Government ‘should keep discipline and reduce debt’

The Government should continue to pay down debt and maintain budgetary discipline to ensure financial markets retain confidence in Ireland, according to Central Bank governor Patrick Honohan.

“Revenue from better- than-expected post-crisis asset sales in particular should be assigned to the extent possible to reducing the national debt. In the previous three years the seal of approval from the troika allowed the Government to take a longer time to bring the deficit under control,” said Mr Honohan in an address to the UCD Economics Society.

“Now financial markets, still a major determinant of Ireland’s borrowing costs, will look closely at budgetary trends and the Government will do well to convince them of its continued determination to adhere to the medium-term fiscal goals set out in EU law. This advice meshes indeed with the recommendations of the Irish Fiscal Advisory Council.”

Mr Honohan’s remarks would appear to be a shot across the bow for the Government. The Taoiseach, as well as a number of senior cabinet ministers, have said that if there is extra revenue above what is needed to meet the 3% fiscal deficit target, then it could be used for modest tax cuts and spending increases.

Mr Honohan said that even though many of the Central Bank’s traditional competencies were being transferred to the ECB, it would retain many responsibilities. This included macro-prudential tools to cool the housing market such as loan-to-value ratios and loan-to-income ratios. The Central Bank would unveil a series of measures in this area today.

Progress was being made in tackling the mortgage arrears crisis, although the pace of remedial action is still too slow, he added.

“Some people think that the Central Bank should mandate specific debt relief or forgiveness for borrowers. In fact this is not within the Central Bank’s power, nor could it be. Intervention into the property rights of creditors is a matter for legislation under the Constitution.”

Even though interest rates are at historical lows, the interest rate on non-tracker mortgages have moved higher. And just as banks under-priced mortgages during the boom years, there was a danger that they could now over-price mortgages as they struggle to return to profitability, he said.

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