Department rejects economist's warning on bank bailout

 

A WARNING from economist Prof Morgan Kelly that the bank bailout will ultimately leave the State insolvent is based on serious inaccuracies, according to the Department of Finance.

Writing in Saturday’s Irish Times, Prof Kelly, who originally predicted the crisis, said the open-ended guarantee of banks’ liabilities and the Nama bailout will leave the Republic with a “a worse ratio of debt to national income than the one that is sinking Greece” by 2012.

A department spokesman said yesterday that the academic’s analysis was extremely pessimistic and based on a number of very serious inaccuracies. He said that two weeks ago, Central Bank governor Patrick Honohan told the Small Firms’ Association the cost of getting the banks out of trouble was manageable and that most of them started the boom with a cushion of shareholders’ funds that would enable them to pay their debts from their own resources.

The department said Prof Kelly’s assertion, that the international institutions that bought Irish banks’ bonds knew there was a risk of default, was incorrect, as most of the bonds are senior debt and carried no risk premium. The State has guaranteed the bank’s bond debts. The department also argued that Prof Kelly’s call to measure the State’s debt against gross national product (GNP) instead of gross domestic product (GDP) made no sense.

“Prof Kelly should be aware that GDP measures the output of the Irish economy and thus what the Irish Government can tax,” the spokesman said. “GNP measures the output of Irish citizens and companies, including that which is earned abroad and taxed abroad.”

Meanwhile, Labour Party leader Eamon Gilmore said he hoped the UCD professor of economics was wrong. Mr Gilmore was worried because it came “from the same Morgan Kelly who, very correctly, predicted what was going to happen with the property market’’. When Mr Kelly had predicted there would be a 50 per cent drop in property prices, many people had said it could not be. “What I found interesting about the article is that he attributes the difficulty directly to the nature and extent of the banking guarantee that was given in September 2008.’’