BUSINESS OPINION:The conspiracy theorists are wondering if the bank signed a €54 billion pact with Ireland, writes JOHN McMANUS

THE EXTENT to which the European Central Bank (ECB) has been propping up Ireland is becoming clearer by the day.

As reported in this newspaper over the weekend, the ECB has indirectly financed over one-quarter of the Irish exchequer deficit since last November by refinancing Irish banks’ bond purchases.

Since last November, the Irish banks’ holdings of Irish Government bonds have increased from about €500 million to €7.5 billion. They have been able to finance these purchases – and in the process help keep the exchequer afloat – because the ECB will accept the bonds as collateral for loans under the emergency liquidity measures introduced after global credit markets froze last September.

The net effect is that the ECB is buying Irish Government bonds, something it is not allowed to do directly under its own rules. A central bank buying its own government bonds is in effect printing money, something which is contrary to the ECB’s number one policy aim of controlling inflation.

The fact is that the ECB’s support to Ireland could be even greater than the €7 billion calculated by King Research (www.kingresearch.ie), as we don’t have figures for the extent to which other euro-zone banks are buying Irish bonds with the intention of refinancing them with the ECB.

It would be wrong to characterise the ECB’s support for Ireland as a bad thing, or even clandestine. The information on Irish bank holdings of Government bonds are published by the Central Bank. It’s just something that no one – for obvious reasons – is all that keen to highlight.

Equally, we have no idea of the extent to which other euro-zone countries are availing of the ECB’s “quantitative easing by stealth” programme.

But it would be safe to assume that we must be one of the biggest, particularly given that the National Asset Management Agency (Nama) is going to be financed in a similar fashion, with the ECB agreeing to take Nama bonds. From this perspective, the whole Nama exercise can be characterised as a €54 billion loan from the ECB to Ireland that will allow the State buy the banks’ bad assets.

And it’s a perspective that many Nama supporters have promoted in recent weeks on the basis that the resulting €54 billion injection of cash into the banking system will boost recovery.

It’s pretty clear the ECB has put its money where its mouth is as far as Ireland is concerned. The immediate reaction is – and should be – one of gratitude, but at the same time it is worth exploring why it did so and what conditions were attached. The answer to the first question is pretty obvious – it had no choice; and the answer or answers to the second are a conspiracy theorist’s dream.

With hindsight, it’s pretty easy to say that the ECB – and by extension the euro-zone members – were always going to come to Ireland’s aid because if Ireland fell, so did the euro.

But such presumption should be tempered by the fact that we don’t know and will not know for a time to come, just how close to collapse the global financial system came and whether we might have been let go under.

But it is possible to link the turning point in Ireland’s economic collapse with the explicit statements of support from both the ECB president, Jean-Claude Trichet, and the German foreign minister earlier this year.

And that is also the jumping-off point for conspiracy theorists.

Europe’s support also appeared to coincide with the waking from its torpor of the Government and the resultant supplementary budget and, in time, Nama.

The extent to which the ECB orchestrated all this is really just a question of how much conspiracy you can cope with. Being a journalist, I am tempted to jump in with both feet and propose something of which Robert Ludlum would be proud.

But moderation prevails. It is fair, however, to postulate that the ECB would not have extended all this credit to Ireland unless it was reassured that corrective measures were being put in place both to stabilise the exchequer finances and clean up the bank system.

Did they have to tell us what to do, or did we figure out for ourselves what we had to do in order to obtain their support? Did we have a choice either way? A bit of all of the above, one suspects.

The notion that the ECB now has its hand – even partially – on the economic tiller does put the recent comments by the Minister for Finance and the Taoiseach regarding taxation in an interesting light. Both have more than hinted that there will not be significant tax increases in December’s budget.

The corollary of that – assuming they have any ambition to try and stabilise the exchequer – is that there will have to be deep cuts in social welfare and public sector pay. And you can’t get away from the fact that if you asked the ECB what it thinks Ireland should do at this juncture, that would probably be the answer.