ECB Placed Undue Pressure on Ireland, Crisis Inquiry Finds

  • ECB advised Ireland not to impose losses on bank bondholders
  • Inquiry head says report not about finding `smoking gun'

Jean-Claude Trichet

Hannelore Foerster/Bloomberg

The European Central Bank exerted “undue pressure” on Ireland during the nation’s financial crisis, a parliamentary inquiry into the collapse of its banks concluded.

Ireland rescued its financial industry after the worst real-estate bust in western Europe, injecting about 64 billion euros ($69.6 billion) into the system. In 2010, with losses mounting after the state’s guarantee of the country’s domestic banks, the government was forced to seek an international bailout. Four years later, Prime Minister Enda Kenny set up an inquiry to uncover the “full truth” about the crisis.

Much of the debate centered around Ireland’s decision not to impose losses on investors in senior bank bonds, a move that amplified the taxpayer costs of the crisis. Finance Minister Michael Noonan told the inquiry that Jean-Claude Trichet, the former president of the ECB, had told him a “bomb would go off in Dublin” if the government went ahead with a haircut.

In April, Trichet said such language "would have been totally not in line with the relationship I had with the government.” Trichet also said the ECB had advised, rather than ordered, Ireland. The risks from burning bond holders “may have far outweighed” potential gains, said Trichet.

“The ECB position on imposing losses on senior bondholders contributed to the inappropriate placing of significant banking debts on the Irish citizen,” the committee said its report in Dublin on Wednesday.

In April, Trichet also said the ECB had advised, rather than ordered, Ireland not to impose losses on senior bank bond holders during the crisis. The risks to Ireland from burning bond holders “may have far outweighed” potential gains, said Trichet.

Snap Guarantee

Ireland introduced a snap guarantee in September 2008 of almost all its banks’ liabilities, weeks after the collapse of Lehman Brothers Holdings Inc sparked a global financial crisis.

Irish authorities didn’t carry out a “deep dive” probe of the banks’ balance sheets before introducing the guarantee, the report said. The guarantee “was decided upon in the absence of accurate information about the underlying health of the financial institutions.”

Trichet told the inquiry that “all governments were shocked by the fact that one particular country was taking an extraordinary decision” to underwrite its bank, a move which helped push the government’s borrowing costs to unsustainable levels.

During the inquiry, the committee criticized a lack of engagement from the ECB.

“On many occasions since the start of the Irish program, the ECB has been transparent regarding its role in supporting Ireland throughout the crisis, addressing the issues mentioned in the report in various formats and settings, including in the context of its accountability to the European Parliament,” the ECB said in an e-mailed response to a request for comment.

The inquiry also said banks had dropped prudent lending policies before the crash, while light -touch regulation and government decisions also contributed to the bust.

“The report was never about finding some smoking gun, ” Ciaran Lynch, chairman of the inquiry a Labour Party lawmaker, told reporters. “ It was about providing the public with the best explanation possible.”

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