A former International Monetary Fund (IMF) official has admitted that austerity alone as a way of solving Ireland’s economic crisis was a mistake and is counter-productive.
Ashoka Mody, former IMF chief of Mission to Ireland, also said that bondholders should have been burned as part of the process while a sovereign default would also have been manageable.
The professor's comments come as eurozone finance ministers are in Dublin for an informal meeting this weekend where it is understood longer repayment terms for our bailout loans will be discussed.
However, it is not yet known whether or not European paymaster Germany will ask for concessions for any new loan deal.
In an interview with RTE’s Morning Ireland, Mr Mody said there were three options at the time the IMF/EU/ECB essentially took over the reins at the Irish economy introducing €67.5bn in bailout loans– make bondholders pay some of the cost, extreme concessional official funding or lastly, austerity.
“The decision then was the entire reliance would be on austerity and clearly the experience, if experience was needed, has demonstrated that reliance on austerity is counter-productive,” he said in the interview.
“The risks of the programme succeeding were such that complete reliance on austerity was the wrong way to go,” he added.
Mr Mody said that burning bondholders, which could have saved billions of euro, was not considered because of a mindset, which remains, that felt it would cause uncertainty.
“There seemed to be a view, then and now that most of the bank debt was quasi sovereign debt and debts need to be repaid because if they are not repaid that will cause financial instability. That was the decision take at the time and that continues to be the view today.
He added that there was a perception that doing so would have had catastrophic results, which, he said, is not the case.
“My reading of history of sovereign defaults is that they can be well managed. And the notion that these defaults are extremely costly is historically not true.”
He also said that he believes long-term, something will have to give in terms of the further easing of loan terms beyond the current negotiations – partly because Europe is dragging itself down through the austerity prospects and growth projections for countries like Ireland and Portugal will become more difficult to meet as debt burdens increase.
For example, Ireland’s debt is due to peak at 120pc of GDP this year.
According to Mr Mody a clean break with debts would better as a decisive break would mean a quicker readjustment process meaning faster economic improvements.
However, he added that getting longer repayment terms on our debts is a necessary vent for now.
Although he sees further easing of loan repayment terms further down the line.
Finance Minister Michael Noonan is heading up discussions with Europe on a restructuring of our banking €64bn bank debt pile.
It is understood talks are ongoing that could result in a further seven year extensions on or bailout loan repayments on top of concessions around the Anglo Irish promissory note agreed earlier this year.