INTERVIEW:Bank guarantee restricts Ireland's power to burn bondholders, argues EU competition chief

EU COMPETITION commissioner Joaquín Almunia has a prime role in the €70 billion rescue of Ireland’s crippled banks. The sector’s implosion devastated the public finances but, he says, the State’s recovery prospects give grounds for optimism in the medium term.

Almunia, Spain’s member of the European Commission, has the final say over the Government’s restructuring plan for the banks. The initiative will take years to execute but it has been portrayed as the beginning of the end of an appalling ordeal. AIB and Bank of Ireland will be recast as “pillar” institutions while Anglo Irish Bank and Irish Nationwide Building Society will be liquidated.

This is a far cry from the cavalier optimism of the boom and a brutal antidote to the soothing claims that followed the 2008 State guarantee. Almunia has strong views about that fateful intervention, describing it as a mistake and saying its vast scope curtailed Dublin’s room for manoeuvre as the crisis evolved.

While many hurdles remain before the State breaks free from the shackles of the banks, the commissioner says it will be important once the recovery takes hold to promote the entry of new players into the market.

“I will need to look carefully at the degree of competition in the banking sector,” he says. “The reduction of the number of financial institutions was needed. There was no alternative to this. But, under normal circumstances, in a few years we will need to be careful not to consolidate a kind of duopoly in the banking system.”

Although AIB and Bank of Ireland are largely in Government hands for now, Almunia says the State will ultimately make its exit.

“These banks will be again fully privatised one day or another and at this moment other players or the other foreign-owned banks that are present in Ireland or new entrants should increase competition and create normal conditions for competition in the banking sector.”

He has little time for those who argue that part of the problem in the Irish banking market was that there was too much competition. “The problem was not the number of players,” he says. “The problem was the size of the cake and this huge size of the banking activities in Ireland was explained by the increased housing sector or real estate activities or a bubble.

“So what was missing in the Irish situation before the crisis was adequate micro and macro financial supervision.”

Does Almunia share the perception that the banks had to be dragged kicking and screaming into the recovery room, making the problem only worse? He replies that it’s never easy to recognise the full extent of losses when a banking bubble explodes.

“This recognition by steps creates more difficulties to find a real solution, so it takes longer. This final and real solution is more difficult than if you recognise since the first moment the size of the value destroyed by the crisis.”

Asked whether the same criticism can be levelled at the Irish political leaders, Almunia insists it’s not for him to say as he is not an Irish politician.

A simple question on the Nama plan, which he approved last year, elicits a similar response. “Don’t ask me these kind of questions,” he says. “I am controlling state aid. I don’t look Irish, I’m southern.”

Although he gives little away about his scrutiny of the individual banks, Almunia is far more at ease in that arena. On AIB, which recently acquired the EBS Building Society for a nominal sum of €1, he hopes to receive a formal restructuring plan by the end of July.

Because the bank’s situation kept changing in the last 18 months, the commission has never issued a decision on its restructuring.

“We need to receive this plan and to analyse to what extent this plan that will be submitted complies with all our state aid rules.”

He says Bank of Ireland is in a less difficult situation to the other banks, “in particular in the case of Allied”. Although he approved Bank of Ireland’s original restructuring plan last July, the bank is required to update its plan in line with its new capital requirement under the last stress test.

“We need to revise the position and we need for this purpose to receive a new restructuring plan or a new plan of viability of Bank of Ireland.”

Almunia says he is very close to a final decision on the “orderly liquidation” of Anglo and Irish Nationwide. Although he still awaits “technical information” from Dublin, he says the likely decision will be to proceed with the wind-down. “Given the huge amount of losses and the increasing needs of capital injections, at one moment it was obvious that the liquidation option was the only one on the table.”

On the vexed question of tackling senior bondholders in Anglo, Almunia says the bank guarantee restricted Ireland’s powers for compel certain classes of stakeholders to absorb losses.

He was speaking before Minister for Finance Michael Noonan declared in Washington on Wednesday his intention to impose losses on €3.2 billion of senior unsecured, unguaranteed bonds in Anglo, breaking new ground for the Irish and euro zone authorities.

As economics commissioner at the time of the State guarantee, Almunia saw up close how Dublin first stepped in to prop up the banks. He says this was a “bad” experience for the Brussels authorities, which had no idea that a sweeping intervention was imminent.

“The Irish authorities at the time explained to us that they had no other alternative because of the very deep crisis in the banking system and given the size of the banking system in Ireland that was too big for the size of the Irish economy. Well, in any case, we were taken by surprise by this decision.”

The Irish sovereign was undermined as a result. We all know what happened next.