ECB refusal on bondholders 'left public with inappropriate burden'

Shared responsibility ‘does not mean that nobody was responsible’, says FF’s McGrath

The refusal of the European Central Bank to allow the country to force losses on to bondholders left the Irish public facing an inappropriate share of banking debts, the Oireachtas banking inquiry has found.

The final report of the cross-party inquiry, which was published on Wednesday, was highly critical of the Central Bank, the financial regulator, the banks and the then government.

The report found there was not one single event or decision that led to the collapse of Ireland’s banking institutions, but a cumulative series of events and decisions.

Saying that there was a shared responsibility for the banking crisis,“does not mean that nobody was responsible,” Fianna Fáil TD Michael McGrath said.

“It means a lot of people were responsible: the banks themselves, those at a senior level within the financial regulator and the Central Bank, and, yes, those at a government level in setting the fiscal and economic strategy – and those involved on a European level.”

The committee found that the failure of the banks was the sole responsibility of the senior management, and that the financial regulator and the Central Bank had the powers to intervene, but did not.

The 456-page report, which makes 74 findings and 29 recommendations, concluded that the Fianna Fáil/Green Party government had eroded the tax base in the years leading up to the crisis.

Sufficient analysis

In addition, the government did not do any sufficient analysis of the cost, benefits or impact of the tax incentives that it introduced, or those that had been introduced when Fianna Fáil shared power with the PDs.

Budget spending plans were exceeded every year, bar one, before the crisis. The inquiry found the main opposition parties, including Fine Gael and Labour, had all called for higher spending and lower taxes.

The blanket bank guarantee covering all six institutions, which was declared after an all-night drama on September 29th, 2008, had been in preparation since January, it found.

A draft press release prepared by the Central Bank shortly after 9pm announcing a six-month guarantee only covered deposits and interbank lending. Another release later claimed the banks were solvent, but a final version removed that claim.

The inquiry confirmed that the Central Bank had measures in place to ensure all banks would open on September 30th and that no bank would have defaulted if a guarantee had not been agreed that night.

The committee found that the information available to the decision makers on the night in question was inadequate and that the government was advised all six banks were solvent.

The strongest criticism is directed at the European Central Bank, which explicitly threatened to pull emergency liquidity assistance if Ireland tried to impose losses on senior bondholders in March 2011.

However, Minister for Finance Michael Noonan only spoke directly to the former president of the Frankfurt-based ECB, Jean-Claude Trichet, twice about the issue.

The report says attorney general Paul Gallagher explored the possibility of burden sharing with senior bondholders with legal assistance from the International Monetary Fund in November 2010.

The ECB’s refusal left Irish taxpayers facing billions more in debt. Mr McGrath said the extra sum was about €9.1 billion.

Threatened funding

The report says the ECB threatened Ireland on November 19th, 2010, that it would discontinue emergency funding if the country did not enter a bailout. Nine days later, it did so.

Fianna Fáil’s Senator Marc MacSharry criticised the ECB for its refusal to co-operate with the inquiry, saying its engagement was nowhere near the level a European member state should expect. The lack of co-operation highlighted the democratic deficit facing EU states when dealing with the institution, said Fine Gael TD Eoghan Murphy.

The financial regulator’s supervision of the banks was condemned, particularly since a large swathe of powers, such as revoking a banking licence, placing conditions on a licence, or sanctioning a bank’s administrators, were left unused.

Banks were able to breach property lending limits with impunity. By the time the crisis hit in 2008, the banks had moved away from prudent lending to betting on higher risk investments. Excessive pay for bank executives encouraged this. In future, pay should be clawed back if problems emerged, the long- running inquiry found.