November 6, 2014 by Sean Whelan
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”.