Ajai Chopra is retiring from the IMF after working there for three decades
By Economics Correspondent Sean Whelan
In a survey article published by the International Monetary Fund on Thursday, 19th December, Ajai Chopra says “my involvement with Ireland over the past few years has been the capstone of a three-decade career at the IMF”.
From his Irish days, Mr Chopra has distilled five lessons.
1- When faced with a systemic banking crisis, governments need to deal with the situation quickly, including resolving banks.Banks must get back to lending quickly, and that means being “forceful” in dealing with bad debts.NAMA was a good move, but distressed small borrowers were left to stew for years.
2- It is unfair to impose the burden of supporting banks on taxpayers when senior bondholders get paid out.Euro zone partners stopped the Irish from imposing haircuts on senior bondholders.
3- Slow, steady fiscal consolidation was the right approach – going faster would have been “a grave mistake”.”Investors also care about growth”.
4- Weak balance sheets of banks, government, households and companies feed off each other.This makes the problem worse. Feedback loops must be broken.The euro zone needs to do more to help break the loops, especially between banks and governments. The investment would pay off.
5- The Government’s design and ownership of the programme was critical.The “excellent” record of implanting and complying with the programme “owes much to the fact that key components of it were designed by the Irish themselves”.”The Irish persisted despite uncertainty and some dark moments”.
Mr Chopra is retiring from the IMF.
He is staying in Washington DC to work on economic policy analysis and advocacy. He is also going to do volunteer work with low income families and students to teach them financial literacy.
“The manipulation of borrowers leading up to the crisis demonstrates the need for improving such literacy”, he says. Not just in DC, Ajai; you could fill the O2 Theatre for a month giving those kind of lessons here.
For the sake of completion here is the full extract from the IMF Survey article on Ireland:
“IMF rules require an independent staff team to prepare an ex-post evaluation of the Ireland program before the end of 2014. That evaluation will provide a more definitive view, but for now I’ll offer five preliminary lessons.
The first is when the government is dealing with a systemic banking crisis it needs to come to grips with the situation quickly. It is essential to identify whether institutions are viable or not and then deal with them accordingly. Nonviable banks need to be resolved while viable ones need to be recapitalised, restructured and restored to healthy functionality.
Even though systemic banking problems in Ireland first blew up in 2008, confidence that these problems were being adequately tackled did not come till the publication of stress test results in March 2011, about three months into the program. These stress tests, together with the underlying asset quality diagnostics that were undertaken with the help of independent experts, have served as a model in other cases. The Irish also set a high bar for the transparency with which they communicated the results of the analysis underpinning banks’ capital needs.
But it is not just a matter of recapitalizing banks. The banks also need to improve their profitability and get back into the business of lending. And to do that they need to be forceful in dealing with the bad debts on their books. Ireland was quick to set up an asset management company, NAMA, to deal with the large problem loans, especially in the property sector. But it is also essential to deal with smaller distressed borrowers, a problem that became more acute with the rise in residential mortgages that are in arrears. On this front, it took some time to develop a political consensus and the necessary legal framework and banks’ operational capacity to deal with mortgage arrears. In retrospect, more rapid progress in dealing with mortgage arrears would have been worthwhile.
The second lesson is that it is unfair to impose the burden of supporting banks primarily on domestic taxpayers while senior unguaranteed bank bond holders get paid out. This not only adds to sovereign debt, but it also creates political problems, making it harder to sustain fiscal adjustment. Eurozone partners precluded the Irish from imposing haircuts on senior creditors of insolvent banks. But subsequent developments in the principles of orderly resolution of banks, after Ireland had paid off these creditors at great cost, have shown that imposing losses on senior bank bond holders is now becoming more accepted.
Third, on the fiscal front, steady but gradually phased fiscal consolidation that is designed within a well-specified medium-term plan, and that allows for the free play of automatic stabilizers, can be consistent with the return of confidence. There are some who wanted Ireland to move even faster with fiscal consolidation. This would have been a grave mistake. Investors also care about growth.
The fourth lesson from the Irish case is that it demonstrates how pernicious feedback loops can be. Weak balance sheets of banks, of the government, of households, and of companies all interact with each other. These interactions cause economic activity to stagnate and increase deflationary tendencies, further worsening all these sectors’ balance sheets all over again. These feedback loops need to be arrested.
Some of this requires a domestic effort, which the Irish have accomplished as has already been outlined, although much remains to be done to reduce over indebtedness. But in a monetary union support is also needed from partners in the union. No doubt eurozone and EU partners have been generous and supportive of Ireland’s efforts through various initiatives. Nevertheless, there remains an excellent case for even greater eurozone solidarity to break these adverse feedback loops, especially between banks and sovereigns. Such additional support would have a positive payoff, making it an investment that is worth undertaking.
Finally, and perhaps most importantly, the government’s design and ownership of the program is critical. The Irish authorities’ excellent record of policy implementation and compliance with conditionality under the program owes much to the fact that key components of the program were designed by the Irish themselves, and adopted only after they had been debated intensively both internally and with external partners. Social and political cohesion was maintained. Only then do you get full commitment to the measures as in Ireland. Moreover, the Irish persisted despite uncertainty and some dark moments. This makes me more confident that they will continue to persevere to get the economy growing again and to improve people’s lives.”