Tuesday 17 September 2019

Honohan: ECB could have helped avoid bailout

Outgoing Central Bank Governor Professor Patrick Honohan
Outgoing Central Bank Governor Professor Patrick Honohan

Colm Kelpie

Ireland might have avoided a bailout had the European Central Bank been more vocal in its support for the country, outgoing Central Bank Governor Professor Patrick Honohan has claimed.

Prof Honohan said that had Frankfurt convinced the international money markets at the time that it would assist Ireland for as long as was needed, the Government might have been able to manage without the need for an international rescue package. But without that support, the Fianna Fáil-Green Party government had no choice, the governor argued in a wide-ranging and lengthy address to the London School of Economics last night.

"Had the ECB convinced the market that the Irish banks would be provided with sufficient liquidity for as long as needed, the Government might perhaps have been able to formulate and implement a renewed and deepened budgetary adjustment without the need for recourse to official financing."

"Absent such statements of support, it was clear that an IMF programme could not be avoided and this was negotiated in November 2010."

Prof Honohan said reassuring statements from the ECB about the continued availability of funding for the Irish banks would have stemmed the outflow of deposits and reduced the urgency of entering a bailout programme.

But he added that trying to struggle with borrowing costs as high as 8pc would not have reduced the burden on people, even if the Government imposed the same level of austerity as was done under the bailout.

"Probably a programme would have become inevitable within months anyway," the bank chief said.

It was Prof Honohan's final public address before his retirement later this month.

Reflecting on the Irish economy and public finances before and after the bailout, Prof Honohan said he believed the fiscal stance in the eurozone in the 2011-2012 period was too prone to austerity.

"While many euro-area governments were also concerned about the rapid rise in their indebtedness during the first phase of the crisis, it is easy to argue ... that the aggregate euro area fiscal stance - with fiscal consolidation of as much as 2pc of GDP in 2011, for example - was too tight," the outgoing Central Bank boss said.

He said this was especially the case given the sizeable international balance of payments surplus of the euro area as a whole, as well as very low interest costs of borrowing.

But he argued that the adjustment path laid out in the bailout, started by the previous Government, "was close to the best available to Ireland".

Prof Honohan also said the mortgage arrears problem has proved difficult to fully resolve despite "energetic regulatory initiatives, some financial engineering and far-reaching reforms in insolvency law".

The governor is stepping down after more than six years in the role, during one of the most difficult economic times in the State's history. He will be replaced by TCD academic Prof Philip Lane.

Irish Independent

Also in Business