Country 'can afford the rising cost of bailing out the banks'
Honohan says bill to emerge as NAMA buys up bad loans
Published 10/02/2010 | 05:00
CENTRAL Bank Governor Patrick Honohan predicted the "overall net cost" of the Government's bank recapitalisation scheme will rise but remain "manageable".
The cost of recapitalising the banks will become clear in "the coming weeks" as the National Asset Management Agency (NAMA) begins buying loans from the banks, the bank governor added.
The comments come as the Government has all but conceded that it will miss another deadline to begin transferring bad loans to NAMA by the end of this week and admitted that it may have to pump even more money into the banks to keep them going.
"It will of course be a sizeable sum, though some of what is needed may be raised by the banks themselves through such steps as asset sales, new issues of equity and discounted debt buybacks," he told recent and unemployed graduates from Trinity College Dublin yesterday morning.
"Still, it is pretty clear that the Government will be acquiring additional equity stakes. While I'm not yet in a position to put a number on it, I can say that the overall net cost to the State will be manageable."
Shares in the country's two biggest banks have tumbled over the past few months as investors continue to fret about delays to NAMA, possible sanctions from the European Commission and the Government's likely move to increase its stake in the banks.
These doubts are boosting the amount the Government has to pay to borrow on the bond market.
"One of the factors keeping the country's borrowing costs higher than they might be is the financial market's concern about the future costs of recapitalising the banking system," Prof Honohan added.
The governor reiterated his criticism last year of the banks for failing to lend to businesses, saying bankers have "lost their edge in small business lending" after years of property-based lending.
"This is something that they need to pay more attention to, not just for the sake of the economy, but for their own business performance in the years ahead when property-based lending will be on a much more limited scale."
The governor appeared to make an oblique criticism of the Government when he criticised the way the country had "sucked in" credit in recent years.
"We did not manage our engagement with the global economy in a manner consistent with stable growth," he told the former students.
But he also urged unions and employees to dampen wage demands, saying that pay restraint would be essential for the economy to return to growth.
"I'm sorry to bang on about this, but central banks aim at overall price stability," he added.
While criticising past decisions, he praised current policies. "The overall thrust of macroeconomic policy and the pace and scale of budgetary adjustment seems about right to me as a basis for building a sustainable economy."