EUROPE’S COMPETITION commissioner has declared Ireland’s banking guarantee was a mistake whose sweeping scope served to concentrate losses on taxpayers.
Joaquín Almunia told The Irish Timesthat the intervention in September 2008 resulted in citizens having to assume responsibility for losses that would have been "better distributed" in the absence of an unlimited guarantee.
Mr Almunia, who is overseeing the €70 billion rescue of the Irish banks for the EU’s executive branch, also warned against the development of an entrenched duopoly as the AIB and Bank of Ireland “pillar banks” recover.
The commissioner said the guarantee curtailed the capacity of the authorities to impose losses on senior bank bondholders and undermined the Irish sovereign.
Interviewed in advance of a visit to Dublin today, the commissioner said “Yes, indeed” when asked whether the guarantee as enacted was a mistake.
Mr Almunia, who at the time was EU economic and monetary affairs commissioner, believes he is not the only top-ranking European official to hold such views. “I never carried out an opinion poll on this particular issue but I have a feeling that I am not the only one who thinks this.”
He said the then government’s failure to notify the EU authorities in advance of the intervention was “very unfortunate” and noted that the initiative came as a big surprise among senior euro zone figures.
“To my knowledge, everything was explained and [discussed] ex poste. I remember some conversations with the Irish authorities that they tried to explain to us why it was not possible to establish the contact, but in any case I think everybody learned from that experience, from that bad experience,” he said.
“If I remember well, it was at the end of the September 2008 when the Irish authorities – without notification here [Brussels] – extended an unlimited guarantee to assets, also to creditors; and all those bondholders that can benefit from this unlimited guarantee, they are protected.
“This was not our decision; even this was not a decision that had been notified here ex ante. We were dealing the day after with – how do you say? – a fait accompli.”
The commissioner was speaking this week before Minister for Finance Michael Noonan declared his intention to impose losses on senior unsecured unguaranteed bonds in Anglo Irish Bank. Asked why senior bondholders should not be compelled to bear losses in the Irish bank rescue, Mr Almunia said investors who can count on the protection of such a strong State guarantee can avoid participating in burden-sharing.
“It has limited capacity to absorb losses of the stakeholders so the losses one way or another have ended in the public sector, in the public debt, putting the sovereign at risk.”
The guarantee added a new dimension to Ireland’s banking crisis, he said. “Within the euro area, even within the EU, the Irish problems were to some extent similar to the ones we observe in some financial institutions in other countries, but with one particular feature that distinguishes the Irish situation from the others.
“In Ireland, first, all the Irish banking system was affected and the size of this banking system was very, very big in proportion to the Irish GDP. And second, we have these restrictions coming from the fact that unlimited guarantees were in place.”
Mr Almunia blamed lax micro and macro financial supervision for the Irish banking crisis and said there were many lessons to be learned, not only in Ireland. The Irish example strengthened the argument for tougher economic surveillance throughout the euro zone, he said.
“In 2001, so not the day before Lehman Brothers, the commission put forward a proposal to warn the Irish authorities about the overheating of the economy. The Irish authorities of the time and their colleagues at [European] Council level here – the other finance ministers – rejected the warning put forward by the commission, saying: ‘No please, the European Commission should not pay attention to this; this is up to us, the Irish, to deal with these kind of issues. We are very happy with this situation’.”
This underlined the case for economic surveillance to examine macroeconomic imbalances, he said. Euro zone “economies should accept their surveillance at the European level and should pay attention – careful attention – to what is included in the recommendations or the warnings in the EU dimension and in particular the euro area dimension.”
Mr Almunia meets Minister for Finance Michael Noonan and Central Bank government Patrick Honohan today and addresses a gathering of international bank sector executives.
