Friday 30 September 2016

Bank guarantee was ‘too generous’, says Europe

Fundamental problems overlooked, turning a financial crisis into a sovereign debt crisis

Donal O'Donovan and Colm Kelpie

Published 17/07/2015 | 02:30

DISTANCE: Former Taoiseach Brian Cowen and the late Finance Minister Brian Lenihan pictured in July 2008.
DISTANCE: Former Taoiseach Brian Cowen and the late Finance Minister Brian Lenihan pictured in July 2008.

The bank guarantee introduced in 2008 was "too generous" and played a major part in turning a financial crisis into a sovereign debt crisis, the European Commission has claimed.

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The guarantee was based on a "misunderstanding" of the problems in the banks, which were seen at the time as liquidity and confidence issues triggered by the global financial crisis, instead of recognising more fundamental problems, according to a report from the commission looking back on Ireland's bailout programme.

The report also said that while the negotiations on the 2010 bailout were completed within a week of a request being made, discussions between the then Fianna Fáil/Green Party government and the International Monetary Fund, European Central Bank and European Commission had been going on for three months.

Government ministers at the time denied any negotiations were taking place.

The European Commission report said discussions had been taking place to "clarify the situation and explore possible responses to the crisis".

The 117-page report also said the decision not to burn bondholders in 2010 was the correct one, and while it said the bailout programme was a success overall, it "missed an opportunity" to provide more fundamental reform to the so-called protected sectors of the economy and to "confront vested interests".

The Troika has been repeatedly critical of delays in cutting high legal costs.

But the most striking aspect of the report is the commission's reflection on the decision to issue a blanket guarantee to the banks in September 2008.

As a result of the guarantee, the solvency of the Irish sovereign and that of the banking system became intertwined, the report said.

"This eventually turned the banking crisis into a sovereign debt crisis," the commission said. "A further consequence of the guarantee was that the potential for any substantial burden sharing - by bailing in senior bondholders - was limited for its duration.

"With hindsight the bank guarantee appears too generous, and the fiscal impact could have probably been limited if banks had been subject to stricter requirements."

Blame

The report, which in essence lays much of the blame for the 2010 bailout on what it sees as the flawed bank guarantee decision, says that when the 2008 decisions were taken, Irish authorities were constrained by high uncertainty.

However, it found that by 2008 the economy here was already highly vulnerable.

It was the combination of the sharp decline in tax revenues and the cost of bailing out the banks that triggered the national debt crisis, the report said.

Overall, the report said the bailout programme was "relevant, appropriate and effective".

It said the financing provided under the bailout allowed for a "smooth and sustained" return to full market access. The report also notes that public sector pay here is "considerably higher" than private sector wages, but claims this is because public sector workers are, on average, more highly skilled than private sector workers.

Meanwhile, the latest post-programme surveillance report from the European Commission says the Irish economy is rebounding strongly, but warned that the Government's deficit target next year does not take advantage of that strong growth. The report says that medium-term budgetary planning does not include specific policy measures, which clashes with EU budget rules.

It also notes that negotiations to achieve further price reductions on patented medicines have failed to achieve any further benefits for the Exchequer, and notes that a critical test of the success of the water sector reform will be the level of payment compliance. It says that without compliance, the utility's ability to raise revenue to address the serious infrastructural deficits in water supply will come into question.

"Payment compliance will be key for Irish Water's ability to raise revenue," it said.

Irish Independent

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