Wednesday, January 15, 2014

15/1/2014: 2008 Guarantee was "fully justifiable": J-C. Trichet

Yesterday, the former head of the ECB, Jean-Claude Trichet, told the EU Parliament's Committee on Economic and Monetary Affairs that the Irish government had been correct to guarantee the banks in September 2008.

The guarantee, which ended up imposing onto the Irish taxpayers costs of EUR64bn or more (depending on how one calculates the full extent of banking measures applied, and excluding the payments on the Guarantee by the banks) was a "fully justifiable position given the very difficult circumstances [the Irish government] faced".

However, per Mr Trichet, Ireland has issued the Guarantee all on its own, based on the same advice as given to other countries. "The message from the (European) Central Bank to Dublin was the same as the message from the Central Bank to Germany, to Belgium, to France, and we were at the heat of the crisis saying clearly, beware. We know what happens after we had Lehman Brothers."

In fairness to Trichet, as he claimed yesterday, the ECB did warn on numerous occasions that prior to the crisis, there was a growing cost competitiveness gap across the euro area and that fiscal performance was insufficient for a number of countries in the region.

More on the story is here:

One way or the other, the Trichet's testimony now opens up room for the Government to put into public domain the content of the controversial letters that Trichet wrote to Minister Lenihan back in 2010 as well as full correspondence between ECB and Irish authorities back in 2008. Let's see what advice was exactly given to Ireland by the ECB on the Guarantee and subsequently.

Update: H/T to Seamus Coffey's: the letters that are yet to be released relate to 2010 exchanges between Mr Trichet and Brian Lenihan.

However, we still do not know as to what exact advice was given to Mr Lenihan by Mr Trichet and the ECB before the Guarantee of 2008. As far as I am aware, back in September 2008 there was no official ECB position on any government issuing guarantees to cover the liabilities in their banking sector. Even after Ireland issued its guarantee, there was no such position publicly formulated. In fact, Irish Government notified the ECB, the Ecofin and the Eurogroup of its decision to guarantee the banks liabilities ex-post issuing the guarantee. It did so at the same time as making the Guarantee public. The closest we know of that the Government came to potentially receiving any wisdom from the ECB of the Guarantee could have been during a phone call between Mr Trichet and Minister Lenihan that took place a week before the Guarantee issuance. As far as I am aware, we do not know the exact contents of this conversation.

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