Speech by Patrick Honohan to the IEA

The address given this evening by the Governor of the Central Bank, Professor Patrick Honohan can be read here.

28 replies on “Speech by Patrick Honohan to the IEA”

There was I thinking the 1980s crisis was caused by the same Euro boys club fascination with fiscal discipline and our sad pathetic efforts to be one of the boys.
Could Patrick kindly explain what exactly does fiscal discipline mean in a freefloating currency world ?

Look we don’t really have a property crisis , we don’t have a credit crisis as we have a glut of these products & services (if you could call bank credit a service) – we have a lack of money crisis.
We also appear to have a rogue CB on our hands.
Its the duty of the exchequer to produce base tokens with or without the CBs help under such circumstances as the lack of effiecent resourse utilisation is now on a epic scale.

”…cooperation must emphasise a growth and employment focus…’

Today, money comes from bank loans. An economy grows when many people organise many bank loans in a short space of time. While this brings new money to the economy, it brings an even higher debt. Hence even significant growth cannot resolve the debt crisis.

Equally a return to full employment cannot end this recession since a person returning to work doesn’t increase the money supply. They are more likely to take on a bank loan but again, this new money brings an even higher debt to the economy.

Regarding full employment, if we looked after the money supply, unemployment would look after itself. We have work to be done, people willing to work and all we’re missing is an adequate medium of exchange to bring it all together. Morally, we should expect an adequate money supply without having to borrow it into existence. Economically, it’s one of the worst ways to try to run an economy also.

Declaring digital money as legal tender could start the road to recovery almost overnight because of its knock-on affects.

Paul – those debt problems are just growing. Seems that the ECB LTRO money didn’t last very long


Or google “Debt fears return as ECB funds are used up”

Maybe banks have decided that it isn’t such a good idea to buy their own sovereign’s debt after all (this as I have pointed out before, is the agenda – get banks in periphery countries to buy their own sovereign debt while banks in the core countries offload it as quickly as possible …. prior to …. what move?).

I guess those periphal country banks will just have to be leant on again. Can someone wheel out JCT please?

(Split into parts)

It would appear that selective quotations taken out of context are not the sole purview of Sinn Fein. I trust that for the sake of consistency Enda Kenny will be as “outraged” with Honohan’s selective quotations as he was with those of Sinn Fein. From Honohan’s speech

However – and this is important given the potential for the unexpected to happen in an economy as globalized as that of Ireland – the operational rules of the Fiscal Compact, which are already decided as part of the so-called “Six-Pack”, provide that the European Commission’s operational assessment of whether an excessive deficit exists involves considerable discretion and judgement. For example, it has to take account inter alia of the state of the business cycle; it will be important to ensure that, if needed, such flexibility is fully exploited in Ireland’s case. The scope for operational flexibility helps reassure me that signing up to the Treaty has been the safer alternative for Ireland.

Note that the The Irish Times summarizes under the headline “Honohan stresses flexibility of treaty”, intended to be the take-away bullet point for the masses.

(Second and final part)

What Honohan fails to mention is that the consideration of the business cycle to which he refers does not apply to the two deficit criteria (3%, MTO). It only applies to the debt criterion (60% GDP). For the next half-decade or more the determining factor for Ireland will be the deficit targets, first the 3%, then the MTO one. The debt criteria will only kick in after both the deficit targets have been met and transitional periods expired. So the realization of this “flexibility” is years away, for a start.

Secondly, (not mentioned in the speech) the impact of the business cycle will be “assessed according to a common methodology to be published by the Commission”. This hardly invokes a scene of wise men using years of experience and insight to formulate policy; instead it suggests a one-size-fits all approach based on mechanical rules (which are deliberately designed to be mechanical to avoid charges of favouring one country over another). It will be the same as the determination of the output gap – done by the Commission on the basis of rules formulated by one of its working groups.

