European Central Bank president Mario Draghi has defended the bank's threat to Ireland in late 2010 that it would cut off emergency liquidity to Irish banks if the State did not agree a formal bailout programme with the EU-IMF troika. All the ECB's actions at the time were in line with its mandate and its powers, Mr Draghi told the European Parliament on Thursday.

He said Ireland should not blame the fire damage from the crisis on the “fire brigade” which helped the country and without which things would have been much worse.

His comments suggested that negotiations with the Fine Gael-Labour government after it took office on the possible burning of bondholders would have saved only €2 billion and it would not then have been worth the risk of hitting confidence in the programme.

The threat was made in a letter sent by Mr Draghi’s predecessor, Jean-Claude Trichet, who wrote to the then finance minister, Brian Lenihan, making clear that the high level of ECB support to Irish banks could not continue if Ireland did not sign up for a bailout.

While Mr Draghi did not refer directly in his speech to the parliament to the letter, it was clear he was addressing this topic.

Mr Draghi said throughout the programmes in Ireland and elsewhere, the ECB played the role assigned to it – to be the central bank for the euro area and to provide liquidity to financial institutions, including those in programme countries, when warranted.

“At times, this meant that risk-management considerations made it necessary for us to consider the progress of programme implementation when deciding on provision of further liquidity if the soundness of the domestic financial sector was intimately linked to programme success. We did so in full accordance with our rules and legal framework and in full independence.”

Referring to Ireland, Mr Draghi said there is no doubt that the adjustment process was painful.

“We should keep in mind that the adjustment would have caused significantly more hardship in the absence of financial assistance.”

“Don’t blame the fire damage on the fire brigade,” he added.

He said the banking crisis was “homemade” and exacerbated by decisions taken by the Irish government before the ECB got involved.

Sinn Féin MEP Matt Carthy put it to Mr Draghi that the ECB was not a firefighter but one of the arsonists in the Irish crisis.

“Well I still claim the ECB was a firefighter,” Mr Draghi responded.

He said the decision not to burn senior bondholders was taken by Irish governments, not by the ECB, though it had advised in that direction.The amount of money that could have been recovered from bailing-in unsecured creditors was small compared with the losses private investors in the banks had already suffered, he said

At the time there were no clear rules about bailing-in bondholders, he said and no precedents for doing so. He said it was “very difficult to judge actions taken at the time” with the eyes of today.

“The ECB is in favour of burden sharing now, but the necessary precedents to facilitate a bail-in were missing ,” he said.

Mr Draghi said arguments to bail-in bondholders at a later date were undermined by an assessment of their loan books in late 2011, which showed that they needed less capital than expected. At that stage the ECB believed it would have been “highly disruptive” to bail-in €4 billion when €43 billion “was already lost.”

Apparently referring to negotiations with the Fine Gael-Labour coalition after it took office in 2011, he said that the bail-in foreseen would only have saved €2 billion, because the Government wanted to exempt two Irish banks, presumably AIB and Bank of Ireland.This would have had a “potential high cost in confidence” in the programme, he said, which turned into a “ 100 per cent success story”.

Addressing the European parliament’s Economic and Monetary Affairs Committee , Mr Draghi said economic risks to the euro zone are “clearly visible”, paving the way for further monetary easing.

“Downside risks stemming from global growth and trade are clearly visible. Signs of a sustained turnaround in core inflation have somewhat weakened,” he said.

He said incoming data shows that the recovery in the euro area is “progressing moderately”. However, he said signs of a sustained turnaround in core inflation have somewhat weakened.