Gabriel Makhlouf: ‘A full second lockdown would be very serious for the economy’

Interview: Central Bank of Ireland governor ‘particularly worried’ about mental wellbeing

Gabriel Makhlouf, the Central Bank of Ireland's governor of 12 months, has not been immune to time taking on a whole new meaning in the world of Covid-19.

"Someone asked me the other day, 'How's your year as governor been?' And I said, 'What, during the year since I started, or the two years since March?'" Makhlouf (60) tells The Irish Times, from a socially-distanced spot on the sofa in the corner of his second-floor office overlooking the Liffey.

Getting into the bank’s eerily quiet headquarters – which has normal capacity for more than 1,400 people – to interview the governor is a feat in itself with the virus on the loose, requiring all kinds of clearance and the reading of a 10-page visitor manual.

Cairo-born Makhlouf, son of a Cypriot-British father and Greek-Armenian mother, had to run the show remotely for about 12 weeks while stranded in Greece at the height of European lockdowns between mid-March and June after visiting his elderly mother. He currently gets away from working at his dining room table to venture into the office about once a week.


“I don’t particularly like remote working,” he says. “But I have to say that people in the bank virtually everywhere responded to this virtual world incredibly well.”

The Central Bank – still dealing with the legacy of the financial crisis as Makhlouf arrived on the scene – was thrown, like most organs of the State, into adrenaline mode as coronavirus struck.

With almost all its 2,000-odd staff switching to working from home in March, it stepped up the supervision of funds, banks and insurers as financial markets went into meltdown. It has needed to be all over how lenders were dealing with distressed borrowers and bad-debt provisioning; press hard on insurers – with questionable success, to date – to pay out on “grey-area” Covid-19 claims; and ramp up hits role in highlighting risks on the horizon to the market, public, and the Government.

In a letter to Minister for Finance Paschal Donohoe before next month's budget, published on Wednesday, Makhlouf said the Government's financial response to the health and economic shocks has been "warranted and necessary to mitigate the worst effects of the pandemic", even if it has triggered a fresh budget deficit and sent the Government debt in the wrong direction. Taoiseach Micheál Martin is factoring in a €30 billion deficit for the year – or 10 per cent of gross domestic product (GDP).

The governor also said “additional policy action is likely to be required” to help the economy, and reduce “scarring effects” from the crisis as well as the risk of otherwise viable firms going bust.

Still, he said it is important the Government sets out a “clear, credible and time-bound” path to much lower deficit and debt positions. Donohue and Minister for Public Expenditure Michael McGrath said this week that it will be next spring before that is outlined.


Makhlouf also popped up at a webinar event hosted by the Institute of International and European Affairs (IIEA) on Monday, saying it was now wise to assume the UK will fail to secure a trading deal with the EU by the end of the year – as Boris Johnson seeks to push through laws that would breach the withdrawal agreement he signed in January.

A no-deal would knock 1-2 percentage points off the growth rate of the Irish economy next year, according to the governor. The bank’s current central forecast is that GDP will rebound by 5.7 per cent in 2021, following a 9 per cent contraction in 2020.

The bank’s “severe scenario”, which is based on the reintroduction of strict lockdown measures and continued spread of the virus, would result in the economy shrinking by 14 per cent this year.

“The very big unknowns here are the paths of the virus and a vaccine,” says Makhlouf in our interview.

With global pharmaceutical groups racing to develop an effective vaccine against the virus which has officially infected about 30 million people worldwide and claimed almost 950,000 lives, Dr Mike Ryan, head of the World Health Organisation's (WHO) health emergencies programme, highlighted this week that there's no guarantee one will be found.

Meanwhile, on Tuesday the Taoiseach unveiled a five-level plan for how the State can live with the virus, ranging from Level One with limited restrictions on gatherings in places from households to bars and restaurants, to Level Five, which would be close to the lockdown earlier this year, save for schools remaining opening and small weddings allowed.

The Cabinet is expected on Friday to act on the advice of health experts and move Dublin, where infections have been growing rapidly in recent days, to Level Three, which would ban people from leaving the county for non-essential journeys, limit outdoor gatherings to 15 people and attendances at funerals and weddings to 25.

Makhlouf, speaking before the blueprint was unveiled, is wary of any return to the severe restrictions of the spring.

“I do think that the consequences of full second lockdown would be very serious for the economy, but more than just the economy,” says Makhlouf. “One thing I’m particularly worried about at the moment is just the mental wellbeing of people – of my own staff and the wider community.

“So I’d like to think that a second lockdown can be avoided, and that we find ways to manage and contain the virus. Some of it will be about making sure the health system has got the capacity to manage multiple cases.”

Payment breaks

The coming weeks will see thousands of households and businesses come off Covid-19 loan payment breaks of up to six months.

About half of the 86,000 mortgage breaks granted by lenders in the Republic since March were active in late August, as many returned to making regular payments as they recovered from the economic shock, according to the Banking and Payments Federation Ireland. A higher percentage of small businesses took the opportunity to extend initial three-month banks to a maximum six months under the industry-wide initiative.

Although there has been speculation in recent weeks that banks may offer an extension to payment breaks at industry-level for particularly vulnerable business sectors, this has gained little traction.

