INTERNATIONAL MONETARY FUND
117
Some commentators go further and suggest that Trichet insisted (telephonically) that the Irish
authorities not bail in bank bondholders on the grounds that doing so would damage the big
French and German banks holding Irish bank paper.
16
Others, such as Draghi (2015), appear to
dispute the claim. They point to the Irish authorities themselves, or at least some of them, as
underestimating bank losses and resisting calls to haircut the bondholders. They point to the
fact that there was, in fact, substantial burden-sharing with holders of subordinated debt of
Irish credit institutions. But they also allude to the possibility that bailing in senior bank
bondholders might have been considered a default event, leading the ECB to withdraw funding
for the Irish banking system. Whether the ECB had a choice under these circumstances will
continue to be re-litigated by legal scholars, without question. But there is no doubt that the
threat, even the uncertainty, caused Irish authorities contemplating further haircuts to hesitate.
A key point is that the monetary union did not possess a mechanism for directly recapitalizing
the insolvent banks of euro area members. This would come with the move to establish a
banking union, complete with resolution fund and with the capacity of the European Stability
Mechanism to directly recapitalize banks—but not in 2010.
17
Its absence in 2010 reflects more
general neglect, at that time pervasive, of the need for banking union to accompany monetary
union.
Controversy then turns to the treatment of the banks’ creditors in the troika program. At the
time, controversy centered on whether to impose losses on the holders of €19 billion of senior
unsecured and unguaranteed debt. The IMF initially favored a haircut of roughly 50 percent, a
proposal that gained the Irish government’s full support. But the ECB opposed this approach on
the grounds that it might disrupt the flow of wholesale funding to other euro area banks. Again
the ECB’s position prevailed.
18
That the ECB was involved in program design and monitoring,
exceptionally and controversially, suggests that its opinions carried weight. That the IMF was
outmaneuvered, or felt obliged to give way, raises questions about whether it should allow itself
to participate in such programs as a “junior partner” (contributing only a minority of the
finance) along with regional entities.
16
McSharry (2014) recounts conversations with Brian Lenihan, who characterized the situation this way.
17
Whether direct recapitalization using ESM resources backed jointly and severally by the members is now agreed to
continues to be disputed; see below. In contrast, the ECB did move quickly, starting in 2008, to create other channels
for meeting the liquidity needs of national banking systems, notably through the fixed-rate full allotment policy of
October 15, 2008, under which “financially sound” counterparts have their bids fully satisfied, against “adequate
collateral” (Gonzales-Paramo 2011).
18
As Pisani-Ferry, Sapir, and Wolff (2013) note, some countries represented on the IMF’s Executive Board, such as the
United States, were not entirely unsympathetic to the ECB’s concerns.