We still face many days of darkness - Chopra
Future problems should be shared fairly, says IMF chief
Published 17/10/2011 | 05:00
THE costs of future bank failures shouldn't be borne entirely by taxpayers in the bank's own country, but shared on a European basis, according to the head of the IMF team dealing with Ireland.
Ajai Chopra also told an annual economists' conference in Kenmare, Co Kerry, that it was too early to say Ireland had escaped the economic crisis.
Replying to questions, Mr Chopra said he was dealing with the future position of bondholders in banks, not the present arrangements.
He proposed a European Banking Authority which could offer the same deposit insurance to savers in all EU banks and which would impose losses on bondholders in the case of failure, after shareholders had taken the first losses.
"Uninsured creditors, including senior creditors, should share the costs after shareholders. Insurance for depositors should be funded as much as possible by the banks themselves," Mr Chopra said.
He believes the high levels of capital provided to Irish banks in their re-organisation was one of the reasons for an improvement in market sentiment towards Ireland.
"In my view, this, along with stringent external assessment of likely losses in the banks, has been a key ingredient in the improved market sentiment."
He said European banks would need larger reserves than those proposed officially under the so-called "Basel III plan'' during what would be a long transition.
"If Ireland had had a macro-prudential body (during the boom), what would it have said?" Mr Chopra asked. He suggested a demand that banks reduce the ratio of loans to value and increase the capital backing for property loans would have been wise conditions to set down.
Mr Chopra also said he saw the Irish bailout having at least three characteristics which distinguished it from some others.
"There has been considerable political cohesion since the process began in November. There is a new Government but the programme did not change much."
Ireland had also come to grips with its banking problems.
"The stress tests and re-capitalisation have given some confidence that there is a clear path ahead. That distinguishes Ireland from some other places."
The Irish economy also seemed to have stabilised, although growth prospects would be pared back by the global slowdown.
"But investors see that reasonable potential for growth. However, there is weak domestic demand and very high unemployment. It is much too early to pop the champagne."
Mr Chopra said Europe was at a critical juncture. Weak banks had damaged the sovereign, as in the case of Ireland, and weak sovereigns had damaged their banks, as in Greece.
The idea of eurobonds guaranteed by all the member countries could strengthen the euro- zone but there would have to be measures to prevent countries exploiting the cheaper borrowing from such bonds, including stronger fiscal governance.
"Some delegation of sovereignty to 'federal' institutions may be necessary," he said. Questioned about this, Mr Chopra said he would not assume that there was no political will for greater integration in the euro area.
"Strengthening the financial architecture can happen at the local level first, and then move to greater integration. In my view it does not require the harmonisation of things like corporation tax.
"The extent to which there can be integration without treaty changes is something the lawyers, politicians and accountants need to start thinking about," Mr Chopra added.