The Trichet-Lenihan letters – the full text


Letter 1

Trichet to Lenihan


Mr Brian Lenihan Tánaiste and Minister Finance Government Buildings Upper Merrion Street Dublin 2 Ireland

Frankfurt, 15 October 2010

Dear Minister, I refer to our last phone conversation. As you know the ECB greatly appreciates the recent commitment of the Irish government to develop, in close co-operation with the Commission in liaison with the ECB, a multi-annual economic and fiscal adjustment strategy. Given Ireland’s convincing track-record in fiscal adjustment, I am confident that your medium-term strategy will be successful in restoring fiscal sustainability and financial sector soundness.

In this context, I would like to draw your attention to a number of issues arising from the extraordinarily large provision of liquidity by the Eurosystem to Irish banks [Mr Trichet’s italics] in recent weeks.

The participation in Eurosystem credit operations is subject to rules. These include the requirement for the Eurosystem to base its lending operations with market participants on adequate collateral. Moreover, the General Documentation on Eurosystem monetary policy instruments and procedures requires our counterparties to be financially sound.

In this context, the Eurosystem may limit, exclude or suspend counterparties’ access to monetary policy instruments on the grounds of prudence and may reject or limit the use of assets in the Eurosystem credit operations by specific counterparties. The Governing Council indeed carefully monitors the Eurosystem credit granted to the banking system, in the Irish as well as in all other cases, and in particular the size of Eurosystem exposures to individual banks, the financial soundness of these banks, and the collateral they provide to the Eurosystem.

The assessment by the Governing Council of the appropriateness of its exposures to Irish banks depends very much on progress in economic policy adjustment, enhancing financial sector capital and bank restructuring.

Moreover, the provision of Emergency Liquidity Assistance (ELA) by the Central Bank of Ireland, as by any other National Central Bank of the Eurosystem, is closely monitored by the ECB’s Governing Council as it may interfere with the objectives and tasks of the Eurosystem and the prohibition of monetary financing under the Treaties. Therefore, if ELA is provided in significant amounts, the Governing Council will assess whether there is a need to impose specific conditions in order to protect the integrity of our monetary policy. In addition, in order to ensure compliance with the monetary financing prohibition, it is essential to ensure that the ELA recipient institution continues to be solvent.

Against the background of these principles, I would like to re-emphasise that the current large provision of liquidity by the Eurosystem and the Central Bank of Ireland to entities such as Anglo Irish Bank should not be taken for granted as a long-term solution. Given these principles, the Governing Council cannot commit to maintaining the size of its funding to these institutions on a permanent basis.

As I told you, a key element of the monitoring by the Governing Council of Eurosystem exposure to the Irish banking system, and the related decisions the Governing Council may take, will be its assessment of progress in implementing the four-year economic strategy that the Irish government envisages to announce in early November.

This is not only because significant parts of the Irish banking systems are partially or fully Government owned, but also because an important share of the Eurosystem exposure to Irish credit institutions is collateralised with securities issued or guaranteed by the Irish Government.

I trust that the four-year strategy will target a fiscal deficit of below 3% in 2014 and a decline in the public debt-to-GDP ratio from 2012-13 onward, based on cautious real growth forecasts, as well as a strong structural reform programme.

Future decisions by the Governing Council of the ECB regarding the terms of liquidity provision to Irish banks will thus need to take into account appropriate progress in the areas of fiscal consolidation, structural reforms and financial sector restructuring.

With my best regards, Jean-Claude Trichet Cc: Mr Olli Rehn, EU Commissioner for Economic and Monetary Affairs Mr Joaquín Almunia, EU Commissioner for Competition

Letter 2

Lenihan to Trichet

November 4th, 2010 Mr Jean Claude Trichet

4 November, 2010.

Dear President,

You will no doubt have noted the very adverse developments in the markets in recent days in relation to the widening spread of Irish Government bonds against the German bund. This issue gives rise to very serious concerns for the Irish Government particularly in relation to the potential impact on the credibility of the very significant budgetary adjustments which we have developed working closely with the European authorities. I know that this concern is one that is strongly shared by you.

The increase in spreads is of course underpinned by a variety of factors. International concerns regarding the budgetary and banking position in Ireland have for some months contributed to a situation where Irish spreads were consistently higher than those in most other Member States. As you know, the Irish authorities are embarking on a significant continuation and intensification of our policy actions to achieve budgetary sustainability. It is absolutely vital that these endeavours are successful in order to secure fiscal and, indeed, overall financial stability in Ireland.

