Honohan downplays claim of bankruptcy

CENTRAL Bank governor Patrick Honohan has downplayed Professor Morgan Kelly’s high profile dire warning of a financially dead Ireland, from earlier in the week, by defending the Government’s austere budgetary measures and denying Ireland will need IMF help.

Addressing the Joint Committee on Economic Regulatory Affairs yesterday, Professor Honohan said that, while he wasn’t denying Ireland’s poor fiscal situation, the UCD Economics professor’s vision of Ireland running out of cash, formally being bailed out by the European Central Bank, and seeing an end to all forms of lending and mass mortgage defaults — as outlined in an opinion piece in the Irish Times — “is not representative of a likely outcome”.

“Clearly, this is a time of considerable risk and balance sheet stress in Ireland. Banks, households, firms and the Government have all been under pressure and what will inevitably be a lengthy period of balance sheet repair, involving consolidation of net spending, is in progress.

“I strongly endorse the Government’s decision to set out a multi-year budgetary plan. I also regard the parameters as being within the credible range and a good basis for rebuilding confidence,” Prof Honohan told the committee.

He said that such a strong budget is needed — and that it can work — in order to convince investors that we are getting our economy under control and quickly; adding that Ireland is currently in a position where it has to jump to meet international market expectations. Reiterating a line he delivered at a financial regulation conference, yesterday morning, Prof Honohan said that IMF assistance wouldn’t be necessary, as the body would probably take the same action currently being targeted by the Government.

Prof Honohan also said that the cost of bailing out the banks remains “manageable”, but added that while “over-capitalising the banks could help build confidence, this isn’t something which the state can be lightly asked to do, given the pressures on its finances”.

Asked whether it would have been wiser to give AIB more time to meet its extended re-capitalisation requirements, and avoid taking it into near full state ownership, Mr Honohan said there was no other practical way to ensure the bank’s capital stability.

“Its chances of raising additional capital in the private market in the short-term was essentially nil.

“I would prefer the Government not to hold large equity stakes in the banks and to dispose of its shareholdings at the earliest opportunity, but you can’t allow banks to trade without capital,” he added.

In welcoming the extension of the bank guarantee scheme, Prof Honohan said that it is possible that the scheme “might be needed for another couple of quarters”.