Thirdly, the impact of this “flexibility” would be relatively minor. It might delay the invocation of an EDP based on the debt criterion by a year or two at most, but the 1/20th per year trajectory to 60% will need to be complied with over an SGP programme cycle (3-4 years).

Lastly, he fails to mention that one of the purposes of the Fiscal Compact treaty is to remove some of the flexibility allowed by the SGP. For example the treaty eliminates consideration of structural reforms when assessing deviations from the MTO adjustment path, and a whole new (undefined as yet) auto-correction mechanism is introduced for the express purpose of removing discretion from policy makers as far as possible.

So we’ve travelled from what is a relatively minor point that may be relevant in 2020 or so, to a flexible treaty that allows for “considerable discretion and judgement” on its adoption. A huge and totally unwarranted jump, and a gross misrepresentation of the situation.

As a government employee and a member of the ECB gov council, PH’s views are totally compromised.

In any case, this is the guy that undermined Brian Lenihan before the bailout, then managed to negotiate a wonderful interest rate on the EFSF money in excess of 6%. He then completely failed in the renegotiation of the interest rate and if it wasn’t for Berlesconi’s antics we would still be paying a huge rate. To top it all off, he voted for 2 ECB rate increases last year knowing full well the impact this would have had in Ireland.

Why should we listen to him again?

Re “The scope for operational flexibility helps reassure me that signing up to the Treaty has been the safer alternative for Ireland.”

” And that alternative would be…..??? ” For the sake of some balance, could we have Prof Terence McDonagh or similar, so we can actually explore in a rigorous, empirical and objective manner, exactly what we have to the ‘blind leading the blind, fools rush in’ style of leadership/propaganda we’re been muddled with since the ‘guarantee’ of our banking system now followed by its European equivalent, an EMU state sponsored guarantee of EMU banks in the ‘Compact’.

Amid the Spanish downgrade overnight, it may have been missed that Ireland has been affirmed again at BBB+ (neg) – the exact same rating as Spain and Italy. S&P warn that lack of access to ESM would put rating under pressure however. Interesting that S&P also only mentioned Ireland’s net debt/GDP and not the gross figure…


On 29 November 2011, European finance ministers decided that EFSF can guarantee 20 to 30% of the bonds of struggling peripheral economies.[13]

Re above, could PH not direct himself to using the above mechanism to explore alternative funding through the issue of Irish sovereign bonds that would be purchased by European sponsored entities such as banks and other financial institutions, as an alternative or complementary source of funding for Ireland to present EFSF. I won’t even go to the ¢16 + bn interest through Promissory Note repayments he’s failed to negotiate down.

Note the following: PH is urging a Y vote on the ‘Compact’. He ought to be contributing as a public servant unbiased and objective information instead of one sided propaganda on the Referendum.

For example, perhaps he should indicate why our interest rate is 5% + on bailout repayments to the EFSF while borrowing “costs for EFSF of 2.89%.”

He should have walked out of negotiations at 3% !!

“Irish bailout The Eurogroup and the EU’s Council of Economics and Finance Ministers decided on 28 November 2010 to grant financial assistance in response to the Irish authorities’ request. The financial package will cover financing needs up to €85 billion. The EU will provide up to €22.5 billion through European Financial Stabilisation Mechanism and the EFSF up to €17.7 billion over 2011 and 2012.

Perhaps PH should explain the following to observers if only to counteract the erroneous propaganda that Ireland will be refused bailout if it does not sign the ‘Compact’ for funding through ESM. The falsehood/propaganda that EFSF will end in 2013 leaving Ireland without funding is being falsely disseminated by Government.

“Had there been no financial operations undertaken, the EFSF would have closed down after three years, on 30 June 2013. However, since the EFSF was activated in 2011 to lend money to Ireland and Portugal, the Facility will exist until its last obligation has been fully repaid.[10]”

“The EFSF is authorized to borrow up to €440 billion,[5] of which €250 billion remained available after the Irish and Portuguese bailout.[6] A separate entity, the European Financial Stabilisation Mechanism (EFSM), a programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral, has the authority to raise up to €60 billion.”

