CENTRAL BANK:CENTRAL BANK governor John Hurley has said that the supply of funding to the Irish banking system was "seriously threatened" last Monday night, and that there had been acute pressure on the system in the weeks leading to the Government's bank-guarantee scheme.
Mr Hurley said events "came to a head" last Monday evening, and he had to inform the Minister for Finance that the risks to financial stability were "becoming unacceptably high with knock-on effects for the wider economy".
The Government agreed to guarantee deposits at the Irish-owned banks and building societies and most of their borrowings early the following morning.
"A major consideration was that the highly-concentrated nature of the Irish banking system created a high risk of contagion. Decisive action to protect the stability of the economy and its financial system was needed," he said.
While the decision to guarantee the banks was difficult, it was aimed at ensuring renewed access to funding for Irish financial institutions, he said.
Mr Hurley said the shortage of short-term funding could have forced Irish financial institutions into difficult territory. The Government had taken a strong and bold decision by guaranteeing the Irish banking system.
He said, unlike other international banks, Irish-owned banks have not had to write-off significant losses on loans and investments, "so that bad debts and loan losses were not the key issues for our financial system last Monday evening".
For the Irish banks the issue was the unprecedented shortage of liquidity in financial markets and the urgent need to solve that problem. He said the primary consideration was to ensure financial stability at minimum cost to the taxpayer.
"A banking system failure, particularly a failure that comes about as a result of situations in the international arena that we now see interacting with a slowdown in the domestic economy, would have made our recession, which is now technical, more deeper and longer," said Mr Hurley.
Work on a system of charges that "minimise moral hazard implications" was complex but should be completed by the weekend.
Mr Hurley said if the correct decisions were taken now the medium-term outlook for the economy was good.
Economic growth will contract this year and next, and unemployment is expected to reach 7.5 per cent in 2009, according to the Central Bank. It has sharply revised down its projections as the credit crisis and economic slowdown weigh heavily on the economy.
In its latest quarterly economic bulletin published yesterday, the bank said it now expects growth in 2008 of -1.4 per cent, a downward revision from its August prediction that economic growth this year would hit 0.3 per cent.