Exaggerating Europe's part in our woes serves no purpose
‘WHEREAS I always felt that they were giving the money on the one hand, but saying on the other hand, well, we might have to cut off facilities.” These are the words of the late Brian Lenihan, uttered just weeks before his death last year during a two-hour interview for a BBC documentary.
The words in italics are, to my knowledge, the only on-record statement by any politician or official acknowledgment that the ECB threatened to turn off its liquidity tap for Irish banks – in response to the Irish proposal to impose a haircut on senior bank bondholders.
Lenihan discussed the issue extensively in the same interview. “We noted that, in the case of Anglo and Nationwide, in particular, that the relevant senior bonds were trading at a substantial discount, and we argued that we should be entitled to impose haircuts on these bonds. The Europeans took a very different view on this issue.”
Much of the commentary on the handling of the banking crisis since it erupted suggests – implicitly or explicitly – that if different policy choices had been made, the damage to the Irish economy and the burden on taxpayers would be radically less than it has turned out to be.
This is wrong. Many mistakes have been made since the crisis erupted, but they have all been trivial compared to the error of allowing a massive credit bubble to inflate in the first place. Once that had happened, its bursting was always going to wreak havoc regardless of the policy options chosen, as experience from Japan to Iceland shows.
Lenihan knew that, no matter the actions taken, all came with their own risks.
“The issue that should have been examined in Ireland, in my view, was whether [some] form of controlled, structured, agreed bank default was permissible on that unguaranteed senior debt,” he said. “That, I think, was a legitimate question.
“Now there were arguments against it; it wasn’t a one-way street. The amounts involved in Anglo and Nationwide were relatively small, so you’d have to weigh up the reputational damage to the country as against the amount saved. And then, in relation to the other banks, the question would arise as to whether, if you did it in the case of Allied or say Bank of Ireland, you’d harm their prospect of funding themselves in the future.”
The matter has been back in the media spotlight recently as journalists have sought access to correspondence between the ECB and the Department of Finance in which the former’s threats on bank funding may (or may not) have been put in writing.
I am not quite sure why the issue has recently sprouted legs again. It may be because the ECB recently decided that the holders of senior bonds in Spanish banks could be burned – an astonishing volte face on its earlier position that to burn any seniors would permanently and very significantly change the riskiness of such securities for all banks across the zone.
There was always reason to feel aggrieved about Irish taxpayers being forced to make good investor losses. There is a great deal more reason to feel aggrieved by the unavoidable implication of the ECB’s move: that it has treated a big member state differently from a small one.
It is impossible to be human and not feel angry about all that has happened. But anger is very rarely a productive emotion. Exaggerating – grossly in some cases – the amount the ECB has imposed on Irish taxpayers serves no productive purpose and merely adds to the poison generated by the banking and wider economic crisis.
People closely involved in decision-making in this administration and its predecessor have told me the disagreement with the ECB centred on seniors in the defunct banks only. The amounts involved were €5 billion at most. If a very large haircut – of, say, 75 per cent – had been imposed, the taxpayers’ bill for the banks (about €65 billion) would be €3.75 billion lower. Europe can be blamed for imposing €3.75 billion on Irish taxpayers. But it has saved those taxpayers multiples of that in subsidised loans. If the June 29th EU leaders’ summit produces tangible results, further multiples of that figure could be lifted off taxpayers’ shoulders.
If the ECB letter is put into the public domain it will provide interesting reading, but little else. Even if it contains an aggressively worded threat, it will merely confirm what has been said many times in off-the-record comments by many people involved.