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Brendan Keenan: Central Bank's review is timely reminder it's too soon to party

GALL and wormwood. That is the taste left by last week's 'Macro-Financial Review' from the Central Bank.

If only we had had such a review when it mattered. In this one, the bank warns of the consequences of further falls in house prices; expects mortgage arrears to increase; and accepts that the banks are still not able to carry out their normal functions of lending and borrowing.

Perhaps most striking is the conclusion that all of this threatens the country's ability to carry the burden of debt which it continues to accumulate.

This is the kind of language needed during the bubble years -- clear, strong and generally alarming. Instead, during those years we got, at best, a form of code which might be interpreted as alarming when reading between the lines, but which the bank resolutely refused to put above the lines.

Most media coverage of central bank reports at the times was more dramatic than the content of the reports really warranted. Journalists' base motive was to try to get a better story out of the unexciting prose, but we also reckoned the bank would have liked to say more, if it dared.

It did not dare, but it is worth remembering that it would have required courage of a high order. The bank's duty, if it believed there was a serious problem, was to try to precipitate an end to rising house prices, create a reduction in jobs and output in the building industry and spark a fall in bank shares.

Had it succeeded, its senior executives and economists, if they did not actually lose their jobs, could have expect to see their careers blighted. If, by some miracle, they actually managed to prevent a crash, they would not even be vindicated by history, because no one would know there would have been a crash.

This is the context in which blaming people for not saying and doing more must be set. If one relies on indomitable courage to bring about desirable outcomes, one must expect to be disappointed. The system must be one which permits ordinary human beings to deliver such outcomes.

There is, of course, no particularly indomitable courage in last week's report. Most of it deals with well-known facts -- one might say excessively well-known facts -- although it does so in a technically impressive way which speaks to the extra resources and higher standards now in place at the Central Bank.

Even the warnings about debt sustainability are unlikely to upset the powers that be. The Government's tactic is to persuade Europe that debt sustainability, and a return to bond markets, requires some debt re-structuring, and it would be better to do this through loans to the banks, rather than loans to the sovereign government itself.

This is a tricky balancing act, as we saw last week. The Government's attempt to bounce the ECB by briefing that it had a deal on the €3bn Anglo payment, when in fact it did not, came unstuck.

But the Government is also claiming that there will be no second bailout. Mr Kenny has even invited foreigners to the party to celebrate Ireland's return to the bond markets next year. The Central Bank report reinforces the view that this is foolish talk. It is too soon to party, or even speak of parties.

The Coalition's fondness for colourful phrases is quite extraordinary. Words which stick in the public mind nearly always spell trouble for the politicians who utter them.

I gather Michael Noonan had at least one lucky escape over his "economy taking off like a rocket" remarks. One TV news editor considered using one of those clips where a real rocket rise off the launch pad before settling gracefully back and then exploding in a ball of fire.

The editor decided that might be too much like comment, but the Central Bank analysis of the economy's growth prospects is the bit most likely to discomfit ministers.

Brian Cowen's mea culpa this week makes the point. In his time, the Central Bank chickened out of trying to apply public or market pressure on the Government by using strong language.

That does not absolve the then ministers from acting on the bank's obvious unhappiness about property prices and public spending, however delicately expressed. (The bank has no excuse when it comes to its own domain of credit growth.)

The present Government's policy is based on a return to growth in 2013. It was based on a return to growth in 2012, but it may get by if there is just one year's delay. However, neither the bank's analysis, nor last week's figures for the final quarter of 2011, give any grounds that there is any kind of rocket on the pad.

The bank notes the three major risks to recovery: the pressure on domestic incomes which will continue for some years yet as the country's own earned income has to replace foreign borrowing; the limited supply of credit for expansion from a severely constrained banking system; and continued weakness in major economies.

The report gives updated calculations on the impact of those economies on Ireland. The vulnerability -- and the buoyancy in better times -- are clear. It reckons that a 1pc drop in output in the euro area decreases Irish GDP by a whopping 2.5pc, while a similar fall in the US or UK would knock 1.3pc and 0.8pc respectively off Irish output.

As of now, the US recovery looks fairly well-based. It is coming at the time and in the manner one would expect after a financial crash -- four years later, led by private investment, and not particularly strong.

US growth is now probably more vulnerable to external conditions than to problems at home. But of course, those external conditions are not good, with the eurozone in some kind of recession and China slowing down. It is possible to hope, though, that the world's most important economy is back in a growth cycle.

On the other hand, the central bank figures imply that stagnation in the euro area and Britain is costing Ireland about 7pc of GDP, as compared with a situation of trend growth in those economies. Recovery there is the only possible source of Irish recovery, which will require confidence among investors and consumers that the euro crisis is well and truly settled.

In rocket terms, one might call that "ignition" -- in which case we are still in the countdown phase.

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