Honohan: Sell main banks overseas

THE Governor of the Central Bank has said that the best way to achieve stability in Ireland’s banking system is to sell the main banks to overseas players — but added that he would be “disappointed and surprised” if all of the €35 billion earmarked for the banks, from the IMF/EU bailout, is ultimately needed.

Addressing the Institute of International and European Affairs (IIEA), in Dublin yesterday, Patrick Honohan said that foreign ownership of the main Irish banks would introduce fresh capital, more risk control and other management skills to the system.

“It seems evident that placing the continuing parts of the system on a firm footing can best be done through the involvement of new foreign owners.

“This would, effectively, short-circuit the risk-reduction process now under way.

“It isn’t unreasonable to suppose that such investors will see sufficient franchise value in the continuing banks to convince them that attractive investment opportunities exist. I look forward to welcoming new owners of Ireland’s downsized and cleaned-up banks,” he added.

Although not anticipating a need for all of the €35bn set aside for the banks from the bailout agreement, Mr Honohan did concede the need for “a strong capital buffer”, but said that a clearer picture will emerge with the results of the next stress-testing round of the Irish institutions in the next few months.

He also told the IIEA that any new Government wanting to put forward alternative fiscal measures, “which were both economically efficient and of equal fiscal effect”, would receive “a sympathetic hearing from the funders”.

Professor Honohan said the IMF/EU support will “buy time” for Ireland to see to its main problems of having too much debt and its perception to international investors.

“First, it [Ireland] has too much debt, public and private. Second, there’s a market perception of significant tail-risk to the debt, especially related to the banks.

“It’s these two problems — which are, obviously, interlinked and which have both been growing in the course of the past year — that have led to the market’s reluctance to provide continuing funding at reasonable rates of interest.”

He added that an insurance scheme for the banks — with a premium to be paid — would have been more effective than additional capital injections, in terms of restoring market confidence in the two main Irish banks and would have enabled them to access wholesale funding at a reasonable rate; but the IMF and EU don’t offer such a service, only lend money.

“This is a pity, because the wider EU and the global community has a better capacity to bear tail risks than does a single state,” he said.

Picture: Patrick Honohan: Fresh capital from foreign ownership.