Former ECB president Jean-Claude Trichet warned ex-taoiseach Brian Cowen of the consequences of the blanket bank guarantee in a previously unseen 2008 letter released under Freedom of Information.

In the letter marked “urgent” and sent to Mr Cowen by special courier on October 16th, 2008, Mr Trichet urged Mr Cowen to exclude short-term deposits from the scheme initially agreed the previous month but subsequently extended.

“I am writing to request that the Irish Government arrange that interbank deposits with a maturity of up to three months be excluded from the liabilities covered under the draft scheme,” he said.

‘Substantial distortion’

Mr Trichet said the extension to cover interbank deposits “could entail a substantial distortion in the various national segments of the euro area money market by potentially increasing short-term debt issuance activity across Member States and therefore impairing the implementation of the single monetary policy”.

He copied the letter to then finance minister Brian Lenihan and then Central Bank governor John Hurley.

Mr Trichet said he wanted to draw Mr Cowen’s attention to an ECB opinion on the scheme, which ruled that unco-ordinated decisions to guarantee interbank deposits in some member states should be avoided as they might involve a “fragmentation” of the euro area money market.

“I am writing to underline the importance that the ECB attaches to the exclusion of interbank deposits with a maturity of up to three months from the liabilities covered by the draft scheme,” he told Mr Cowen.

Maintain exclusion

“I would wish that the Irish Government would maintain such an exclusion until this matter has been fully co-ordinated throughout the euro area Member States, in order to avoid distortions in the implementation of the euro area single monetary policy.”

Mr Lenihan wrote back to Mr Trichet on November 14th, 2008. He said Irish banks had a high degree of reliance on interbank deposits of a relatively short maturity for meeting their ongoing liquidity needs.

“In this context, there was a concern that any change in the scope of the guarantee at a late stage could impact adversely on the liquidity and stability of the Irish banking system and indeed on the credibility and reputation of the guarantee overall,” he wrote.

He also told Mr Trichet the parliamentary process to provide legal certainty in relation to the guarantee did not allow for any amendment to the scheme.