Banking Inquiry hears 2008 guarantee was ‘too generous’

The government’s bank guarantee from September 2008 was “too generous” and “magnified the fiscal impact of the banking crisis”, the European Commission’s director-general for economic and financial affairs told the Oireachtas banking inquiry on Thursday.

Appearing at the second public sitting of the day, Marco Buti told the committee: “At the same time, it is clear that the decision was taken in a very difficult situation characterised by great risks and uncertainty.”

Mr Buti said he did not envy the decision the government had to take and his only criticism was that Ireland should have consulted first with its European partners given the magnitude of the decision.

He said the limited surveillance mandate of the commission turned out be a “serious problem” when the global financial crisis emerged in late 2008.

“Many crucial events that took place in Ireland between 2008 and 2010 concerned the banking sector and thus fell outside the range of the European Commission and my DG in particular,” he said.

Mr Buti said the commission’s fiscal surveillance was limited in scope before the crash, with EU member states preferring to retain their own economic sovereignty.

Mr Buti said the implementation of the €85 billion Troika financial assistance programme was “smooth and efficient” but they could have done more to reduced the burden on the less well off.

Mr Buti said he would not change in any fundamental way the basics of the programme.

Bailout programme

He said the commission was aware of the the stance of the European Central Bank (ECB) in November 2010 to the effect that it would not continue to support the Irish banks without the country entering a bailout programme although it was not a party to the letter sent by the former ECB president Jean-Claude Trichet to the late minister for finance Brian Lenihan.

“We did not have any willingness to influence the ECB at the time,” he said.

The EU-IMF Troika was right not to allow for the burning of senior bondholders at Irish banks in 2010, when the original bank guarantee expired and as Ireland was negotiating its bailout programme, Mr Buti said.

“We [the Troika] came to the common judgement that this was not the right thing to do,” he told the committee, adding that the ECB was “very forceful” on the matter.

He told the committee that Ireland and the euro zone found itself in a “life threatening” situation in 2010 and it would have been “too risky” to bail-in senior bondholders at Irish banks, which could have led to “spillover effects” in the rest of the euro area.

Mr Buti said there were uncertainties with the legal systems in place at the time and it could have led to litigation by the bondholders.

Mr Buti has been director-general for economic and financial affairs at the commission since 2008.

His evidence follows that of former International Monetary Fund (IMF) deputy director Ajai Chopra, who became “the face” of Ireland’s bailout programme from 2010-2013.

Mr Chopra said the ECB “worsened” the economic crisis in Ireland and the letters between Mr Trichet and Mr Lenihan in 2010 showed an “ultimatum” being issued to Ireland over entering the bailout.

In the final session in the afternoon, the inquiry will hear evidence from Minister for Finance Michael Noonan. Among other topics, he will be questioned on the Government’s response to the crisis since coming into office.