I remember interviewing the late Brian Lenihan at the Department of Finance in early November 2010. After the interview we chatted and he asked how I thought the markets had received news that some holders of subordinate bonds in Irish Nationwide were going to sue the State because the bank was about to impose haircuts on them.
Russian billionaire Roman Abramovich was one of them. “Imagine the size of the mushroom cloud that would go up if we tried to impose losses on senior bondholders,” Lenihan told me.
It was a vivid choice of phrase that reflected his concerns of the possible chaos for Ireland if every cent was not paid back, albeit on dead banks.
It was eerily similar to the phrase used by former ECB governor Jean-Claude Trichet when speaking to the new finance minister, Michael Noonan, a few months later. Trichet told Noonan down the phone that not paying out on senior unsecured bond holders would see a bomb go off, not in Frankfurt but in Dublin.
The circumstances around the taxpayer-funded payout on billions of euro to bondholders will receive close scrutiny at the banking inquiry. Trichet won’t be showing up.
But in the meantime, a former adviser to the European Commisison president has said that Ireland was bullied and treated outrageously by the EU and the ECB in particular.
A new book by Philippe Legrain claims that massive mistakes were made by the European powers in handling the euro crisis. He believes bank bondholders should have shared in the losses.
He also says that Ireland’s enthusiasm for the euro, as a small country, allowed this bullying to take place. Legrain believes that if Ireland had played hardball with the ECB, the bank in Franfurt would have blinked.
He is saying that if Ireland had gone ahead and imposed losses on unsecured bondholders in Anglo Irish Bank and Irish Nationwide Building Society, and possibly some of the others, that the ECB would not have withdrawn its emergency bank funding which at its peak was around €135bn.
The official view from Brussels and the ECB is straightforward. Ireland created its own banking crisis. The scale of that crisis created a problem for the euro and our European partners were patient and generous in lending us badly needed funding. The ECB kept cash in our ATM machines while the European Commission oversaw part of the €65bn troika bailout.
Legrain, who was an economic adviser to EU Commission president Jose Manuel Barosso, has a different perspective. He believes that bondholders should not have been paid in full and that Europe’s response across the eurozone was based on a misunderstanding of the problem at heart.
He believes bank debt should not have been imposed on taxpayers. It is true that billions in bank bonds were held by German and French banks. Legrain believes it was imperative for the Germans and French to ensure they got paid in full.