Four letters and a bailout: why Ireland still has a case for financial relief

I once met Jean-Claude Trichet. It was some time in the mid-1990s as the plans to create a single currency were being hatched and a group of Irish journalists went to interview some of the key players.

We first went to Frankfurt to meet the Bundesbank boss, the formidable Hans Tietmeyer, who delivered a half hour lecture on the virtues of stable money around a grim Formica table in the ECB canteen.

We then travelled to Paris, where Trichet greeted us in the grand entrance hall of the Bank of France saying something like: “We can talk about the euro later, but first let me show you my paintings.”

It was difficult to reconcile the urbane central banker that greeted us that day with the tone of the correspondence dispatched to Brian Lenihan. Part of the back story here was of something of a rift between Frankfurt and Dublin. You can get the feeling of this from reading the letters. The final “gun to the head” letter of November 19th – probably already conveyed informally the previous weekend – shows Ireland being pushed firmly towards the bailout door.

The ECB knew at that stage that this was the way the political wind internationally was blowing. Some kind of bailout had become inevitable. But it was the cost it left Ireland with that now creates the key vulnerability in our economy, our remaining high debt level. Yes, we were bullied. Yes, there does appear to have been a vicious whispering campaign against Ireland that further freaked the markets. And yes, some rich financiers – many from the US and UK, according to a Central Bank analysis – will have been surprised and happy to get all their money back from bust Irish banks. But none of this means we could, in November 2010, have avoided a bailout.

Recapitalisation

One of the conditions of the Trichet letter of that November 19th was a further recapitalisation of the banks from the bailout cash we would receive – and any cash in Ireland’s coffers. It was clear that this bill would be Ireland’s. The letter also insisted that the government “fully guarantee” emergency funding (known as emergency liquidity assistance or ELA) extended to the banks by the Central Bank. These are the threads from the Trichet letter to the debt burden left with Ireland.

In particular, it is the legacy of this emergency bank funding that still haunts us. As economist Karl Whelan explained in a paper in the Economic and Social Review in 2012, by the end of 2011 the IBRC – the vehicle charged with winding down Anglo and the Irish Nationwide – owed €40 billion to the Central Bank of Ireland to repay this emergency funding the banks had received. They had used this money to pay depositors and bondholders. As Whelan pointed out, the infamous promissory note – a long-term financial commitment by the government – was needed mainly to pay off our own Central Bank. This promissory note has been torn up since, with €25 billion in government debt issued to the Central Bank of Ireland to replace it, making the repayment terms easier but leaving us with the debt.

The net cost of bailing out Anglo and Irish Nationwide to Ireland was about €35 billion. As things stand we will not get any of that back, bar maybe a small dividend after the recent sell-off of IBRC assets. The rest of the bailout bill – some €30 billion – went on the surviving banks, AIB, Bank of Ireland and Permanent TSB. Here we have recouped some cash and if AIB can be sold down at some point we might get, say, €20 billion back eventually.

Political traction

The bill for Ireland remains steep. And now, with the economy due to be the fastest growing in 2014, we are not getting any political traction on the Government’s position that we continue to look for a delivery on a pledge made at the 2012 EU summit to examine ways to help Ireland’s financial sector.

The typical narrative about this is along the lines of “poor little Ireland, was bumped into a bailout and left burdened with debts from evil financiers”.

This tends to miss the huge culpability of Irish policy and the fact that the decisions during the crisis were not straightforward.

I don’t agree with a lot of what the ECB says about why it stopped the burning of senior bondholders on two occasions, in late 2010 and 2011 – and there may have been a third earlier in 2010. But its arguments show that at no stage was it an easy call to change course.

We were never going to come out of the crisis without a big hike in our national debt and a big recession. And we can’t now avoid all the difficult decisions – how to pay for water, where to save money and so on, by saying we can suddenly and magically shake off this debt.

But even the ECB now says that it welcomes new rules which will, in future, ensure all bondholders share part of the burden of a bust bank. It still rankles that this did not happen in Ireland’s case. And Mario Draghi’s contention that all is now fine in Ireland and maybe the policy was right all along is as inconsistent as it is insensitive. We still do have a case here. How it can be pursued is another question.