Economy still showing scars of financial crisis, Honohan says

Ireland's economy is still showing the scars of the financial crisis and will need to be managed very carefully, Central Bank governor Patrick Honohan said on Friday as he confirmed he would retire at the end of the year.

Prof Honohan confirmed that he intends to retire at the end of the year, nine months before his seven-year term was due to end.

He said it was a good time to retire as the bank was moving from a crisis management phase to one of repair and consolidation.

“That is more an implementation phase, a new chapter and a good time to hand over to somebody else,” he told a news conference, adding that he would remain in his job until at least November 1st.

“I don’t want to exaggerate the degree to which the crisis damage has been fixed,” Honohan told a news conference. “The situation is well on the road to repair but there is a degree of fragility which means management of the economy has to be very, very prudent and cautious.” “A lot of the legacy damage is still there, it’s there in households, it’s there in firms, it’s still there in banks. There is certainly a lot less fragility than there was.”

The European Commission backed up Prof Honohan’s cautious tone on Friday, saying at the end of a post-bailout surveillance mission that while progress continued in Ireland, the legacies of the crisis demand further determined policy efforts.

The bank’s latest annual report shows it made a €2.1 billion profit last year, of which 1.7 billion will be paid to the exchequer.

In his foreword, Prof Honohan said the “unprecedented scale of profits” earned in recent years reflects several exceptional crisis-related factors, including the disposal of bonds related to the liquidation of IBRC, formerly Anglo.

He said having emerged from the bailout programme the economy continued to recover last year with employment growing steadily, underscored by improving domestic demand and favourable

external factors.

Prof Honohan also said progress was being made in the banking sector, with the banks’ balance sheets gradually being repaired.

However, he noted that challenges remain, particularly around longer-term loan arrears.

The Governor said a key policy objective of the bank in 2014 “was to avoid, in the recovery, the risk of bank credit and house price spirals from developing.”

To address this, he said the Central Bank enhanced its macro-prudential policy framework, introducing new regulations “which apply proportionate limits to mortgage lending by regulated financial services providers in the Irish market”.

Prof Honohan said that after a slow start, the capacity and approach of the banks for dealing with distressed borrowers has materially improved over the past few years, with a significant shift from relying on short-term forbearance, to longer term sustainable solutions.

“ Notwithstanding the progress, significant bank specific areas for improvement remain,” he said.

Minister for Finance Michael Noonan said: “The departure of Professor Honohan marks the end of an era. His clear thinking, leadership and wise counsel helped to steer the country through some of our most difficult times and he has also guided the reform of the Central Bank following the financial crisis.”

Mr Noonan said he would now begin the process of identifying suitable candidates for the post.

Additional reporting by Reuters