What Honohan said about exiting the bailout without a safety net
On Thursday night's Prime Time, Central Bank Governor Patrick Honohan told David McCullagh about the Government's decision to exit the bailout without back-up credit in place. This is an edited transcript of that interview.
DM: "Patrick Honohan, the Government is launching the ship of the State into potentially choppy waters without the benefit of a life-jacket. Did you agree with your colleagues in the ECB when they said it would have been prudent to take out the insurance policy?"
PH: "There are risks and there are ways of protecting against risks. I actually favour the clean exit, though a case can be made for the other approach."
DM: "The Government is making quite a big deal about the fact that we're going without the precautionary credit line. . . Were you consulted on that in advance?"
PH: "For sure. I volunteered my advice. . . I felt the Government could choose between the options here and I waited to see what they would say. They opted for a clean exit and actually I would have done the same for Ireland."
DM: "But what's the economic argument for doing so?"
PH: "We're dealing with markets, and convincing markets that we, Ireland, are a credit-worthy and credible counterpart. This is a statement of intent that the Government intends to continue on the path of discipline in its approach. . ."
DM: "The other leg of the Government's strategy is to try to get retrospective recapitalisation of the banks, to try and pull back some of the billions that were poured into the Irish banks by the Irish taxpayer. Now, there seems to be a certain amount of resistance, to put it mildly, from the Germans; a lot of people are saying this is never going to happen."
PH: "There's no doubt that our debt levels are very high. The difficulty we have arrived at is partly due to the huge amounts of money that had to be poured into the banks. That, I think, is, however, now a political argument that has to take place among the governments of Europe."
DM: "And is it possible to win it?"
PH: "Well, I don't see it happening very soon."
DM: "So we're back in the markets, everything is fine until everything isn't fine and there's some kind of external shock and there is clearly a danger of that. What are you most worried about?"
PH: "Well, I'm always worried. . . "
DM: "Start with growth in the eurozone?"
PH: "It's not so much a risk as a constant negative, the fact that growth is so much below potential in the eurozone. . . the six quarters of recession have been followed by two quarters of very low growth, so that is a weak environment in which to sustain and build the Irish recovery. We don't depend entirely on the eurozone for our trading partners, not at all, so we are getting growth from the USA, from China, so Europe is not the only environment but it's a negative."
DM: "But for people worried about negative equity, worried about unemployment, worried about emigration and wondering how long it is going to take before things are actually going to start getting better, for them. . . when are they going to see the growth as it lifts us all out of the mess?"
PH: "The growth has started to recover. I don't want to be too optimistic. I don't do optimism very well, but I have to say the signs are all in the positive direction. So that may not be felt, is not being felt, by a large number of people. Some people are feeling it but a large number of people are not feeling it and they will not get back to the living standard of five years ago, that's for sure. But the direction is positive on a range of fronts. And I think we should build on that positivity and be aware of it and not prolong negative expectations beyond what's justified."
DM: "And have we prolonged the depression, prolonged the problems for people, by not cutting more in the Budget?"
PH: "Well, I would have done a little bit more, but that's done."
DM: "Now, obviously the problem is, growth here isn't really going to pick up until businesses are able to borrow from the banks effectively and efficiently and in a timely fashion. You clearly can't be happy with how banks are lending at the moment?"
PH: "No, nobody could be happy about the banking system. Not only our own banks but the foreign-owned banks have found doing business here so difficult that they have either withdrawn or they are limiting what they're doing. The environment is difficult for banks, that's why they're not doing it. What needs to be done – there needs to be a repair of balance sheets, over-indebted households, over-indebted firms..."
DM: "And you want to see some repossessions at least."
DM: "I don't want to see any repossessions, but they're going to happen. It's inevitable that they're going to happen because there are some situations, particularly in the buy-to-lets. . . But, also, we're seeing longer-term, sustainable arrangements being made by banks and so there is a reason for borrowers to come to the banks and talk."