Honohan Says Ireland's Fiscal Deterioration Almost the Worst in the World

Irish Central Bank Governor Patrick Honohan said tougher action is required to reduce the nation’s budget deficit after a fiscal deterioration “worse than almost any other country” during the financial crisis.

The decline partly reflects the fact that the “home-grown property bubble had risen further and so has fallen further than most,” Honohan, who is also a member of the European Central Bank governing council, said in a speech in Dublin late yesterday. The government deficit will now be subject to “intensified corrective action,” he said.

Ireland’s government on Oct. 26 announced plans to seek 15 billion euros ($21 billion) in spending cuts and tax increases through 2014, twice what it previously planned. It aims to lower the deficit to the European Union limit of 3 percent of gross domestic product in four years from about 12 percent of GDP this year, or 32 percent when bank-bailout costs are included.

Finance Minister Brian Lenihan said yesterday the plan will be “frontloaded” and include “significant” measures in 2011 to restore investor confidence and lower borrowing costs. He will announce details of the plan in mid-November, he said.

The yield premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened to 421 basis points yesterday from 393 basis points the previous day. It reached a record 454 basis points on Sept. 29.

‘Sharp’ Adjustment

Answering questions on Irish bonds after his speech, Honohan said he thinks they are a “great buy, at current prices.”

Ireland’s bonds have plunged this year, pushing the yield on the country’s 10-year debt up about 180 basis points to 6.7 percent.

Honohan also said that Ireland’s banks cannot be wholly blamed for the soaring budget deficit. The fiscal problems in part relate to Ireland’s reliance during its economic boom on tax revenue “dependent to an exceptional degree on profitable economic conditions, high transactions in the property market and asset price appreciation,” he said.

“A sharp fiscal adjustment would have been needed anyway - - even if the Anglo and Nationwide had not lost quite so much money,” he said at the event hosted by the Certified Public Accountants Group, referring to Anglo Irish Bank Corp. and Irish Nationwide Building Society.

Honohan said the central bank will conduct prudential capital reviews on lenders on an annual basis.

“This will allow capital requirements to be kept consistent with evolving information on future economic and financial developments, including the performance of the residential mortgage portfolio,” he said, adding that the reviews will take account of the emerging Basel III capital rules.

To contact the reporter on this story: Finbarr Flynn in Dublin at fflynn3@bloomberg.net;

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net

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