Senior ECB official plays down prospect of debt cut for Ireland
ONE OF the most senior members of the European Central Bank yesterday laid much of the blame for Ireland’s economic difficulties on domestic factors and played down the prospects of an easing of the State’s debt burden.
Jörg Asmussen – one of six members of the ECB’s executive board – bluntly told a think tank audience in Dublin that by 2007 the Irish economy had become “unfit and overweight”.
Excessive pay increases in the public and private sectors, poor supervision of banks and overspending by governments had all contributed to weakening the economy, he said.
In the decade to 2010, “wages per government employee rose by 90 per cent”, he said, adding this was almost double most other euro area countries. He noted that among euro area countries only in Greece had public sector pay risen more over that period.
Although the recently appointed central banker acknowledged reform efforts to date, he said more were required.
He highlighted reforms of the legal and medical professions which were under way. These reforms would “lower prices for Irish consumers, expand activity and increase employment”.
Referring to debts associated with the banking crisis but taken on by the State, he warned that “any desire to offload this debt could have dire consequences”.
He added that seeking to reduce the debt would signal that the debt level was not sustainable, thereby undermining confidence in the State’s capacity to repay it.
The German national said Ireland had “a very good chance” of borrowing normally by next year, thereby allowing it to exit its EU-IMF bailout by the end of 2013.
He said the ECB was “ready to work with the Irish authorities” in proposals to restructure the promissory notes used to honour the commitment of defunct banks.
He noted, however, that the full cost of the promissory notes had been factored into the bailout programme.
“Any deviation from that programme should be considered very carefully indeed,” he warned.
Referring to the treaty on fiscal discipline among 25 EU member countries, which will be subject to referendum next month, Mr Asmussen said the ECB believes “it to be of the utmost importance that all euro area members especially adopt – and implement – the fiscal compact”.
Mr Asmussen ruled out any medium-term commitment to funding the Irish banking system, a long-held Government objective.
In his speech to the Institute of International and European Affairs, he strongly defended the record of the ECB vis-a-vis Ireland, which he said has been “misunderstood” and “misrepresented”.
Acknowledging that the repayment of Anglo Irish Bank’s bondholders had been a “source of controversy”, he said the ECB viewed it as the least damaging option in ensuring that “no negative effects spilled over to other Irish banks or banks in other European countries”.
No senior bank bonds anywhere in the euro zone have been defaulted on since the crisis erupted in 2007.
He went on to note that the ECB and the wider euro system of central banks, of which the Irish Central Bank is a part, had been providing “extraordinary levels of lifesustaining transfusions into the banking system” long before the bailout in late 2010.
No other country had received more support proportionally, he added.
Mr Asmussen acknowledged Ireland had done much to restore its position but said that, as in many other countries, further reforms were necessary to restore sustainability and improve the “fragile” state of the domestic economy.
In the longer term, “further steps to a fiscal union are ultimately needed” in the euro zone, he said.
Responding to Mr Asmussen, the Government said in a statement last night that it was still awaiting a draft paper being prepared by the troika on the debt issue.
“The Government has set out on several occasions what was firstly an Irish request is being converted into a joint troika policy paper. We await a draft of this paper. This is a medium-term issue,” said the statement.