Monday 18 November 2019

'Net cost of bank bailout will be well below €40bn' - economist Alan Ahearne

Alan Ahearne
Alan Ahearne

Daniel McConnell

THE net cost of Ireland’s bank bailout will be “well below” the €40bn put forward by Central Bank Governor Patrick Honohan, the Oireachtas Banking Inquiry has heard.

Dr Alan Ahearne, who predicted the economic crash would not be drawn on an exact figure but said  the costs would be “a lot less than €40bn”.

Costs were reducing as interest rates fell. and thankfully the trend was very much downward.

Dr Ahearne who is Head of Economics at NUI Galway and a member of the board of the Central Bank said there were very few predictions of a “hard landing” prior to the crash.

He recalled how in the run up to the 2007 general election none of the three main political parties were recommending the sort of policies needed to stop the property bubble.

He conceded, however, that any party that had written down such policies would not have been elected.

Booms, he added, “are very popular when they are happening because of the amounts of money they put into people’s pockets”.

All kinds of people had benefitted from the property bubble, people in the sector but “on a wider dimension” the exchequer was taking in huge amounts of money and then “was dishing it out left right and centre”.

It was “disappointing” that the IMF had not spotted the looming crash, he told Sen Marc McSharry.

Borrowing huge amounts from foreign banks would normally ring alarm bells for the IMF but they did not spot it because at the time Ireland was part of the single currency.

Dr Ahearne described to the Inquiry how he had been called to a meeting with Finance Minister Brian Lenihan in August 2008 and had been surprised to hear the Minister say that Irish Nationwide was “very exposed” and while Anglo too was exposed “it also had some good stuff”.

Rumours he had been hearing at the time suggested Anglo was a “basket case”.

Dr Ahearne, who later became Mr Lenihan’s economic advisor said at no stage had the Minister mentioned solutions like guarantee or nationalisation.

When the Bank Guarantee was introduced he was surprised at the broad scope and also “puzzled as to why subordinated debt was included”.

In response to questions from Deputy Michael McGrath he said he had looked at 44 boom-busts as part of a study and although Ireland was not included in that study the financial bust here would rate among the top three biggest.

Dr Ahearne was highly critical of 100pc mortgages which doubled in 2006 and which, he said were being used by people who could not afford property but who wanted to get on the property ladder.

When the property market stalled from mid 2006 developers were not able to pay their loans because they could not sell enough houses.

He had heard at the time that banks may have been rolling over the loans they were giving to developers, covering old loans with new ones.

This would look good on the books “as if things were fine”

Earlier the man credited with the design of NAMA today criticised its “ethos”.

Economist Dr Peter Bacon said it was “more of a debt collection agency than a property value maximiser”.

Dr Bacon described the “enormous potential” of NAMA  with the biggest property portfolio in Europe acquired at rock bottom prices.

He said his criticism was about the “ethos” of NAMA and not about the “general approach”.

Dr Bacon explained how recommendations made by him and his team brought house prices under control in the late 90’s.

He had not been consulted, however, when these were overturned two years later and prices spiralled upwards, he told Chairman Ciaran Lynch.

But in 2001 his recommendations were reversed and “thereafter prices re-accelerated”.

The reversal of the measures had happened “too early” and he was not consulted.  This decision had resulted in price increased.

In response to questions from Deputy Joe Higgins he said he believed the measure with the most significant impact in the subsequent rise of house prices was the decision to reverse the exclusion of tax deductions of interest for investors.

Relaxation of the interest deduction measure, excessively low interest rates for the Irish economy and the unlimited supply of finance from international banks to Irish banks from the time of monetary union  were the “ingredients that increasingly fed speculative demand”.

Online Editors

Also in Business