Honohan stresses importance of 'delving behind averages'
CENTRAL BANK governor Patrick Honohan has said that the European sovereign debt crisis emerged because analysts at home and abroad stopped paying attention to national balance of payment and debt conditions, relying instead on euro area averages.
Speaking to the Chartered Accountants Ireland’s Leinster Society, Mr Honohan pointed to the importance of “delving behind averages” as they were potentially misleading and hid disparities.
He said the European Central Bank’s latest bond-buying programme was designed to address “extreme disparities” which emerged between benchmark bond yields in different parts of the euro area.
“No longer is the single policy rate and the average of monetary conditions in the euro area a sufficient statistic,” said the governor.
The ECB’s new policy tool to stem the crisis carries “the risk of moral hazard” but it would only be used with strict conditions applied on national governments, said Mr Honohan.
“A convergence of yields will also help that other disparity, between rates charged by banks to customers in different countries and on different types of contract,” he told the accountants at a lunch in Dublin.
Mr Honohan said there were also “false friends” in the simple averages on mortgage arrears, noting that there was only a small overlap between houses in negative equity and those in arrears.
New data becoming available would also “throw light on an important conjecture – that unemployment and income loss may be a stronger predictor of mortgage arrears than negative equity”, he said.
“This also has implications for predicting the future evolution of mortgage arrears and loan losses, and for designing bank policy towards the management of the arrears problem. Watch this space,” said Mr Honohan.