However, it is very noticeable that over recent days the widening in spreads has accelerated on the basis of speculation on the conditions that may be necessary to apply to the debt of countries accessing the European Financial Stability Facility and reported policy comments of senior political figures. It is the case that many market commentators attribute these comments as being the primary driver of the increased spreads of peripheral countries, including Ireland, in recent days.

I fully appreciate that there are valid legitimate policy perspectives for individual Member States to hold and disclose, but the reality is that already difficult market conditions are being worsened.

I am sure that you will agree that it [is] imperative that comments, particularly from senior political figures within the euro zone, are consistent in their content and do not, as an unintended consequence, undermine the efforts of Member States such as Ireland to address the serious difficulties that they are continuing to confront.

I hope you agree with me on this matter and will continue to use your influence to help calm markets.

I enclose for reference some press commentary from recent days in both domestic and international media on this point as well as the latest details on the spreads of 10-year Government bonds in Ireland and other peripheral euro zone countries. Yours sincerely, Brian Lenihan TD, Minister for Finance

Letter 3

Trichet to Lenihan

November 19th, 2010



Jean-Claude TRICHET President

Mr Brian Lenihan Tánaiste and Minister of Finance Government Buildings Upper Merrion Street Dublin 2, Ireland

Frankfurt, 19 November 2010

Dear Minister,

As you are aware from my previous letter dated 15 October, the provision of Emergency Liquidity Assistance (ELA) by the Central Bank of Ireland, as by any other national central bank of the Eurosystem, is closely monitored by the Governing Council of the European Central Bank (ECB) as it may interfere with the objectives and tasks of the Eurosystem and may contravene the prohibition of monetary financing.

Therefore, whenever ELA is provided in significant amounts, the Governing Council needs to assess whether it is appropriate to impose specific conditions in order to protect the integrity of our monetary policy. In addition, in order to ensure compliance with the prohibition of monetary financing, it is essential to ensure that ELA recipient institutions continue to be solvent.

As I indicated at the recent Eurogroup meeting, the exposure of the Eurosystem and of the Central Bank of Ireland vis-a-vis Irish financial institutions has risen significantly over the past few months to levels that we consider with great concern. Recent developments can only add to these concerns. As Patrick Honohan knows, the Governing Council has been asked yesterday to authorise new liquidity assistance, which it did.

But all these considerations have implications for the assessment of the solvency of the institutions which are currently receiving ELA. It is the position of the Governing Council that it is only if we receive in writing a commitment from the Irish government vis-a-vis the Eurosystem on the four following points that we can authorise further provisions of ELA to Irish financial institutions: 1) The Irish government shall send a request for financial support to the Eurogroup; 2) The request shall include the commitment to undertake decisive actions in the areas of fiscal consolidation, structural reforms and financial sector restructuring, in agreement with the European Commission, the International Monetary Fund and the ECB; 3) The plan for the restructuring of the Irish financial sector shall include the provision of the necessary capital to those Irish banks needing it and will be funded by the financial resources provided at the European and international level to the Irish government as well as by financial means currently available to the Irish government, including existing cash reserves of the Irish government; 4) The repayment of the funds provided in the form of ELA shall be fully guaranteed by the Irish government, which would ensure the payment of immediate compensation to the Central Bank of Ireland in the event of missed payments on the side of the recipient institutions.

I am sure that you are aware that a swift response is needed before markets open next week, as evidenced by recent market tensions which may further escalate, possibly in a disruptive way, if no concrete action is taken by the Irish government on the points I mention above.

Besides the issue of the provision of ELA, the Governing Council of the ECB is extremely concerned about the very large overall credit exposure of the Eurosystem towards the Irish banking system.

The Governing Council constantly monitors the credit granted to the banking system, not only in Ireland but in all euro area countries, and in particular the size of Eurosystem exposures to individual banks, the financial soundness of these banks and the collateral they provide to the Eurosystem.

The assessment of the Governing Council on the appropriateness of the Eurosystem’s exposure to Irish banks will essentially depend on rapid and decisive progress in the formulation of a concrete action plan in the areas which have been mentioned in this letter and in its subsequent implementation.

With kind regards Jean-Claude Trichet

Cc: Mr Brian Cowen, Prime Minister

Letter 4

Lenihan to Trichet

November 21st, 2010 SECRET

Department of Finance Office of the Minister

21 November 2010

M. Jean-Claude Trichet President European Central Bank Kaiserstrasse 29 60311 Frankfurt am Main Germany

Dear Jean-Claude I refer to your letter of 19 November 2010.

First, let me say that I fully understand your concerns and that of the Governing Council in regard to the implications of the current situation of the Irish banking system. As you know, Ireland has worked very aggressively, and to the limits of our fiscal capacity, to protect and repair the banking system in the light of the dangers to financial stability both in Ireland and Europe.

