ECB sought fire sale of Irish assets to protect balance sheet - Chopra

The European Central Bank (ECB) pushed for a quick fire sale of Irish bank assets as Ireland entered the bail-out programme in late 2010, putting the protection of its own balance sheet ahead of the interest of Irish taxpayers, former IMF deputy director Ajai Chopra has said.

Mr Chopra, who was one of the senior IMF officials responsible for the design and monitoring of the bailout programme, wrote in a report for the European Parliament that the ECB's advice on fiscal policy and structural reforms - which he said were outside its mandate - were wrong for Ireland. The report was requested by the parliament's committee on economic and monetary affairs.

In the report, which analyses the ECB's role in the design and implementation of the programme, Mr Chropra writes that several missteps were made which tainted the bank's legitimacy in Ireland. Identifying the letters sent by then ECB president Jean Claude Trichet to then finance minister Brian Lenihan, pressing Ireland to enter the bailout or risk losing bank funding, Mr Chopra said their "imperious tone is unbecoming of the way in which EU institutions and nations should conduct business."

Among the ECB’s errors, he said, were the prevention of burden sharing with senior bank creditors, the pressing for swift deleveraging – or sale of bank’s assets – to reduce the ECB’s exposure and failing to provide up front commitments to provide liquidity support under the programme. Mr Chopra said that the ECB twice blocked the imposition of losses on senior bondholders, once when the programme was being negotiated in late 2010 and then in early 2011 when the new Government came to power and wanted to impose losses on senior bondholders of Anglo Irish Bank, then still owed €3 billion to €4 billion.

“It is understandable that there is a strong sense in Ireland that burden sharing between Irish taxpayers and bank creditors has been unfair,” he said.

“The ECB prevented the imposition of losses on senior creditors of Irish banks, thus increasing the burden on Irish tax payers,” Mr Chopra added. “(It) also took positions, for example on the pace of deleveraging, in the interests of protecting its own balance sheet rather than in Ireland’s interest.”

Mr Chopra said the ECB later accepted – around March 2011 – that fire sales of bank assets would be counterproductive but that by then, “trust in the institution and its legitimacy had been damaged.” Selling off assets allowed banks to repay emergency assistance given to them by the ECB with the proceeds.

The former IMF deputy director – who now works with the Peterson Institute for International Economics in Washington – said even though ECB liquidity support for the Irish banking system was a critical component of the bailout programme, the bank was unwilling to make an up front commitment on this front as Ireland entered the programme. He said more vocal public support by the ECB from an early stage would have inspired greater confidence in Ireland’s banking system and would have likely reduced the amount of Eurosystem funding that Ireland had to borrow.

Mr Chopra said the incompleteness of the euro zone’s institutional design, especially the absence of a banking and fiscal union, has propelled the ECB’s role in the design and implementation of EU-IMF programmes for Member States.

“This role gives the ECB great power and influence but also generates controversy and resentment in these programme countries,” said Mr Chopra.

He said that as the central bank and bank supervisor of each euro zone member, the ECB should not be a part of the troika where it sits across the table from country authorities and negotiates and monitors fiscal assistance.

“The ECB belongs on the country’s side of the table,” he said.