Decision to nationalise Anglo Irish 'triggered euro crisis'
Published 24/11/2011 | 05:00
THE decision by Brian Cowen and Brian Lenihan to nationalise Anglo Irish Bank was the trigger for the global financial crisis, two well-respected International Monetary Fund (IMF) economists said in a report.
A study of data such as bond yields suggests that it was the decision to take the insolvent bank into state control four months after the collapse of Lehman Brothers that turned the world's financial problems into a full-blown crisis, claim Ashoka Mody and Sandri Damiano.
"The relevance of Anglo is, at first, not obvious, since it was a small bank in a relatively small country," the two IMF researchers say. "However, the data quite robustly suggests a break at this point."
Most Irish officials still defend the decision, arguing that the collapse of Anglo would have led to the collapse of Allied Irish Banks and Bank of Ireland as well.
A report by Central Bank governor Patrick Honohan last year also concluded that the decision to nationalise Anglo was the right one because of the dangers posed to the main lenders.
The IMF economists believe that the large cost of rescuing the bank relative to Ireland's economic output raised serious concerns about the wider economy; a banking problem had become the State's problem.
The projected cost of rescuing Anglo is €34bn -- although the figure could be lower.
"Suddenly, the ability of the sovereigns (governments) to support the financial sector came into question," write Mr Mody and Mr Damiano.
"The worrying news a few months later about Greece's fiscal imbalances confirmed that the eurozone crisis had evolved from a banking crisis into a sovereign crisis."
The two economists say Anglo Irish should have been slowly closed down rather than nationalised. This is now Government policy but many attempts were made to keep Anglo going before the policy changed.
Mr Lenihan argued in 2010 that it would have cost more to close the bank and than keep it open.
Mr Mody, an economist who escaped a bizarre assasination attempt at his home near Washington DC when Dominique Strauss-Khan was head of the IMF, knows Ireland well and was a member of the IMF team that came here in the wake of last year's bailout.
He was also assistant director in the IMF's European Department -- although the opinions expressed in the research paper are not official IMF views.
Not all European bank rescues were wrong, the researchers add. Most banks were in a better position than Anglo and some governments had more money which allowed them to rescue their lenders.
In future, governments need to better distinguish between banks that are worth saving and banks that should be closed, they write. "A more resolute strategy for winding down banks is also needed."
Rescuing banks such as Anglo created a vicious circle for governments because the value of state bonds often fell after the government took the risk of saving a lender. Banks are the biggest owners of government bonds which meant that the banks lost money as government bonds slumped.
"At this point, the sovereign and banks were joined at the hip, with their respective weaknesses threatening to reinforce each other," they add.