Economic recovery must co-incide with €15bn plan: Honohan

CENTRAL Bank chief Patrick Honohan has warned that if the economy doesn’t recover at a relatively strong pace in the coming years then the Government’s ability to deliver the €15bn four-year budgetary/fiscal adjustment could be under threat.

“If economic growth recovers as it did in the late 1980s — when debt and deficit levels were as high — then delivering the needed multi-year fiscal adjustment will be well within the economy’s capacity. But a weaker economic recovery could exacerbate what some in the market interpret as a debt overhang,” Professor Honohan said in a Financial Times article.

Many economists, as well as the Central Bank have already lowered their forecasts for the country’s economic growth

Forecasts for the economic growth — as measured by GDP — have been lowered from pretty much all relevant bodies in the past couple of months, including most economists and the Central Bank itself.

The most recently published forecast — by Jim Power at Friends First — suggested that the Irish economy should grow by 0.8% this year.

“The new Government has displayed its determination to bring the public finances under control by reaffirming the fiscal targets for 2011 and 2012. This domestic effort is fundamental,” Prof Honohan wrote.

Linking Ireland’s debt repayments to economic growth would help restore “a favourable dynamic” to the country’s sovereign debt ratio, he said. This could be done by introducing GNP-linked bonds, “or similar risk-sharing innovations”.

“One dimension which, in my personal view, has not yet received the attention it deserves is the potential for mutually beneficial risk-sharing mechanisms. A variety of financial engineering options could be considered going beyond the plain vanilla bonds currently employed.

“A simple version, which could indeed be useful beyond the specific case of Ireland, would, over time, shape the arrangements with European partners in such a way that Ireland pays more if its GNP growth is strong; less and slower if growth remains weak,” he wrote.

“The aim of such GNP-linked bonds or similar risk-sharing innovations must be to restore, through growth, a favourable dynamic to the sovereign debt ratio, putting its sustainability too, like that of the banks, beyond doubt.”