Banks should get interest-free ECB loans, says ESRI

THE EUROPEAN Central Bank should provide Ireland with an interest-free loan of €40-50 billion to “overcapitalise” the Irish banks, according to a report issued by the Economic and Social Research Institute (ESRI).

In its latest quarterly economic commentary, ESRI authors Joe Durkan and Cormac O’Sullivan say there must be “an acceptance that this is an EU problem and requires EU solutions”.

As the State’s actions have contained cross-border problems of poor lending within Ireland, the Government should not now have to make further concessions in exchange for a lowering of the interest rate on the EU-IMF deal, Dr Durkan said.

A loan from the ECB to capitalise the Irish banks would give them “excess credibility” and subsequently allow them to raise funds from the interbank lending market, while also encouraging a reversal of the outward flow of deposits from the State, Dr Durkan argued.

He described the figure of €40-50 billion as “optimal”, but said some degree of burden-sharing between Ireland and the rest of the EU would be better than the current approach of placing unsustainable debts on countries. “In three to four months’ time, there will be another crisis,” he said. “The alternative is that our banks would fail and then their banks would fail.”

The ESRI’s forecasts for the Irish economy include a 0.5 per cent growth in gross national product (GNP) and 2 per cent rise in gross domestic product (GDP) this year. For 2012, it forecasts growth of 2 per cent in GNP and 3 per cent in GDP.

The number of people employed will fall again this year, but the rate of decline will slow down and employment levels will grow again next year, it predicts.

Unemployment will average at 14.25 per cent this year, falling to just 14 per cent in 2012, it says. Figures from the census will reveal the extent to which unemployment has been kept down by emigration, Dr Durkan said.

Turning to Ireland’s budget deficit, the ESRI report urges the Government to make a faster reduction than currently planned.

Dr Durkan said he advocated cuts in capital spending this year and beyond, on the basis that the economic benefit of certain infrastructure projects is unproven.

“The Metro North, for instance, shouldn’t happen,” he said.

Balancing the budget one year earlier than planned would allow the State to return to the financial markets in 2014, Dr Durkan said.

A surplus in the balance of payments means the Government could raise its borrowing needs domestically, the report says. “This requires an imaginative approach to selling Government bonds to households with substantial savings and those capable of generating future savings,” it notes.

As well as more rapid cuts in expenditure, the ESRI advocates higher taxes. “I think that taxes have to be raised as well. I think it’s inevitable and I think we should just do it,” said Dr Durkan.

Dr Durkan said he was in favour of the introduction of broadly based charges such as property taxes, water charges and car taxation, arguing that these would not just raise revenue but allow for reductions in rates charged to businesses.

Exports in the food and drink sector were recovering as companies realised they could not rely on weak domestic demand, said Dr Durkan. “It’s a dead repeat of what happened in the 1980s.”

HOUSEHOLD SPENDING: INSTITUTE PREDICTS SLIGHT RISE

HOUSEHOLD SPENDING will begin to rise this year, albeit “very modestly”, with 2 per cent growth in the volume of consumption next year, the Economic and Social Research Institute forecasts.

Households satisfied with the amount of debt they have paid down may give a boost to retail sales despite an ongoing drop in disposable income, the ESRI notes. “While this might seem optimistic, the critical difference for households is that they now know the parameters of the adjustment that the economy faces and can plan accordingly,” the ESRI said.

The forecasting body expects Ireland’s savings rate – the ratio of savings to disposable income – to fall next year as a result. This rate shot up from 5.2 in 2008 to about 14 per cent last year.

“Households have repaired their balances quite well and, once they have done that, they will start spending,” said Joe Durkan, one of the authors of the ESRI report.

Consumers may be in for a bumpy ride when it comes to the cost of living, however. The pattern of inflation will be “very uneven” this year as a result of fluctuations in oil prices, said Dr Durkan, who believes the current upward pressure on oil prices will dissipate later in the year.

The ESRI forecasts that inflation, as measured by the Central Statistics Office in its Consumer Price Index, will be 2.5 per cent this year. The Harmonised Index of Consumer Prices, which excludes volatile costs such as mortgage interest, will rise by 1.5 per cent, it predicts.