the ECB’s appreciation for the Irish government’s commitment to developing a multi-annual economic and fiscal adjustment strategy (this was the “four year plan” from the department of finance, which later became the “troika Programme”).

It also recalled the rules to which Eurosystem credit operations are subject, as well as the role of the ECB’s governing council in monitoring provisions of emergency liquidity assistance, in particular in the case of large liquidity provisions given to some entities, as this may interfere with the objectives and tasks of the Eurosystem and the prohibition of monetary financing under the Treaty on the Functioning of the European Union”.

This letter was issued about three weeks after Brian Lenihan had met ECB executive board member Juergen Start and EU Commissioner Olli Rehn for secret talks in Brussels about the rapidly increasing costs of Ireland’s bank collapse.

With the initial two year guarantee ending in September 2010, the banks faced a “funding cliff” as they tried to refinance billions of euro worth of bonds that were expiring.

Brian Lenihan’s letter to Trichet on November 4 2010 expressed – according to the ECB’s précis of the letter – “the Irish government’s concerns about the very adverse financial market developments at that time, in relation to the widening of the spread of Irish government bonds vis avis German Bunds and its possible impact”.

This letter was written after the so called “Deauville declaration” by Chancellor Merkel and President Sarkozy, which stated that France and Germany would back the EFSF and EFSM rescue funds, but they would expect bank bondholders to lose some of their money as part of the restructuring of Euro area banks.

Markets reacted very badly to this, and it triggered a huge blowout in Irish bond yields, as investors dumped Irish government paper. These are the “adverse financial market developments” referred to by the ECB.

At this time Brian Lenihan announced the four year plan would entail  a new €15 billion adjustment programme, with €6 billion of that front loaded into the 2011 budget.  This was to be on top of the €15 billion adjustment that had already happened over the previous two years.

The third letter referred to by the ECB in its FOI refusal to Gavin Sheridan is that of the 19th of November from Trichet to Lenihan.  This was written the day after Governor Patrick Honohan’s famous interview on Morning Ireland, when he told the nation the ECB expected Ireland t take a bailout programme, and that the IMF was already in Dublin for meetings that morning.

The ECB says “the letter of 19 November 2010 expressed the concerns of the ECB’s governing council regarding the extraordinarily grave and difficult situation faced by the Irish Financial sector at the time, and its impact on the stability of the Irish financial sector as a whole. The letter also invited the Irish government to take swift and bold action in order to address those concerns.

“In line with the message which it has consistently delivered to the public, the ECB encouraged the Irish government to commit to taking decisive action in the areas of fiscal consolidation, structural reform and financial sector restructuring, including recapitalisation where necessary.  Similarly th ECB also asked for reassurance that th Irish government would take the necessary action to ensure that the balance sheet of the Central Bank of Ireland remained protected, in line with the principle that liquidity could only be provided against adequate collateral”.

This last line is particularly significant, as it appears the ECB had severe doubts about the bank assets that had been pledged in return for borrowings from the ECB that amounted to some €140 billion at that point as well as emergency liquidity assistance (ELA) of some €30 billion for Anglo Irish Bank and Irish Nationwide.  The ECB was only supposed to lend (including ELA) to solvent banks – i.e. ones they could get their money back from.

Lenihan wrote to Trichet on 21 November, the day the government decided to formally seek a bailout programme from the Troika.  Lenihan’s reply states “In relation to points (1) to (4) of your letter, I would like to inform you that the Irish Government has decided today to seek access to external support from the European and International support mechanisms.  This grave and serious decision has been taken in the light of the developments I have outlined above (the Deauville declaration, the Greek debt Crisis, ratings agency downgrades, an economic slowdown), and informed by your recent communications, and the advice you have conveyed to me personally and courteously in recent days”.

The ECB was not the only one to to be worried about the country. Olli Rehn recently confirmed on the Marian Finucane show that Timothy Geithner, the then US treasury secretary and former head of the New York Fed had raised his worries that Anglo could trigger an international banking crisis at the G20 summit in Seoul on November 11 2010.
Rehn said he met Geithner, Trichet and German finance minister Wolfgang Schauble in Seoul, and they had agreed that Ireland had to enter a bailout programme to stop the threat of a wider banking crisis.

The following day – November 12 – Trichet reportedly phoned Lenihan and apparently told him then that the ECB could not go on funding Irish banks if the state did not enter a bailout programme.

Over the next few days the Taoiseach and Irish ministers say Ireland is not looking for a bailout, until on Thursday November 18th, Patrick Honohan phones into Morning Ireland from the Eurotower in Frankfurt, and says the ECB expects the government to do a deal with the Troika for “tens of billions”.

Tony O’Reilly – the Real Deal

Posted on by David Murphy

Tony O'Reilly was once the biggest player in Irish business - but his fortunes have turned in recent years

Tony O’Reilly was once the biggest player in Irish business – but his fortunes have turned in recent years

By Business Editor David Murphy

For decades Tony O’Reilly was Ireland’s richest man.

He was eulogised as the ultimate Renaissance man: a sporting hero, marketing tycoon and philanthropist. But in June this year, his run of good fortune came to an abrupt halt when State-owned AIB appointed a receiver over some of his assets. Continue reading

Web Summit – it’s back!

