ECB says Irish policymakers to blame for economic crash

The European Central Bank (ECB) has issued a forthright defence of its actions in the course of Ireland's bailout, saying domestic figures were responsible for the unsound policies which led to the crash.

In a six-page paper published as the ECB released key correspondence from 2010 with the late Brian Lenihan, the Frankfurt-based institution said Ireland was not "pushed" into the bailout programme by a letter from its then chief Jean-Claude Trichet.

Citing the 2008 banking guarantee and other Irish decisions, the ECB said it was the very scale of the domestic crisis that made it necessary for Ireland to apply for an EU-IMF adjustment programme.

‘Inadequate policies’

“While it is understandable that Irish citizens feel acutely aggrieved by the legacy of the crisis, it was domestic policymakers who were responsible for the inadequate policies relating to banking supervision, public finances and the loss of competitiveness.”

In a reference to lax scrutiny of Ireland’s banks, the ECB added: “In particular, it was the lack of adequate domestic macro-prudential policies which failed to mitigate the excessive credit growth and subsequent housing boom.”

On the contentious question of its refusal to allow losses to be imposed on senior Irish bank bondholders in 2010 and 2011, the ECB noted that holders of secondary or subordinated debt in Ireland incurred losses of €14 billion between 2009 and 2011. The ECB said the refusal to impose losses on senior bondholders in 2010 followed two EU statements in October and November 2010 that “burden-sharing” of senior debt would not be applied until mid-2013.

“It should be emphasised that this took place amid an environment of heightened uncertainty and following a surge in the yields of stressed euro area countries in the previous month,” the ECB said.

Bondholders

The ECB accepted it was very difficult for Irish citizens to accept the refusal to force senior

Anglo Irish Bank

bondholders to take losses in 2011. “It should be stressed that this decision was taken during a period of still acute uncertainty,” it said.

“In addition, the potential benefits arising from any burden sharing with senior bondholders or Anglo Irish Bank were considerably outweighed by the possible risks this could entail, particularly in the context of an ongoing recapitalisation of the Irish banking sector and the continued fragile state of the sector as a whole.”

Mr Trichet's successor, Mario Draghi, told reporters at the bank's headquarters in Frankfurt that the decision to seek aid in 2010 was made by the then government on its own. Although Mr Trichet threatened in a letter on November 19th, 2010, that ECB support for Ireland's banks would be withdrawn if there was no formal application for a bailout, Mr Draghi insisted the bank did not force action on Ireland. "The decision to ask for a programme was the government's decision." He raised a doubt over the ECB's willingness to participate in the Oireachtas banking inquiry.

Legal advice to the ECB is understood to say it is under no legal obligation to take part in the Oireachtas investigation.