Tone of Trichet letter made it clear ECB was calling shots

A November 2010 letter from Jean-Claude Trichet, then ECB president, to then finance minister Brian Lenihan includes the most clearly worded threat seen to date that further emergency liquidity assistance (ELA) would not be provided for the Irish banking system unless Ireland applied for a bailout.

The tone and nature of the letter, acquired by The Irish Times last night, is even more direct than most commentators had expected. It explicitly stated that the governing council of the ECB would not provide further emergency funding unless the government applied for a bailout. It also said that the government had to commit to a programme of budget cuts and bank restructuring, that new capital had to be put into the banks and that the Irish government must underwrite the ELA already provided and guarantee its repayment.

The nature of the letter is surprising as it is dated November 19th, by which time Ireland was already clearly heading towards a bailout. The previous day Central Bank governor Patrick Honohan had appeared on RTÉ Radio One's Morning Ireland and said that the government now had no alternative but to apply and by the 19th, officials from the bailout team were already in Dublin. The government formally applied to the EU and IMF two days later, on Sunday, November 21st.

ELA was special funding supplied by the Central Bank of Ireland – an arm of the ECB – to the Irish banks. Around €50 billion of it was loaned to the Irish banks at the time. The ECB had even more extended to the banks in normal finance, backed by collateral, but this ordinary lending was not proving sufficient.

While ELA was provided by the Central Bank, it had to be approved by the governing council of the ECB. So this allowed Trichet to hold out the threat over Ireland that the council would not provide funding if Ireland did not do what the ECB wanted.

He also said the ECB would review the overall provision of credit to the banking system if necessary, as it was concerned about its extent at the time.

The level of detail in the direction given by Trichet – including not only applying for the bailout but what should be done – shows the concern in Frankfurt about the money extended to the Irish banking system. The letter refers to the “great concern” of the governing council and its fear about the solvency of some of the banks. A failure to provide further ELA finance if required would have threatened the future of the financial system, had Ireland not gone into the bailout programme.

Renew debate

The publication of the letter will renew the debate about the pressure from the ECB at the time and its subsequent insistence that senior bank bondholders not be hit. The letter said that some of the capital borrowed from the EU and IMF for the bailout should be used to recapitalise the banks.