Agreement could be turning point, says Honohan
CENTRAL Bank governor Patrick Honohan said yesterday's European Union summit could break the vicious cycle of high borrowing costs which forced the State to seek a bailout two years ago.
Prof Honohan spoke in Dublin yesterday as the notional cost for Ireland to borrow on the bond markets sank as investors cheered news that European leaders were prepared to renegotiate the terms of Ireland's debt mountain. The cost of borrowing fell below Spain's and below the levels seen on the eve of the November 2010 bailout for the first time yesterday.
Prof Honohan, who sits on the board of the European Central Bank, said it was too early to say whether the agreement to address the eurozone's debt crisis would be enough to reassure markets but he said the agreement could be a turning point for Ireland. Previous summits have met with a stock market bounce which has quickly faltered.
"If financial markets and growth conditions in Europe can indeed be stabilised, if financing conditions for Ireland can be improved, and if restraint remains the policy watchword at home, the corner can soon be turned," he told a conference yesterday.
"While there will no doubt be some more setbacks on the way, it is not unreasonable to hope that the balance of negative and positive surprises will be better than it was," he added.
Prof Honohan also welcomed the EU leaders' summit commitment to reform the banking sector and create a single regulator who would be responsible for failed banks.
"At last there is a clear push towards integrated banking supervision with ultimate authority at the European level enforcing a common rule book," he said.
The plans could also break the damaging link between bank collapse in smaller countries and the taxpayer. The proposals clearly ensure that what happened in Ireland would not be repeated elsewhere. The plans contain "very little by way of threat to Ireland in moving forward; rather there is quite a lot to gain," he added.
Ireland still has large debts and banks which are burdened by bad loans, the governor warned.
"Progress has been made but more is needed," he said.
He also hinted that bank debts could still rise. "Loan-loss projections following a big bust involve an irreducibly large element of uncertainty."
Earlier, former Taoiseach John Bruton told the same conference that the origins of the financial crisis went far beyond the banking system.
Mr Bruton said technological changes had made the developing world far more competitive and challenge the West and Japan.
"We anesthetised ourselves from this reality with debt," he said. The United States continues to do this but will suffer a crisis just as bad as Europe's, the former EU ambassador to Washington added.