‘No movement of capital to Ireland detected’

Finance Minister Tonio Fenech told Parliament yesterday that local banks had not noticed any movement of capital from Malta to Ireland, which gave a blanket guarantee on bank accounts, while Malta only guaranteed €100,000 for each bank account.

Mr Fenech was answering questions from MPs from both sides of the House following a statement by Prime Minister Lawrence Gonzi on the decisions taken during last weekend’s 15 eurozone heads of government meeting in Paris, at which he was present.

Dr Gonzi said that on Monday and Tuesday, Mr Fenech met local bank representatives to discuss the decisions taken in Paris.

Both the Prime Minister, and later Mr Fenech, reiterated that the Maltese financial sector was sound and that there were no particular problems, including that of liquidity. Local investors should therefore have peace of mind.

Dr Gonzi said that in the present financial scenario one should appreciate Malta’s "wise" decision to join both the European Union and eurozone. These two factors, he said, had permitted Malta to be present for last Sunday’s meeting where difficult but vital decisions were made.

Malta’s membership in the eurozone did not only mean that Malta’s currency was sound, but also that the government had at its fingertips information which otherwise would not have been available and that it was being continuously being consulted. Malta was giving its contribution to be part of the decisions which closely affect it.

The Leader of the Opposition Joseph Muscat welcomed the government’s declaration and, like the government, also emphasised that there was no cause for alarm. He asked whether the government had any plans in case local banks might face future problems and whether the government was making any provisions in the budget for this eventuality.

Dr Muscat also asked whether the financial regulatory body had performed any simulation exercise and whether the government was considering any scheme on the tightening of credit facilities and on reviewing the concept of common supervision.

Other questions were asked by Labour MPs Charles Mangion, Leo Brincat and Carmelo Abela and Nationalist MPs Franco Debono, Fredrick Azzopardi and Joe Falzon.

Mr Fenech confirmed that, accompanied by representatives of the MFSA and the Central Bank, he had met with each local bank to assess how they saw the decisions taken by the eurozone meeting. The banks confirmed they had all the required liquidity and there were no inter-banking problems.

Mr Fenech said that Malta had no need to intervene to guarantee inter-banking loans. The government plan was evidently built on the local banks’ situation. Maltese banks were not undercapitalised and there was no lack of liquidity. In fact, while local banks should, by law, have 30 per cent liquidity, some had between 50 and 60 per cent.

As he had earlier declared, the government would not hesitate to intervene if the situation warranted it. But, at this point in time, there was no need. The situation was stable and there was no cause for concern.

Mr Fenech reiterated that it would be cheaper for the government to intervene in a bank rather than pay each account holder the guarantee.

The minister said that the Central Bank had carried out a simulation exercise a week before the Northern Rock crisis. The lesson learnt was that in similar cases, the government must intervene. This was contrary to earlier ideas, mooted out last year, when it was said that governments should not intervene to strengthen financial institutions. However, the simulation exercise showed that if government did not intervene, the crisis would not stop but would continue to snowball.

Mr Fenech said that the problem would arise if credit became more expensive as this would affect home owners and the self-employed. The government felt that there was no need to intervene because local banks had lowered their interest rate by 0.5 per cent, giving the message that it was business as usual and they are not restricting credits.

Surely, there was the need of greater supervision of the cross-border financial institutions. The government did not agree with the single operator approach as proposed by the European Commission. This was dangerous. A big regulator would look at the bigger institutions and Malta could not afford not to know what was happening on the regulatory front.

Mr Fenech said the government was assured that there were no problem with banks working with international businesses because they had guarantees from their parent companies. Local banks had assured government that when stock mature, they would hold on to them as a further buffer.

It was difficult to evaluate the economic impact. The IMF was pessimistic, warning of recession. The government’s economic division was evaluating what was happening to gauge the effect on commerce, tourism, the manufacture industry and exports. Serious problems would be encountered if credits were not available for the economic operators.

Referring to oil prices, Mr Fenech said he would not dare make predictions. Oil prices seemed to be stabilising at $US80 but the government hoped it would go lower to help address local problems. However, reports are conflicting.

The crisis would lead to a change in the global financial architecture. Certain underlying rules, supervision and guarantees need to change. What was happening now was an exercise to control the contagion. The second round would ensure that the story did not repeat itself.

The Maastricht criteria has the mechanism that in exceptional circumstances, government could go over the limit established by the Stabilisation Pact.

The Prime Minister said the government had made plans for the possibility of such a situation years ago when Malta joined the European Union. Difficult and unpopular decisions, but necessary in the national interest, had been taken to safeguard employment and Malta’s competitiveness.

He said this showed that it was wise for the government and the opposition to agree on financial legislation. The government has striven for a good financial base to be able to counter such challenges.

Dr Gonzi said the eurozone summit addressed the possible danger facing stock exchanges when they had to open on Monday morning but it did not discuss pension funds. Solutions arrived at by the eurozone heads of government, which were different from those adopted by the British government, had been welcomed as being more positive than those presented by the US government.

Concluding, Dr Gonzi once again gave the assurance that the local banking situation is stable and the local regulatory authorities are effective.