“Lenders still have the discretion to extend payment breaks under their normal toolkit (for problem loans), but I think we’re now probably getting to the point where it’s starting to become more than a payment break,” he says, adding that banks need to focus now on restructuring problem loans that have little chance of returning to normal payments to “avoid repeating the problems of the past”.

Makhlouf says there also needs to be a fresh look at legacy bad loans, more than a decade after the property crash. More than 26,400 owner-occupier mortgages and about 10,300 buy-to-let loans were greater than two years in arrears at the end of March.

Is he suggesting current rules favour borrowers who refuse to engage with lenders?

“It probably does need everybody to look again at where we are. Or what I mean is, the bankers, the regulator, the many civil society groups, and the Government. All stakeholders in this project need to look again at where we are. What are the rules? And do we think they’re still fit for purpose? I wouldn’t like to jump to the conclusion that they’ve gone too far in one way or the other,” he says. “It needs to be resolved some way.”

Meanwhile, figures published by the Central Bank this week showed borrowers behind almost 24 per cent of all small-business (SME) loans from AIB, Bank of Ireland and Ulster Bank secured payment breaks during the Covid-19 crisis. The figure was as high as 59 per cent for food and accommodation firms, followed by arts, entertainment and recreation companies, at 45 per cent.

The Government finally launched a long-awaited €2 billion scheme, guaranteeing 80 per cent of new loans to SMEs, last week, adding to other supports on offer, including grants.

Makhlouf says it will be difficult separating companies that have a viable future from those that don’t.

“Your starting point will be quite an important factor in any lender’s decision about whether you’re viable or not,” he says. “There’ll be some businesses who’ve been run badly – that, irrespective of the pandemic, are probably on their way out. There are other businesses that have been run extremely well, and what’s impacting them is simply the pandemic. And then it’s just a question of making the best possible calculation as to how long this will carry on for.”

“And then there’s a bunch of businesses – like, for example, those that rely on commuter traffic – that may have to reimagine themselves if companies actually go in for this remote working in a big way. And some of them may not be viable.

“Part of what we’re seeing, but in a very dramatic way, is the ebb and flow of economic activity that leads some businesses to thrive but others have to reinvent themselves.”

Fresh start

Makhlouf himself is no stranger starting afresh. The holder of an honours degree in economics from the University of Exeter and a master's in industrial relations from the University of Bath, he began his career in 1984 as a tax inspector. He went on to climb his way up the ranks in Her Majesty's Revenue and Customs to head up its debt management and banking directorate, having also done a stint as principal private secretary to then chancellor of the exchequer Gordon Brown at the start of Tony Blair's administration.

In 2010 he joined the New Zealand Treasury, and was appointed chief executive and secretary the following year.

Makhlouf became the last government's surprise choice in May 2019 to become the 12th governor of the Central Bank, making him the first overseas official to fill the post since the organisation was founded in 1943. The vacancy had been left by the early departure of Philip Lane for Frankfurt to become the European Central Bank's (ECB) chief economist.

“At about Christmas time December 2018 I knew that my contract was coming to an end. My wife, Sandy, wanted to come back to Europe. She said, ‘If you can get a job that’s within 12 hours of London, that’s fine’. It meant that up to Singapore and LA were within the range, but Australia and New Zealand weren’t. But I said to her, ‘I’m going to finish my term. I’m going to take two months off and have a complete break, go to the Greek islands, and then I’ll start looking for something else to do’. That was the plan,” he recalls.

Makhouf got a call in early 2019 from headhunters scouting on behalf of Donohoe for Lane’s replacement.

“What piqued my interest – aside from coming back to Europe – were two things in particular: the combination, which this job provides, of economic leadership and organisational leadership, which are things that I am personally interested in.”

If the career civil servant thought he was going to have an easy glide into the new role, he was mistaken. Within weeks of his appointment being announced in that May, Makhlouf reacted to the publication of snippets of information on the country’s upcoming budget by claiming to reporters that the ministry’s IT system had been hacked.

It later emerged, however, that the information had been published accidentally on the ministry’s website and could be accessed using a search function. An initial investigation concluded within a month that Makhlouf sought to blame others and managed the incident poorly – but that he had acted in good faith and was politically neutral at all times.

“Well, I think there was a particular incident and the way I managed it, or the way I got involved in it, I could have done differently,” he reflects now. “I went to the media too quickly at the time.”

On his first day at the helm of the Central Bank, Makhlouf told staff he would be in "listening mode" for his first few months. His first field trip was to the National Ploughing Championships, and he chose Waterford for his first key note speech, addressing students and staff at the local institute of technology and members of the chamber of commerce.

“I think it’s important for this institution that it gets out, that it understands what’s happening to the real economy,” he says.

Covid-19 has forced him to postpone other plans for official travels around the country, even if he adopted the zeitgeist of the summer by opting for a staycation with his wife in August.

"We went down to the bottom of Wicklow, across to west Cork, Killarney, Galway, Dingle, Connemara, Donegal and back. It was for relaxation and sightseeing, but you also got you quite a good feel for what was going on. Actually, one of my takeaways was how busy everything was."

With coronavirus cases on the rise again as the country heads into winter, the summer respite appears to have been all too brief.