ECB's treatment of Ireland and Italy is a constitutional scandal, yet nobody held to account
Blog: Europe has forgotten its moral debt to Ireland
By Ambrose Evans-Pritchard
4:15PM BST 03 Oct 2014
Photo: AP
So the truth comes out at last. The EU/IMF Troika – actually the ECB – compelled the Irish state to take on the vast liabilities of Anglo-Irish and other banks in the white heat of the financial crisis.
It threatened to pull the plug on ECB support for the Irish banking system, in breach of its own core duty to act as a lender-of-last resort, unless the Irish taxpayer took the full losses.
This protected bondholders from their condign fate, even though these creditors were fully complicit in Ireland’s credit bubble. Indeed, they helped to cause it, along with the ECB’s ultra-loose monetary policy and negative real rates (set for German needs) during the boom. Even the riskiest tranches of junior bank debt were deemed off limits.
Working class youths in Cork, Limerick, and Dublin will have to service a very high public debt -- currently 124pc of GDP, up from 25pc in 2007 -- for a very long time.
Patrick Honohan, Ireland's central bank governor, told a group of foreign journalists in Dublin some time ago that this had occurred. We knew, but were sworn to silence, forced to bite our tongues every time we had to listen to the usual pack of lies from certain quarters.
Now he has spoken out in a new book on the former Irish finance minister, the late Brian Lenihan. Extracts were published in the Irish Independent on Sunday. Those who follow Ireland will already be aware of this, so forgive me for coming to it late.
Mr Honohan was in an impossible position in 2010. The ECB could at any time have withheld emergency support, sending the Irish financial system crashing down in flames. Yet the ECB’s terms for a rescue programme were that Ireland protect all creditors. (Many of them British, Dutch, Belgian, and German)
"The Troika staff told Brian in categorical terms that burning the bondholders would mean no programme and, accordingly, could not be countenanced," he said. "For whatever reason, they waited until after this showdown to inform me of this decision, which had apparently been taken at a very high-level teleconference to which no Irish representative was invited."
Ireland was not allowed to do an Iceland and walk away.
Let me be clear. The ECB’s argument at the time was in many ways defensible, and probably the right course, even if the methods were scandalous. Iceland is tiny, of no systemic relevance for the world. Ireland’s banking system was €800bn when the financial crisis first hit. It was and is intricately linked to Europe’s banking nexus.
A haircut for EMU bond-holders at that very dangerous moment – before the eurozone had built up buffers and sorted out its crisis regime – would have led to instant contagion and incalculable consequences (as later spasms of the EMU debt crisis were to show).
Mr Honohan told me that Anglo-Irish was “systemically-relevant” for the whole eurozone at that juncture, and I fully agree. Ireland defended the whole currency bloc (and the City of London). It held the line with courage and stoicism.
My criticism is that the EU authorities have never recognized this, and never admitted what occurred behind closed doors. Indeed, they deny to this day that Mr Lenihan was strong-armed into swallowing the debt.
They did acknowledge at the EU’s June summit in 2012 that the eurozone has a special duty of care to Ireland, and that the EU bail-out machinery should take on direct responsibility for recapitalizing Irish banks (retroactively), lifting the burden off the shoulders of the Irish state.
This pledge is written in black and white in the final communique, yet Europe’s leaders have never delivered. Four finance ministers from the creditor core later denied that there had ever been such an agreement. The Irish government has chosen not to protest incessantly about this – with good reason perhaps, since Ireland is covering under its own efforts – but it rankles in Dublin.
There is now pressure to haul former ECB-chief Jean-Claude Trichet before an inquiry in Ireland, chiefly to determine exactly what he wrote in a confidential letter to the Irish finance minister in November 2010. The ECB continues to stonewall even after a request from the European Ombudsman.
There is a pattern to this. The ECB wrote astonishing letters to the elected leaders of Italy and Spain in August 2011, dictating a string of demands in return for ECB action to support their bond markets. When Italy’s Silvio Berlusconi failed to comply fully – or was deemed to be failing by these unelected, secret, inquistors – the bond purchases were shut down. Berlusconi was forced from office. It was an ECB coup d'etat.
The ECB had no legal or constitutional mandate for such action. The letters touched on intimate issues of domestic policy, such as Italy’s Article 18 on the labour protection, an issue so sensitive that it has led to the assassination of two Italian labour advisors since 1998. The Italian letter was later leaked, no thanks to Frankfurt.
