Belfast Telegraph

Dublin 'put fuel on fire' of crisis

Ireland's economic crash could have collapsed the euro, Europe's bailout chief has said.

Klaus Regling, who co-wrote a report on Dublin's banking crisis, blamed homegrown decisions for throwing fuel on the fire of the country's financial meltdown.

A "soft landing" could have been possible if the right action was taken by those in power at the time.

"Fiscal policy could have been counter-cyclical, instead it was pro-cyclical, supervisory action that could have been taken was not taken," he told a parliamentary inquiry into the crisis.

The German economist, who heads up the European Stability Mechanism, said blame for the crash can be spread widely and needed to be seen against the culture of the time.

Leaving banks and financial markets to virtually regulate themselves was fashionable while central bankers and regulators ignored alarm bells and the warnings from a minority that a crash was imminent.

"The bottom line was nobody seemed to be in charge," he said.

However, while a number of global and European elements played their part, Irish authorities could have taken action to moderate the boom and been much more firm with the banks, he told the hearing.

A "soft landing was possible" but instead Dublin's policies put "fuel on the fire", he said.

Mr Regling was cross-examined by TDs and Senators as part of the Oireachtas (parliament) Banking Inquiry into the lead up to the crash, which is expected to publish its findings later this year.

The crisis in Ireland at the time could have led to a collapse in the euro, he said.

The founding fathers of the common currency could not foresee the worst economic crisis in 80 years, or the need for emergency funding to countries locked out of the international money markets.

"(The euro system) was incomplete, but some Euro area countries managed within that incomplete system better than others, that's why the homegrown issue also plays a role," he said.

The bailout chief said the large proportion of bank loans to a small number of Irish investors was one of the "clear failures" at the time.

"It was striking that some of the Irish banks got into property deals quite far away from Ireland," he added.

"Some integration of financial markets is desirable and we want that.

"But it happened too quickly, went too far and without good risk analysis."

Property is "almost a national obsession" in Ireland, and at the time there was unprecedented access to money, he told the inquiry.

"People thought - and not only in this country - that we lived in the 'great moderation' where everything was perfect, high growth would continue forever, low inflation, there would be no problems," he said.

Mr Regling said the European Commission, the International Monetary Fund and the international economic alliance, the OECD, shared in the blame.

The former EC chief also admitted his own role.

Between 2001 and 2008, he himself was the EC's head of economic and financial affairs.

"People whose job it is to monitor and ring alarm bells were fairly quiet in Europe and globally because the situation seemed so under control and good," he told the hearing.

Along with former IMF official Max Watson, Mr Regling co-authored the 2009 Preliminary Report on the Sources of Ireland's Banking Crisis, commissioned by former finance minister Brian Lenihan.

The report did not examine any developments after September 2008, including the 440 billion euro State banking guarantee.

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