Unfair to make taxpayers pay while bondholders escape - Chopra

Former Irish IMF mission chief outlines lessons learned from bailout

Ajai Chopra, former IMF Ireland mission chief, says it’s “unfair” to make taxpayers carry the cost of supporting banks while senior unguaranteed bondholders get repaid in full. Photo: Dara Mac Donaill / THE IRISH TIMES

Ajai Chopra, former IMF Ireland mission chief, says it’s “unfair” to make taxpayers carry the cost of supporting banks while senior unguaranteed bondholders get repaid in full. Photo: Dara Mac Donaill / THE IRISH TIMES

Thu, Dec 19, 2013, 16:09

The Irish bailout has shown that it is “unfair” to make taxpayers carry the cost of supporting banks while senior unguaranteed bondholders get repaid in full, the former IMF Ireland mission chief, Ajai Chopra has said.

In an interview published by the IMF to mark the end of the bailout, Mr Chopra said the policy pursued in the case of such bondholders in Irish banks both added to sovereign debt and created political problems, thus “making it harder to sustain fiscal adjustment”.

Mr Chopra said subsequent developments, after bondholders had been repaid, have shown that bailing in such creditors “is now becoming more accepted”.

The observation is among five lessons Mr Chopra said the Irish crisis had taught international policymakers. He said it was also now clear that when a government is dealing with a systemic banking crisis, “it needs to come to grips with the situation quickly”. In the case of Ireland, he said,the crisis emerged in 2008 but was not sufficiently addressed until 2011.

The Irish decision not to proceed “even faster” with fiscal consolidation was, however, correct, according to the analysis.

“Investors also care about growth,” he said.

Fourthly, the former mission chief said the Irish experience illustrated the danger of “feedback loops”, whereby weakness in bank, government, household and company balance sheets all interact with each other, causing economic activity to stagnate.

“These feedback loops need to be arrested,” he said, suggesting that “even greater euro zone solidarity” could help with this.

Finally, according to Mr Chopra, we have learned that it is best to let governments design the key components of their own rescue programmes.

“Only then do you get full commitment to the measures as in Ireland.”