ECB and the Bailout

The role of the ECB in the situation was controversial. In one of the many books on the onset of the crisis and the reaction to it, Gene Kerrigan summed it up by stating that “It was the ECB that had put a loaded gun to the Irish government’s head”. There appeared to be an implied threat that the ECB would withdraw liquidity support for the banks if the Irish government did not move to calm market fears. The ECB, of course, had a bigger concern with the stability of the wider Eurozone, but according to Kerrigan, the ECB subsequently “conveniently forgot its own enormous failings in dealing with the crisis, as well as its responsibilities.” This was the same ECB whose president, Jean Claude Trichet, in Dublin in May 2004 heralded Ireland as a ‘model for the millions of new citizens of the European union.’ But by 2008 Trichet’s main concern regarding Ireland was that no European bank would be seen to collapse and subsequently, in 2011, he put undue pressure on the Irish government to abandon its plan to enforce burden-sharing on senior bondholders in Anglo Irish bank by threatening to withdraw ECB emergency funding from Irish banks.

There was a determination to continue to honour the bank guarantee even after it became clear that the bank losses were beyond the resources of the state. Some have argued it should have been revoked, though others have challenged this narrative and warned against the simplification of the ‘blame game’ narrative as the absence of regulation dominated the world’s financial markets and was not just an Irish issue; the Lehman Brother’s implosion involved the largest financial default in world history  and there was no apparent alternative to the Irish bank guarantee beyond a run on the banks and the complete implosion of the banking system. Nonetheless, the idea that bondholders did not have to take any of the pain remained one of the striking and controversial aspects of the Irish crisis.

International lenders stopped lending to Ireland and the state was forced to accept an EU/ECB/IMF bailout at the end of 2010. The programme provided for up to €50 billion in fiscal needs and up to €35 billion in banking support measures from 2011 to the end of 2013, contingent on action to clean up the financial sector, put the public finances on a sustainable path and implement a structural reform package. Forecasts of bank losses of €40 billion were shown to be hugely underestimated; some suggested that the bank losses would eventually cost the state in the region of €100 billion, and that along with capital invested in worthless banks, Irish national debt could rise closer to €240 billion. There would also be the need for new capital for the banks and there was the danger of widespread defaulting on personal mortgages.