Lenihan told no way out but bailout
ANALYSIS:Jean-Claude Trichet had hinted strongly that funding for the Irish banking system could be at risk if we did not agree to a rescue plan, writes STEPHEN COLLINS
ON THE morning of November 12th, 2010, the late Brian Lenihan rang the president of the European Central Bank (ECB) Jean-Claude Trichet to seek clarity about the contents of a letter that hinted strongly that funding for the Irish banking system could be at risk if Ireland did not enter a bailout programme.
In conversation, Trichet was far more blunt than he had been in a number of written communications. He told Lenihan quite simply that the ECB could no longer provide unconditional support for the Irish banks unless the government in Dublin accepted the need for a bailout.
At that stage the ECB had pumped €130 billion into the Irish banks and underwritten another €34 billion in emergency liquidity assistance from the Irish Central Bank to the country’s dead banks, Anglo Irish and Irish Nationwide.
Trichet told Lenihan the governing council of the ECB was becoming fearful that the whole European banking system was being put at risk by Ireland. Continued support would have to be conditional on Ireland entering a bailout programme.
It took another week for Lenihan and his colleagues to accept the reality that there was no alternative to a bailout, but the die was cast on November 12th.
In an interview with Irish Times economics editor Dan O’Brien a few months later, Lenihan, by then in opposition, referred to a crucial letter from Trichet on November 12th. There does not appear to be a record of one on that date, although it is possible there was an email or a fax on November 11th or 12th.
In response to a Freedom of Information request, the Department of Finance made reference to three letters from Trichet to Lenihan in the run-up to the bailout, which appear to have been decisive. They were sent on October 15th, November 4th and November 19th.
The October 15th letter spelled out the ECB’s worries about the rapid increase over the previous few weeks in the funding it was providing to the Irish banking system. It referred to the extraordinarily large provision of liquidity by the euro system to the Irish banks.
The letter pointed out that the provision of this liquidity was subject to rules about the provision of adequate collateral, and said Ireland’s access to such funds could be limited or even ended completely. Trichet also pointed out there were worries among the members of the governing council of the ECB about the appropriateness of its exposure to the Irish banks.
In particular, the letter referred to the provision of emergency liquidity assistance (ELA) by the Irish Central Bank and said the governing council would assess whether there was a need to impose specific conditions in order to protect the integrity of monetary policy.