Honohan warns on budget cuts

 

The Governor of the Central Bank has indicated he believes the December budget should involve a package of greater than €3 billion so that Ireland can keep on track for reducing its deficit.

Prof Patrick Honohan told a conference in Dublin today that for small financially stressed countries such as Ireland, national growth was best served by ensuring that the public finances were on a convincingly convergent path.

The impact on confidence and the rate of interest Ireland has to pay on its debt “surely more than offsets any short term adverse impact on domestic demand from lower net public spending.”

He said some explicit reprogramming of the budgetary profile for the coming years is “clearly necessary soon” if Ireland’s debt dynamics are to be convincingly convergent.

Prof Honohan’s comments come a week after comments from the Minister for Finance, Brian Lenihan, to the effect that the budget would involved a package of “at least” €3 billion.

Prof Honohan said recent movements in the yield spread or interest Ireland must pay on debt demonstrates the cost that can result if international lenders are not convinced that the budget is going to be kept on a convergent path, “as indeed the Government is committed to ensuring”.

He said he had recently been looking at the multi-year prospects for the budget. If the economy stayed close to the track originally envisaged the deficit would be close to 3 per cent by 2014. However as the IMF and others had noted, the real economy, the price level and interest rates on Government borrowing have evolved in a less favourable way. “Servicing of the additional debt related to the bank restructuring is also a negative factor.”

He said the Government’s recent decision on Anglo Irish Bank came as a relief to him. He did not want to anticipate the levels of capitalisation needed for the two new institutions being created. The Central Bank would be assessing the potential exposure presented by Anglo under “a severe hypothetical stress scenario in the run off of its book.” He said the numbers involved “will be less than the numbers being recently touted around.”

Prof Honohan was speaking at the SUERF European Money and Finance conference in the Dublin Convention Centre. He said the cost of stabilising the banking system would be a “heavy burden” on taxpayers and the users of public services in Ireland for several years, but would be manageable from the point of view of the national public finances.

The European Union's Economic and Monetary Affairs Commissioner Olli Rehn also said toay he was confident that Ireland would deal with the current problems.

"I have full confidence on Ireland and its capacity to act with determination to complete the financial repair and the necessary restructuring of the banking and financial sector," Mr Rehn said at an event in Estonia.