Jean-Claude Trichet warned Ireland crisis funds propping up collapsed banks in 2010 would be withdrawn unless they asked for a rescue package
‘With regard to threats, the ECB does not operate that way. Jean-Claude Trichet is a perfect gentleman.” That’s what Michael Noonan told me in the Dail Chamber on November 2, 2011. In light of Trichet’s 2010 letter, published this week, that’s a pretty extraordinary thing for him to have said. Because unlike the rest of us, he had access to the letter – and the letter contains a direct and serious threat, along with a set of demands no Central Bank has the right to make of any democratically elected government.
The minister and I were debating a $1bn payment being made that day to Anglo Irish Bank bondholders – the type of payment Mr Noonan vehemently opposed in Opposition. What he said on the topic just a few weeks before the 2011 General Election is relevant to Trichet’s letter.
“What legal or moral compulsion is there on Ireland to honour in full debt incurred by Irish banks when there was no State involvement in the arrangements? These loans were entered into freely by willing lenders and borrowers with absolutely no State participation…It is obscene that the liability for these loans is now being transferred to the Irish taxpayer, in many respects to the poorest of the Irish taxpayers… What a disaster and an obscenity…There must be transparent, open, negotiated burden sharing of bank debt.”
An excellent speech, making it crystal clear that Michael Noonan, and a Fine Gael-led government, would stand firm on behalf of the Irish people. While he was talking about the payment of bondholders, the logic applies just as well to the European Central Bank (ECB).
Let’s stay with Anglo. When the global credit crunch arrived in 2008, Anglo bankers couldn’t get their hands on any more foreign money. Citizens stopped buying over-priced properties from developers, who then couldn’t pay back their loans to Anglo. So Anglo ran out of money and was in danger of not being able to pay back its loans to other European banks. So the ECB stepped in, and provided Anglo with something called Emergency Liquidity Assistance (ELA), or ‘cheap loans’. By the time Trichet wrote his letter, the ECB had nearly €50bn of its money in the Irish banks.
Why did the ECB do this? To protect Anglo? To help Ireland? No – it did it to protect the eurozone banking system. It wanted to avoid a loss of confidence in the banks Anglo owed that money to, which is where the contagion might have come from. The ECB loaned that money to private banks operating in Ireland to protect other private banks operating elsewhere.
But in his 2010 letter, Jean- Claude Trichet, the “perfect gentleman”, demanded these loans be underwritten by the Irish people. To use Michael Noonan’s own argument, even though “the loans were entered into freely by willing lenders and borrowers with absolutely no State participation”, Trichet demanded that “the liability for these loans (be) transferred to the Irish taxpayer.” And if Ireland didn’t accede to this? Jean-Claude would pull the ECB’s money out of the Irish banks, forcing them to close. Bear in mind that the ECB loaned tens of billions to Anglo et al before the State guarantee was put in place. This is just as much “a disaster and an obscenity” as forcing the Irish people to take on the liabilities of the unguaranteed bondholders.
But Trichet had far more to say about what Ireland must do. The first demand was that we enter a Troika programme – which was not entirely unreasonable. But the second demand was that the Irish Government commit to “undertake decisive actions in…structural reforms.” What does that mean? It means that you, the Irish Government, will change the way you run your country to a way we, in the banking sector, prefer. Ireland’s first Troika agreement was put in place just weeks after Trichet wrote his letter, and it specified two structural reforms. The first concerns measures to increase competition in the electricity and gas sectors.
Here’s the second: “The government will have undertaken an independent assessment of transfer of responsibility for water services provision from local authorities to a water utility, and prepare proposals for implementation, as appropriate with a view to start charging in 2012/2013.” Yes indeed.
Central Banks were always controlled by democratically elected governments. The problem is that, coming up to elections, some governments had a tendency to instruct their central banks to do things like printing loads of money – which is good for votes, but bad for most everything else. So there has been a move recently to make central banks independent of governments. What nobody imagined was that the pendulum would swing the other way – that Central Banks would start telling governments how to run public services. But that’s exactly what the ECB did – and it’s a deadly serious erosion of the democratic process.
Under European law, the ECB has one primary objective – to keep inflation in the eurozone area to just below 2pc. It has no mandate or power, whatsoever, in dictating to sovereign nations as to how they run their countries, or fund their water systems. The list of structural reforms grew substantially over the course of the Troika programme – but it started with water. I would encourage anyone who thinks Irish Water was not set up by the Troika, with a view to privatising it, to read the December 2010 agreement. Trichet’s letter greatly strengthens the case for a constitutional amendment guaranteeing the public ownership of our water system in Ireland.
It is unclear why Michael Noonan, having read Trichet’s letter, would state that “With regard to threats, the ECB does not operate that way. Jean-Claude Trichet is a perfect gentleman.” The letter makes it clear that Trichet insisted on the socialisation of private debts, something our Finance Minister described himself as an obscenity. It demonstrates a very clear treat made by the ECB. And it shines a light on a central bank that believes it can and should dictate to sovereign states as to how they should organise their public services.
Maybe the explanation lies not in economics or political science, but in psychology. Here’s how Stockholm syndrome is defined: “A psychological phenomenon in which hostages express empathy and sympathy and have positive feelings toward their captors, sometimes to the point of defending and identifying with them.” A perfect gentleman indeed.