The ECB Letter to Brian Lenihan

Almost three years to the day after its release was requested a letter sent by the European Central Bank to then Finance Minister  Brian Lenihan has been leaked to the Irish Times and is now in the public domain.

The letter confirms what was long suspected – that the ECB had threatened not to support the Irish economy unless it entered the troika bailout programme and agreed to recapitalise and guarantee any Irish bank that needed such support. The leak comes just before the governing council of the ECB meets to decide whether it should now officially make this correspondence public. The indications are that it will.

In early November 2011 journalist Gavin Sheridan made an official request to the ECB for access to a copy of the letter. The ECB refused on the basis that the publication of its contents would undermine Eurozone monetary policy and would threaten the financial stability of Ireland and other Eurozone countries. You can see the full exchange here but between the jigs and the reels the ECB held firm and refused access.

Working with Gavin we then appealed to the European Ombudsman complaining that the ECB had wrongly refused access on a number of grounds. You can read the full submission here.

In March 2014 the Ombudsman, Emily O’Reilly, issued a recommendation for a friendly solution saying that the ECB was justified in not releasing the letter in 2011 but given that the Eurozone and the Irish economy were no longer under imminent threat it should release the letter in the interests of transparency.

Unfortunately the ECB maintained its position that even in March 2014 the contents of the letter that are copied below would undermine Eurozone monetary policy and threaten the financial stability of Ireland. Well now we can see for ourselves if that is true. Of course the publication today now begs the question of what has changed in the eight months since O’Reilly’s recommendation.

There is one other loose end – two further letters which the ECB denies that it holds. These are letters dated 4 and 12 November 2012 both from Trichet to Lenihan. We know they exist because they were reported on by Stephen Collins in the Irish Times and Dan O’Brien in his excellent radio report “Bailout Boys Go to Dublin” (at 5:07). At the time the ECB denied holding them and the Ombudsman declined to investigate the issue on the grounds that they did not form part of the original request. It will be interesting to see if these letters now emerge either form the ECB or the Irish Department of Finance.

Here’s the text as reported today by the Irish Times

EUROPEAN CENTRAL BANK EUROSYSTEM

SECRET

Jean Claude TRICHET

President

Mr Brian Lenihan

Tánaiste and Minister of Finance

Government Buildings

Upper Merrion Street

Dublin 2, Ireland

Frankfurt, 19 November 2010

Dear Minister,

As you are aware from my previous letter dated 15 October, the provision of Emergency Liquidity Assistance (ELA) by the Central Bank of Ireland, as by any other national central bank of the Eurosystem, is closely monitored by the Governing Council of the European Central Bank (ECB) as it may interfere with the objectives and tasks of the Eurosystem and may contravene the prohibition of monetary financing.

Therefore, whenever ELA is provided in significant amounts, the Governing Council needs to assess whether it is appropriate to impose specific conditions in order to protect the integrity of our monetary policy. In addition, in order to ensure compliance with the prohibition of monetary financing, it is essential to ensure that ELA recipient institutions continue to be solvent.

As I indicated at the recent Eurogroup meeting, the exposure of the Eurosystem and of the Central Bank of Ireland vis-a-vis Irish financial institutions has risen significantly over the past few months to levels that we consider with great concern. Recent developments can only add to these concerns. As Patrick Honohan knows, the Governing Council has been asked yesterday to authorise new liquidity assistance, which it did.

But all these considerations have implications for the assessment of the solvency of the institutions which are currently receiving ELA. It is the position of the Governing Council that it is only if we receive in writing a commitment from the Irish government vis-a-vis the Eurosystem on the four following points that we can authorise further provisions of ELA to Irish financial institutions: 1) The Irish government shall send a request for financial support to the Eurogroup; 2) The request shall include the commitment to undertake decisive actions in the areas of fiscal consolidation, structural reforms and financial sector restructuring, in agreement with the European Commission, the International Monetary Fund and the ECB; 3) The plan for the restructuring of the Irish financial sector shall include the provision of the necessary capital to those Irish banks needing it and will be funded by the financial resources provided at the European and international level to the Irish government as well as by financial means currently available to the lrish government, including existing cash reserves of the Irish government; 4) The repayment of the funds provided in the form of ELA shall be fully guaranteed by the Irish government, which would ensure the payment of immediate compensation to the Central Bank of Ireland in the event of missed payments on the side of the recipient institutions.

I am sure that you are aware that a swift response is needed before markets open next week, as evidenced by recent market tensions which may further escalate, possibly in a disruptive way, if no concrete action is taken by the Irish government on the points I mention above.

Besides the issue of the provision of ELA, the Governing Council of the ECB is extremely concerned about the very large overall credit exposure of the Eurosystem towards the Irish banking system. The Governing Council constantly monitors the credit granted to the banking system not only in Ireland but in all euro area countries, and in particular the size of Eurosystem exposures to individual banks, the financial soundness of these banks and the collateral they provide to the Eurosystem.

The assessment of the Governing Council on the appropriateness of the Eurosystem’s exposure to Irish banks will essentially depend on rapid and decisive progress in the formulation of a concrete action plan in the areas which have been mentioned in this letter and in its subsequent implementation.

With kind regards