IMF would use same fiscal policy - Honohan


CENTRAL BANK VIEW:CENTRAL BANK governor Patrick Honohan has said that availing of “backstop” support from the International Monetary Fund (IMF) would not result in a shift in Ireland’s fiscal or tax policy, and would not be a “panacea”.

He also predicted that Ireland’s borrowing costs would fall from “crisis” levels to more sustainable rates if the Government’s fiscal policies are implemented.

Speaking at the International Financial Services Summit 2010 in Dublin, Prof Honohan said the type of policy package the IMF would want to see Ireland putting in place is “very much” the package of fiscal adjustments that the Government is implementing.

He said that Ireland’s low corporation tax rate of 12.5 per cent would unlikely be a matter of interest to the IMF, as its aim is to get economies growing again so they can repay their loans quickly.

“If we look through history, the IMF has been indispensable for stabilising countries that ,” he said.

When asked whether Ireland has gone off the rails, he said that the overall structure of the fiscal policies laid out by the Government seem “exactly right”.

He also told members of the Oireachtas Committee on Economic Regulatory Affairs that “there is no reason to believe” the spread between Irish bonds and benchmark German bunds will not return to the more sustainable levels seen in April of this year. The spread at that time was in the region of 150 basis points, compared to the current spread of more than 600 basis points.

The exchequer is fully funded until the middle of next year and the Government is not borrowing at current rates.

When pressed repeatedly by a committee member as to what bond rate would represent a sustainable level, Mr Honohan said “there is no simple number”. The decision to re-enter the bond markets is a “tactical” one which depends on many factors such as “the flow of sentiment” and the effectiveness of the budgetary measures. “There will be a point where it makes a lot of sense to go back in ,” he said.

However, Ireland’s bond yields will never return to the levels seen in 2005 and 2006, when the premium paid to investors to hold Irish sovereign debt over benchmark German bunds was very low. This is because the crisis has exposed the “scale of the weakness”. “But I don’t see why we can’t get back to April rates if the [Government’s] fiscal policies are implemented,” he said.

Prof Honohan said there is “no hard indication” yet that loan losses on residential mortgages will exceed the 5 per cent stress case used by the Central Bank to determine capital requirement levels for banks. However, the Central Bank will now carry out a “granular analysis” to determine whether the expected loss provisions remain sufficient.

When asked why he is supportive of the Government’s four-year austerity package, he said: “though we may not like it, we have to jump to what the lenders expect and convince lenders we can get to the situation where debt is not spiralling out of control”.

The “wrenching adjustments” will no doubt be painful, but it is possible to put together a package of measures that keeps the economy in growth mode. “The alternative is a more damaging inability to fund,” he said.

Prof Honohan did not think European commissioner for economic and monetary affairs Olli Rehn came to Ireland to exert influence on the Government. “I think his role here was to offer the views of the commission,” he said.

He also said that the burden of recapitalising the banks is over-stated as a contributor to the fiscal adjustment. The interest cost of recapitalisation only accounts for about 10% of the adjustment of the next four years, he said.