Friday 30 September 2016

Europe must break the 'deplorable' tradition of bailing out bankers at the expense of taxpayers

Published 19/05/2015 | 18:23

Lars Frisell quit the Central Bank for an IMF role last year
Lars Frisell quit the Central Bank for an IMF role last year

One of the most important lessons of Ireland's banking crisis is the need to break Europe's "deplorable" tradition of bailing out bankers at the expense of taxpayers, an advisor to Patrick Honohan has said.

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Lars Frisell also said that if half of the money that was ploughed into the banks here is recouped, the bank bailout would still have cost €7,500 per Irish man, woman and child.

The Central Bank’s former chief economist and now advisor to the Governor told a conference in Stockholm that the rules of the game have changed in Europe, and that when a bank fails, losses fall on bondholders and not taxpayers.

“At least in the eyes of the Irish, Europe has turned 180 degrees on this issue,” Mr Frisell said.

“It is a welcome change though it came too late for Ireland.”

In a wide ranging speech, Mr Frisell told the Financial Safety Net Conference that a lasting legacy of the crisis here is the vast number of mortgage and small business loans in arrears.

And he speculated that some loan holders may question why they should have to repay their debt, while creditors and investors go their money back.

“Seven years after the property bust there are still more than 100,000 people in arrears on their primary dwellings, which means one out of every seven mortgages,” Mr Frisell said.

“A lot of people genuinely cannot afford their mortgages any longer, as they have lost their job or suffered other financial losses. But others might ask what moral right the rescued banks have to require full payment since their creditors, among them foreign banks and professional investors, were compensated in full.”

Mr Frisell described the bank guarantee of 2008 as “a very costly mistake” and said the now defunct Anglo Irish Bank should never have been included under the guarantee.

“Anglo  -as well as the equally reckless building society INBS - should never have been included in the blanket guarantee,” he said.

“Whatever the short-term benefits of a general guarantee, the costs in terms of credit losses arguably outweigh them. There were several voices arguing against including Anglo in the general guarantee at the time. Exactly who sided with which alternative is still a contentious issue.”

But he said the task of restoring trust in the banking market at the time was urgent and that a more conservative guarantee might have failed to do what was required of it.

He estimated that if the state can recoup half of the money put into the banks, the guarantee would have cost every man, woman and child here €7,500.

"Suppose half of the bailout money can be recouped. That would still imply a cost of some €7,500 per Irish man, woman and child," he said.

And he added: "Going forward, I think one of the most important lessons of the resolution of the Irish banking crisis is the necessity of adhering to the Resolution Directive, and to break Europe’s deplorable tradition of bailing out banks and bankers at the expense of taxpayers,” Mr Frisell said.

“The credibility of European politicians, and the European project, depends on it.”

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