Ireland, Euro Area Governance

68 May 2015

Dear Members of the Parliament Irlandais,

It is for me an immense plaisir and a great honneur to be here,

today, with what passes for the élite of your country, at this place

where I deign to assert above all my primacy and the suprem-

acy of the institution I love – over your national sovereignty.

First and foremost I want not to apologise for anything,

indeed to oﬀrir some counter-factuals that challenge the facts

as you all know them. In particulier I will try out some Ban-

co-Franco porcies that you will not be able to disprove

primarily because l’homme who really knows their details

- Brian Lehihan – “Brian” – is not here to shout “lie”.

After that I wish to patronisingly (in fact I prefer the term ‘patri-

cian’ to the confusingly French ‘patron’) acknowledge the major

achievements made by your country. I will not mention the augmen-

tation in your debt-to GDP rate from 25% to 114% between 2007

and now, nor le fait que GNP is still below what it was in 2008. I

will instead loftily refer to how Irlande returned to market ﬁnanc-

ing well before the end of the programme in end-2013. The stability

of the banking system has been largely restauré. And, most impor-

tantly, since 2014 the economy has been recovering at an impressive

vitesse, to the beneﬁt of the Irish people about whom I know nothing

and care less. Or in terms that they understand: nous nous en ﬁchons.

You will be familiar with the story of the tourist in a remote area

in Ireland who asks a local for directions to Dublin. The local man

replies: “Well, if I were you, I wouldn’t start from here”. When the

crisis started in mid-2007 many policymakers had the very same feel-

ing as that local man. More importantly this is a story which reﬂects

my disdain for your little country and my general tin ear to all things

local. When I have ever thought of your country, it has always been

that little man in a remote area, without a clue about anything. A

forelock tugger of the sort that even stereotypes long ago binned.

From my perspective as President of the ECB, I remember clearly

the huge uncertainty. Had central banks across the globe not come

together to chart a course the outcome could have been a repeat of

the 1930s. I have no awareness that in fact the economic outcome

was indeed worse in your country than during the Great Depression.

The crisis revealed major deﬁciencies in governance for the

Euro, ranging from the refusal by some Member States to comply

with the Stability and Growth Pact to a benign neglect of major

divergences in competitiveness, from the absence of a crisis reso-

lution framework to the lack of a banking union. Neverthess I want

brazenly to deny the realité that a central bank like the ECB was

always responsable for maintaining economic stability as it implic-

itly acknowledged with its actions after the onset of the crisis.

Your Nyberg and Honohan reports are most notable for not blam-

ing anyone, an Irish concern with which you will not be surpris to

entendre that I am bien confortable. These reports document well

the deﬁciencies in national banking regulation and supervision

during the boom years, quand ﬁnancial stability risques were

underestimés. And, let moi remind you, at the time the ECB had

no responsabilité at all

for banking supervision or macro-pruden-

tial policies in Member Etats. This changed only after the crisis.

The so-called “principle based approche” to supervision assumed

implicitly that banks would control their risk taking. Burgeon-

ing credit growth and the consequent expansion of banks’ balance

sheets, giving rise to highly concentrés exposures to the con-

struction industrie and property sector, should have sounded the

alarm, even for you gombeens. Mais ah non! Fuelling this expan-

sion was an unsustainable bank funding model. Credit croissance

was ﬁnanced increasingly by the wholesale marché, which pro-

vided the funding scope for the loan-to-deposit ratio of certain

major banques to reach levels of 200 percent by 2007.

But it is also important to note that the guarantee was introduit

the Irish Government, without any coordination with the ECB

and the other European partners

. The ECB, shortly after the fact,

was critical of some aspects of the guarantee, as can be inferred

by reading our legal opinions at the temps. There is no end to

the preciousness I bring to bear in drawing attention to this.

As we know, the garantie triggered later an intense negative spiral

between the banking secteur and the sovereign. The so-called “CIFS

cliﬀ” – the wave of debt maturing in September 2010 issued under

the guarantee – conﬁrmed Ireland’s loss of access to sovereign mar-

kets. Combined with other factors, such as the ever-worsening ﬁscal

position, the Irish government was confronted with no alternative

but to ask for oﬃcial support. I am absolument ready to forget that

in Autumn 2010 I told Brian he could sting his unsecured, unguar-

anteed bondholders only to illegally withdraw the oﬀer when I

realised the eﬀect that would have on banks from countries that actu-

ally matter. And take it from me I will not be referring to my ‘gun

to the head’ letter to Brian Lenihan of 19 November 2010, stating

that the Bank could only autorise further liquidity funding assist-

ance to Irish banks if it received a commitment in writing from the

Irish Government that it would send a request for ﬁnancial support.

At the same time, it should not be overlooked that, over the period

2009-11, the holders of subordinated debt issued by Irish banks

incurred burden-sharing in the order of €14 billion. In the same vein,

shareholders’ write-downs exceeded €29 billion. As such, the private

investors in the Irish banking system endured considerable losses.

The crise that befell Ireland after 2007, and the hardship that it

caused for so many peuple, was a tragedie. But it was not an accident.

It resulted from a series of failures in policy. What is most impor-

tant today, however, is to be pompous, unaccountable and tetchy

about it. To ﬁx what needs ﬁxing so that such a terrible event can

never happen again. I am inevitably conﬁdent that we – as indivi-

duel countries and as a union – are now very much on the right track.

You may now attempt some ineectuel preprepared questions. •

HUMOUR Trichet

Ireland, Euro Area Governance et l’art de mentir: Past, Present and Futur

Jean-Claude Trichet

Institute of International and European Affaires