Reading between the lines of ECB letter to Brian Lenihan
Opinion: ‘Was the notion of collective responsibility used to conveniently distract from the failures of leadership and oversight?’
‘It is no secret Trichet and the ECB exerted serious pressure on the Government to accept a bailout, but the precise language and contentions in the letter will arouse much interest, given the enormity of what was at stake.’ Jean Claud Trichet, President, European Central Bank (centre) with Lucas Papademos, Vice President European Central Bank (left) and John Hurley, then Governor, Central Bank of Ireland, at Dublin Castle in May 2007. Photograph: Eric Luke Staff Photographer
There were indications during the week that a letter between European Central Bank (ECB) president Jean-Claude Trichet and former finance minister Brian Lenihan in the run-up to Ireland’s bailout in November 2010 might be published.
It is no secret Trichet and the ECB exerted serious pressure on the Government to accept a bailout, but the precise language and contentions in the letter will arouse much interest, given the enormity of what was at stake.
It is a letter which will surely loom large in historic accounts of this period, shedding light on the pressure placed on the Government by the ECB’s power to withdraw emergency funding from Irish banks.
The challenge in such historical analysis will be to assess how much weight should be attached to such correspondence. It will be interesting to see if the language employed approximates to a loaded gun: did the ECB step outside its mandate? Did Trichet threaten, directly or indirectly, to allow Irish banks to go to the wall?
These are important questions, but so too are the broader reasons for the scale of the Irish boom and bust. Trichet is the same ECB president who in Dublin in May 2004 heralded Ireland as a “model for the millions of new citizens of the European Union”. This was the same ECB that did not seem unduly concerned about lack of corporate and financial regulation in Ireland. How much was it at fault?
In 1997, Irish banks were funded entirely by Irish deposits, but by 2005 most of their funding came from abroad and could be easily removed. Economist Morgan Kelly has highlighted that between 2000 and 2008 banks found they could borrow almost any amount on international markets without security, at rates only slightly above central bank rates:
“This led to an international lending boom where bank lending in most European economies rose to around 100 per cent of national income. In Ireland, lending rose from 60 to nearly 200 per cent and most of this was funded by borrowing from overseas banks. Everything that happened in Ireland between 2000 and 2008 stems from this simple fact.”
‘A Ponzi scheme’American financial journalist Michael Lewis characterised what was going on as in effect “a Ponzi scheme”. How much of that was facilitated by the ECB? Will a focus on the ECB skew the apportioning of responsibility? What about other, Irish, culprits? Personal debt as a percentage of disposable income increased in Ireland from 89 per cent to 140 per cent between 1996 and 2006; was this the fault of borrowers or lenders?
Crucially, there has been no comprehensive official inquiry into the failings of the banks and no accountability with regard to their practices, which means the public narrative about what actually happened has remained vague and incomplete. So it is not only the European dimension to this that needs excavation.
The three reports commissioned by the Government into the collapse of the economy suggested that the burden of responsibility was broad, with insufficient surveillance, warnings not heeded and, in the words of the report of the Commission of Investigation into the Banking Sector, a property-centred “national speculative mania ... As in most manias, those caught up in it could believe and have trust in extraordinary things.”
That contention raises even more questions; it seems a trite exaggeration that exacerbates the tendency towards pseudo-historical analysis.
Was this notion of collective responsibility used to conveniently distract from the failures of leadership and oversight? Brian Lenihan asserted in 2008, “we decided as a people collectively to have this property boom. That was a collective decision we took as a people.”
Likewise, in January 2012 in Switzerland, Taoiseach Enda Kenny maintained, “What happened in our country was that people went mad borrowing.” Surely these were simplifications to the point of distortion of reality.
People did not collectively decide to “have” a property boom. A relatively small number were able to skew the market through speculation, reckless lending, lack of regulation and a refusal to reduce the inflation of the property market.
Many were encouraged to borrow beyond their means or panicked into buying through warnings that if they did not move with speed they would fail to get a foot on a much vaunted property ladder. So the idea that “we” moved from being the Most Oppressed People Ever to the Most Speculative People Ever seems hollow and lazy.
Leading Irish sociologist Tom Inglis has edited a new book, Are the Irish Different? He makes the point that “it is very easy to recreate myths about the Irish and make them into a collectively responsible group”. The danger of this approach, he argues, is that it “contaminates rigorous, scientific analysis”.
Knowing precisely how the ECB treated Ireland before and at the outset of the bailout would contribute significantly to such analysis.