Lower bailout rate is likely but default not an option - Honohan
Published 02/03/2011 | 05:00
THERE is likely to be "movement'' on lowering the interest rate on Ireland's €85bn bailout package and defaulting is not an option, the governor of the Central Bank, Dr Patrick Honohan, said last night.
Honohan also admitted for the first time that if the government knew how bad Anglo Irish's losses would become, that bank wouldn't have been included in the September 2008 guarantee.
In an RTE interview, Honohan refused to say how much new capital the banks would need, but dismissed predictions by Alan Dukes, the Anglo chairman, that up to €50bn would be needed. "I don't place any credence on that,'' said Honohan.
"I want the rate to be lowered,'' said Honohan of the average 5.8pc rate agreed in December with the IMF and EU. "There could be movement on those terms,'' he added.
Honohan, appointed by outgoing Finance Minister Brian Lenihan, said negotiations on the bailout package could take place on and off over ten years, as Ireland and Europe had a "shared interest'' in restoring growth.
Asked about the amounts owed to the ECB by Irish banks, Honohan said the ECB had grown impatient on this issue.
"Naturally the ECB is not going to fund something that is not necessary." He said the Frankfurt-based bank was "alarmed'' when the outgoing government failed to pump fresh money into the banks. "There was a great deal of disappointment'' and even "alarm'' said Honohan when the ECB first heard of this decision.
Honohan said the banks were now prepared to shrink in size, but he there would be no "fire sales'', and he had made this clear to his ECB colleagues. Asked why he was concerned about this, he said: "Because the State can't afford it''.
Honohan said Ireland was previously in debt to the private sector; now it was in debt to the "European public sector'', a reference to the ECB. "It's now more of a partnership''.
Asked would Ireland be better off defaulting at this point, such is the high level of debt, Honohan strongly disagreed. "This is not an option that is attractive at all''.
Honohan said if the outgoing government had foreseen Anglo's losses, the guarantee might have looked differently. "We would be glad now if we didn't have to include Anglo,'' he said. But even an Anglo closure would have caused huge problems, he said. "It would have been a European Lehmans,'' he remarked.
Share the pain
Meanwhile, the EU Commissioner for Economic and Monetary affairs Olli Rehn said last night that senior bondholders of Irish banks must not be forced to "share the pain" -- but the interest on Ireland's bailout loans should come down. The comments come ahead of talks later this month aimed at ending the debt crisis.
Mr Rehn said renegotiation of the banks' debt is "not on the cards nor on the agenda".
His comments appeared to end speculation that the incoming government has room for manoeuvre on the issue even as Fine Gael and Labour held talks on forming a coalition.