Trichet letter revealed: ECB threatened to stop emergency funding unless Ireland took bailout

The European Central Bank (ECB) explicitly threatened in late November 2010 to cut off emergency funding from the Irish banking system, unless Ireland immediately applied for a bailout and agreed a programme of austerity and bank recapitalisation.

The letter from then ECB president, Jean-Claude Trichet, to former finance minister Brian Lenihan – marked “secret” – was sent on November 19th, 2010. A copy has been obtained by The Irish Times. Its publication is due to be considered at a meeting of the ECB governing council today.

The letter states that the governing council of the ECB would only agree to provide further emergency liquidity assistance (ELA) to the banks if it received “in writing a commitment” from the government to apply immediately for a bailout.

It said that the request for financial assistance had to contain a commitment to budget cutbacks and a restructuring of the financial sector.

Also, it said that the restructuring plan must include the provision of the necessary capital to the Irish banking system and that the government had to agree to underwrite the repayment of the ELA to the Central Bank.

ELA was special funding provided to the banks who no longer were able to draw down normal ECB lending. Around €50 billion had been extended to Irish banks at the time – with additional funds approved by the ECB the day before.

A failure to continue this funding would have threatened their ability to stay open and provide cash to the public.

Swift response

The letter was sent the day after Central Bank governor Patrick Honohan appeared on Morning Ireland to say Ireland had no option but to apply for support. The ECB letter called for a “swift response” from the government.

Two days later, on November 21st, the formal application for the bailout was made.

The ECB council was due to consider the publication of the letter today, and it is thought they may also release earlier correspondence.

The ECB would be expected to argue that its financial exposure to Ireland and the risk that the money would not be repaid left it with no option but to try to secure its position. Critics will say that the ECB overstepped the mark in dictating to the government.

The letter also refers to an earlier letter of October 15th.