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Trichet denies stopping the Irish Govt burning senior bondholders

Updated / Friday, 1 May 2015 07:37
Mr Trichet said domestic and European failures played a role in the crisis
Mr Trichet said domestic and European failures played a role in the crisis

The former head of the European Central Bank has denied it blocked the burning of senior bondholders by Ireland saying the ECB issued advice on full repayment, not an instruction.

Jean-Claude Trichet said there was "broad consensus" against burden sharing, including within the International Monetary Fund.

He said individual IMF staff may have felt it was justified on unguaranteed bondholders, but not the organisation itself.

Mr Trichet said he did not think it would have been wise for Ireland to burn junior bondholders at a time when it was regaining the market's trust.

However, he said he did not threaten to withdraw ECB assistance to Ireland if they did so.

Speaking on RTÉ's Prime Time, Mr Trichet said in the run up to the 2008 bank guarantee he did not ask former finance minister Brian Lenihan to save the banks at all costs.

He said it was the sentiment of all governments of the world at the time to avoid a collapse, adding "these were dramatic circumstances. 

He said he had a "confident" relationship with Mr Lenihan. 

"We were in a situation where a depression - not a recession - a depression was at stake" he said.

Mr Trichet said the ECB helped Ireland more than any other country in Europe. "I think it has to be known Ireland was helped by the ECB in an extraordinary fashion" he said. 

He said he had a lot of admiration for Ireland and described the country as a success story. 

"Ireland has always accepted its responsibilities. It has never played a game that other countries would have played" he said.

Bank guarantee a 'thunderbolt' - Trichet

Speaking earlier today at an event organised by the Institute of International and European Affairs, Mr Trichet described the bank guarantee as a "thunderbolt".

He said the ECB had warned all governments to be careful following the "drama" coming from the collapse of Lehman Brothers in the United States.

Mr Trichet said ministers around Europe were saying that they would not allow a similar collapse in their countries.

Domestic and European failures played a role in Ireland's financial crisis, he said, though large imbalances in Ireland inflicted serious economic damage.

Mr Trichet led the ECB when Ireland introduced the bank guarantee and when the country went into a rescue programme with the European Union and the IMF in controversial circumstances.

He said Ireland did not seek advice from the ECB about a bank guarantee and the ECB did not give any.

He said the ECB learned of the Irish guarantee through the media.

Mr Trichet said the guarantee was a response to the mounting financing pressures on the Irish banking sector and in this context could be understood. 

He said Mr Lenihan did what he thought was best in traumatic circumstances, and that it was important to note that the Government went ahead with the guarantee without any co-ordination from the ECB or any of its European partners.

As it happened: Trichet gives evidence on banking crisis

When asked if the ECB spoke to anyone in Ireland about a guarantee of any kind prior to September 2008, Mr Trichet said no.

The absence of a European framework meant that financial imbalances like these went uncorrected, Mr Trichet said.

He also said his systematic warnings on labour costs were ignored in Europe.

He admitted that European governance was not good enough to deal with the challenges posed by the crisis, but said national failures were a more significant part of the problem.

Mr Trichet says he tried to point out problems in banks in Europe, but national central banks were the regulators.

This was a bad system, he said, but it has now changed.

Mr Trichet said Europe now has mechanisms to ensure that, if a bank fails, it will not bring down a country.

He also defended the actions of the ECB, saying it and other central banks prevented the financial crisis from becoming a 1930s-style depression.

Mr Trichet said Ireland had had the full support of the ECB, pointing out that 25% of all refinancing for euro area banks went to banks in Ireland.

As part of a compromise agreement with the banking inquiry, Mr Trichet answered questions from inquiry members after his lecture at the IIEA event in Kilmainham.

Initially, the ECB had insisted that it is not accountable to national parliaments or the bank inquiry, but after protracted representations by the Government a compromise was reached.

Responding to a question from banking inquiry Chairman Ciarán Lynch, Mr Trichet said the ECB is only accountable to the European Parliament and so can not participate in a national parliament's inquiry.

Opening his address, Mr Trichet said that Ireland returned to market financing before the end of its bailout programme, while the banking industry has seen a return to stability and the country's economy is recovering at an impressive pace.

But he said he remembered the huge uncertainty about where Europe was going during the crisis, which could have resulted in great global depression.

Mr Trichet said the terrible lesson of the crisis was that you cannot rely on market discipline to control government finances.

He said problems can be hidden by good numbers and good governance was needed to identify this.

He paid homage to those involved in governments which had led the country through the crisis, as well as the general public.

Mr Trichet praised the flexibility of the Irish workforce, as well as the understanding of people in doing what was necessary to regain competitiveness.

He said confidence was importance for Ireland as the country gained the confidence of people, markets and investors through its actions.

He said the strength of return to economic soundness and market credibility was impressive.

But he said it was no time to declare victory as there were still challenges facing the country.

One was the "overhang" from the crisis, he said, pointing to debt levels and youth unemployment in particular.

The second was the issue of non-performing loans that remain on Irish banks' balance sheets.

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