Force banks to lend or face 'decade of misery' : ESRI
ESRI warns of soaring jobless, crippling debt unless credit flows
Published 21/07/2010 | 05:00
THE Government will have to force the banks to lend to businesses or face a decade of low growth, high unemployment and crippling debt, the country's leading economic think-tank warned today.
The Economic and Social Research Institute (ESRI) also urged Finance Minister Brian Lenihan to consider a tougher Budget for this year.
That would mean cuts and taxes over and above the €3bn already planned.
The Cabinet will today begin to study how and where it will find that saving.
The ESRI also warns it would be a big mistake to ease back on planned cuts in public spending and tax increases. It also foresees difficulties in bringing in a further €2bn reduction in the deficit in the 2012 election year.
Unveiling a 10-year analysis of the economy's prospects, ESRI senior professor John FitzGerald said the evidence suggested the banks on their own would not lend enough to fund an economic recovery.
The report says that Ireland can enjoy a brisk recovery, with a return to full employment by 2015 if it responds to sustained global growth.
But this will require continued tough budgetary measures, vigorous education and training programmes -- and a resumption of lending by the banks.
"There are signs of recovery. One is already meeting business people with the fullest order books they have had for a long time, and they cannot get bank finance to fund their expansion," Mr FitzGerald said.
"One of the problems is that banks seem to have lost the skill to lend real money to real people. We may have to adopt the 'foie gras' approach to the banks: stuff them with cash, then kill them and eat them.
"The fact is that when they have the capital demanded by the regulator they should be able to lend. AIB will probably be substantially owned by the State and, at that stage, can be made to lend."
Mr Lenihan has warned that he would use legal powers to ensure banks do not continue to refuse credit to customers who have made a successful appeal to the new Credit Review Office.
The report sets out two starkly contrasting future courses for the economy -- the "high-growth and "low-growth" scenarios.
It refused to say which was more likely, but warned that €7.5bn in Budget corrections over the next four years was the "absolute minimum" needed.
The report says it would be a big mistake to ease back on the cuts, and the Government should even consider a tougher Budget for this year. "If we surprised the markets with a bigger correction than €3bn, we might see a cut in interest rates," Mr FitzGerald said.
The report argues strongly against the idea that it would have been better to ease up on the fiscal correction. "The severity of the deterioration in the public finances means that failure to take remedial action could have left government borrowing on an explosive trajectory," it says.
Mr FitzGerald fears that a general election due in 2012 may limit budgetary action next year. "The €7.5bn correction which the Government plans for the next five years is the absolute minimum needed. If the economy does not recover strongly, more will have to be done," he said.
The low-growth scenario sees the national debt continuing to grow to reach 140pc of output (GDP) by 2025 -- a situation described as "unsustainable" -- whereas it falls to 70pc of GDP with higher growth.
The planned Budget cuts will see a loss of 40,000 jobs in the public sector -- mostly through natural wastage. The ESRI reckons the effort to fix the public finances will cut growth by an average of 1pc a year and cost more than 60,000 jobs, but doing nothing would be even more damaging in the end.
The ESRI takes no view on which scenario is more likely, but warns there are risks to the global recovery, and uncertainty about the damage done to the Irish economy by the recession and the banking crisis.
"It will be the end of 2011, or 2012, before there will be sufficient evidence to establish which of these two scenarios is likely to be correct," it says.
On a day when the National Treasury Management Agency had to pay a whopping 5.5pc for 10-year loans, Mr FitzGerald said both the Government and the private sector were suffering from the higher "risk premium" being charged to Ireland.
The ESRI also says:
- Effective job policies are needed to ensure that Ireland is not left with a legacy of unskilled long-term unemployment.
- A sustained improvement in competitiveness is required.
- And the cost of the banking crisis has added to the burden of fiscal adjustment.