BANKING SYSTEM:FORMER TAOISEACH John Bruton has warned that Ireland should think very carefully before deciding to inflict losses on bank bondholders.
Mr Bruton said Ireland is the second most open economy in the world and trusted by international investors because it has “kept its word” on corporation taxes and other issues.
“As Irish people we should think once, twice, three times, a hundred times before breaking our word,” he said, answering questions after a lecture in the London School of Economics.
“We have got to be realistic. We have to recognise who we are. We depend on other people. We must not let them down, even though it is hard,” he said.
However, Mr Bruton said the EU must not insist on a “fire sale” of banks’ assets because such a move would “destroy value and make no economic sense”.
Such a move “at the bottom of a market” would “not clear the road towards prosperity”.
“Irish taxpayers, in taking on in 2008 the private liabilities of the Irish banks to other European banks, are now helping to stabilise the situation of European banks, and of the European banking system,” said Mr Bruton.
The European Central Bank’s founding legislation gave it powers under article 14 to ensure that national central banks acted “in accordance with the guidelines and instructions of the ECB”, said the former Fine Gael leader.
“One must ask then what use the ECB made of article 14 when it saw the disproportionate increase in the size of the banking sector in countries like Ireland and Spain from 2000 onwards,” he said.
The European Commission, he said, “has recently claimed that it ‘repeatedly signalled downside fiscal and macroeconomic risks related to the property boom in Ireland’ from ‘as early as 2000’.
“If that was so, and given that the ECB had the power under article 14 of its statute to issue instructions the Irish Central Bank, one has to ask whether and how it used those powers and, if not, why?”
Acknowledging Ireland’s own regulatory flaws, Mr Bruton asked: “If the central bank of a country was allowing its banking sector to grow to 300 per cent of its GDP, surely the ECB would have seen the dangers in that and used its powers?”
He added: “From 2000 on, British, German, Belgian, French banks, and banks of other EU countries, lent irresponsibly to the Irish banks in the hope that they too could profit from the then obtaining Irish construction bubble”. Mr Bruton said those banks “were supervised by their home central banks, and by the ECB” who “seemingly raised no objection to this lending.”
ECB executive board member Lorenzo Bini Smagi last week said that it was “no surprise” that the countries with “the largest deficits and the largest increases in debt after the crisis” were those where the financial sector had come to play an ever-increasing role.
Mr Bruton quoted that statement and asked: “Given its overall responsibility for financial stability, should then the ECB have been surprised by what followed, as they clearly were?”
Imposing fines on countries with debt troubles “involves trying to extract blood from a stone”, Mr Bruton said.
Financier George Soros had argued that all of the emergency funds put aside by the EU should be used to recapitalise Europe’s banks, Mr Bruton noted. “If that is not to be done, there must be an alternative. The March 25th EU summit should come up with one,” he said. Rules governing the amount of capital banks need to keep to back up their lending were too loose, but he warned: “The new [tougher] rules may prove to be procyclical too, but in the opposite direction.” He cautioned that the new government will face a battle to get the interest rate on EU-IMF borrowings reduced. “I do not expect that there will be any immediate result on that agend,” he said.
