An old hand at prescribing financial rescue medicine

 

ANALYSIS:The leader of the IMF mission to Ireland is a firm believer in downsizing our banks

AJAI CHOPRA is packing his bags after a two-week stint on Merrion Street. The leader of the 12-person International Monetary Fund (IMF) team involved in drawing up the terms of Ireland’s bailout will fly back to his organisation’s base in Washington DC tomorrow morning.

Chopra is an old hand at rescuing countries suffering severe economic crises. Though now deputy head of the agency’s Europe division, in the late 1990s he covered Asia and led the IMF bailout mission to South Korea when that country, along with many others in east Asia, was engulfed in a severe financial and economic crisis.

Speaking to The Irish Times in his hotel yesterday, the 52-year-old Indian national was as controlled and measured as he has been in all of his media appearances over the past two weeks.

From a wide-ranging discussion, it was clear that Chopra’s main focus over his time here has been on the banking crisis, rather than on issues related to the public finances or deeper structural reforms of the economy.

And on that crisis, he sought – and obtained – an intensification of strategy the Government has pursued up to now, rather than a radical change of direction. More capital, more restructuring, more downsizing and more stress tests are the prescriptions the IMF, along with the European Central Bank and the European Commission drew up for Ireland’s broken banks.

And there is no longer any doubt the banking prescriptions were those of the rescuers following the revelation yesterday in a forthright radio interview when Patrick Honohan, the governor of the Central Bank, said he did not favour putting a further €10 billion into banks’ capital bases, as will happen under the terms of the bailout.

Asked why he did not seek a more radical approach, Chopra said “big and visible” actions would be “helpful” and “nice”, but he cited “legal and market” constraints on taking such actions.

Does he envisage any of the banks being sold off lock, stock and barrel in order to meet downsizing targets? Chopra thinks it is more likely that bits of the banks would be sold, as is more typically done. This would bring about a more “right-sized” banking system, proportionate to the size and needs of the economy. But this would not happen quickly, he added. All of this will require a reassessment of the banks’ business plans. Such plans have been, or are being drawn up under EU competition rules.

Chopra clearly believes this route offers the best way to try to rebuild confidence in the battered banking system, which would return it to a stable long-term footing.

He also believes confidence will be engendered by conducting fresh stress tests on the banks. Stress testing involves attempting to predict how much more the banks could possibly lose, in an effort to reassure potential funders.

Although such tests were performed on the banks earlier this year, the fresh scrutiny will see the IMF bring its expertise to bear on the design and conduct of the new tests. This needs to be done in a “slow, deliberate, careful way”, Chopra said, something that was not possible in the two weeks that the IMF has been involved.

Among other things, stress testing requires an assessment of the banks’ outstanding loans. He said that independent outside assessors will be sent into the banks to do this, as has happened in other banking crises where the IMF has become involved. He also said he was unaware of the terms of reference under which the auditor, PwC, was employed to assess the banks in 2008, but that the IMF would work on the terms of reference for the new stress tests.

When asked whether such an exercise should have been conducted earlier, he said it takes time for an understanding of the scale of a banking problem to emerge and the scale of the problem changed as the economic situation changed. Independent assessment of the new financial regulator will also take place to ensure that international best practice is being followed, but he had every expectation that the new people in those roles can be “world class”.

On the National Asset Management Agency (Nama), Chopra described it as the right way to proceed, as similar models had worked elsewhere in cleaning up after banking crises. His main concern was to ensure the governance structure of the agency was appropriate. He was approving of these structures as Nama had brought in international expertise. A recently retired IMF staffer, Steve Zellig, whom Chopra name-checked yesterday, is on the board of the agency.

On the IMF’s ability to predict the future, he said the economics profession’s forecasting record was not good enough to predict changes to gross domestic product (GDP) to the last decimal point. The IMF’s focus during the bailout talks was on the size of the budget adjustment, rather than the deficit target as a percentage of GDP, he said.

Chopra provided some reassurance on concerns raised on Sunday by the former leader of the Labour Party, Pat Rabbitte, about rumoured losses on derivatives positions entered into by the banks [derivatives are bets on future changes in asset prices]. He said losses in the Irish banks are not predominantly from such positions, but from bad lending.

Will anyone from the IMF become a permanent fixture in Dublin in order to oversee compliance with the terms of the bailout, as is the case in Athens?

No plans for such a permanent presence have been discussed, said Chopra.

While it was clear yesterday that there is a desire to maintain parity in the terms of the bailouts for Ireland and Greece as much as possible, the fact the IMF does not feel the need to have one of its people here full time to check up on implementation can only be interpreted to mean that it retains more trust in the Government and public officials than most voters appear to do.

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