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We have to get the 'bond market vigilantes' off our back -- ESRI

THE chief economist of Government think-tank the ESRI yesterday slammed "bond market vigilantes" for "beating up" Ireland by inflicting huge interest rates on the country's borrowings.

The comments from Professor John Fitzgerald (right) came days after the Government agreed to pay 5.38pc for 10-year borrowings, an interest rate 300 basis points higher than the German state pays.

"I don't think EU surveillance is that important to us (in terms of managing the public finances)," Prof Fitzgerald told a conference of US and European politicians and business people. "What is more important to us is the bond market vigilantes -- they're an unlicensed police force.

"They may not be very rational but. . . the bond market vigilantes are out there beating us up and the only way we're going to get them off our back is by getting our house in order."

Pointing to the "huge premium" paid by the Government at this week's €1.5bn bond auction, Prof Fitzgerald said the only way to reduce those borrowing costs was to reduce the budget deficit.

"The Government still has a long way to go," he said. "We need another very tough Budget for next year, and delivering that is going to be very difficult.

"We also need another tough Budget for 2012 and delivering that is going to be even more difficult because there's an election due."

Prof Fitzgerald stressed, however, that the crisis within Ireland's financial system was "being dealt with", adding that "the Irish banking system will be off life support" by 2013.

Speaking after the conference, Prof Fitzgerald said his remarks referred to the Irish banks' reliance on last-resort lending from the European Central Bank (ECB).

"By 2013 the net foreign liability of the Irish financial system will have fallen dramatically," he said. "Most of the Irish banking system's funding will come from domestic sources -- not from the EU interbank market or the ECB."

The much-debated bank guarantee should be "well resolved before 2013", Prof Fitzgerald stressed, adding that any extension beyond December's deadline should be in "quarters not years".

Addressing the conference, Prof Fitzgerald also pointed out that Ireland was in a better position than the other so-called PIIGS countries -- Portugal, Italy, Greece and Spain -- because the country is running a balance of payments surplus.

"We, the people of Ireland are miserable," he said. "We're not spending money, we're saving it . . . That balance of payment surplus is very significant".

The economist stressed, however, that it was now "vital" for the Government to address the issue of business lending. "A lot of companies out there are now wanting to expand," he stressed.

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"So far it hasn't mattered that the Government has been slow (to address business lending), but it's vital that they deal with it by the end of the year".

Prof Fitzgerald was speaking at a conference organised by the State Legislative Leadership Foundation, who are attending two days of events in Ireland.

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