Irish depositors would have lost all their money had the Government burned the bondholders, the ECB president has pointed out in a seven-page letter about the banking crisis.
Mario Draghi, replying in detail to a letter from Sinn Féin MEP Matt Carthy, denied comprehensively forcing Ireland to pay off the senior bondholders in Anglo Irish and the other banks that cost more than €67bn.
He showed, step by step, that the decisions which brought the country to its knees were taken by the government, either by acts of omission or commission from 2008 and before.
He pointed out that Ireland did not have legislation that would protect depositors and so they were on an equal footing with senior bank bondholders under Irish law and would have to suffer the same.
If the government had tried to burn the bondholders, it would have put AIB and Bank of Ireland, which acted as a stabilising force at the time, in danger, Mr Draghi said.
This, rather than any other element, led the government to not burn the bondholders, he said.
Economist Seamus Coffey said Mr Draghi was stating facts and since there was no law in Ireland that ensured “depositor preference” at the time, the government had few options.
“They could have forced losses on senior bondholders and paid back the depositors their money later. But this would have required the State to have billions of euro upfront, which the State did not have,” he said.
Mr Coffey added that the contents of the letter were “fair enough”. The blanket bank guarantee and lack of bank supervision led to the crisis — “nobody forced us to borrow money or pay 10 times the worth of a field for development”, he said.
The letter also goes into some detail again about the role of the ECB in the events leading up to the bailout. It points out that burden-sharing under the rules of the eurosystem could have been considered a default that could have shut Irish banks out of funding.
Mr Coffey also points out that at the time, because Ireland was shut out of the markets, the banks were entirely reliant on the ECB making funds available to keep the ATMs working in November 2010.
The ECB had provided €140bn, 85% of Ireland’s GDP, and an unprecedented quarter of the ECB’s total lending at the time, despite Ireland’s share capital of the ECB being about 1%.
“This is why the ECB was anxious for Ireland to take a bailout — to save its funds and not save the French and German banks,” he said.
Had Ireland refused the bailout, it would have resulted “in a different sort of bad to what we are going through”, he said.
The government, Mr Draghi said, could have decided to burn some senior bondholders before the start of the programme, especially given the grave state of Anglo Irish Bank — but this was not pursued by the State. And the guarantee prevented it happening from 2008 to 2010.
Mr Draghi said the ECB did not have any authority to instruct any eurozone government. and the decision on the resolution of Irish credit institutions was taken by the Irish authorities in accordance with the EU/IMF financial assistance programme.
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