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Patrick Honohan: Stay the course - it's paying off


Central Bank Governor Patrick Honohan. Photo: Gareth Chaney/Collins

Central Bank Governor Patrick Honohan. Photo: Gareth Chaney/Collins

Central Bank Governor Patrick Honohan. Photo: Gareth Chaney/Collins

If you do any hillwalking in Ireland, you will know that part of the climb where it stops being steep and slippery and you can at last see the cairn is at the top. Economic policy right now feels just like that: it is clear that we have indeed been on the right path, which now looks less steep - though there is still a strenuous climb ahead.

It is fully seven years since the first big tremors of the global financial crisis were felt. Soon Ireland was engulfed in a wave of over-indebtedness that was revealed when our property bubble burst, striking at the foundations of the economy and the public finances.

Now, with the signs of recovery well established, and talk of a return to normality, it is time to take stock of where we are and how we should proceed.

As the repair of the economy is completed over the coming few years it becomes increasingly important to look to the medium term. Some of what had to be done in the earlier phases, after the crash of 2008-9, was stop-gap and temporary in nature: right for the time; less than ideal for the long-term.

Having played our part in the stabilisation of financial conditions, which was a 
pre-condition for the return to the employment and income growth that is now increasingly evident, the Central Bank is determined to help ensure that the recovery is sustainable and sustained.

The questions I am most often asked concern three broad areas: house prices, bank loan arrears and the Government budget.


The speed at which house prices have rebounded, especially in the greater Dublin region, has surprised many, though the volume of transactions is still small.

Good for some, but not for others, this rebound reflects how improving incomes and employment have released a back-log of demand for housing in some areas.

Yes there are housing shortages, but it doesn't follow that there will be a return to progressive increases in the real cost of housing.

If we avoid the errors of the past, a return to more normal rates of housing output will restore availability and mop up the pent-up demand that exists, primarily in the Dublin area.

Certainly credit expansion has not been, and will not be allowed to become, an out-of-control driver of housing demand; the Central Bank is determined to see to that.

We have a toolbox of measures which can be used to cool down credit-fuelled demand. We will not hesitate to use them to prevent bank credit overheating the market. Policy initiatives to stabilise the market should emphasise removing supply constraints rather than fuelling demand.


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Getting the banks to operate more effectively in dealing with mortgage arrears and distressed small business lending has been a wearing task, but one which is now showing definite progress.

The banks have finally acknowledged the challenges that they face in getting sustainable solutions in place. That's why the Central Bank stepped in last year to force the pace.

It is not for the Central Bank to try to engineer debt relief for borrowers who can afford to pay; indeed, some would say that the Central Bank has been interfering too much in what is the responsibility of the banks themselves to deal with this problem.

I don't agree. Given the very slow initial response of the banks to the problem, their over-optimism about the ability of some borrowers to repay, and their lack of imagination about solutions that can balance the need for relief in many cases with their fear that some non-performing borrowers may be chancing their arms, we needed to push the banks.

I believe that our Code of Conduct on Mortgage Arrears and our guidelines and definitions of sustainable solutions have gone some way towards getting many borrowers back onto a viable repayment plan.

At the same time, far too many cases persist where no adequate cooperation between bank and borrower has been achieved. It is mainly for these cases that the banks have gone down the legal path towards repossession.

I am still optimistic that the bulk of these cases can come back on track, and with renewed engagement between bank and borrower and more appropriate solutions can be agreed. Just as we are pressing the banks to resolve these cases, I would urge borrowers who have not been cooperating to recognise that that is a hazardous course of action: bear in mind that banks can get court approval for repossession if borrowers are not cooperating.

Meanwhile, those who can currently just afford to pay have had some insulation: for the past five years most mortgages have been serviced at exceptionally low interest rates. While this situation has resulted because the euro area economy as a whole needs low interest rates, it will prevail for as long as the ECB deems it necessary to ensure that euro area inflation gets back up towards 2pc.

With so much of the Irish banks' management and financial resources still being soaked up by the resolution of their non-performing loans, it is still not possible to describe them as being fully restored to health and delivering the services needed by the economy.

Their new management teams have struggled to bring a disastrous position into some semblance of normality (as indeed have the foreign-owned banks that also succumbed to - and contributed to - the boom mentality).

At least the two worst performers, Anglo and INBS, are off the scene: the liquidator (and before him the management that was brought in during 2009), has been recovering as much as possible from the debris of those institutions. Meanwhile, the bulk of the losses assumed by Government from those two entities will only be repaid over a very long period and on very favourable terms.


Strong policy implementation has helped the Government meet its budgetary targets and this has in turn greatly lowered its borrowing costs from the financial markets.

The Government knows this does not mean that there is scope for easing-up.

Government debt is exceptionally high and could easily start rising again if developments turned adverse. For this reason the nation will still need prudent revenue costing and careful expenditure control. The electoral cycle cannot be a driver.

Even within a fixed overall budgetary envelope, Government is faced with a vast scope of choice on the specifics of taxation and spending policy. It is these choices which will influence the quality and nature of our society's recovery in the years ahead.

Managing domestic demand, ensuring the banks are healthy, and offering advice to Government: these are the tasks of the Central Bank, and our measured approach to all three over the past few years has, I believe, borne fruit. Recovery remains slow and partial.

For example, the total number at work and average living standards are both still well below the peak reached at the top of the bubble. And the elevated debt levels remain a lasting legacy. But the consistency of policy direction over the past half-decade, and successful delivery of results, points the way ahead and confirms the value of staying the course: it's paying off.

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