Lagarde interview: Lessons learned from Ireland’s crash
IMF head Christine Lagarde says right decisions have put economy ‘off to a good start’
Christine Lagarde offered me a date. No, this isn’t a reference to the interview the International Monetary Fund managing director has given. She is sitting down with The Irish Times to look back at Ireland’s three-year bailout programme of recovery from crisis before she speaks on the topic at a conference in Dublin today.
This was an actual date. They were lined up neatly in a red box on a table in her spacious office a few blocks from the White House. I politely declined the date – there was too much to talk about in the time the IMF had allotted.
The subject of the conference at Dublin Castle is “Ireland – Lessons from Its Recovery from the Bank-Sovereign Loop.” Ms Lagarde is speaking in a panel discussion alongside Minister for Finance Michael Noonan, European Central Bank board member Benoît Cœuré and Valdis Dombrovskis, vice-president of the European Commission.
Taking the helicopter view of what Ireland did right to repair the economy since the devastating 2008 crash, Lagarde pauses to think and points to two things: “the ownership of the measures” and “the right diagnosis of what the issues were – namely a largely inflated banking system and a housing bubble”.
She admits that the repayment of senior bondholders in defunct banks (Anglo Irish Bank and Irish Nationwide Building Society, which account for €34 billion of the public’s Irish crash bill) was “not optimal” but was the best choice at the time in the absence of a formal mechanism to prevent the crisis deepening.
“It’s certainly a lesson that was learned by all those who looked at the situation and, unfortunately, at the time when the decision was made, it was probably the only option available,” she said.
There was “no big firewall” to protect contagion spreading from the banks to the sovereign at that time, she says.
Ireland has set standards for the correct measures to follow towards a recovery, she says – “the ownership, the collective drive, the Irish resilience coupled with the right diagnosis and the focus on the banking system”, she said.
“But it also sets standards in what we need to build to avoid a repetition of this situation – namely, a strong firewall and the ability to shortcut the risk of contagion between the banks and the sovereign. We are not quite there yet but we are heading in that direction.”
Ms Lagarde, in her previous role as France’s finance minister, had a front-row seat for Ireland’s crisis in September 2008. She vividly recalls the early morning telephone call from then minister for finance Brian Lenihan informing her that the government had decided overnight to guarantee the Irish banks.
“This is what I have to do,” he told her.
“We can’t rewrite history. Decisions were made on the spur of the moment under a climate of extreme crisis,” she said. She wished Europe’s finance ministers had been consulted during the frantic discussions the night before.
“Had we had the night to think it over, to bring the key finance ministers together around a conference call, we might have come up with a different solution,” she said, adding that what happened happened.
“I know he did the best he could and he thought at the time in view of the abyss that was just coming up and the risk of the run on the banks.”
Ms Lagarde says that IMF rules prevent her from testifying in public before the Oireachtas banking inquiry but she welcomed the review, saying that it would help to inform future political leaders.
Excluding the decision not to “bail in” senior creditors in the bust Irish banks to share some of the losses, Ms Lagarde agrees that Ireland is a textbook path to follow in an economic recovery from crisis.
But, despite the State being held up as such a success story, more than half of the population, if political opinion polls are anything to go by, support people outside Government or the political establishment.
“It is very easy when you are on the outside, not involved, don’t have to make decisions, do not really assess risk with a sense of accountability because you are in the job,” she said.
She cites a French phrase – “Y’a qu’à faut qu’on” – to describe this position. It’s kind of like saying, “it’s simple; all you have to do is…”. It is an expression often directed with irony at people who tend to underestimate the complexity or consequence of major decisions.
“Measures had to be taken and clearly it was needed to restore the economic situation of Ireland,” she continued. Ms Lagarde points to the lower unemployment rate and the reduction in the public deficit as examples of how the hard decisions have helped the country.
“I am not obsessed with numbers but they are good indicators that huge progress has been made to stabilise the economy,” she said.
“If you ask me of the assessment today, I would say that the Irish economy is off to a good start. More needs to be done to make sure that people have jobs, that people actually perceive the strength of the recovery.”
But does the public not have a substantive point that the economic adjustment has been so severe for so long that there should be some relief at this point, from public and private debt?
“So much has been done over the last five years that clearly the path and trend is going to be easier and slower but it doesn’t mean to say that we can all go back to business as usual in 2007 – the borrowing binge, the excess that we saw, not especially in Ireland but generally,” she said.
