Honohan dismisses economist's claims on debt crisis

CENTRAL BANK governor Patrick Honohan has said there was “no miscalculation” or missed opportunity that could have resulted in Ireland pulling itself out of its debt problem.

Prof Honohan was responding to an article by economist Morgan Kelly in The Irish Timeswhich accused him of making the "costliest mistake ever made by an Irish person" by miscalculating the scale of the bank losses.

Prof Kelly also argued that Ireland is heading for bankruptcy unless it pulls out of the EU-IMF deal.

Speaking on RTÉ Radio's This Weekprogramme, Prof Honohan said while a lot of the economist's analysis was "absolutely spot on", there were some serious errors of fact in the piece. He also accused the economist of using "somewhat hyperbolic language".

In particular, Prof Honohan disputed the suggestion that the bank guarantee could have been reversed. “I took a lot of legal advice on this. There was no way of the Government walking away from that very formal guarantee, endorsed by the Oireachtas,” he said. “The Government would have been treated as a bankrupt right away.”

Asked about Prof Kelly’s assertion that he had miscalculated the bank losses, Prof Honohan said that it was an “evolving story”.

“Any estimates of condition of banks is always subject to revision. Banks report on a quarterly basis what their profit and loss is and people are constantly looking at changes in circumstances so I am not concerned at all about credibility.”

“The fact that we did not have precise numbers did not affect the honouring of the guarantee,” he said, adding that it would have been damaging to over-capitalise the banks in March last year.

“All it would have done would have been to bring forward and accelerate the EU-IMF programme probably to May or June of last year.”

Prof Honohan also said that the favourable market reaction to the latest round of stress tests indicated that Ireland’s credibility with markets is not a problem.

He said that his strategy has been to keep Ireland’s options open in what is a difficult position, and not to undertake further costly engagements. “To a large extent we have been successful in doing that.”

Asked about his “dual role” as governor of the central bank and European Central Bank board member, Prof Honohan said: “Everything . . . was done by me and by colleagues on behalf of Ireland”.

Prof Honohan also explained his decision – criticised by Prof Kelly in his article – to phone Morning Ireland last November from a meeting of European bank chiefs in Frankfurt to reveal that Ireland was close to seeking a rescue package from the EU-IMF.

“The facts of the matter are pretty clear, because the negotiators for the lenders were in Dublin with snow on their boots. They had been invited by the Minister for Finance . . . There had already been elaborate and detailed preliminary discussions,” he said. “What my purpose there, which I said it at the time, was to provide reassurance and fact, what was going on.

“There was growing concern and even alarm both at home and abroad – it did not in any way affect the Government’s negotiating position.”

He added that he had made it clear that it was a matter for Government to approve a deal if negotiated.

He also questioned the wisdom of a policy of silence on his part “when the whole world was asking what’s going on in Ireland”.

He said that the deal, which was put together in a hurry, was the best the other side could offer. “It was not a final solution.

“I would regard it as a holding operation, something to offer a window of time in which to get what could be sorted out within our own competence in Ireland . . .

“It’s not the end of the story. Negotiations, discussions will continue with Europe for a long time to come as we know there are already discussions about the interest rate and so forth.”

Asked about Prof Kelly’s assertion that Ireland has a debt of €250 billion, Prof Honohan said there were a number of errors in his calculations, “or at least [it] would require a lot of footnotes to justify them”.

However, he stressed that the sustainability of Ireland’s debt depended on its economic growth prospects.

“If things don’t go well in terms of economic growth it will be much more difficult . . . in that case there will be a problem and in order to cope with that situation we need to think of better financial arrangements with Europe,” he said. “We need to think of risk-sharing arrangements that would ensure that the growth will come right.”

While defending the EU-IMF deal, he said that Ireland has a number of cards to play.

“We have a number of cards . . . there is a right time to play your most important card.”