Banking sector ‘remains fragile’

THE banking sector is still fragile and there are still many reasons for concern about the economy.

This is according to ratings agency, Moody’s which said the banking sector will remain weak until NAMA had finished its transfer of property assets and the sector had been recapitalised.

Reacting to figures published last week by the Central Statistics Office (CSO) which showed Ireland’s GDP rose by 2.7% quarter-on-quarter, Moody’s said Ireland’s return to quarter-on-quarter positive GDP growth is “no four-leafed clover”.

Moody’s analyst, Ross Abercromby said: “This return to growth in GDP will be positive in the longer term for the stand-alone creditworthiness of the banking sector and points to a gradual stabilisation of the economy. We do not, however, expect to see any substantial improvement in bank asset quality until 2011 at the earliest.”

He said there are several reasons to remain concerned about the domestic economy and bank asset quality.

“The high level of foreign direct investment in the Irish economy means that a large section of the economy is owned by foreign companies. Therefore, for the domestic banks a more telling economic statistic is the performance of GNP, which continued to be negative in the first quarter, showing the two-speed economy that has developed in Ireland.

“In addition, this week’s Live Register figure shows a further increase, indicating that unemployment will remain a substantial issue, and this will further delay improvement in bank asset quality,” he said.

He said the Irish banking sector will take longer to recover than more geographically diversified banks or banks in economies that have not suffered to the same extent in recent years.

Meanwhile, Bloxham chief economist, Alan McQuaid said the Government should take a leaf out of the books of other Eurozone countries and consider selling off State assets to meet its funding needs.

“At the very least, the privatisation issue should be on the agenda for political debate. As such, we welcome the news at the weekend that the Government is to appoint an expert group, chaired by economist Colm McCarthy, who produced the ‘Bord Snip Nua’ report last year recommending more than €5bn in public expenditure cuts, to assess the scale and value of the assets and liabilities of semi-State companies.”

Mr McQuaid also said that if Greece is forced “kicking and screaming” to default, the precedent will inevitably raise fears that Portugal, Ireland and Spain, will face a similar fate.

“And that fear in itself risks becoming a self-fulfilling prophecy as confidence drains. However, whatever about Greece and possibly Portugal, we don’t see either Ireland or Spain defaulting on their debt,” he said.