ECB letters shed new light on 2010 Ireland bailout

AP News
Posted: Nov 06, 2014 10:01 AM

DUBLIN (AP) — Long-confidential letters between European Central Bank and Irish government leaders document how Dublin's cash-starved banks were threatened with collapse unless Ireland sought an international bailout.

The 2010 letters published Thursday by the Frankfurt-based bank paint a stark picture of negotiations between former ECB President Jean-Claude Trichet and former Irish Finance Minister Brian Lenihan in the days before Ireland's reluctant acceptance of a 67.5 billion euro ($92 billion) package of rescue loans from European Union partners and the International Monetary Fund.

The aid was used to recapitalize and restructure six largely state-owned banks and fund government spending through the end of 2013, when Ireland resumed normal borrowing on bond markets.

Trichet's key letter dated Friday, Nov. 19, 2010, and labeled secret, warned Lenihan that the ECB would not keep rolling over and increasing its emergency financing of Irish banks unless Ireland sought an international rescue before markets reopened Monday.

At that time, all of Ireland's banks and the government itself had been forced out of bond markets by exorbitant debt-funding costs. The ECB's cash supply for those banks had rapidly soared above 50 billion euros, dominating Frankfurt's so-called emergency liquidity assistance support for the entire eurozone. Trichet argued that the central bank could not legally keep providing this aid — whose repayment was guaranteed, with increasing implausibility, by vulnerable Irish government bonds — unless Ireland accepted drastic and immediate measures.

Trichet spelled these out in four take-it-or-leave-it points: Ireland must request help, must agree to pursue major cost-cutting and reform in cooperation with the EU-ECB-IMF "troika," must use much of the aid to strengthen Irish banks, and must guarantee to repay all further ECB liquidity aid to banks.

Lenihan, who the previous week had insisted publicly that Ireland needed no bailout, wrote back that Sunday to confirm acceptance.

"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," wrote Lenihan, who died of cancer in 2011.



Four letters,