From Gary O’Callaghan – “Professor of Economics at Dubrovnik International University… a member of the staff of the IMF and acts as an adviser to various governments” – ECB must share some of blame in Irish debt crisis:
In preparing for further negotiations, Ireland should use the time to examine and highlight: the extent to which it suffered from systemic defects in the eurozone; the way in which it was used to plug a hole in the European banking system that was not entirely of its own making; and how a more permanent and sustainable solution might be put in place to the benefit of all…
The Nyberg Report highlighted the role of a “herd mentality” but this raises as many questions as it answers. People move in herds in most economies because they react to the same market prices and incentives. The interesting question is what incentives made this particular herd stampede over a cliff. And part of the answer must lie with continual cheap funding from cross-border financial markets in the new eurozone. As pointed out in the Honohan and Watson-Regling Reports, people honestly thought that we had achieved a new level of wealth.
The extent to which fiscal and regulatory policies in Ireland could have contained the resulting boom can be debated and serious mistakes were made. But capital transfers to small economies were also far larger than anticipated and the de Larosière Report notes that the ECB should have been concerned about such localised credit booms when making monetary policy instead of focussing entirely on average inflation across the eurozone. Macro-prudential supervision will be enhanced in future but Ireland and other peripheral countries have suffered badly in the meantime.
And when the crisis broke, European institutions sometimes panicked in the absence of agreed procedures. The response to any banking crisis should be quantum, quick and quiet. But the Irish authorities did not fully realise the magnitude of the problem confronting them; any proposed solutions were slowly prepared and slowly approved in Brussels (as mentioned by Brian Lenihan recently); and ECB board members expressed loud frustration with having to deal with attendant liquidity problems.
This last element triggered a bank run…
…Ireland was famously not allowed to impose a haircut on most bondholders and a great many of these have since been paid off with money from the ECB. The ECB has acted as lender of last resort, on behalf of the entire eurozone banking system, but Ireland is liable for all the sums that have been expended in this effort.
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