State feared ECB charge hike before rescue deal
GOVERNMENT OFFICIALS were concerned in the weeks leading up to the country’s bailout that the European Central Bank could charge a higher rate of interest on emergency loans provided to the Irish banks if it did not accept a bailout.
The officials interpreted the letter from ECB president Jean-Claude Trichet to the then minister for finance Brian Lenihan on November 12th, 2010, as a threat to withdraw the emergency loans.
However, they were more concerned that the ECB could charge a higher rate of interest on the loans and this would have been more damaging for the State.
The dramatic increase in exceptional liquidity assistance (ELA) loans from the Central Bank to the Irish banks to cover lost deposits forced the ECB to write to the government on November 12th, 2010.
Mr Trichet asked Mr Lenihan if Ireland would be applying for a programme. The ECB also raised the possibility of a heavy deleveraging of the banks to reduce their dependence on Central Bank funding over a period of months rather than years. Such a rapid disposal of assets with costly credit enhancements to entice buyers would have triggered an even heavier cash call on the State.
Government officials did not take the threat of the withdrawal of ELA loans as seriously as the possibility that the ECB could at “the stroke of a pen” increase the interest rate charged on those loans, said one well-placed source.
Today marks the one-year anniversary of the Government’s application for the State’s bailout by the European Union and the International Monetary Fund, which agreed to lend €67.5 billion.
The banks’ reliance on ELA loans rose sharply to €34.6 billion at the end of October 2010 and €44.6 billion a month later from €21 billion in September 2010.
The loans were provided as the banks lost deposits due to downgrades in the credit rating of the State, the guarantor of the banks.
By the end of 2010, ELA loans had reached €51 billion in addition to the €100 billion the ECB had provided through regular lending.
Anglo Irish Bank accounted for most of the ELA loans which are provided by the Irish Central Bank but approved by the ECB.
Speaking to Irish Times economics editor Dan O’Brien earlier this year, Mr Lenihan said that from early September 2010 the ECB were “becoming hostile to their collateral dependence on Ireland”. Senior officials familiar with Mr Lenihan’s position believed the ECB had grown nervous that it was in effect funding the State and moving from monetary to fiscal policy, which was outside its remit, by providing loans for the wind-down of State-owned Anglo.
This was outside the regular financing provided by the ECB.
Mr Lenihan said that the ECB had a role as the lender of last resort and had to “assist any member state’s banking system that’s running out of funding”.
One well-placed source familiar with the events leading up to Ireland’s bailout said Mr Lenihan had argued that the US Federal Reserve would have had no similar reservations about funding Anglo.
The source said he believed that the ECB was concerned that its heavy exposure to Ireland left it in a vulnerable negotiating position.
Mr Lenihan also raised the possibility of a “precautionary” credit line to avoid a full bailout in the weeks leading to the actual bailout. He believed the Government could convince the markets of Ireland’s recovery prospects with the publication of a detailed plan in late 2010 and borrow again for the second half of 2011 as the State was funded until mid-2011.
A precautionary credit line, which the IMF provides to states, would have created a contingency plan if this option failed to work.
Ultimately, this idea proved academic as the deteriorating debt crisis would have inevitably forced the State to accept a full bailout.