Saturday 17 March 2018

The man from the IMF

The economist dubbed 'chopper' is now the most powerful man in the country -- and doing what needs to be done

This week's decision to seek a bailout from the IMF and the EU makes Ajai Chopra, the IMF's man in Ireland, the most powerful person in the country for at least the next three years.

How could it have come to this? Even in the dog days of 1986, when we had been forced to devalue the Irish pound by 8pc, interest rates stood at 14pc and the national debt was the equivalent of almost 150pc of total economic output, we still managed to avoid IMF intervention and retain our economic sovereignty.

Former Taoisigh Garrett FitzGerald and Charles Haughey may have hated each other's guts but they were united on one issue. They and their parties would do whatever it took to keep out the IMF. And they did.

Fast forward 24 years and the contrast couldn't be more stark. Last Sunday, after almost a week of fevered speculation, which was threatening not just the stability of the Irish banking system but that of the entire eurozone, Taoiseach Brian Cowen and Finance Minister Brian Lenihan were forced to admit that Ireland would be seeking "assistance".


The word "bailout" is strictly verboten in government circles. The aid is from the European Financial Stabilisation Facility (EFSF), the €750bn eurozone bailout fund established last May by the EU and the IMF in the wake of the Greek financial crisis.

In the end, Irish economic sovereignty disappeared with a whimper rather than a bang.

Even before last Sunday's official announcement, the men from the IMF and the EU were already in town meeting with officials from the Department of Finance and the Central Bank.

Leading the EU/IMF delegation was Ajai Chopra, the acting head of the IMF's European department and the head of its mission to the UK.

The Indian-born monetary economist, quickly dubbed "chopper" by Irish wits, specialises in monetary economics.

He has spent more than 20 years with the IMF and before moving to its European desk he was with its Asia-Pacific department. He was head of the IMF's mission to Korea when that country sought IMF assistance during its financial crisis in the late 1990s.

While the Irish Government denied that it was seeking assistance from the EFSF until the very last minute, it is now clear that both the IMF and the EU were on standby for a possible Irish intervention for several weeks before last Sunday's announcement.

With the benefit of hindsight it can now be seen that Ireland passed the point of no return when Mr Lenihan revealed on September 30 that the cost of fixing the Irish banking system would exceed €50bn, with €34bn of that figure going on Anglo alone.

With the 2008 deposit guarantee having effectively transformed the Irish banks' losses into Irish government liabilities, the escalating cost of rescuing the banks fatally undermined the ability of the Irish State to borrow on the international bond markets.


The September 30 announcement also shut the Irish banks out of the financial markets. Unable to borrow from other banks they were forced to borrow ever-larger amounts from the ECB and the Irish Central Bank.

By the end of October the Irish-owned banks had borrowed more than €90bn from the ECB and a further €34bn from the Irish Central Bank.

With borrowing on this scale by the Irish banks threatening to destabilise the ECB, quite clearly something had to give. This inevitably led, after much arm-twisting, to last Sunday's historic announcement.

Mr Chopra and his colleagues arrived in Ireland on November 18. Last Wednesday, a mere six days later, the Government published its four-year plan, which proposed public spending cuts and tax increases of €15bn over the next four years, with €6bn being front-loaded in the December 7 Budget.

What connection, if any, was there between Mr Chopra's arrival and the severe fiscal medicine contained in the four-year plan?

In reality there was probably little direct connection between the two events, as the Government had been working on the four-year plan for several weeks before the arrival of the man from the IMF. While there was little in the four-year plan that Mr Chopra would have objected to, the notion that he was the behind-the-scenes author of the document is probably wide of the mark.

Yes, there was undoubtedly a significant external input into the four-year plan, but it almost certainly came mainly from EU economic and monetary affairs commissioner Olli Rehn and his staff, rather than from Mr Chopra and the IMF.

While the four-year plan may have been a fait accompli, so far as Mr Chopra was concerned, he quickly made his presence felt once he had arrived in Dublin.

As the escalating cost of fixing the banks gradually bankrupted the State, Mr Lenihan consistently refused to force the senior, or secured, bondholders to share the pain.

While the subordinated, or unsecured, bondholders of the Irish banks have suffered "haircuts" of up to 80pc, the senior bondholders have so far escaped unscathed, with Mr Lenihan arguing that their rights under Irish law are similar to those of depositors.

Why has Mr Lenihan consistently refused to burn the senior bondholders? While the 2008 deposit guarantee, which covered senior bonds, certainly complicated matters, there has also been a strong suspicion that the ECB, desperate to avoid a bank failure within the eurozone, has been quietly supporting Mr Lenihan's stance.

It isn't just the Irish banks that are now under severe pressure.

As Irish bank lending grew seven-fold in the decade to the end of 2007, more than twice the rate at which Irish bank deposits grew over the same period, the Irish banks were increasingly forced to borrow from overseas banks, mainly UK, German and French, to fund their rapidly-growing loan books.

Many of the banks which lent to Irish banks could find themselves under pressure in the event of an Irish bank failure of debt default.

While estimates vary, it would appear that overseas banks lent the Irish banks somewhere between €100bn and €200bn. Some of this lending was in the form of plain vanilla bank deposits with overseas banks merely depositing money with their Irish counterparts.

However, a significant proportion of this lending was in the form of senior and subordinated bonds.

Even after significant redemptions last September, as the original deposit guarantee expired, the Irish banks still have bonds with an original face value of about €45bn on their books. About a quarter of this amount consists of junior bonds, with the rest being senior bonds.

Mr Chopra moved quickly to make it clear that agreement on the €85bn EFSF bailout package for Ireland, which is expected to include a major restructuring of the Irish banks, would depend on the senior bondholders sharing in the pain. This is likely to happen through a combination of debt write-downs and debt-for-equity swaps.

Not alone does this insistence on burning the senior bondholders represent a complete reversal of previous policy, it also demonstrates that, contrary to expectations, it is the IMF rather than the EU which is calling the shots in the EFSF delegation.

This is good news for embattled Irish taxpayers. While the IMF will be no soft touch, far from it, it is likely to be more far pragmatic in its handling of the crisis than the EU, which is ideologically wedded to the euro and the European "project".

After just nine days among us, Mr Chopra has got off to a good start.

Following more than two years of seemingly endless drift, delay and evasion, someone is finally doing what needs to be done.

The tragedy is that it took the man from the IMF rather than our own elected leaders to do it.

Irish Independent

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