Business Irish

Monday 23 October 2017

Banks may 'derail our economic recovery'

Brendan Keenan

Brendan Keenan

FURTHER losses in the banking system could derail an economic recovery, the new medium-term ESRI report has found.

With Central Bank tests on the state of the banks due next year, the report examines the effects if €7.5bn in fresh capital had to be injected.

"We are not forecasting that this will be the case," said senior research professor John FitzGerald.

"But a lot of things could happen – unexpected costs in liquidating the former Anglo, possible losses in NAMA, or more capital to meet new international rules.

"The banks were given a lot of capital in 2011, but they have taken too long to use it to deal with their problems and we are still not certain what they need," he added.

The report said recovery could also be damaged by households and firms continuing to save rather than take advantage of easier conditions from the banks.

UNEMPLOYMENT

"If these problems are not resolved rapidly, growth in the second half of the decade could be closer to 3pc a year than 4pc, even with a European return to growth," the report said.

"This, in turn, would mean that the 2015 and 2016 Budgets would have to take more money out of the economy. This would contribute to the unemployment rate remaining in double digits for most of the decade.

"Michael Noonan has referred to a back-up facility which could cover future losses. If the Budget was on target, Europe would presumably respond," Dr FitzGerald said.

High levels of public debt mean it would not be feasible for the Government to run larger deficits, the report said.

"This scenario shows that failure to maintain policy vigilance in a number of key areas, for example to remedy the problems in the financial system, could mean that the Irish economy would fail to realise its potential over the next decade," the report said.

This scenario shows unemployment still at 12pc in 2018, net emigration of 20,000 a year and the government net debt declining from the current 140pc GNP to 117pc.

"On the other hand, fixing the banking system could provide a substantial investment return at the end of the decade. If the government shareholdings in the banks could be sold at a reasonable price, it would have a big impact on the national debt," Dr FitzGerald added.

Irish Independent

Also in Business