SOME OF the €17 billion injected by Ireland into its banks last year alone, using EU-IMF funds, should have come directly from the European Financial Stability Fund, the governor of the Central bank has said.
If it had, Ireland’s debt sustainability would be much less of a concern to the rating agencies, while the EFSF could look forward to future gains with stakes in “two banks with a substantial national franchise”, Patrick Honohan told an audience in London last night.
Greece now faces having to recapitalise its banks along the same lines as Ireland, “assuming the corresponding debt, and acquiring or increasing its ownership stakes in the banks.
“If there’s any European government that doesn’t need any more debt, it’s the Greek one. Another missed opportunity, one might say, in the design of restructuring and resolution policies for European banking,” the governor went on.
Member state governments should not be faced with the responsibility of guaranteeing bondholders in “order to protect the functioning of the bank bond market in other countries.
“Such decisions, and paying for them, should at least be the responsibility of a Europe-level resolution agency,” said Dr Honohan, who was giving the Mais Lecture at Cass Business School.
“Even if the Irish government had not stepped-in pre-emptively with its rash and overly-broad guarantee at the end of September 2008, there can be no doubt that irresistible partner-country pressure would have been brought to bear on the government to avoid bondholder losses [as indeed happened after the period of guarantee ended in respect of the remaining out-of-guarantee bonds, as a quasi-condition for continuing troika support],” he said.
The European Union needs centralised powers to regulate and supervise banks, along with holding powers to support those who get into difficulties, Mr Honohan said.
“Some have taken the message from the euro crisis that financial integration has gone too far in Europe. My read is different,” he added.
An EU banking union would see centralised regulation, licensing and supervision, along with central responsibility for resolution, depositor protection and public sector solvency support.
“It’s not just the spill-over effects that warrant centralised supervision. ‘Keen is the eye of the guest’, as an Icelandic proverb has it.
“Of course nationals should be involved in supervision: often it is they who pick up the vibes and the market talk.
“And – while I do think that many governments don’t want to cede control over bank licensing issues to foreigners – I don’t attach as much importance as some to the relevance of national political pressures on the supervisor,” he went on.
“In periods of collective national myopia such as that which generated the property bubble in Ireland, the chance of getting somebody whose judgment is not affected is greater, the more distant their base,” he said.
