ANALYSIS:Jean-Claude Trichet had hinted strongly that funding for the Irish banking system could be at risk if we did not agree to a rescue plan, writes STEPHEN COLLINS
ON THE morning of November 12th, 2010, the late Brian Lenihan rang the president of the European Central Bank (ECB) Jean-Claude Trichet to seek clarity about the contents of a letter that hinted strongly that funding for the Irish banking system could be at risk if Ireland did not enter a bailout programme.
In conversation, Trichet was far more blunt than he had been in a number of written communications. He told Lenihan quite simply that the ECB could no longer provide unconditional support for the Irish banks unless the government in Dublin accepted the need for a bailout.
At that stage the ECB had pumped €130 billion into the Irish banks and underwritten another €34 billion in emergency liquidity assistance from the Irish Central Bank to the country’s dead banks, Anglo Irish and Irish Nationwide.
Trichet told Lenihan the governing council of the ECB was becoming fearful that the whole European banking system was being put at risk by Ireland. Continued support would have to be conditional on Ireland entering a bailout programme.
It took another week for Lenihan and his colleagues to accept the reality that there was no alternative to a bailout, but the die was cast on November 12th.
In an interview with Irish Times economics editor Dan O’Brien a few months later, Lenihan, by then in opposition, referred to a crucial letter from Trichet on November 12th. There does not appear to be a record of one on that date, although it is possible there was an email or a fax on November 11th or 12th.
In response to a Freedom of Information request, the Department of Finance made reference to three letters from Trichet to Lenihan in the run-up to the bailout, which appear to have been decisive. They were sent on October 15th, November 4th and November 19th.
The October 15th letter spelled out the ECB’s worries about the rapid increase over the previous few weeks in the funding it was providing to the Irish banking system. It referred to the extraordinarily large provision of liquidity by the euro system to the Irish banks.
The letter pointed out that the provision of this liquidity was subject to rules about the provision of adequate collateral, and said Ireland’s access to such funds could be limited or even ended completely. Trichet also pointed out there were worries among the members of the governing council of the ECB about the appropriateness of its exposure to the Irish banks.
In particular, the letter referred to the provision of emergency liquidity assistance (ELA) by the Irish Central Bank and said the governing council would assess whether there was a need to impose specific conditions in order to protect the integrity of monetary policy.
Trichet emphasised that the large provision by the ECB and the Irish Central Bank to Anglo Irish Bank could not be taken for granted as a long-term solution.
The precarious position of the Irish banks was exacerbated hugely by a development on the international stage just three days later, when German chancellor Angela Merkel met French president Nicolas Sarkozy at the resort of Deauville in Normandy.
The two struck a deal to establish a permanent EU rescue fund, but they suggested that once it was established, private creditors should make a contribution to future rescues. The move spooked the markets and Ireland’s borrowing costs rose significantly. At that stage Ireland had left the bond markets, but any chance of a quick return had evaporated.
On November 4th, Trichet wrote another letter to Lenihan. He repeated many of the points made earlier about the massive exposure of the ECB to Irish bank debt. He focused again on the concerns of the governing council of the ECB to its exposure to the Irish banking system for such enormous sums and he repeated many of the points made in the earlier letter.
This time, however, he pointedly said the ECB was monitoring the government’s commitment to its four-year plan, still in preparation, and said continuing ECB support was contingent on the plan being implemented. On the same day, Lenihan announced a targeted adjustment of €15 billion over four years, with €6 billion of that coming in 2011. The full detail of the four-year plan was to follow at the end of the month.
That same day in Frankfurt, Trichet gave a guarded welcome to the new budget target. At a press conference, he said the decision to frontload the four-year plan with a €6 billion package was of “extreme importance” and said the scale of the overall endeavour was “not insufficient”.
Privately, however, his letter to Lenihan indicated the prevailing mood on the ECB governing council was that Ireland would need a bailout.
EU commissioner Olli Rehn arrived in Dublin on Monday November 8th and appeared to give a more optimistic assessment that Ireland could still avoid a bailout. However, by the time he flew out of Dublin the following day, the 10-year yield had climbed above 7.9 per cent, an impossible rate of interest that fuelled speculation about a bailout.
The decisive conversation with Trichet followed on November 12th and it is possible that this arose following a fax or email reinforcing the points made on November 4th.
In his interview with Dan O’Brien, Lenihan was adamant a letter from Trichet had arrived on November 12th, and that this communication had prompted his phone call.
One way or another, after that conversation with Trichet, Lenihan was fighting a losing battle to try to keep Ireland out of a bailout programme.
Just to compound Ireland’s problems, US treasury secretary Timothy Geithner had told Olli Rehn at the G20 summit in Seoul that Anglo Irish Bank had the capacity to do severe damage to the world banking system. Rehn rang Lenihan to inform him of the conversation.
The final letter from Trichet urging Lenihan to accept the bailout was sent on November 19th, but by this stage the game was over. Two days earlier the governor of the Irish Central Bank Patrick Honohan had publicly said a bailout was necessary, following denials from senior ministers that it was going to happen.
The Trichet letter of the 19th urged Lenihan and his colleagues to get on with it, accept the bailout and agree to a programme with the troika. The following Sunday, November 20th, Lenihan and his colleagues bowed to the inevitable and formally applied for an EU-IMF programme.
COUNTDOWN TO BAILOUT
September 22nd, 2010
Brian Lenihan flies to Brussels for a secret meeting with Olli Rehn and European Central Bank (ECB) executive board member Jürgen Stark to discuss the spiralling cost of the Irish bank bailout
September 30th
Lenihan announces plans to recapitalise Irish banks and says Ireland fully funded until June 2011
October 7th
Lenihan meets IMF in Washington
October 12th
Senior EU officials arrive in Dublin to discuss four-year plan to get the Irish public finances in order
October 18th
German chancellor Angela Merkel and French president Nicolas Sarkozy meet in Deauville and announce bondholders may suffer haircuts in future. Irish interest rates rise sharply as a result
October 25th
Lenihan back in Brussels to meet Rehn and Stark
November 4th
ECB president Jean Claude Trichet writes to Lenihan warning extraordinary level of support for Irish banks cannot be taken for granted in long term. On the same day Lenihan unveils €15 billion adjustment target for next four years, with €6 billion of it in 2011
November 8th
EU commissioner Olli Rehn arrives in Dublin for talks with government and opposition about need for four-year adjustment plan
November 11th
US treasury secretary raises concerns of Anglo Irish Bank as threat to international banking system at G20 meeting in Seoul
November 12th
Trichet tells Lenihan ECB cannot go on funding Irish banks if State does not enter bailout programme. Lenihan insists in public that Ireland has made no application
November 15th
Taoiseach Brian Cowen says Ireland not making aid application and senior ministers repeat the message
November 18th
Irish Central Bank governor Patrick Honohan announces a rescue plan involving tens of billions of euro is on way
November 21st
Government applies for assistance under the EU-International Monetary Fund programme