“The housing frenzy is not healthy and we cannot go back to that. What is in people’s mind is this past and gone El Dorado… The crisis has reset expectations, reset levels of growth. The post-crisis must create jobs for the people who have lost them.”
“It is for the elected representatives and the people of the country to have enough of a dialogue and a consultation to see what is feasible in the public interest,” she said.
She adds that in Ireland, like in many countries, resources have to be managed and to be managed properly. Costs and external costs – what she calls “eternalities” – have to be taken account.
“What is key is that people be protected so that children, poor people, underprivileged be protected from a harsh increase,” she said.
She says that natural resources cannot be assumed to have no cost; if that is the assumption, then they can be wasted.
“Economically you see it – something that doesn’t have a price is deemed to have no particular value and when something has no particular value, it goes to waste,” she said.
She described the protests by members of the public over the water charges as “sort of unexpected consultations” in response to which the Government chose to relax plans for the water costs.
“It is the time to fine-tune, phase over time, bring some transition period, some progressivity about it,” she said. “This is happening and it has to happen through the dialogue that has been the hallmark of Ireland and the reason the recovery is off to a good start.”
Ms Lagarde says reductions in tax, as started by the Government in the last budget – with further cuts promised – are possible if they are affordable and the State’s fiscal deficit is reduced significantly.
“What I hope is that all the efforts and all the sacrifices that were made in the last five years will not be in vain and will not be wasted by excessive measures,” she said. “But, you know, I would trust the wisdom of the Irish people to see what is in the best interest of the country, of the economy and of the people of Ireland.”
Such a conference is modelled on the 1953 London conference that wrote off a large part of Germany’s post-war debt and extended the repayment period on the remainder. Government sources suggested that Irish, Spanish and Portuguese debt could be included in a similar present-day agreement. Ms Lagarde declines to comment on what Mr Noonan said because she has not had a chance to see his remarks.
“Collective approaches are always good at the European level,” said Ms Lagarde, speaking generally about the idea. “As a principle, collection endeavours are welcome but at the same time a debt is a debt and it is a contract. Defaulting, restructuring, changing the terms has consequences on the signature and the confidence in the signature.”
She reserves judgment on whether Greece’s debt pile, at 175 per cent of the country’s GDP economic output, is sustainable.
As for whether the debt levels of EU peripheral economies in general are sustainable at a time of such low economic growth, Ms Lagarde observes that Ireland’s debt has reduced significantly.
“All of that was not with a very high growth so there is no reason to expect that it will not continue to go down if the recovery is pursued,” she said.
Declining to give her view on growth outlook for Europe ahead of publication of the IMF’s world economic outlook this week, Ms Lagarde says she is “pretty certain that Ireland will continue to lead the pack”.
National governments should focus on sensible fiscal policies that show both sustained discipline and growth-friendly measures and on structural reforms, she says. This second priority doesn’t apply so much to Ireland, she adds. A third focus should be on investment, including in public infrastructure for countries that can afford it.
The European Central Bank has “done an awful lot”, she says, and is “carrying on its shoulders a lot of helpful policies to support growth”. She noted how Mario Draghi, the president of the central bank, had very early on in the crisis said the ECB would do whatever it takes to protect the euro and guarantee economic recovery. The broad endorsement of the ECB’s unlimited sovereign bond-buying by the advocate general of the European Court of Justice, Europe’s highest appeals court, last week would provide “comfort” on the options available to him, she said.
“We certainly hope that the ECB continues to support the recovery in Europe. It is needed. It cannot be the only one to do it but it has to do what it has to do,” she said.
Terror attacksCharlie Hebdo
One of the murdered cartoonists, Jean Cabut, better known by his nom de plume Cabu, famously drew Ms Lagarde as a cucumber and her predecessor at the IMF Dominique Strauss-Kahn as a pickle just before she was about to take up her role in Washington.
“Un concombre pour remplacer un cornichon?” read the headline next to the front-page cartoon in a June 2011 edition of Charlie Hebdo.
The portrayal has left her with no bad feeling – quite the opposite, in fact; the IMF managing director was among those who attended a vigil on the night of the attacks at the Newseum, the museum on Pennsylvania Avenue in Washington dedicated to the media and the US First Amendment right to freedom of speech.
To say she was shocked at the attacks was “an understatement”, she said.