Thursday 22 March 2018

Ireland's crash was most extreme ever, says ex-IMF deputy

Marco Buti arrives for the meeting of the Oireachtas Banking Inquiry at Leinster House yesterday. Photo: Tom Burke
Marco Buti arrives for the meeting of the Oireachtas Banking Inquiry at Leinster House yesterday. Photo: Tom Burke

Clodagh Sheehy

THE International Monetary Fund's judgment of Ireland's financial position prior to the crash was "extreme" and close to its worst ever assessment, the Banking Inquiry heard.

Former IMF deputy director Donal Donovan said while he was reluctant to use the term "worst", it was "certainly the most extreme case".

Mr Donovan said he could "not recall a situation where a rosy picture turned so negatively in such a short space of time".

He told the inquiry that he believed the IMF should have been more cautious in its assessments, more questioning and more critical. Mr Donovan said they should not have accepted uncritically the soft landing hypothesis put forward by the Irish authorities.

"I think it is widely accepted that the IMF's surveillance process failed in Ireland," he added.

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 it 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.

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.

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 €5bn-6bn, and while this was not a trivial amount it had to be seen in the context of €64bn.


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

Earlier, Marco Buti, head of the European Commission's Economic and Financial Affairs, told how the Irish government had ignored a critical warning from the commission about the economy overheating as it prepared the draft budget for 2001.

He said signals of "potential macroeconomic problems" prompted the commission to issue a "critical opinion" to the Irish government on January 24, 2001 to avoid further overheating.

"As some of you may remember, the recommendation was not very well received in Ireland. It was not implemented", he added. "Also many in the economic profession derided the commission."

Irish Independent

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