Wednesday 17 July 2019

Thank heavens for the happy heretics of the IMF

HOLD ON TO YOUR HATS: The happy heretic, Ashoka Mody, former IMF head of mission in Ireland. Photo: Damien Eagers
HOLD ON TO YOUR HATS: The happy heretic, Ashoka Mody, former IMF head of mission in Ireland. Photo: Damien Eagers

Shane Ross

It's confession time down at the Banking Inquiry. The confessions are a trifle premature. Suddenly there is a real danger that the inquiry's appetisers will render the main course less digestible.

The appetisers are the IMF and the ESRI - intended to be the boring build-up bits. The main courses are the bankers and Fianna Fail politicians, reserved for grilling in the pre-election period.

The boring bits are turning out to be fascinating.

Now, for two weeks in a row, the script has gone wrong. Ten days ago Professor John FitzGerald of the ESRI confessed. He had failed to warn about the property crash. He would carry the guilt to his grave. He made a "big mistake".

Last week, a former big shot in the IMF went in to bat. Prof FitzGerald's mea culpa from the previous week was outshone by another professor.

Donal Donovan, former IMF deputy director, said that IMF staff had endorsed the view of the Central Bank that Ireland's property market would enjoy a "soft landing".

Professor Donovan insisted that he was speaking in a personal capacity, but he must have known that while he was doing his former employers no favours, he was doing the State some service. These professors have an awkward habit of telling the truth and upsetting the apple cart.

Suddenly the ESRI, the Central Bank and the IMF are all cuddling up in the same dunce's corner. None of them foresaw the property or banking crash. Unwittingly, they are providing cover for the day that Bertie and his gang come in as witnesses. Where better was there for the government of the day to seek advice than from its think-tank the ESRI, its regulator the Central Bank or the global watchdog, the IMF? The star witnesses will all point to their evidence.

Prof Donovan did not mince his words. "I think it is widely accepted that the IMF's surveillance process failed in Ireland," he insisted.

He could say that again. Indeed, if he had been feeling more mischievous he might have read out extracts from the IMF's 2006 Country Review. In August 2006, less than a year before the crash, the mighty IMF's economic review was almost euphoric about Ireland, asserting that "thanks to largely sound policies - including prudent fiscal policy, low taxes on labour and business income and labour market flexibility, Ireland's economy is performing well. Growth is strong, unemployment is low and labour participation is rising... Government debt has been reduced dramatically over the past two decades. Inflation is close to the euro-area average..."

The IMF review slipped in a few token caveats about "heavy reliance on building investment, sharp increases in house prices and rapid credit growth". Yet there were no red lights, not even any amber ones. It even committed the cardinal sin - of giving the all-clear to the diseased Irish banks, insisting that "major lenders have adequate buffers to cover a range of shocks".

Echoes of former regulator Pat Neary's claim that Irish banks were as well capitalised as any euro rivals.

Bertie Ahern, Brian Cowen and the entire banking fraternity will be greeting those IMF sentiments with glee as they wait their turn to appear before the inquiry.

How could the simple man from Drumcondra have foreseen the bank collapse if the global policeman, his own regulator and the cautious ESRI were all advising him that there was no need for alarm? There was just a correction, a blip, a soft landing.

Indeed, the IMF threw caution to the winds about the condition of the banks. In September 2007 - after a visit to Ireland - the IMF reported the banking system "is well-capitalised, profitable, and liquid and non-performing loans are low". Admittedly there was a meek reservation. "However, bank lending to construction and real estate firms amounts to 47pc of GDP."

Perhaps the visiting gurus from the IMF had been talking to Ireland's social partners. The all-powerful oligarchs that ruled Ireland at the time were intoxicated by the boom for which they felt such pride and ownership. Writing in The Irish Times in August 2007 the chief policy director and current director-general of Ibec, Danny McCoy, waxed enthusiastically about the economy.

In an article headed 'Prosperity will not come to a sudden end', the Ibec boss dismissed the doubters.

McCoy offered a few hostages to fortune that may even have been read by the IMF visitors. His insistence that "the belief that Ireland's prosperity may be coming to a shuddering end does not stack up... But a reality check is nonetheless warranted" was trumped by many other embarrassing claims.

He greeted the decline in house-building, the slowdown in consumer spending and the fall in the growth rate as "signs of a welcome rebalancing of the economy. A rebalancing of the economy that we should cheer, not fear."

Ouch. McCoy's optimism prefaced six years of recession. The Ibec man even clung to an IMF report for support.

He summed up with the rousing words: "even with growth slowing somewhat, Ireland will continue to outperform its neighbours by a good margin".

It seems likely that McCoy, an insider to his fingertips, was one of those consulted by the IMF when they visited Ireland to take the temperature of the economy. According to reports at the time, they reached their bullish conclusions after talking to representatives of business organisations, banks, economic research bodies, the Minister for Finance, regulators John Hurley and Patrick Neary, and officials from the Department of Finance. All together on Planet Property boom.

Did they speak to Morgan Kelly? Or David McWilliams? Or even Alan Ahearne?

No, the IMF does not do heretics.

But it breeds one or two. Not only has the honesty of Prof Donovan enlightened us about the flawed judgment of the IMF, but last week another heretic popped up from the same IMF stable. Both will be equally unwelcome to the establishment.

Former IMF head of mission in Ireland, Ashoka Mody, had words of scorn for the current Government. He torpedoed Enda Kenny and Michael Noonan's efforts to convince the nation that they clinched the best possible bailout deal for Ireland in negotiations with the IMF in 2011.

In a damning insight into their negotiating skills, Mody declared on RTE and Newstalk that Ireland blew its opportunity. "It fell in with that culture," he said, meaning that it accepted that Irish economic policy was determined in Brussels and Berlin. He was adamant that we had missed a chance to gain a writedown of what he called "odious" [unenforceable] debt. By cravenly bottling it in 2011, we had now made life more difficult for the unfortunate Greeks.

And then Mody plunged the knife into the Coalition when he condemned the unequal burden of the water charges. IMF leaders rarely speak with such honesty.

Noonan dismissed the latest heretic's exocet with characteristic disdain, acidly insisting that the IMF man did very little for Ireland when he was arranging our bailout programme.

Why should he have done? He was on the other side of the table. He obviously concluded Ireland's government were lousy negotiators - pushovers.

The problem with all these heretics is that they speak with the experience of battle at the coalface. Mody was head of the IMF mission in Ireland, Prof Donovan was one of their most respected executives and is currently a member of the Fiscal Advisory Council.

It was not just official Ireland that missed the oncoming collapse. Even the IMF was in the loop.

Thank heaven for the heretics.

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