Banking inquiry live: Ireland was right to guarantee banks, says Jean-Claude Trichet

Consequences of bailing in senior bondholders could have ‘far outweighed the gains’

The consequences of bailing in senior bondholders in Irish banks at the time of the financial crash in late 2008 could have "far outweighed the gains", former president of the European Central Bank Jean-Claude Trichet said in Dublin today.

"This is the reason why I trust that the government of Ireland was right to take this difficult decision," Mr Trichet said an event organised by the Institute of International and European Affairs (IIEA).

He delivered a speech to an invited audience on Governance of the Euro zone: Past, Present and Future.

Mr Trichet said the Government’s decision to issue a blanket guarantee to the Irish banks on the night of September 29th, 2008, was taken without any co-ordination with the ECB and our EU partners.


“As we know, the guarantee triggered later an intense negative spiral between the banking sector and the sovereign,” he said.

He described the crisis in Ireland as being “more acute than in any other country” at the time.

Mr Trichet said the Government’s original two-year bank guarantee prevented the State from “fully bailing in the senior bondholders of Anglo Irish Bank well before the start of the [Troika bailout] programme” in late 2010.

“The consensus view - and I reiterate, it was still a consensus in late 2010 - was that burden-sharing with senior bank bondholders at such a critical juncture was too risky to countenance.”

Mr Trichet noted that burden-sharing of €14 billion involving subordinated debt did occur in Ireland, while the banks’ shareholders lost €29 billion between them. “The private investors in the Irish banking system endured considerable losses,” he said.

Mr Trichet said that when burden sharing was discussed in the spring of 2011 with the Fine Gael-Labour Party government, it was "made clear by the Irish authorities that they did not wish to pursue the issue" in relation to AIB and Bank of Ireland.

“These banks had a retail deposit base that had remained relatively stable during the years of turbulence and acted as a stabilising force,” he said.

Mr Trichet said anything that could have undermined confidence or called into question the safety of those deposits and led to outflows - even imposing burden-sharing on Anglo Irish Bank and Irish Nationwide - could have placed “additional funding and deleveraging pressures on the system”, which was already under significant pressure.

Mr Trichet’s presence at the IIEA also allowed the Oireachtas Banking Inquiry to ask him questions about the ECB’s role around the financial crisis in 2008 in a carefully choreographed appearance.

Mr Trichet said the financial crisis that hit Ireland from 2008 and the “hardship it caused for so many people was a tragedy - but it was not an accident”.

“It resulted from a series of failures in domestic and European governance - failures that could have been acted on earlier,” he added.

Mr Trichet said the Irish crisis was the result not only of fragility in the global financial system but was also because of “major deficiencies in both European and domestic governance”.

He added the Stability and Growth Pact had not been “properly implemented”.

“If all euro area countries would have lived up to their promises when entering the euro area, the crisis would not have begun with such a grave situation in Greece nor spread so dramatically across countries, including those with lower initial debt levels such as Ireland,” he explained.

He said there was also no European framework to monitor and correct financial imbalances or appropriate crisis management and resolution tools to deal with the financial crash.

In Ireland, he said, the country became “overly reliant” on the construction sector as a source of employment and government revenues.

“Burgeoning credit growth and the consequent expansion of banks’ balance sheets should have been causes for concern in themselves, but this expansion that gave rise to highly concentrated exposures to the construction industry and property sector should have sounded the alarm,” he said.

Fuelling this expansion was an “unsustainable banking funding model”.

Mr Trichet said the ECB had “played its role” in supporting the Irish economy through the financial crisis and helped to prevent that crisis from becoming a great depression.

Given the scale of the Irish crisis, the recent economic recovery has been “quite a turnaround”, he said, adding that there was no time for complacency.

“Despite the reforms of recent years, it would be naive to assume that the Irish growth model is no longer susceptible to boom-bust cycles,” he said.

The Central Bank of Ireland’s recently introduced rules to limit mortgage lending could be “crucial” in preventing “another housing boom”.

“What is most important today, however is to learn the lessons for the future. To fix what needs fixing at the national, European and global levels, so that such a terrible event can never happen again,” he said.

He also paid tribute to the late former minister for finance Brian Lenihan during his speech.

Mr Trichet, who originally refused to give evidence to the Banking Inquiry on the basis that the ECB is accountable to the European Parliament and not to national parliaments, is taking questions from the inquiry for 90 minutes after his speech in Dublin.

It is likely that Mr Trichet will be questioned about the role played by the ECB in the banking guarantee decision in September 2008 and whether the bank was correct to oppose any burning of senior bondholders by Ireland.

Members of the Banking Inquiry are in the audience at the Royal Hospital Kilmainham where Mr Trichet delivered his speech from 2.30pm.

The role of Mr Trichet and the ECB in pressing Ireland into a bailout has been the subject of controversy since it occurred in December 2010.

In a letter to then minister for finance Brian Lenihan weeks beforehand, Mr Trichet warned that the ECB would stop providing emergency loans to the State’s banks if the Government failed to agree to a rescue.

Weeks later, then Minister for justice Dermot Ahern said "people from within the ECB" were "trying to bounce" the country into a rescue programme.

This morning's Banking Inquiry session saw former Bank of Ireland chief executive Brian Goggin give evidence.