For example, in September 2008, the Government introduced an extensive Bank Guarantee to seek to bolster the funding difficulties of the banks by providing a Sovereign guarantee of bank liabilities. This was quickly followed by a bank recapitalisation programme announced in December 2008 and nationalisation of Anglo Irish Bank in January 2009.

The establishment of NAMA was announced in April 2009 to remove the riskiest land and property development loans from the banks’ balance sheets. At this stage, Ireland has provided or pledged some €32 billion of capital to the banking system.

These extensive set of measures have been taken in tandem with a most extensive programme of fiscal adjustment, amounting to some €15 billion of discretionary fiscal consolidation in 2009 and 2010 so far, with a further adjustment of another €15 billion planned by 2014. Measures for 2011 alone will amount to over €6 billion. Thus, Ireland has proved so far to be flexible and aggressive in dealing with its problems and will continue to be so.

These assertive measures contributed to a substantial improvement in international sentiment towards Ireland and a partial recovery in the banks’ funding position in the first quarter of 2010. The new Financial Regulator announced the results of his PCAR exercise and required the banks to meet it by the end of the year.

The banks successfully commenced the process of accessing longer-term funding to manage the large redemptions cliff due in September. Reliance on bank funding from the Eurosystem was reduced. In addition, Bank of Ireland initiated and ultimately successfully completed its private capital raising exercise.

However it was not possible to sustain the improvement in the banking environment. As the year progressed there were a number of developments which led to a sharp reversal in financial conditions, of which the following are just some: l Following the onset of the Greek debt crisis during April, international markets became increasingly concerned regarding Ireland’s fiscal position, the strength of the Bank Guarantee and the fiscal capacity of the State to stand behind the banks. l There was a slowdown in the pace of economic recovery nationally and increasing concern regarding the speed of recovery in the international economy, particularly in the USA. l Credit rating actions and negative market sentiment exacerbated the situation. l Uncertainty about the status of bondholders in the event of access to external support added to instability. l These events led to a crisis of confidence in both the Irish banking system and increasingly the Irish Sovereign. As a result, our banks, as you know so well, have had to turn to ECB-Central Bank funding to replace their market funding, especially in September when a large number of bonds which matured under the two year Credit Institutions Financial Support (CIFS) Guarantee became due.

In order to seek to reverse these trends, I made a further comprehensive and detailed further Statement on Banking at the end of September and outlined the actions being taken to provide certainty to the international markets on the scale of bank losses. The Statement covered changes to NAMA to accelerate loan transfers and provide visibility on the final discounts expected to arise, the revised assessment of the capital positions of the banks on the basis of final expected NAMA discounts and the projected maximum capital requirements for Anglo Irish Bank.

While initially this information was initially well received, the credibility of projected bank loan losses was increasingly called into question by analysts and investors – there comes a point at which negative sentiment starts to feed on itself, even independently of underlying realities, and we are clearly at that point.

In relation to points (1) to (4) of your letter, I would like to inform you that the Irish Government has decided today to seek access to external support from the European and international support mechanisms. This grave and serious decision has been taken in the light of the developments I have outlined above and informed by your recent communications, and the advice you have conveyed to me personally and courteously in recent days.

The Government is clear, in the light of the very intensive and productive work done by Irish, European Commission, IMF and of course ECB officials, in recent days, that there is a potential programme which will be both workable and effective and which will incorporate real and significant restructuring measures in relation to the financial sector, structural reforms and fiscal consolidation, and the Government is committed to this.

Indeed, your officials in Dublin have had the opportunity to see a draft of our proposed four-year plan, so you may be aware that our fiscal and economic programme is in fact very extensive, and forms an appropriate basis for programme discussions.

It is also clear from the discussions over recent days that any programme will include provision for further capitalisation on a scale, which should convince markets that capital is not a problem.

I was very pleased to note that the intensive examination of the Irish authorities’ work on capital requirements has not indicated any new and unanticipated ‘hole’ in the banks’ capital position, and it would be helpful if this is made clear in internal and external communications. However, the fact is that the market has not accepted the current capital levels as adequate, so more must be done.

In relation to your fourth point, there are already such arrangements in place in respect of each bank in receipt of ELA which provide the assurances that you call for.

I hope that this will provide some reassurance to the Governing Council and that you will be able to reiterate in a public way the continuing practical support of the ECB for the liquidity position of the Irish banks, to help to reassure the market on this crucial point. You know that we here will not be lacking in the will to do all that is necessary on our part to protect our economy and people and to play our role in the Eurosystem.

Yours sincerely, Brian Lenihan, TD Minister for Finance