Posted on by Will Goodbody

Elon Musk was last year's biggest draw

Elon Musk was last year’s biggest draw to Web Summit

By Will Goodbody, Science & Technology Correspondent

If technology isn’t your thing then you should probably head off on holiday for the next few days. Because Web Summit is back, and it’s bigger than ever. Which means that over the coming week you are going to be hearing an awful lot about it. About what the next big things in the world of technology are likely to be. About which company is next likely to be bought or floated on the Nasdaq for billions of dollars. About which scruffy young fella in jeans and a t-shirt is likely to be the next tech multimillionaire. And a lot of sentences beginning with, “So…”
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The wider damage caused by the exploding rocket

Posted on by Will Goodbody


The Antares rocket exploded seconds after lift-off

The Antares rocket exploded seconds after lift-off

By Will Goodbody, Science & Technology Correspondent

Some are calling it a disaster. That’s a pretty strong word to use when talking about an exploding rocket, which thankfully didn’t injure or kill anyone.

But make no mistake about it. The short, dramatic and costly end to the fourth flight of the Antares rocket carrying the Cygnus cargo vessel to the International Space Station (ISS) from the launch pad in Virginia on Tuesday night is a massive setback to the US space program.

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Is Irish science funding under resourced and overly commercial?

Posted on by Will Goodbody

€245m is to be invested in the five new SFI centres

€245m is to be invested in the five new SFI centres

By Will Goodbody, Science & Technology Correspondent

€245 million is a big figure, by any measure. That’s how much is to be invested in five new “world class” research centres here over the next six years. The centres span a variety of areas – telecoms networks, digital connectivity, geosciences, medical devices and software. Two thirds of the investment, around €145m, will be injected by government through Science Foundation Ireland (SFI), with the balance coming from dozens of industry partners – 165 to be precise. The five new centres will join the seven existing ones announced last year, which are equally commercially focused.

It’s a model which appears to make sense in an economy where the unemployment rate is 11%. Science funding is pooled, prioritised and targeted at areas of expertise which hold the highest level of promise for the creation of jobs here. Industry is attracted in by the opportunity of having access to cutting edge R&D people and facilities. In return these industry partners must stump up cash, and in-kind contributions. They offer opportunities for licensing, help train researchers in the ways and efficiencies of the private sector and provide advice on things like setting up spin-out businesses.

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Why do the multinationals come here?

Posted on by Sean Whelan

by Sean Whelan, Economics Correspondent


ESRI research shows corporation tax is key

New research by the ESRI for the Department of Finance looks at the impact of tax policy in the decision of Multinational Corporations (MNCs) to locate overseas.

The standout finding is that if Ireland had been operating a corporation tax rate at the EU average of 22.5%, fewer than half the multinational companies that have come here since 2005 would have opened in Ireland.

Even moving to a corporate tax rate of 15% could, the ESRI says, have knocked more than a fifth off the number of foreign firms opening here in the period under review.

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Ireland’s banking crisis – forgotten but not gone

Posted on by David Murphy

Permanent TSB may have to raise more money to meet ECB rules - but it probably won't have to come from the taxpayer

Permanent TSB may have to raise more money to meet ECB rules – but it shouldn’t have to come from the taxpayer

By David Murphy, Business Editor

Many would have imagined that by the end of 2014 the difficulties of Irish banks would, after six tortuous years, have concluded.

However the strong possibility that one Irish bank may need further money illustrates that the effects of Ireland’s financial collapse is lingering. Continue reading

Deficit still dictating Budget arithmetic

Posted on by Sean Whelan

Michael Noonan expects Budget 2015 to meet the European Commission's rules

Michael Noonan expects Budget 2015 to meet the European Commission’s rules

By Economics Correspondent Sean Whelan

Next year the Government will spend a shade over €70bn. It will have an income of €65bn. So it has to borrow another €5bn to plug the gap.

Indeed the Government is borrowing more than it strictly needs to borrow for a neutral Budget. For the first time since 2007 it has introduced an expansionary Budget – though expansionary is rather a grand word for what is a very modest increase in spending. Continue reading

Better-off are big beneficiaries in Budget 2015

Posted on by David Murphy

Higher earners are in line to gain more from Budget 2015 than those on middle or low incomes

Higher earners are in line to gain more from Budget 2015 than those on middle or low incomes

By David Murphy Business Editor

It was supposed to be a Budget targeted at low and income middle earners – the reality was the higher earners will be better off too. Continue reading

Budget 2015 to mark the end of adjustments

Posted on by Sean Whelan

By Sean Whelan, Economics Correspondent


Michael Noonan may increase borrowing more than is strictly necessary in order to increase spending in Budget 2015

The most important thing about this Budget is that it marks the end of the adjustments – a  year earlier than planned.

The White Paper published on Friday night shows that the Government can easily met its EU deficit target of less than 3% of GDP without the need for tax increases or spending cuts over and above those already legislated for.

In eight budgets over the course of seven years the Government have taken almost €30 billion out of the economy, a cumulative adjustment of almost one fifth of GDP. This has been an enormous adjustment by any standard.  And now its over – a point that is well worth reflecting on.

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