The ECB may not be the friend it seems
BUSINESS OPINION:Suggestions that bailout may in fact be to protect European interests may not be too wide of mark
WHEN THE history of Ireland’s banking and fiscal collapse comes to be written, the role of the European Central Bank may well turn out to be the most controversial.
The question will be whether they really were some sort of honest broker who in the end forced us to confront our predicament or were they in fact the villain of the piece?
Both narratives have some resonance but the former is very much in the ascendant. The weary relief that characterises most people’s response to the arrival of the ECB, the European Commission and the International Monetary to negotiate a loan for Ireland is consistent with the view that time has finally been called by impartial outsiders on our botched effort to sort out the mess we have made of the Irish banks and our finances.
The main elements of the story are that the banks’ problems are so deep that they exceed the fiscal capacity of the State. We cannot borrow enough money from the bond markets to sort them out and also fund the exchequer deficit, so we have no choice but to turn to the European Financial Stability Facility and the IMF.
While the later point is unfortunately true, the role of the ECB in how we came to this sorry pass is worthy of some scrutiny. A more critical analysis might conclude that its policies over the last two years added greatly to our problems and ultimately its own. And it is the ECB’s problems as much as ours that brought things to a head last week.
One of the main differences between how the two-year-old crisis has played out in Europe and America has been the refusal of the ECB to allow any significant bank fail.
It is worth noting in this regard that Jean Claude Trichet rang Brian Lenihan over that fateful weekend in September 2008 to impress on him the importance of not letting any Irish bank fail. The obvious inference was that the ECB would play its part.
Trichet was, of course, pushing at an open door given the other factors at play in Ireland: profound regulatory failure combined with the inability of the administration or the banks to comprehend the scope of the problem.
But the fact remains that the Government could not have gone down the road it did without the support of the ECB. Frankfurt has provided the liquidity needed to make the National Asset Management Agency function and was committed to a similar facility for the winding up of Anglo.
Above all it has provided liquidity to the Irish system to such an extent that Irish banks account for something like one in every four euro it makes available through its emergency measures. We kept our end of the bargain. No Irish bank has failed although two are to be closed, but crucially their secured creditors are to be paid.
The reason the ECB did this was because it also misjudged the Irish banking crisis. Its calculation that stability in the euro system was best served by letting the Irish banks limp on with massive liquidity support was incorrect.
Instead a situation arose whereby the problems in the Irish banks were not dealt with as they should have been – through letting them fail or some sort of debt for equity swap – and the ECB found its own balance sheet contaminated by the amount of support it had to extend to Ireland as a consequence. Meanwhile, the Irish exchequer is left with a bill it cannot afford.
Now, in order to extract itself from this mess, the ECB has in effect withdrawn its support and said that the Irish taxpayer must now borrow even more money and try – for a third time – to fix the knackered banks so the ECB can get its money back.
The alternative to the Irish taxpayer stumping up – letting the badly broken AIB and Anglo Irish banks fail or default on their bonds – remains resolutely off the agenda at the insistence of the ECB. The reason being the same as it was in September 2008: the Irish banks are systemic in the European context . The big losers if either bank failed are the German, French and other European banks and institution that funded their insane lending sprees. And while these institutions and the euro system are probably strong enough now – as against two years ago – to absorb the loss, the fear remains that an Irish bank failure would trigger some sort of secondary European banking crisis.
Many are of the view that this crisis is in fact inevitable due to the level of debt in the system across Europe and the ECB – and the other European institutions should really focus their energies on getting ready to deal with it in the immediate future.
But, for the time being, the consensus seems to be that it makes more sense to try and put the fire out in Ireland by pushing the burden on to the Irish tax payer and its exhausted administration.
The Government may appear more mendacious and delusional by the day, but when they say this is a European problem they actually do have a point and history could well prove them right.