Ireland risks a lost decade, warns expert

Ireland risks a lost decade if it fails to shift its credit supply to new viable enterprises, the Central Bank’s chief economist Lars Frisell has warned.

Irish banks face economic uncertainty and pressure to deleverage but this threatens to stifle their ability or willingness to supply credit at reasonable cost, he told a conference in Luxembourg.

He was making a case for a banking union that includes the single supervisory mechanism, now under way, and the further components of a common deposit protection and a single bank resolution mechanism.

The overriding purpose of the banking union is to break the bank-sovereign link. The link is due to banks holding large amounts of their own sovereign’s debt on their balance sheets — own country sovereign bonds forming the bulk of a bank’s most liquid reserves since they are uniquely deemed risk free.

The behaviour of banks affects the health of the overall economy, since if they are strong they can supply the real economy with credit.

“Ireland and several other European countries risk facing a dilemma similar to that suffered by Japan during its ‘lost decade’ in the 1990s, when many of its banks failed to shift their credit supply to new, viable enterprises,” he said.

What is needed, Mr Frisell argues, is a circuit-breaker, a common European backstop to supply banks with both capital and liquidity without feeding the sovereigns’ vicious debt circle.

“This logic should provide the backdrop for a European banking union,” he said.