IMF urges EU to keep pledges on bank debt

DUBLIN ECONOMICS WORKSHOP:THE IMF'S representative in Dublin, Peter Breuer, has said it is important the commitments made by EU leaders regarding bank debt at the June summit are upheld.

Welcoming Ireland’s return to the bond markets earlier this year, Mr Breuer noted most of Ireland’s recent debt issuances occurred after the euro leaders’ summit.

“Much of this market access came shortly after this June 29th announcement by the heads of state, so it’s important then that the commitments that were made then are actually implemented so that market access will in fact manifest itself on a regular and sustainable basis,” he told delegates at the annual Dublin Economics Workshop in Galway.

EU leaders pledged at the June 29th summit to review the Irish bank bailout, but a German-Dutch-Finnish statement two weeks ago cast doubt over the scope of any intervention.

Separately, European Central Bank executive board member, Joerg Asmussen said on Saturday that Ireland and Portugal were not yet eligible for the European Central Bank’s new bond-buying programme, known as Outright Monetary Transactions (OMT). Pointing out that countries can only qualify when they regain full bond market access, Mr Asmussen said recent moves by Portugal were “not sufficient to qualify for the OMT – it is not full market access”.

Though Ireland continues to be funded by the IMF-EU programme, the NTMA began to re-enter the bond market this year, issuing T-Bills in July and more long-term amortising bonds in August.

In a speech on the euro zone economy delivered at the workshop, Mr Breuer said that, despite major policy actions, financial markets in parts of the euro area remained under stress, with unemployment a major issue across most euro zone countries.

He noted an increasing divergence between peripheral and core countries in terms of interest rates, with higher interest rates in place in the so-called peripheral countries at a time when lower rates “are needed most”.

He said that a European banking union, which would involve common deposit insurance, a common bank resolution system and common supervision, was “the first priority” for Europe, noting that stress in the banking system was a bigger issue in Europe than in the US, because financial intermediation in Europe was more dependent on banks, and there was a much stronger relationship between GDP growth and private sector credit growth in Europe.

Pointing out that the absence of a bank resolution process and an insistence on paying unsecured bank creditors had exacerbated the financial crisis, economist Colm McCarthy said the implementation of a bank resolution process was essential. Using data from the IMF, Mr McCarthy said the fiscal cost of a banking crisis for countries could sometimes be 50 per cent of GDP.

“The quickest way to go bust in a currency union is to embrace unknown bank – in other words foreign currency – liabilities,” he said, noting the Irish bailout could be one of the most costly ever.

Earlier, Prof Joe Durkan of the ESRI criticised what he described as a lack of leadership at the heart of the euro zone. In a paper that compared the approach adopted by the ECB to the financial crisis to that pursued in the US and the UK, he said Europe appeared to be floundering.

“There is no dominant economist at the helm,” he said, pointing out that the ECB’s decisions on issues such as interest rates suggested a sense of “confusion about what they should be doing”.

Ciarán O’Hagan of Société Générale said that while there had been calls for aggressive bond-buying by the ECB, any programme of official bond-buying would necessarily result in smaller holdings of Government bonds by bona fide investors.

As long as prices were held well above what were seen as market clearing, investors would sell, he said. “Shouldn’t crisis resolution mean a re-engagement with buyers of bonds . . . rather than getting them to sell?” he asked.

As regards the forthcoming OMT, he said the ECB should quantify how much it was going to purchase and over what time-frame.