Letter was the last in a series moving us towards bailout

ECB president Mario Draghi went on the offensive yesterday, saying the ECB did not push Ireland into a bailout. Which leaves the obvious question of why, then, did the ECB feel the need to send a letter threatening to cut off emergency funding from the Irish banking system if we did not sign up for one. If we were heading into the arms of the EU and IMF anyway, why bother?

Perhaps part of the answer is that the correspondence published yesterday showed that the letter of November 19th was the last in a series. Back in mid-October the ECB warned that emergency funding could not be relied on by Ireland as a long-term solution. By mid-November it was a case of “ sign up or else”. It would appear likely the contents of the letter of the 19th were informally told to the Irish government the previous weekend, or just before.

The ECB did itself no favours by delaying so long before releasing the letters. FOI requests in Dublin looking for the letters from the Department of Finance were turned down. Following this, journalist Gavin Sheridan went through the ECB's own FOI system and recently the ECB indicated they were again considering the release of the letters. The Irish Times obtained the letter of the 19th November which was published in yesterday's paper, with the ECB then releasing all the correspondence later yesterday.

Pressure

Draghi, the successor as president to the author of the letters, Jean-Claude Trichet, was correct in his argument yesterday that Ireland could not have survived without a bailout. Even after we entered the programme, bank finances and bond yields remained under pressure until full details of what would happen were announced the following spring.

The ECB might not have fulfilled the threat to pull funding from the banks, but there was little point in fighting on in what, it was clear, was a losing battle.

Did the pressure on Ireland involve the ECB going beyond its mandate? Legally, this is hard to call, as the ECB statute does give it powers to offer opinions on matters in its “ field of competence”.

The letters to the Irish government would seem to be beyond “opinions”, though clearly the ECB argues that it was acting to safeguard financial stability, within its central mandate.

Certainly the tone of the ECB letter was about as direct as it could have got. It is not the generally understood role of a central bank to issue such wide-ranging directions to a government. The ECB argues that Ireland had to understand the reality of its position and the fact that by that stage one euro in every four of EU funding extended to the euro zone banking system was in Ireland.

Anticipating where the debate would go next, the ECB also made a statement yesterday on its attitude to not burning senior bondholders in the Irish banks. The ECB statement refers to discussions on whether this should happen around the time of the bailout and again the year after, when the new Government was in place. On both occasions it argues that imposing losses on senior bondholders would have risked creating too much instability in the Irish and European financial systems.

Questionable

It also pointed out that there had been a political decision at EU and

G20

( large industrialised states) level not to impose losses on senior bondholders until structures were in place by mid 2013. In the event, even that deadline was missed and the new rules were only recently agreed. There are valid arguments here: there would have been some risk involved. However, the full protection of senior bondholders through most of the crisis remains very questionable and – by weakening sovereign governments – it arguably deepened and extended the length of the turmoil.

For Ireland, it increased the legacy debt carried on our national balance sheet after the crisis. And remember, the ECB also insisted that Ireland explicitly underwrote the money extended in emergency lending to the banks and the other money routed via the Central Bank to pay the Anglo and INBS bills.

This issue of the management of the fallout from the bank collapse is where this debate is heading next.

However, given the current calm state of the markets and our strong economic growth, any significant further concessions from Europe in return for Ireland "taking a bullet" during the crisis look unlikely.