Later this week, Jean–Claude Trichet, former president of the European Central Bank (ECB), will speak before an invited Dublin audience on “ Governance of the Eurozone: Past, Present and Future”. Trichet’s long-awaited appearance is a compromise. He declined to attend the Oireachtas Banking Inquiry, on the grounds that the ECB is accountable to the European Parliament and not to national parliaments.
The ECB’s role in dealing with the euro crisis has come under considerable criticism. In Ireland’s case , it was generally depicted as the “ harsh face” of the troika, in contrast with a somewhat more sympathetic image of the IMF. Trichet’s speech provides an important opportunity to clarify a number of key questions .
1 What was the basis for the ECB’s declaration in 2007 that European banks were in “ a generally healthy condition”? Trichet may well argue that since the ECB bore no direct responsibility for bank regulation its assessment – a fatally wrong one – relied on judgments of national supervisory authorities .
However, this defence is weak and reflects an excessively passive approach, reminiscent of that of the Central Bank of Ireland in the pre-crisis period. Trichet should squarely recognise the failure of the ECB, under his leadership, to discharge effectively its mandate to promote overall financial stability, as other key players in this catastrophe, such as the IMF, have already done.
2 What role did the ECB play in the banking guarantee decision in September 2008? Many commentators have asserted that the ECB “pushed” Ireland into the guarantee so as to prevent an Irish bank failure that could have caused a wider run on European banks.
However, the record suggests that the ECB’s role was confined to ruling out any pan-European intervention, while emphasising that responsibility for taking action lay with each national authority. Moreover, the decision in principle not to allow an Irish bank to fail, although shared by the ECB, had been taken much earlier in 2008 by Irish officials. It is important that Trichet addresses these issues.
3 Does Trichet regret threatening the late Minister for Finance Brian Lenihan with a cut-off of emergency ECB funding to Irish banks unless Ireland immediately sought a bailout? Many have characterised the letters of November 2010 to Lenihan as bullying of a sovereign government. The former head of the IMF mission, Ajai Chopra, recently described Trichet’s call then for fiscal retrenchment and “structural measures” as an “outrageous” overstepping of the ECB’s mandate.
At around the same time (unnamed) ECB officials were briefing the media in Frankfurt that a bailout was imminent, in an apparent attempt to force the government’s hand.
It was reasonable for Trichet to express major concerns about the state of the Irish banks, given the unprecedented large amounts they owed to the ECB. And clearly, any rescue package would include fiscal adjustment. Trichet might also have felt that the Irish government was in denial regarding the severity of the situation.
Nevertheless, process and tone are important. The broad scope of the letters went beyond the ECB mandate. Moreover the negative media briefing was an unacceptable breach of trust by the ECB vis-a-vis one of its members.
Trichet should be willing to publicly acknowledge that the ECB could – and should – have handled these matters better.
4 Was the ECB right to refuse to countenance any burning of senior bondholders by Ireland?
In November 2010 (with the strong support of US treasury secretary Geithner), the ECB adamantly opposed any Irish burning of senior unguaranteed unsecured bondholders. In March 2011 it again rejected a haircut even for bondholders of defunct Anglo Irish and Nationwide. It is unclear how strongly the Irish authorities advocated these proposals given their need to maintain good relations with external partners and the fact that by then the amounts involved were less than €5 billion – compared to total debt of over €200 billion.
The ECB argued that forced haircuts on senior bondholders would probably have major harmful effects, especially in view of the serious financial fragilities throughout the euro area at that time.
Reasonable people’s judgments may differ regarding acceptable risk-taking in the face of unknown potential contagion. Yet, despite ECB opposition, haircuts were successfully imposed later on Greek sovereign debt and on creditors of Cypriot banks, while “burden sharing” will, in principle, form part of future EU bank rescues.
5 Would Trichet now concur that Ireland is due some recompense for “taking a hit for Europe” at that time? Jean – Claude Trichet is a highly distinguished public servant whose passionate devotion to European ideals is not in doubt. Moreover, a respected and financially strong European Central Bank is crucial for the euro area to prosper.
Any great institution requires that its leadership learns from experience. Hopefully Mr Trichet’s forthcoming presentation will not only provide useful insights as to past ECB actions but also acknowledge explicitly what, in his view, could and should have been done differently – and the lessons for the future. His Irish audience deserves no less.
The author is a former deputy director at the International Monetary Fund. He was a member of the Irish Fiscal Advisory Council from 2011-2014 and is the joint author , with Antoin E Murphy, of The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis ( Oxford, 2014).
