Bundesbank sympathetic to Ireland's recovery
ANDREAS DOMBRET is the equivalent of foreign minister for Germany’s mighty Bundesbank. One of six members of the central bank’s executive board, he is its representative on bodies such as the International Monetary Fund, the G-7 and the G-20.
The Bundesbank styles itself as the arch-guardian of economic probity in the distressed landscape of the euro zone but Dombret (52) is not a lifer in the institution. For more than 20 years he held senior posts in Bank of America, Rothschild, JP Morgan and Deutsche Bank.
Interviewed in Frankfurt before visiting Dublin yesterday, he makes the familiar case that Ireland is an exemplar for all stricken euro zone countries.
He insists, however, that Ireland has no scope to ease off on the austerity drive and says the Government should set out how it will bring the budget deficit within EU limits in 2015.
He also calls for more clarity over the business plan for the Irish banks. “Sustainable business models of individual banks and the structural question of a banking sector as a whole are two different things,” he says.
“But the markets will look to the final solutions you present there, and they have to be convinced. It’s not up to us to judge on that. The Irish financial sector remains in a critical state, though, as you are aware I’m sure, and there are some question marks which I don’t want to comment on.”
Dombret is sitting in his 12th-floor office, down the corridor from where Bundesbank chief Jens Weidmann presides over Europe’s most powerful national central bank. The Bundesbank is an influential force in the ECB, which has a prime role in the Irish bailout.
“Looking at Ireland from the distance does not put me into a position to provide detailed comments,” Dombret says.
Asked if there is anything the Government should be doing that it is not, he says it is not for the Bundesbank to give advice to Dublin.
“That being said, Ireland certainly has made the largest progress among the euro area countries in trouble, just to be very up-front with that. You have had tough years in Ireland but many signs, many economic indicators point to a silver lining.
“That doesn’t mean that Ireland has overcome the crisis fully. Ireland still faces challenges and problems when it comes to regaining complete market access. But I also think that one can learn a lot from the Irish way of tackling the crisis.”
But it’s not all rosy. “I would like to say . . . that a clear path is needed in Ireland concerning the reduction of your budget deficit below 3 per cent of GDP in 2015. That’s not there yet.”
This brings us to the tension between pushing ahead with the drive to tame the deficit or waiting until later, front-loading or back-loading.
“Back-loading further measures is not really a viable option.”
So the Government should not take the foot off the pedal?
“In my opinion, yes, the more so as in contrast to ‘normal times’, the negative impact of pro-cyclical measures should be smaller than the loss of confidence.
“The IMF typically points to reductions in expenditure always becoming progressively more difficult in later phases of consolidation than in earlier phases.”
In line with the view that it would be unwise for Ireland to seek the same kind of leniency shown to Greece in terms of deficit targets, he says the progress made in Dublin should not be compromised.
“I am complimentary of what has been achieved in Ireland, and, of course, it would be wrong to jeopardise that now.”
On the jagged topic of legacy banking debt, he adheres to the standard German message that such costs should not be borne by the European Stability Mechanism (ESM) fund.
Dombret argues that it is illogical to impose historic costs on a new scheme in which the European Central Bank must ensure banks are properly supervised in the future.
“You cannot say we can only use the ESM for the recapitalisation of banks once we have a single supervisory authority and then say everything which ever happened is also covered. This simply does not follow,” he says.
“In my view, the wish for harmonised bank supervision is separate from the issue of legacy assets. These are two different things and we should address them separately.”
He draws a similarity between the new ECB bank supervisor and an insurance policy, and says insurance typically covers ex ante risks and not ex post risks.
“To put it bluntly, the single supervisory mechanism should not be used for a mutualisation of debt through the back door. You know that we are quite strong on that.”
Dombret says firm proposals for a common resolution system for failing banks are still awaited from Brussels. “We need to wait for the EU Commission to come up with a political suggestion. Our role in this regard is of an advisory nature,” he says.
He also raises the notion of financial transfers to deal with the bank debt conundrum.
“If there’s a political wish for fiscal transfers, that should be made transparent, very much be in the open, and not be disguised by a banking union.”
Addressing the Institute of European Affairs yesterday, he said this should be done “via national budgets and subject to the approval of national parliaments” rather than under the guise of a banking union. “It may be that such fiscal transfers are desired or even deemed necessary,” he said in his speech.
This may well, of course, represent a fundamental shift away from the loans-based bailout policy. If the previous battles of the crisis are anything to go by, such a move would present a clear political challenge.
Dombret argues that Ireland has a good chance of making a full return to private debt markets when the EU-IMF programme expires next year.
“There certainly are a lot of ifs and whens, but it may well be doable. You are well on track to regaining confidence in the market. You are a good example, maybe kind of a role model for other countries that experience similar problems.”
On the piercing question of whether this can be done without an appreciable debt relief deal, he simply won’t go there: “I don’t want to get into scenarios.”
When it is put to him that this question is pivotal, he says he knows that.
“We are sympathetic to Ireland keeping the path of recovery.”
Bundesbank bullion: Controversy over foreign-held gold
HOLLYWOOD GERMANS have always been drawn to gold held in US vaults, from Gert Fröbe as Goldfinger, who held up Fort Knox, to East German terrorist Simon Gruber, who masterminded the gold heist at the Federal Reserve Bank of New York in Die Hard 3.
It’s not just American gold held at the Manhattan bank: for decades it’s been home to nearly half of Germany’s 3,396-tonne gold reserves, currently worth €144 billion.
“There is no doubt about the integrity, reputation and security of these foreign depots,” said the Bundesbank this week.
Not quite: for the last year a group of German politicians, aided and abetted by Bild tabloid, have been asking precisely these questions about the integrity of German gold reserves held abroad.
How can we trust annual reports from the New York Fed that all is well, they argue, when no one from the Bundestag has visited the reserve to do an on-site inventory for decades?
Their outlandish argument: Goldfinger or Simon Gruber could have made a withdrawal and the German people would have no way of knowing. Their campaign has provoked much amusement in most sections of the German media.
“It must be a terrible fear . . . that the Yanks have secretly replaced our gold with copper to finance their Iraq war,” snorted Stern magazine.
But the conspiracy theorists won an important ally this week. Germany’s federal court of auditors demanded improved inventory standards for Bundesbank gold reserves and regular spot checks on foreign deposits that all is as it should be.
The Bundesbank hit the roof, describing the debate as “grotesque”.
But, to settle the matter, the Bundesbank has decided to withdraw 150 tonnes of gold from New York and transport it back to Germany for storage and checks.
Goldfinger: now’s your chance. DEREK SCALLY