BRUSSELS (MNI) – Convincing investors that Ireland can implement
its budget deficit reduction plan and that its banks are healthy is the
key to ensuring the credit of the state, Irish central bank governor
Patrick Honohan said Wednesday.

“Even if moving towards a stronger banking system in terms of
capital and liquidity has entailed costly outlays for the State, it is a
prerequisite for ensuring the credit of the State,” Honohan said,
according to the text of a speech delivered at the International
Financial Services Summit in Dublin.

“Likewise, healthier public finances are indispensable for keeping
interest costs and ensuring that the banks have ready access to market
funding,” he added.

Irish sovereign debt spreads have widened dramatically in recent
weeks as investor fears mount that the country won’t be able to manage
its debt burden without outside help.

The costs of the banking system will push Ireland’s budget deficit
to 32% of its GDP this year. The Irish government has committed to
getting the deficit below the EU’s 3% limit by 2014. Stripping out the
banks, the deficit is around 11% this year, still the largest in the
Eurozone.

“I believe it is the prospects for effective fiscal adjustment
against the background of the global macroeconomic recovery that will
most directly determine the degree to which investors will be fully
convinced that the banks have been de-risked and strengthened in the
manner envisaged by the Basel 3 process, and thus able to contribute
more effectively themselves to the consolidation of that recovery,”
Honohan, who sits on the European Central Bank’s Governing Council,
said.

“Even if there is a negative initial demand effect” from
consolidating the debt burden, Honohan said, “healthy government
finances are – like healthy banks – needed for job creation and economic
recovery.”

Honohan said recapitalizing Ireland’s banks “has reduced fiscal
headroom and contributed to the concern of the financial markets.”

“Still, I would like to remind you that this recapitalization
burden is often over-stated as a contributor to the required fiscal
adjustment,” he said, adding that the interest cost of servicing the
notes injected to recapitalize the banks only accounts for about
one-tenth of the fiscal adjustment now in prospect over the next four
years.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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