The International Monetary Fund’s surveillance of the Irish economy before the crash gave "no inkling" that Ireland faced a downturn and had "failed", a former IMF deputy director has told the Banking Inquiry.
Donal Donovan, who was speaking in personal capacity, said that IMF staff had endorsed the view of the Central Bank that the property market was facing a soft landing.
However, he said that during the housing boom the IMF believed Irish house prices were "somewhat overvalued".
Reports by the IMF staff said the introduction measures to cool the property market, such as property tax, were seen as facing "political, likely insurmountable difficulties" during the years 2004 and 2006.
Mr Donovan said that IMF staff were not aware of the lack of engagement by the Financial Regulator with banks.
However, the inquiry also heard that the European Commission did pinpoint issues in the economy which turned out to be important.
Mr Donovan told the inquiry that the IMF mission to Ireland did explore some limited burning of senior unguaranteed bondholders.
He said the IMF was not opposed to debt writedowns and tends to take the view that if a debt is unsustainable and some restructuring writedowns are needed, then its better earlier than later.
Mr Donovan said Ireland was entitled to and should have got some burning of bondholders in November 2010 and March 2011.
On the IMF surveillance before the crisis, he said they got it badly wrong and more wrong here than elsewhere.
Mr Donovan said Ireland was entitled to and should have got some burning of bondholders in November 2010 and March 2011.
It did not happen because of opposition from the ECB who feared systemic consequences and the US through then Treasury secretary Timothy Geithner.
Marco Buti, the European Commission's Director-General for Economic and Financial Affairs, also said that even if they had anticipated the end of the boom and the collapse, it did not then have the legal tools to ask Ireland to take corrective measures.
However, he said this was not the main constraint.
The real constraint, he said, was their limited understanding of what really endangers overall macroeconomic stability.
Fianna Fáil Senator Marc MacSharry asked if Mr Buti was confirming that the commission had an incomplete set of tools and if that was a failure?
Mr Buti agreed that they did not have all the tools and he said Europe had paid a price.
He said firewalls such as the EFSF and the ESM were not there in the first place.
He also said that the domestic financial supervisor did not acknowledge and address the risks associated with the credit and housing boom and bore primary responsibility, but he added that supervisors in the originating countries share some of the responsibility.
He said that until 2007 the focus of macroeconomic surveillance was clear: the ECB looked after price stability, with a very strong mandate.
The European Commission monitored national fiscal policy marking against the parameters of the stability and growth pact.
There was also an instrument to coordinate economic policies beyond public finances, the so-called Broad Economic Policy Guidelines (BEPGs).
However, this instrument amounted to soft coordination only with no enforcement power.
On 24 January 2001, the commission issued a critical opinion on the 2001-2003 stability programme.
It concluded that Irish fiscal policy was inconsistent with the Broad Economic Policy Guidelines the European Council had endorsed just half a year earlier.
Those guidelines had asked Ireland to avoid further overheating of its economy by containing public expenditure.
In parallel to the critical opinion on the Irish stability programme, the commission also recommended the council to ask the Irish government, under the Maastricht Treaty, to take countervailing measures in the course of 2001.
He said the recommendation was not very well received in Ireland; it was not implemented.
Also many in the economic profession derided the commission accusing us of focusing more on decimals rather than acknowledging the strength of the Irish economy.
Fianna Fáil's Michael McGrath asked if the commission did not see the risks in Ireland from the banking sector.
Mr Buti said they did see the risks in relation to housing and that was documented, but he said they did not draw all the policy consequences which are now known.
He said they did not see the risks of the banks and the possible impact on financial stability. He agreed that their criticism in 2001 was an early warning to Ireland.
Mr McGrath asked if the commission had not rung the alarm bells sufficiently loudly or persistently.
Mr Buti said they used the tools they had at the time to ring the bell but Ireland was in line with the Stability and Growth Pact
He said the bank guarantee was not a good idea and amounted to an excessive coverage of banks and he said the commission was not notified.
Labour Senator Susan O'Keeffe asked if the commission had been giving Ireland mixed messages, and she quoted Rob Wright who told the inquiry that the criticisms were leavened by praise.
Mr Buti said they went beyond their remit to highlight risks but he said it was not a blurred message, it was a more nuanced one.
Ms O'Keeffe asked how the commission's supervisors could not include banks and Mr Buti agreed, saying they now knew better and understood the role of banking and financial statements.
