The Government should ask the European Central Bank to consider allowing Irish Bank Resolution Corporation, formerly Anglo Irish Bank, to avoid repaying emergency funding to the Irish Central Bank until the economy recovers.
The suggestion was made by UCD professor Karl Whelan at an economics conference in Dublin today as a way of reducing the debt burden of Anglo and Irish Nationwide Building Society on the State.
The Government is covering €30.6 billion of the €34.7 billion cost of the lenders now housed in IBRC through promissory notes.
The State is paying IBRC €3.1 billion a year through the notes until 2023 and a declining sum of money every year until 2031.
The structure of the notes means that the State must also pay interest to Anglo which amounts to a further €17 billion over the life of the annual payments until 2031.
IBRC also uses the notes as collateral to borrow emergency loans from the Central Bank through its exceptional liquidity assistance (ELA) facility to fund the bank.
Dr Whelan estimated that the ELA loans to IBRC amounted to about €42.2 billion last year but he said that these debts were notional and that central bank insolvency was a meaningless idea.
“The liability is essentially a fiction,” he told a Dublin Economic Workshop conference. “Central banks can create money and they can just as easily destroy money; they don’t go bust.”
Printing money to bail out insolvent banks and telling the banks that they don’t have to pay it back could be considered, he said.
The notes should be restructured to allow IBRC to repay the remaining ELA debts slowly when the economy recovers and the Government should ask the ECB governing council to consider this.
“This issue is as simple as - we have to pay this money back because the ECB insists that we have to pay this money back.”
IBRC should be left to use its existing resources to pay off bondholders, the ECB (from which it has also borrowed money), other creditors and as much of the ELA funding as the bank can, he said.
Dr Whelan said the use of ELA should have been considered to save Anglo in September 2008 instead of the bank guarantee.
Brian Lucey, a professor of finance in Trinity College Dublin, said the Government’s plan was to create a duopoly in Irish banking around the “two pillars” of Bank of Ireland and Allied Irish Banks.
There should instead be more domestic banks and new entrants which are smaller in sizes; their assets should amount to no more than 30 per cent of Ireland’s GNP.
He called for the creation of cooperative banks and private banks as well as the entry of more foreign-owned banks into Ireland.
Dr Lucey said that more competitive banking systems were less prone to systemic and large crises, and said that there was relatively little evidence of significant competitive pressure during the boom.
Frank Barry, an economics lecturer at Trinity, said that the only way the euro could survive was if there was a move towards a fiscal federal union to create a massive EU federal budget to absorb future shocks affecting just one country.
Such a shock on Ireland could be if multinationals pulled out or if a common corporate tax rate was created across Europe, he said.