Report’s author says global factors also key

THE international factors which contributed to the Irish banking crisis should not be ignored although Government tax breaks for the property sector were also a key element, according to one of the authors of a report on the financial crash.

German banking expert Klaus Regling claimed such international factors were “not very prominent” in media coverage of the report, which was published last Wednesday.

However, he stressed that it was impossible to quantify how much domestic and international factors each contributed to the near collapse of the Irish banking system.

The report by Mr Regling and co-author Max Watson outlined how a number of international factors created what they described as “an accident waiting to happen”.

“One cannot understand the Irish development of the last few years without looking at the global environment,” said Mr Regling at a press conference yesterday

However, he acknowledged that there were factors specific to Ireland which exacerbated the scale of the crisis – namely the concentration on the property market, in particular commercial real estate.

The former director general for Economic and Financial Affairs at the European Commission said other important domestic factors included too much liquidity, low interest rates which led to wrong investment decisions as well as wrong fiscal policy by the Government and a weak supervisory environment.

“It’s not enough to blame one or two institutions. One has to see that there are a long list of factors,” said Mr Regling.

He said he had been most surprised by the extent of tax allowances given to the property sector. “They were larger than I had thought and we know from OECD analysis it is the highest level of any EU country,” he remarked.

However, Mr Regling said there would still have been a problem with the Irish banking sector even without the Government’s extensive tax allowances.

He also observed that nobody had focused on obvious problems within the banking sector, despite the availability of data which highlighted the extent of bank credit growth. “It was not a secret,” Mr Regling said.

He acknowledged that the mainstream view among most banking experts was that the global economy had entered a new era where growth was fuelled by low interest rates, low inflation and readily available credit.

Max Watson said he was surprised by the level of concentration on the property market, especially commercial real estate involving a small number of borrowers.

He described Ireland’s commercial property market as “a time bomb”.

However, he said the views of all important bodies like the Central Bank and Financial Regulator were predicated on a soft landing. “By 2006 there could not have been a soft landing,” said Mr Watson.

He claimed low interest rates and huge liquidity – which resulted from Ireland’s membership of the euro combined with the arrival of foreign banks into what had been an uncompetitive property market – created the root causes of the resulting crash.

He claimed the residential property market should not suffer to the same extent as office and hotel development, especially if house prices stabilise and income levels recover.

The Government was praised by both authors over its eventual handling of the banking crisis following the right policies to return the economy to growth.

They said they had not met the Taoiseach in the formulation of their report, nor had they been asked by Mr Cowen for a meeting.