Central Bank warns over debt sustainability


Falls in property prices, weaker growth and possible capital shortfalls in state-owned lenders continue threaten Ireland's debt sustainability, the Central Bank said today.

In a new report, the Central Bank identified risks around continued economic weakness, over-indebted private and public sectors and warned that mortgage stress, poor profit outlooks and funding pressures could see the fresh capital put into the country's banks erode quicker than expected.

"It is clear that, despite the exceptional scale of policy interventions domestically and significant progress in the stabilisation and restructuring of the financial system, its transition to a fully normal mode of functioning is not yet complete," the report said.

Benchmark bond yields have more than halved to 6.9 per cent during the most recent period of progress since the cost of official funding was cut last summer but the Central Bank said the market's views of Irish debt remained at a
level incompatible with access to long-term funding.

It said sovereign debt sustainability is vulnerable to further unexpected increases in debt levels or reductions in
economic growth and warned throughout its report that of the risks across the economy of further property price declines.

Property prices have halved since the spectacular bursting of a building boom in 2007 and the monetary authority said continued falls could result in increased loan losses for Irish banks that it said were expected to remain at elevated levels for some time regardless.

Using its current forecast for unemployment and house prices, the bank projected that the 90-day owner-occupier mortgages arrears rate would rise to just above 10 per cent this year from 9.2 at the end of 2011.

Buy-to-let arrears are projected to rise to 18 per cent, according to the bank's modelling.

It added that the banks, already planning thousands of job cuts, would have to cut more costs, that they faced further
eroding of margins due to the high cost of funding and would have difficulty significantly increasing deposit volumes
given the weak economy.

"Banks face the challenge of generating recurring earnings in an environment of limited ability to re-price tight loan
margins and funding cost pressures," the bank said.