OPINION:The ECB is 50 per cent culpable, but we are to pay 100 per cent of price
THE GOVERNMENT has signed us up to a bad deal. The European Union and the European Central Bank (ECB) have stitched us up. The taxpayer is now being forced to repay money to the European banking system as well as the Irish banking system because of policies implemented by the Government, by people who frankly don’t know what they were about and haven’t the wit to learn from those who do, even when it’s clearly and comprehensively explained to them.
We have been used by a European banking system that was flush with cash and needed someone to lend to. It operated recklessly and with dereliction of a duty of care. The EU banking elite, the European Commission and the ECB don’t care what damage they do to our country. They just want their money back at any cost. There is no European solidarity here. That too is an illusion of our deluded politicians and officials. We needed a strong negotiating team with the will and the nerve to say “No! Here’s what the people of Ireland need. This is what we will accept.”
We needed tough negotiators prepared to withstand the pressures that were brought to bear on them, because they understood what they were about and knew it was right. We needed our best politicians to back this team.
This Government had no right to agree to the deal the Taoiseach announced on Sunday night. This Government has failed us. It should be removed immediately, without delay.
Ten days ago, the troika arrived in Dublin: teams from the International Monetary Fund (IMF), the European Central Bank and the commission of the European Union. The ECB was alarmed by a recent and growing problem. A €130 billion problem. A problem sited in the Irish banking sector that the ECB helped to accommodate and then specifically enabled to grow.
First, what Ireland’s negotiators had a duty to clearly demonstrate to the ECB/EU/IMF team was that the ECB had been 50 per cent culpable in its failure in regulation and supervision of Irish banks for four years up to 2007-2008 in which the banks had conducted reckless lending
Second, Ireland’s negotiators should have emphasised the ECB had knowingly advanced loans to the banks which specifically enabled the banks to redeem in full senior bondholders when it was obvious that emerging loan losses at the banks clearly showed they were headed into insolvency.
Increasingly this year, EU financial markets experienced alarming volatility while the EU economies referred to as the Piigs (Portugal, Ireland, Italy, Greece and Spain) presented large and growing fiscal deficits on the back of chronic structural problems.
In particular, ballooning losses in Ireland’s banking sector started to receive market attention. By summer, it was apparent these problems were acute. Ireland’s banking losses started to impact on markets as did, but to a lesser extent, the structural weaknesses in Ireland’s fiscal management.
However, the EU appeared to be reasonably satisfied Ireland’s fiscal problems were being addressed. Olli Rehn had expressed approval for the National Recovery Plan that was being announced while ECB and IMF teams were conducting negotiations.
In relation to the austerity programme, there will be enormous pain for the people of Ireland in making the adjustments. No one, least of all outsiders from the IMF, EU and ECB, needs to tell us or prescribe for us what we have to do. We can, without the direction of others, democratically ensure the adjustments are borne and shared fairly. We must not overload the weaker and vulnerable members in our society.
The stronger and more fortunate must step up to the challenge and lead by example. That challenge is addressed to our senior politicians, senior civil servants, leaders in business and senior management in semi-State companies. Also to senior members of the professions including law, banking, accountancy, medicine, insurance, property development and investment, construction, valuation/surveying etc. We must reduce the differentials in earnings between people at the top and people at the bottom of income scales in Ireland.
Similarly, there were undeniable factors surrounding the reckless lending of the Irish banking sector over a four- to five-year period up to 2008. The outcome of what could be seen as something of a credit cocaine surge was an unprecedented financial meltdown in September 2008. Regrettably, the Government, its advisers and others failed to acknowledge the true scale of the reckless lending.
The fact that embedded loan losses in the original €77 billion National Asset Management Agency (Nama) loan listings were not €23 billion, as the Government had insisted when bringing forward the Nama project for enactment, but rather approximately €45 billion, sat uncomfortably with Government. They chose to deny reality. That denial has proved disastrous.
In September 2008, the Government walked us into what has turned out to be the unimaginably costly consequences of the extensive two years’ blanket guarantee for all the liabilities of the banks. We know there was no need to introduce a guarantee other than for deposits, including inter-bank deposits, on that occasion.
As a direct result of the Government’s ill-judged Nama strategy, we have the ECB-IMF bailout.
It was patently obvious last week was the time for us to say “No” – unless there was built into the deal a writedown of €60 billion on the €130 billion lent by the ECB to the banks.
A writedown of this magnitude should have been insisted upon for the following reasons.
From September/October 2008 to June 2009, the ECB had advanced over €35 billion emergency liquidity loans to Irish banks.
The ECB had hoped to have got this back by now but it didn’t because the improvement to the liquidity the Government had told us was going to happen as a result of Nama didn’t happen. So the banks had to retain the emergency €35 billion. In addition, when the transfer of bad loans from the banks to Nama started, loan losses were far higher than expected. The banks, especially Anglo and Irish Nationwide, needed huge recapitalisation and this resulted in further loan advances, probably in the order of €30 billion, from the ECB.
Finally, the markets lost faith in Ireland mainly because the Government’s bank loss estimates have been appallingly bad.
On September 30th, 2010, Minister for Finance Brian Lenihan announced “finality” of bank losses at €50 billion. However, reliable counter-estimates of Nama-type loan losses are now totalling €66 billion, excluding losses for mortgages, personal lending, and the small-to-medium enterprise sector.
Add to this independent estimates of anticipated mortgage and personal loan losses of €25 billion. Taken together, the total estimated loan losses in the banks amount to €91 billion.
Because of rating agency downgradings and market volatility in recent weeks and months, the banks borrowed further from the ECB and also from our own Central Bank. The net result was that the ECB woke up alarmed to find that instead of its initial advances of about €35 billion to Irish banks in the first half of 2009 being reduced following a stabilisation of the banking sector, quite the opposite happened.
That’s why the ECB is now staring at a whopping total of €130 billion loans advanced to the Irish banks, including the €60 billion which it lent enabling them to redeem senior bondholders.
And that’s why the overarching duty for Ireland’s negotiators was to present those indisputable facts assertively to the ECB, demonstrating how the ECB itself contributed directly to the problem for which it was now forcing Ireland to pay.
Peter Mathews is a former banker now working as a banking sector analyst