Don’t blame Frankfurt bogeyman Trichet for our ills

The senior bonds debacle is resonant because it reflects a profound sense of injustice

Yet more controversy over the refusal of former European Central Bank chief Jean-Claude Trichet to permit losses on senior bank bonds obscures deeper lessons.

Yes, some of Trichet’s actions were reprehensible. Three times, he threatened to cut Ireland loose if Dublin did not submit to the ECB’s will. This was beyond the Pale as engagements go between a government and any member, even an exceedingly senior member, of Europe’s bureaucracy. No doubt about that.

But to suggest that Trichet was “the man who broke Ireland” is as fanciful as it is convenient politically to slather the blame for our woes on some kind of a bogeyman in faraway Frankfurt.

True, the ECB did itself no favours by refusing to participate in the Oireachtas banking inquiry. True also, Trichet left far too many gaps and glossed over far too many serious questions in his imperious appearance before the Institute of European Affairs. To cast him, however, as arch villain is to portray an existential emergency in the State as pantomime.

The senior bonds debacle is resonant because it reflects a profound sense of injustice which will linger for decades. Hapless taxpayers were saddled with a huge, intergenerational bill for the misdeeds of the few, curtailing vital public services as life went awry for many thousands.

From this sorry mess senior bondholders walked off merrily with all their money, their unwise bet proving as safe in the end as the constitutional protection on the pensions of errant bankers. It shouldn’t have happened but it did, and it still seems unlikely that unilateral Irish action would brought Europe’s banking system to its knees. The International Monetary Fund certainly reckoned it was worth the chance.

But where’s the proportion?

One of the few, new points of information from the banking inquiry report was the disclosure that the National Treasury Management Agency believed that the State could save €9 billion or more by imposing losses on senior bondholders in March 2011.

Minister for Finance Michael Noonan sought to recover €3.7 billion but Trichet refused in the most strident of terms.

Puny savings

Put this in perspective. If the overall rise in Ireland’s debts can taken as the upfront cost of crisis, then putative savings from the exercise contemplated by Noonan were really rather small. This is crucial.

Data points to a rise of some €160 billion in Ireland’s general government debt since 2006, the year before the global crisis began. Some €64 billion went to Ireland’s banks: they received about €2 for every €1 in tax the State collected in 2010, the worst year for revenue collections. The inquiry found that was the banks’ responsibility. Timorous regulation made it worse.

Note, however, that close to €100 billion was taken on to fund the budget deficit. In summary, the overwhelming bulk of the crisis debt was assumed simply to keep the wheels of State turning. This was the outwork of deep recession, made worse by the banking flameout and worse still by accumulated fiscal malpractice. Be they in government in the pre-crash times or in opposition, each of the main parties was criticised for their pursuit of pro-cyclical policy as spending rose and taxes were cut. To be fair to the inquiry, it did not shirk this finding.

All of that seems a good deal more telling – and rather less misleading – than to suggest a French central banker was chief culprit. Although the infamous “Trichet letter” on the eve of the bailout put extraordinary pressure on Irish leaders, a rescue programme was at that point inevitable.

Ireland was shut out from bond markets, which had lost all confidence in the State’s capacity to repay and service its ever-expanding requirement for debt after the blanket guarantee for banks.

The report cites Michael Somers, former NTMA chief, saying the notion of an IMF intervention was always a nightmare.

“We would be writing memos to government telling them to cut back on their expenditure . . . ‘Listen, if you don’t behave yourselves and get your finances under control, the next thing is we’ll have the IMF in here running the show for us.’ So, for me, I felt it was the ultimate humiliation actually for us, as a country, to have the IMF come in to run the show for us.”

Ireland was broke from within. That’s the crux of it.

Failure to recognise that would lead only to a repeat of the saga.