THE Irish government may have looked at the apparently successful Swedish bank guarantee of the 1990s when deciding to do the same for Irish banks in 2008, the Swedish-born chief economist of the Central Bank of Ireland (CBI) said yesterday.
Speaking a day after the ending of the Irish bank guarantee was announced, Lars Frisell (pictured) said the euro area must come to a situation where bank difficulties can be resolved smoothly, without threatening financial stability or at significant cost to taxpayers.
What was needed was a common eurozone "backstop" which could supply banks with both capital and loans without increasing governments' vicious debt circle, he told a meeting of the Institute for International and European Affairs in Dublin.
Once the "thorny issue" of legacy debts – where the Irish government is campaigning for EU assistance – was settled, "a European fund could act as a patient, deep-pocket investor which provides assurance to creditors that, in the event of any further negative surprise, future capital needs will be met."
Currently, "whether the banks contaminated the sovereign, as in the case of Iceland and Ireland, or the other way around, as in the case of Greece, many countries may face elevated funding and lending rates for a long time, with huge costs for society in terms of lost growth and employment," Mr Frisell said.
There would still have to be financial and structural reform in troubled countries, but such reforms will take many years, "possibly with political and legal pushbacks along the way."
Mr Frisell said creditors of many banks in Europe and elsewhere have enjoyed an implicit government guarantee.
"Now and then this implicit guarantee becomes explicit, as in the case of Ireland. But guarantees of different forms have been continuously granted to banks in Europe," he added.