Any fool would have known to call the ECB’s bluff – Constantin Gurdgiev
In recent weeks, a new circus has pitched its tents in Merrion Street. Courtesy of Professor Karl Whelan’s well placed article on the forbes.com website, and the untiring efforts of Gavin Sheridan of thestory.ie, the infamous letters from the ECB chief, Jean Claude Trichet to the late Minister for Finance, Brian Lenihan, in October and November 2010 have forced the bank guarantee to the front pages of our newspapers once again.
We can only speculate as to Minister Noonan’s motives for belatedly promising to publish the letters contrary to previous decisions from his department. My suspicion is that the Minister is interested in using the letters as a pressure point on the ECB in the ‘seismic’ debt restructuring effort that he is allegedly engaged in. This has, so far, produced zero results.
The added impetus to act came from the simple fact that the ECB correspondence was brought straight to the attention of international business leaders who read forbes.com. Nothing is capable of penetrating the skulls of the Irish establishment as effectively as bad international publicity for their thiefdom.
Finally, bringing up the topic around the time when the country is starting to focus on Budget 2013 can be seen as softening the taxpayers to a host of forthcoming tax hikes. The argument here is that the ‘bad guys from the ECB’ have dictated our policies since October 2010.
However, the charade surrounding the letters is revealing of something much more significant than either possible Ministerial plans or the well-known proto-Pavlovian reactions of the Irish elite to bad international publicity. The real importance of the letters is not in the factual discourse they contain, but in the revelations they provide about the governance system that we call Irish representative democracy.
The core threat contained in the letters, as revealed recently by the Irish Times, is that, faced – as it was – with excessive demand for bank financing, the ECB would have deemed Irish Government Guarantees and securities ineligible as the collateral for Irish bank borrowings from the ECB. That would have resulted in the shutting off of the ECB’s liquidity supply to the Irish banks and either total insolvency of the Irish banking system – and Ireland’s forced exit from the euro system – or the transfer of the funding burden to the Central Bank’s own ELA line of funds as has happened on two occasions with Greek banks.
The Irish Government response to these alleged threats was to assume they were credible and surrender to the diktat of the ECB.
What concerns me in the whole affair is the myth that the then-Minister for Finance, his advisers, the Department, plus the Central Bank and the other authorities of the Irish State actually acted to the full extent of their capabilities to protect the interest of the taxpayers and the State.
There is absolutely no logic that would suggest that the ECB threat, even if it was real, was credible. At the time, Irish banks were indeed borrowing some €150 billion worth of funds from a combination of ECB and Central Bank of Ireland sources. Turning off the liquidity flows to Irish banks would have triggered a banking-system collapse that would have been at least two times larger than the €150 billion in borrowing and would have immediately crystallised all losses on ECB lending to the Irish banks. In addition, the move would have spelled disaster for the peripheral euro area banks, as it would have undermined the credibility of the ECB commitment to underwrite liquidity supply to distressed banks in countries other than Ireland.
Even a panic-stricken high school-dropout would understand this. Highly paid, seasoned professionals in senior departmental and advisory roles should have spotted and anticipated this even before the letters left Frankfurt.
Which, in turn, raises another set of questions: Where were the Government advisers and the senior civil servants, the ones who are today still in the positions of considerable power and authority? If the competence of the Government can be tested in elections, who tests the competence of the permanent elite?
Sadly, the answers to these questions are unlikely to arise in the wake of the release of these ECB letters. These questions are not even being asked in the media. In fact, even if the questions were to be raised, the outcome of any process of inquiry would inevitably find no culpability or responsibility for any adverse finding that could possibly challenge the Croke Park-enshrined indemnification of the public sector against any accountability.
The wall of silence stretches from both the Official Left and the Official Right of Irish politics on the topic of competency among the Irish public sector elite. The objective of the entire political spectrum in Ireland remains the evasion of responsibility for the reckless and mindless destruction of the economy perpetrated not by the ECB, but by our native captains of the State.
Dr Constantin Gurdgiev is head of research at St Columbanus AG and an adjunct lecturer in Finance at Trinity College, Dublin. He holds a PhD in Macroeconomics and Finance from Trinity College, Dublin, an MA in Economics from Johns Hopkins University and an MA in Pure Mathematics from the University of California.