Thursday 19 April 2018

Banking Inquiry: 'IMF did not give enough timely professional advice to Irish authorities'

Former Deputy Director of the IMF, Dr. Donal Donovan, with speakers at the seminar (back, from left) Graham Stull, Economic Analyst, European Commission; Noelle O'Connell, European Movement; Brendan Keenan, Economics Columnist, Irish Independent; and Jonathan Claridge from the EU Commission.
Former Deputy Director of the IMF, Dr. Donal Donovan, with speakers at the seminar (back, from left) Graham Stull, Economic Analyst, European Commission; Noelle O'Connell, European Movement; Brendan Keenan, Economics Columnist, Irish Independent; and Jonathan Claridge from the EU Commission.

Clodagh Sheehy

The International Monetary Fund did not give enough timely professional advice to the Irish authorities, a former deputy director at the IMF has told the Banking Inquiry.

Donal Donovan, in response to Deputy Marc McSharry said while it might not have been the worst assessment of the IMF in its history it was “certainly the most extreme case”.

“I cannot recall a situation where a rosy picture turned so negatively in such a short space of time”.

“I think it is widely accepted that the IMF’s surveillance process failed in Ireland”, Mr Donovan added.

He believed the IMF should have been more cautious in its assessments, they should not have accepted uncritically the soft landing hypothesis put forward by the Irish authorities.

They should have been more questioning and more critical.

He described the extent of Ireland’s sharp and dramatic financial deterioration “with minimal prior anticipation by the IMF” as “to my knowledge, probably unprecedented in the history of IMF surveillance.”

While some vulnerabilities had been noted by IMF staff their assessments “gave no inkling that a major disaster could be in the making.

“There was no hint given to the possible occurrence of a major problem, let alone of the potential for the crisis that eventually unfolded”.

Mr Donovan drew attention to the fact that the normal annual consultation between the IMF and the Irish authorities did not take place during 2008.

He said the postponement that year meant that “during this critical two year period - from mid 2007 to 2009 - there was no formal dialogue between the IMF and the Irish authorities

“This must be considered a significant flaw”.

The reasons were not in the public domain and remained “an important question to which I do not have the answer”.

The Fiscal Council member said while IMF staff did have a view that house prices between 2000 and 2007 were “somewhat overvalued” this was not accepted by the Irish authorities and in essence the two “agreed to differ” over the question.

Sadly the overall assessment of Ireland’s situation by the IMF was “reassuring if not indeed rosy”

On the Bank Guarantee, Mr Donovan, pointed to the lack of any indication “at least on the public record suggesting that IMF staff provided input”.

His own view was that considering all types of alternatives, it was difficult to conclude that the outcome would have been materially different unless senior bondholders were going to be burned.

He believed that Ireland was entitled to and should have burned bondholders in 2010 and 2011 but this did not happen because of fears expressed by the ECB and more importantly the United States.

That being said he doubted if it would have saved more than €5-6bn and while this was not a trivial amount it had to be seen in the context of €64bn.

To hang the whole of the banking crash “on this particular non event would be to exaggerate its importance”

He told Inquiry chairman Ciaran Lynch that he considered the Bank Guarantee to be the best option at the time.

In response to questions from Sen Sean Barrett about “disarray” in the run up to the Guarantee, Mr Donovan said there was a fairly concerted effort by those involved to hold regular meetings in the run up to it  but “the tsunami came too fast to get out of the way”.

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