Sunday, November 09, 2014

An uncommon thief

On the Wall Street Journal op-ed piece, Brian Carney (free link) has a correct-in-spirit diatribe about the injustice of the Irish bank bailout. However, in his eagerness to lay all the blame at the door of the ECB, there is an important error in his logic:

Specifically, Mr. Trichet threatened in a letter dated Nov. 19, 2010, to revoke the credit lines of Ireland’s banks unless the government agreed to (1) request a bailout; (2) impose stringent budget cuts; (3) recapitalize its banks; and (4) fully guarantee the Irish banks’ outstanding liabilities to the ECB ....Mr. Trichet’s final condition—an Irish sovereign guarantee of the ECB’s own lending to Irish banks—is especially telling about his motives. 

Here's the aforementioned letter. Clause (4):

The repayment of funds granted 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.

As that final part makes clear, the loans in question were Emergency Liquidity Assistance (ELA), which is not ECB lending. It's lending by the national central bank when ECB facilities can't be used. The Irish bailout was indeed a heist, as Carney calls it. But the heist was in motion long before those 2010 ECB letters.