Honohan: Debt deal talks will be torturous

Central Bank governor Patrick Honohan says negotiations to secure a deal on Irish bank debt will often seem “like two steps forward and one step back”.

Mr Honohan was responding to a question about the communique issued by the ministers of finance from Holland, Germany and Finland on Tuesday night which appeared to rule out a restructuring of Irish bank debt.

“It is a very complex political environment with lots of different problems facing different countries. Each player is trying to redesign a system on the hoof as we see large-scale changes to the operating procedures at the ECB and numerous EU summits that try to make fundamental decisions. So it is probably not surprising that there are two steps forward and one step backwards,” he said,

The hardline approach from the three AAA-rated countries earlier this week seemed to contradict the outcome of the Jun 29 EU summit, which pledged to break the link between banks and sovereigns across the eurozone. The communique said that the ESM would only be able to recapitalise banks in the future and would not be allowed deal with legacy toxic assets.

Speaking at a Corporate Restructuring Summit in Dublin yesterday, Mr Honohan said. “I tend not to react to headlines about what some finance minister or government said. I think there is a process that is continuing and let’s see what happens.”

Speaking at the same conference, the UCD economist Colm McCarthy that the EU’s approach since the start of the crisis has been to announce something that really excites the market and then backtrack. “It is very frustrating because the overall cost of solving the eurozone crisis — if the euro is to be saved — will be harder and more expensive than it needs to be.”

Managing director with the investment bank Alvarez & Marsal, Nils Melngailis, said, “Ireland will probably have to wait for a decision to be made about Spain and Spain will probably have to wait for a decision to be made about Greece.”

Mr Honohan also said that Nama was not responsible for creating losses in the banks. He said there are four steps that heavily loss-making banks have to take at the start of a crisis. “They have to recognise the losses. Then a decision has to be made who pays for these losses. The banks then have to be recapitalised and then a decision has to be made who manages the distressed asset portfolio.”

Mr Honohan said it would have been a huge error if Nama has paid above market rates for the property assets, because the markets would have forced the banks to recognise those losses anyway. The big mistake was the Government guaranteeing all the bank losses in the first place, he said.