Such meddling has nothing to do with monetary policy. The ECB was acting as an enforcer of the creditor bloc and its political interests.
If you were charitable, you might say that the ECB was forced into this role because there was no other European institution capable of taking charge, but that is to admit that the EMU construct is by its nature an authoritarian monstrosity outside all democratic control, a form of soft monetary tyranny. If you admit that, how can you continue defending EMU at all? … unless, of course, you are not a democrat.
Mario Draghi has been a breath of fresh air at the ECB, a modern mind in the dank dungeon of Austrian School pedantry.
Now he should go further, and release a fistful of secret letters. And can we have some clarity on that Italian coup d'etat while we are at it?
Mr Honohan was in an impossible position in 2010. The ECB could at any time have withheld emergency support, sending the Irish financial system crashing down in flames. Yet the ECB’s terms for a rescue programme were that Ireland protect all creditors. (Many of them British, Dutch, Belgian, and German)
"The Troika staff told Brian in categorical terms that burning the bondholders would mean no programme and, accordingly, could not be countenanced," he said. "For whatever reason, they waited until after this showdown to inform me of this decision, which had apparently been taken at a very high-level teleconference to which no Irish representative was invited."
Ireland was not allowed to do an Iceland and walk away.
Let me be clear. The ECB’s argument at the time was in many ways defensible, and probably the right course, even if the methods were scandalous. Iceland is tiny, of no systemic relevance for the world. Ireland’s banking system was €800bn when the financial crisis first hit. It was and is intricately linked to Europe’s banking nexus.
A haircut for EMU bond-holders at that very dangerous moment – before the eurozone had built up buffers and sorted out its crisis regime – would have led to instant contagion and incalculable consequences (as later spasms of the EMU debt crisis were to show).
Mr Honohan told me that Anglo-Irish was “systemically-relevant” for the whole eurozone at that juncture, and I fully agree. Ireland defended the whole currency bloc (and the City of London). It held the line with courage and stoicism.
My criticism is that the EU authorities have never recognized this, and never admitted what occurred behind closed doors. Indeed, they deny to this day that Mr Lenihan was strong-armed into swallowing the debt.
They did acknowledge at the EU’s June summit in 2012 that the eurozone has a special duty of care to Ireland, and that the EU bail-out machinery should take on direct responsibility for recapitalizing Irish banks (retroactively), lifting the burden off the shoulders of the Irish state.
This pledge is written in black and white in the final communique, yet Europe’s leaders have never delivered. Four finance ministers from the creditor core later denied that there had ever been such an agreement. The Irish government has chosen not to protest incessantly about this – with good reason perhaps, since Ireland is covering under its own efforts – but it rankles in Dublin.
There is now pressure to haul former ECB-chief Jean-Claude Trichet before an inquiry in Ireland, chiefly to determine exactly what he wrote in a confidential letter to the Irish finance minister in November 2010. The ECB continues to stonewall even after a request from the European Ombudsman.
There is a pattern to this. The ECB wrote astonishing letters to the elected leaders of Italy and Spain in August 2011, dictating a string of demands in return for ECB action to support their bond markets. When Italy’s Silvio Berlusconi failed to comply fully – or was deemed to be failing by these unelected, secret, inquistors – the bond purchases were shut down. Berlusconi was forced from office. It was an ECB coup d'etat.
The ECB had no legal or constitutional mandate for such action. The letters touched on intimate issues of domestic policy, such as Italy’s Article 18 on the labour protection, an issue so sensitive that it has led to the assassination of two Italian labour advisors since 1998. The Italian letter was later leaked, no thanks to Frankfurt.
Such meddling has nothing to do with monetary policy. The ECB was acting as an enforcer of the creditor bloc and its political interests.
If you were charitable, you might say that the ECB was forced into this role because there was no other European institution capable of taking charge, but that is to admit that the EMU construct is by its nature an authoritarian monstrosity outside all democratic control, a form of soft monetary tyranny. If you admit that, how can you continue defending EMU at all? … unless, of course, you are not a democrat.
Mario Draghi has been a breath of fresh air at the ECB, a modern mind in the dank dungeon of Austrian School pedantry.
Now he should go further, and release a fistful of secret letters. And can we have some clarity on that Italian coup d'etat while we are at it?
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