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‘I would have handled Cyprus bailout differently’

Patrick Honohan says he would have taken a different approach to the Cyprus bailout although he declined to provide any details.

However, there would no repeat of the bailout template used for Cyprus, he added. Last month, the euro tanked and bond yields surged when the European Commission announced that the rescue of the Mediterranean country would involve the cut to depositors of over €100k.

Mr Honohan was speaking at the launch of the Central Bank’s annual report yesterday. He said the timing of the stress tests of the Irish banks still had to be decided. Minister for Finance, Michael Noonan, had recently stated he would like the stress tests to coincide with EU-wide stress tests next March.

However, the IMF said that it would like the stress tests done before the country exits the bailout programme in November.

Mr Honohan said: "We haven’t decided that yet. For the moment we are working towards doing it in the latter part of the year".

At another press briefing yesterday evening, Mr Noonan said the Troika would like to see a health check of the banks before the country exits the bailout programme, which indicates they will be completed in the second half of this year.

Mr Honohan declined to say if the banks will need capital as a result of the stress tests or where this capital would if it was required.

However, banks would need capital over the medium term to comply with Basel III capital requirements by 2019. It is hoped the banks will be able to raise this from private investors, he added. He hoped Ireland would not need the help of the ECB’s outright monetary transaction programme when it exits the bailout programme. However, if it met certain criteria, then it would be able to use the facility.

The Central Bank governor urged the Government to proceed with the fiscal consolidation path agreed with the Troika. Meeting the Troika targets was the single biggest determinant in regaining investor confidence, he said.

The biggest challenge was solving the unemployment problem. But over a 10-year timeframe it was unlikely the jobless rate would return to the levels seen in the 1990s and 2000s. The three most important factors in deciding the fate of the labour market were productivity, cost competitiveness and the external environment, he said.

The Central Bank had looked at options around restructuring the mostly loss-making tracker mortgages held by Irish banks.

However, the most effective solution would be for the banks to lower their cost of funding, he said. "Market funding is now cheaper than ECB funding."