'Unilateral' Irish bank guarantee triggered EU-wide stability measures, says Almunia

IRELAND’S “UNILATERAL” bank guarantee of September 2008 was the trigger for subsequent EU-level actions to preserve Continent-wide financial stability, according to Joaquin Almunia, EU commissioner for competition.

Speaking to an audience of bankers in Dublin yesterday, the Spaniard repeated criticisms he made earlier in the week of the guarantee. Among other things, Mr Almunia said that it had limited the “margin for manoeuvre to seek burden-sharing from senior bondholders”.

In a more veiled criticism, he said the EU countries played as a team in responding to the crisis “most of the time”.

Mr Almunia was blunt in his criticism of Ireland’s banks. Speaking at a subgroup of the Irish Banking Federation yesterday, he said: “Ireland’s financial woes originated in excessive and careless lending by the Irish banks to the commercial real estate sector.”

He went on to say that banking sectors could not be allowed reach a size “disproportionate” to the economies in which they operated. In Ireland’s case the “economy needs smaller, more robust and more prudent institutions”.

He said that another factor in the crisis was a failure of the State regulator to assess risk in “traditional” lending.

In the future, Mr Almunia warned that the creation of two pillar banks will “create a de facto duopoly”.

He said Irish and EU authorities would have to work to ensure consumers enjoyed the benefits of competition in the sector.

Mr Almunia’s competition directorate-general is among the most powerful in the European Commission. Among other things, it vets aid given by states to commercial enterprises, which is prohibited for the most part in the EU. When aid is given, it is subject to strict conditions.

In the aftermath of the outbreak of the financial crisis in September 2008, the state aid rules were temporarily suspended for the financial services industry as governments scrambled to prevent their banking systems collapsing.

Now, those banks that received state aid are being restructured so that they do not have an unfair competitive advantage over unaided banks.

The commission has a veto over all restructurings and continues to play a central role in the ongoing restructuring of Irish banks.

Mr Almunia noted yesterday that governments in the 27- member bloc had given €2,000 billion to financial institutions since 2008, and even more had been made available.

He described the figures as “staggering”.

Ireland’s bank bailout has been by far the most expensive in the EU, the commissioner stated, reaching 33 per cent of gross domestic product.

The Netherlands has had the second most expensive bank rescue, at 6.6 per cent of GDP, he added.

Belgium and the UK suffered costs of 5.4 per cent and 4.4 per cent respectively.

Mr Almunia praised the European Central Bank’s reaction to the three-year-old crisis, describing it as “outstanding”.

The commissioner also expressed his admiration for the Government and the Irish people for “tightening their belts” and showing “discipline”.