Sunday 25 March 2018

Economist Morgan Kelly in talks with Central Bank over SME risk

Stress tests and debt on agenda

Economist Morgan Kelly
Economist Morgan Kelly

ECONOMIST Morgan Kelly has taken up Finance Minister Michael Noonan's invitation to discuss his views with the Central Bank on the threat he believes Ireland's small businesses faces from the upcoming ECB bank stress tests.

The Sunday Independent has learnt that senior officials from the Central Bank moved quickly to contact Prof Kelly following remarks from Mr Noonan last Monday night in which he acknowledged that the UCD professor's views had to be taken seriously because of his track record in predicting the country's house price crash.

"What Morgan Kelly says has to be taken seriously. He was correct before when nobody else was and I think if the Central Bank was to make contact and access some of the data that is underpinning his speech, that would be helpful," Mr Noonan told reporters at a meeting of eurozone finance ministers in Brussels.

Mr Noonan was responding to a warning given by Prof Kelly in a lecture to the Economics Society in UCD last week. In the course of that address, Prof Kelly said the SME sector which provided most of the employment in the economy was still struggling with debts from the property boom which it was unable to repay.

These businesses were now "an existential risk to the economy", he said.

News that discussions between Prof Kelly and the Central Bank are already under way will come as a surprise to some given the UCD academic's past tendency to avoid public attention in the immediate aftermath of making forecasts for the economy.

It is an intriguing development considering Prof Kelly's devastating criticism of Central Bank Governor Patrick Honohan in 2011.

In one of his rare published articles, Prof Kelly accused Mr Honohan on that occasion of having made what he described as "the costliest mistake ever made by an Irish person" after the bank stress tests conducted by the Central Bank in 2010 failed to properly assess the true condition of the country's banks.

In a further searing criticism, Prof Kelly accused Mr Honohan of having "deftly sliced off at the ankles" the then Finance Minister Brian Lenihan by insisting that the "bank losses could and should be repaid by Irish taxpayers".

Mr Honohan rejected that claim, insisting that he was "playing for Ireland" during the negotiations, but that his ECB role was restricted to certain scenarios.

He admitted, however, that the deal had been put together in a hurry and was not the "final solution", but a "holding operation".

Responding to Prof Kelly's latest predictions for the country's SME sector last week, the Central Bank Governor insisted there was no mechanism whereby the ECB bank stress tests could increase pressure on small and medium-sized businesses.

ANALYSIS pages 20 & 21

He said the Irish banks had been working through the SME loans on their books in a very systematic way for the past three or four years.

"As with the mortgages, it has been very slow, but it has been going on and the banks are dealing with the loans," Mr Honohan said.

Speaking to the Sunday Independent in the course of his official St Patrick's Day visit to Sydney, Australia, Agriculture Minister Simon Coveney also rejected Prof Kelly's views on the dangers faced by the SME sector.

"I think he's wrong but he's entitled to his opinion," Mr Coveney said.

Ronald Quinlan

Sunday Independent

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