Government efforts haven’t restored sentiment -- Honohan
Central Bank Governor Patrick Honohan said government efforts to push down the country’s deficit and recapitalise banks haven’t yet convinced investors.
“The scale on which capital has been replenished is very large, though the favourable impact on investor confidence has not yet been as strong as might be hoped for,” Honohan, who is also a European Central Bank council member, said today.
“Much of the reason for the slow return in confidence lies in the parallel weakness of the fiscal situation.”
Irish yields have soared on concern that surging costs to bail out domestic banks will make the debt burden unsustainable.
While European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday he’s got “no doubt” that the nation will overcome its crisis, Goldman Sachs Chief European Economist Erik Nielsen has said there’s a “big probability” of the Government seeking external aid.
Irish bonds fell for a 12th day today, pushing the yield on the country’s 10-year bonds to 8.4pc as of 11:56am in London.
The spread over German bunds, Europe’s benchmark, widened to a record 571 basis points.
The Government last week reiterated that it aims to push Ireland’s budget deficit below the EU limit of 3pc of gross domestic product by 2014 from about 12pc of GDP this year.
When the costs of the banking rescue are included, this year’s shortfall jumps to 32pc of GDP. Rehn said on November 8 that Ireland hasn’t requested any financial support.
With the country’s fiscal burden remaining “such a challenging problem,” investors aren’t fully convinced that government actions have been “effective and sufficient,” Honohan said at the event.
Ireland’s total loan losses through 2012 are estimated at “no less than” €85bn, or 55pc of GDP, he said.
“With government finances so stretched, the additional burden of recapitalizing the banks has reduced fiscal headroom and contributed to the concern on the financial markets,” Honohan said.
“Still, I would like to remind you that this recapitalization burden is often overstated as a contributor to the required fiscal adjustment.”
While “observers” have questioned whether Irish lenders have set aside enough loan-loss provisions for their residential mortgage books, “there is yet no hard indication” that losses will exceed the central bank’s 5pc stress scenario, Honohan said.