Europe ‘had a role in bank crisis’

The Irish banking crisis was caused by too much borrowing and poor supervision combined with reckless lending by European banks, according to Christine Lagarde, managing director of the IMF.

Minister for Finance Michael Noonan and IMF managing director  Christine Lagarde at a press briefing at Government Buildings, Dublin. Picture: Gareth Chaney

Her statement directly contradicts the position of the German finance minister, Wolfgang Schäuble. In a recent interview he said the responsibility of absorbing the Irish bank losses lay with the Government because the crisis was caused by domestic factors.

The State has had to pump €64bn into bailing out the banking system. The Government is looking for debt relief through the ESM taking stakes in the domestics banks. However, the creditor countries are opposed to such a move.

In a speech at Dublin Castle, Ms Lagarde said it was not possible to change the policy response now.

“We cannot rewrite history. We made known the position of the IMF at the time. Now we have to look to the future. We cannot keep looking in a rearview mirror.” She said the emphasis had to be on growth and employment.

But in future, an EU banking union has to ensure that the toxic link between banks and sovereign debt is broken. Ms Lagarde called for a single supervisory mechanism as well as a strong resolution regime with the capability of closing or restructuring banks in a timely manner — including burning bondholders.

“Troubled banks that are not systemic can be handled at the national level. But what about systemic troubled banks, which might be too big for any one country to handle? Here, direct recapitalisation by the ESM could play an important role,” Ms Lagarde said.

“It would share the cost across membership — with heavy lifting to be done, 17 pairs of hands are better than one. This has particular relevance for Ireland. Direct recapitalisation of the viable Irish banks can lower public debt — by switching some debt owed to Europe with equity — and help insulate the Government from further potential drain if the economic situation gets worse.”

The Irish banks face another round of stress tests in July, which will determine whether they need to be recapitalised again.

Ms Lagarde said northern European countries would have to accept higher levels of inflation and higher wage levels to correct macroeconomic imbalances.

The German government is implacably opposed to inflation above the ECB ceiling of 2%. It insists the only solution to the eurozone crisis is by all member states improving competitiveness.

Ms Lagarde said she has made her views known to the German chancellor Angela Merkel. “A tradition of mine has been to annoy some of the [EU] leadership. We need a more balanced approach. I will not renege until I am heard,” she said.

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