Thursday 15 November 2018

'Irish bank crisis could've killed off euro' - ESM chief

Klaus Regling leaving the Oireachtas Banking Inquiry, alongside Conor Sweeney from the European Stability Mechanism
Klaus Regling leaving the Oireachtas Banking Inquiry, alongside Conor Sweeney from the European Stability Mechanism

Philip Ryan and Clodagh Sheehy

The scale of the banking crisis in Ireland could have brought down the euro, the head of the EU's bailout fund has claimed.

The managing director of the European Stability Mechanism (ESM), Klaus Regling, said his agency was forced to bail out Ireland because of the wider threat to the rest of the European Union.

Mr Regling told the Oireachtas Banking Inquiry that the bailout was offered because it was feared the collapse of the Irish economy would spread to other European countries.

"This is true for Ireland and it is also true for several of the other countries that received emergency funding finance from my institution," he said.

"There was a serious threat for the euro area as a whole because we saw at the time a lot of contagion," he added.

Ireland received almost €50bn through Mr Regling's agency which oversees the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM).

Mr Regling was appearing before the Inquiry to discuss a 2010 report he wrote with economist Max Watson, who died last year, on the Irish financial crisis.

However, the German economist yesterday revealed he did not interview former Taoiseach Brian Cowen before publishing his report. His report found Ireland was a country were "no one was in charge" in the years leading up to the banking crisis which forced the country into an International Monetary Fund (IMF) bailout.

At the height of the crash, Mr Regling said international investors were abandoning all EU states because they could not differentiate between the countries hit badly by the crash and those with stable economies. "They had not done their homework to study the differences," he said.

"When one country got into problems, they didn't know how to interpret that and withdrew from the other countries."

In Ireland, he said the banking sector had "weak governance and risk management - sometimes disastrously weak".

Banks were highly exposed to individual borrowers and property lending. He said the increase in property lending by individual banks was "unprecedented" and "it was really a multitude of factors that all impacted in the same negative direction."

And 'light touch' regulation meant the banks were free to "go in the wrong direction" for far too long. Mr Regling said the approach of regulators was too hands-off and today would be more intrusive and assertive. He said bonuses for middle management loan managers led to a lack of credit checks and helped fuel the property bubble.

He was also critical of the IMF and European Union regulators for not keeping a more watchful eye over the banking sector before the credit crunch.

Trinity College Professor Philip Lane told the inquiry the Government should have set up a "rainy day" fund during the boom when there was surplus of tax revenue. He said this would have eased the financial burden of the crash and could have been used to recapitalise the banks and fund NAMA.

Irish Independent

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