CENTRAL BANK GOVERNOR Patrick Honohan has said that it would be “unwise” to blame the huge bank debt assumed by the State for the current situation of the Irish economy.
The governor said that much of the deterioration in State finances has been due to reasons other than the jump in debt caused when the government took control of a number of financial institutions on the brink of failing.
In a speech this evening, Honohan noted that the economic crisis has adversely affected most people in Ireland.
“Since the peak in 2007-8, average living standards have fallen by some 17 per cent, and aggregate wealth has fallen by an estimated 59 per cent,” the governor told the Limerick Law Society.
“The peak activity levels reached by the economy were altogether unsustainable, and it is unwise to expect too much sympathy from outsiders for the fact of having fallen back after such a rapid run-up”.
Honohan said that people on lower incomes had been more adversely affected than the rich.
He also said that the private sector in Ireland was not alone in accumulating debt during the boom years.
However he said that by easily sourcing money from abroad thanks to Ireland’s strong credit rating, Irish banks were happy to accommodate demands for loans from both big developers and people who had bought houses to get on the property ladder which seemed to be “soaring out of reach”.
In the speech on household debt, Honohan was critical of the bank guarantee scheme of September 2008. The governor cited the extent of the guarantee, the cast-iron nature, and the lack of consultation with partners as problems with the catch-all guarantee. However he added:
But what cannot – in light of subsequent events – be doubted is that there would in any case have been irresistible pressure from those partners to ensure that losses would not fall on depositors or senior bondholders, given the fragility of banking worldwide in those frenetic weeks of September and October 2008, and indeed, thereafter.
And:
Whatever about the merits of such an international policy, it has been in place ever since, greatly expanding the indebtedness of the Irish State.
The governor of the Central Bank used some unusual metaphors to open the speech at the Limerick Law Society tonight, saying:
How quickly the lubricant of credit turns into the millstone of debt, the slingshot of leverage into a lethal boomerang.
Honohan has a history of using elaborate metaphors and literary parallels in speeches. In February he compared the disastrous economic experiences of the Irish people in recent years with the misfortunes in classic folktales.
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