Former IMF chief says Irish authorities were not helpless over EU policy

Economist feels Irish could have pressed for a better deal from Europe

Former IMF mission chief for Ireland Ashoka Mody, says he believes bondholders should have been burnt, be they lenders to the Irish banks or the State.

Former IMF mission chief for Ireland Ashoka Mody, says he believes bondholders should have been burnt, be they lenders to the Irish banks or the State.

Fri, Dec 13, 2013, 01:00

Freezing temperatures and heavy snow in late November- early December 2010 meant the International Monetary Fund’s mission chief for Ireland, Ashoka Mody, could not fly out of Dublin after helping design the Irish bailout programme.

It was a day after the bailout was concluded and Mody returned to the Merrion Hotel in the city centre where he met the then minister for finance Brian Lenihan in the lobby. They agreed to have lunch the following day.

Mody knew Lenihan was suffering from cancer. The Indian- born IMF economist had a book by Bohemian-Austrian poet Rainer Maria Rilke with him at the time.

He read Lenihan a poem about how wonderful life is and that, when facing death, a person should not be afraid but should rejoice in life.

“I looked at Brian and his expression was, ‘what was the punchline’?” said Mody. “Brian always knew it – it was how he operated. I saw it in action. Knowing he was going to die, he put his heart and mind to work in a way that was just stunning. It is a memory that will always stay with me.”

Three years on, speaking after another heavy snowfall, this time outside his office at Princeton University in New Jersey, Mody, now retired from the IMF, is not nearly as complimentary about how the European authorities dealt with the Irish crisis or their prospects for kickstarting economic growth.

Instead of “muddling through” the crisis, he believes the European authorities, his former partners in the troika while working as a senior IMF official in Washington, have become stuck in a “muddle”.

Europe’s aggressive, single- minded focus on austerity by way of sharp tax increases and deep spending cuts at the expense of measures that might encourage economic growth in a programme of sharp fiscal consolidation was “analytically, practically and institutionally wrong,” said Mody.

The fundamental error was in the European authorities taking the view that if you do not aggressively consolidate you will be seen to be “fiscally profligate” losing you vital fiscal credibility, he said.

The argument that the financial markets would have been scared if Ireland did not continuing cutting and taxing its way out of the crisis was “completely wrong”.

Markets could have been trained to think that it was good both ways. “In the end when they do not see growth, they get as scared as when they don’t see consolidation,” said Mody.

He believes another error was not burning bondholders, be they lenders to the Irish banks or the State, because a system of orderly debt restructuring – write-offs – is fundamental to the integrity of the euro zone.

“If that system is not an integral part of Europe, I think Europe is tying its hands in a very deep economic way with enormous social repercussions,” he said. Mody argues that Ireland could have been “more pushy” with the European Commission and the European Central Bank in arguing for less austerity and more measures to stimulate growth.

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