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Thursday 7 December 2023 Dublin: 11°C
Julien Behal/PA Archive/Press Association Images
Too big to fail

'I do not think allowing Anglo to collapse would have been the right thing to do'

Former IMF and Irish financial official Dónal Donovan gives his 2c at the banking inquiry.

Updated 1.53pm

A FORMER TOP International Monetary Fund official has said letting Anglo Irish Bank collapse would have been a mistake – and the government made the right move in issuing the bank guarantee.

But Dr Dónal Donovan, the deputy director of the IMF until 2005, today told the Oireachtas banking inquiry “only history can tell” whether allowing Anglo to fail and burning the bondholders would have cost the state less than its controversial decision.

He said if the bank had gone under the “cost would (still) have been very substantial”.

“I do not think allowing Anglo to collapse would have been the right thing to do and I don’t think any government would have been likely to do that,” he said.

If you are the leader of a country and in the middle of a crisis you need to do thing that won’t lead to a crisis the following morning.”

Donovan, who is also a former member of the Irish Fiscal Advisory Council, said the IMF had got its advice on Ireland’s economy “badly wrong” before the financial crisis.

Instead of predicting the pending property crash in its 2007 updated it instead delivered a “rosy picture” on the country’s outlook.

I think it is widely accepted and it would be my personal view that the IMF’s surveillance process failed in Ireland,” he said.

Donovan Dr Dónal Donovan at the banking inquiry

Commission never said no bank should fail

Earlier, the European Commission’s financial chief, Marco Buti, told the inquiry the organisation never told the Irish government that no bank should be allowed to fail in the lead-up to the controversial 2008 guarantee.

He said that concept never formed part of the organisation’s formal policies – nor was it an “unwritten rule” in Brussels.

“There was never a recommendation on the part of the commission on that subject,” he said.

It was not addressed to the Irish policymakers, it was not addressed to any other countries or institutions. You will not find, in our opinions, in our recommendations either on the stability programmes, on national reform programmes … a recommendations of this sort.” 

Inquiry into the Banking Crisis. Pictu Sam Boal / Photocall Ireland Marco Buti, centre, outside the banking inquiry today Sam Boal / Photocall Ireland / Photocall Ireland

But Donovan said the record from the four years after the financial crisis showed the European position was there should be no burning of bondholders.

“I’m not suggestions that was necessarily the right view, but that was the view and it did not change,” he said.

‘We have paid the price’

Buti, who has been the commission’s director-general for economic and financial affairs since December 2008, told the inquiry that the commission’s focus was on overarching economic policies and in its various assessments of the Irish economy between 2001 and 2007  had never looked at the strength of the country’s banks.

In retrospect I admit this was a failure, this was a problem,” he said.

Buti said the responsibility for keeping an eye on banks was at a national level and the EU didn’t have the tools at the time of the financial crisis to deal with the problems that had been brewing.

“We did not have all the tools that we have now – I think we have paid the price,” he said.

Buti said before Ireland’s property bubble burst the banking sector had been allowed to become “severely oversized” and the country’s financial regulators had failed to either recognise or deal with the risks that flowed from the housing boom.

Ireland is probably the most extreme example of what can happen when these problems are ignored,” he said.

READ: Bertie and Brian need to get ready for some tough questions >

READ: We made a ‘bad mistake’ not predicting the banking crisis – but so did everyone else >

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