Letters show extent of pressure put on Lenihan for bailout
THE EXTENT of the pressure put on Ireland by the European Central Bank to apply for a bailout in November 2010 has been revealed in letters seen by The Irish Times.
The three letters from the then president of the European Central Bank Jean-Claude Trichet to the late Brian Lenihan culminated in an insistence that Ireland should apply for a bailout or risk the country’s banks being cut off from access to support.
The decisive exchange of views took place in a phonecall between the two men on Friday, November 12th, more than a week before the formal application for a bailout was made. At that stage, the ECB was underwriting funding to the Irish banking system of more than €150 billion.
Mr Trichet told Mr Lenihan the governing council of the ECB was becoming fearful that the whole European banking system was being put at risk by the drain on its resources coming from the Irish banks.
Three critical letters were dispatched by Mr Trichet to Mr Lenihan in the run-up to the bailout.
They were sent on October 15th, November 4th and November 19th, 2010. It also appears likely that an email or fax reinforcing the message was sent to Mr Lenihan on November 12th, prompting his conversation with Mr Trichet.
The Department of Finance made reference to the letters in response to a freedom of information request by The Irish Times.
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. Mr Trichet pointed to the extraordinarily large provision of liquidity by the euro system to the Irish banks.
The letter pointed out that this liquidity was subject to rules about the provision of adequate collateral. It said that Ireland’s access to such funds could be limited or even terminated completely.
Mr Trichet also pointed out that 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 by the Irish Central Bank and said the governing council would assess whether there was a need to impose specific conditions to protect the integrity of monetary policy.
Mr Trichet emphasised that the large provision by the ECB and the Irish Central Bank to Anglo Irish Bank could not be taken for granted as a long-term solution.
On November 4th, Mr Trichet wrote another letter to Mr Lenihan. He repeated many of the points made in the earlier letter about the massive exposure of the ECB to Irish bank debt.
He focused again on the concerns of the governing council of the ECB about its exposure to the Irish banking system for such enormous sums, and he repeated many of the points made in the earlier letter.
This time, however, he pointedly said that the ECB was monitoring the Irish government’s commitment to its four-year plan, still in preparation, and said that continuing ECB support was contingent on the plan being implemented.
On the same day, Mr Lenihan announced a targeted adjustment of €15 billion over four years, with €6 billion of that coming in 2011. The full detail of the four-year plan was to follow at the end of the month.
The decisive conversation with Mr Trichet followed on November 12th, and it is possible that this arose following a fax or email reinforcing the points made on November 4th.
In an interview with Irish Times economics editor Dan O’Brien, conducted after Fianna Fáil had lost power, Mr Lenihan was adamant that a communication from Mr Trichet had arrived on November 12th.
The final letter from Mr Trichet urging Mr Lenihan to accept the bailout was sent on November 19th. However, by that stage, the governor of the Irish Central Bank, Patrick Honohan, had publicly said a bailout was necessary.
The Trichet letter of November 19th urged Mr Lenihan and his government colleagues to accept the necessity for a bailout and agree to a programme with the troika.
By that stage, there was no longer any doubt that a bailout was necessary and all that was outstanding was the precise terms of the deal.
The following Sunday, November 20th, Mr Lenihan and his colleagues bowed to the inevitable and formally applied for an EU-International Monetary Fund programme.