ECB’s bond buying has brought ‘unqualified benefits’ - Honohan

The European Central Bank bond-buying programme has delivered unqualified benefits to Ireland’s economy, Central Bank governor Patrick Honohan has said.

Prof Honohan also acknowledged that the State stands to benefit from large capital gains on the 2013 deal to scrap the Anglo Irish Bank promissory note scheme, but he noted that the potential scale of such gains fluctuates according to conditions in debt markets.

Prof Honohan was speaking at the Oireachtas finance committee, likely to be his final appearance before he leaves Dame Street later this year.

At a hearing dominated by controversy over standard rate variable mortgages, he said the effects of the ECB quantitative easing scheme pass through the economy at large. He also argued that there was a “broad distributional impact” from the programme.

In the Irish context, he said the benefit could be seen in the reduction in Government borrowing costs which had enabled the National Treasury Management Agency to refinance IMF debts carring an interest rate in excess of 5 per cent at “very low” interest rate.

A further benefit was seen in the reduced cost of servicing tracker mortgages on which the interest rate was contractually tied to the record low ECB rate.

Prof Honohan also said the State benefited from the increase in Central Bank profits arising from favourable market conditions. “This really strong benefit to the public finances has been a boon to Ireland,” he said.

The ECB did not initiate QE for the specific benefit of “overindebted” states such as Ireland “but it has been an unmitigated plus for the Irish economy”.

Anglo promissory note

Of the Anglo promissory note deal, Prof Honohan said the Central Bank had already realised a €1.1 billion gain on the disposal of bonds linked to the transaction. Saying the market valuation of the bond portfolio at the end 2014 was €9 billion greater than the book value, he said this pointed to an unrealised gain of €10 billion at that time.

“The €9 billion isn’t in the bag but if interest rates went up again then the gain would be smaller.”

He said the potential benefit varies: the unrealised capital gain when the bank was publishing its 2014 annual report in April was €13 billion. “I don’t think €9 billion is in the bag. Still, things are going well on the front.”

Prof Honohan replied “yes and no” when asked by Labour TD Pat Rabbitte whether such gains could be interpreted by the man on a bar stool as a “clawback” from the €30 billion-plus cost of rescuing Anglo, later renamed as Irish Bank Resolution Corportation (IBRC).

The interest rate was high when the promissory note went into Anglo as it was “bad time” to carry out such a transaction “What the Government has managed to achieve is a refinancing of that at these extremely low interest rates,” he said.

“Did IBRC still cost us €35 billion? Yes. But now it’s being refinanced in such a way that we only have to borrow maybe in the end, maybe €10 billion less than that.”

Greece

Of the situation in Greece, he responded to questions from Socialist Party TD Paul Murphy that he did not want consider it possible that the country could leave the euro. “I think this scenario painting [is something] I don’t want to get into,” said Prof Honohan, a member of the ECB governing council.

“It does not want to be in a political space,” he said of the ECB’s stance in relatoin to emergency support for Greece. “It’s not possible tnot to be in a political space but it tries to minimise it.”