Bad loans could hinder State's recovery, warns Central Bank
THE speed and effectiveness of dealing with banks' bad loans could hit domestic demand and the ability of the economy to recover, the Central Bank has warned.
It said the level of distress among small and medium borrowers was "particularly acute", endangering the profitability of the banking sector, posing consequences for the viability of the businesses and jobs they generate.
The Dame Street bank struck a relatively downbeat tone in its latest Macro Financial Review, stating further austerity and high levels of private sector debt would weigh on domestic demand and constrain consumption and investment activities.
"Despite a weak first quarter, GDP is projected to increase marginally in 2013 and by about 2pc in 2014 as a pickup in domestic demand begins to complement continued export growth," the review stated. "The economic outlook, nevertheless, remains uncertain and dependent on external demand.
"The pace and effectiveness of loan arrears resolution and the related ability of the banking system to support the recovery may impact domestic demand and the capacity of the Irish economy to benefit from any improvement in the external environment."
It also said that despite recent improvement, the scale of the mortgage arrears problem "remains a significant threat to financial stability".
The assessment comes as Finance Minister Michael Noonan told Bloomberg Television in London he was hopeful that ratings giant Moody's would look at Ireland again in the New Year.
Moody's is the only major agency that still classes Irish government debt as 'junk' investment, which hurts our ability to borrow on the markets.
Mr Noonan said Moody's problem was with the eurozone, not Ireland specifically. "We're hopeful that Moody's will have another look at us early in the New Year," Mr Noonan said. "The mood from all the rating agencies is positive."
The Irish Independent reported earlier this week that Moody's looks set to upgrade the country's credit rating to the much sought-after "investment grade" status. An upgrade would be a major boost as we exit the EU/IMF bailout.
However, the Central Bank said some recent developments were positive.
"The related, albeit small, rise in nominal disposable income which is expected over the period will help ease the high household debt to disposable income ratio," it said.
The bank said that the overall value of impaired loans continued to rise, albeit at a declining rate. And it warned that uncertainties remain as to whether the banks were sufficiently provisioned to cope with outstanding distressed loans.
The bank did not base its comments on the recent balance sheet assessments carried out on the banks.
It is also understood that officials in Dame Street had wanted to provide more details on how the assessments were carried out and their results, but were constrained because of the wider ECB tests taking place next year.