It is the intention in ECB that EFSF and EFSM will be amalgamated. EFSM will remain permanent but EFSF will remain for as long as its programmes run eg
until it gets its money back from Ireland.



“In order to fulfil its mission, the EFSF is authorised to:
* issue bonds or other debt instruments on the market to raise the funds needed to provide loans to countries in financial difficulties.
* intervene in the debt primary market
* intervene in the debt secondary markets
* act on the basis of a precautionary programme
* finance recapitalisations of financial institutions through loans to governments including in non-programme countries”

But, let’s assume funding will end through EFSF for Ireland contrary to the above documentation.

You do not have to be in a programme to avail of support from EFSF. Not only that, but because we are already in a programme under EFSF, this is guaranteed not to run out until all our debt is repaid. So, for all intents and purposes, we already have a programme under EFSF and have no need to avail of EFSM. EFSM is directed primarily at support of larger states eg Spain/Italy whose scope of needs would go far beyond the scope of EFSF.


But other sources of funding would exist for Ireland outside an EFSF programme. In pursuit of an agenda of fools rush in where angels fear to thread, you would also need to suspend disbelief that Europe would not lend us money to pay back its own banking system.

But lets suspend disbelief and go for two alternative scenarios.

1. Remaining within the euro. It is not inconceivable that another governor of our Central Bank in the future could negotiate a loan directly from the IMF

2. Other sources, our neighbours, UK and others, Canada, Russia.

3. Debt writedown following exit from euro.

Do we really need another Groundhog day for Ireland repeating the mistake of the Irish ‘guarantee’ to its banking system with another fools rush in where angels fear to thread even bigger mistake of ‘Compact’ guarantee of ESM for european financial institutions paid for by taxpayers with austerity, destruction of public services and democracy.

Given Francoise Hollande signal re protocols and changes he wishes to ‘Compact’, perhaps Gilmore et al should put off Referendum Day until those new protocols are agreed. It would be too much to ask that PH et al negotiate to remove the blackmail clause or have a protocol inserted that Ireland insofar as its needs are already addressed by EFSF, is not required to sign up to the blackmail clause.

Time to wake up from Tir na N’Og and say ‘NO’.

“When will the price equilibrium be reached, and when will transaction volumes reach steady state levels? Given elevated levels of uncertainty, will the relative price of housing — as a risky asset — converge to a price that undershoots that which would prevail in less uncertain times?”

the grand old Duke of credit
He financed ten thousand houses
He marched them up to the top of the market
and he marched them down again
and when they were up they were up
and when they were down they were down
And when they are neither up nor down we don’t know when the market will reach bottom but by god the IT property property section will call the turn

@ Colm

“For example, perhaps he should indicate why our interest rate is 5% + on bailout repayments to the EFSF while borrowing “costs for EFSF of 2.89%.” ”

Factually boll&x. EFSF no longer has any margin on funds given to program countries. Agreed last July.

“As is well known, partner pressure inhibited burden-sharing with the holders of senior Anglo Irish /IBRC debt even after the guarantee ran out

synonyms include pigheadedness , spitefulness, mercilessness, ruthlessness, despotism, sadism

“That the NAMA timeline of purchases would turn into a drip-feed of bad news through the middle months of 2010 was clearly unfortunate. My initial idea of stuffing the banks with so much capital that they
could absorb anything that NAMA pricing and the residential mortgage market denouement could throw at them was defeated by the clear threat to the State’s market access that this would have caused (no doubt advancing the need to fall back on the IMF et al.).”

Nobody ever took responsibility for this

@ Bond,

Factually your figure is out of date, Current rates since last September belie the original rates he ‘negotiated’ or failed to negotiate, finfacts has it here, this was last Sept. Nothing to do with ourselves, but more to do with embarrassment over Greece and rates negotiated with Portugal.


I welcome corrections, elaboration, further information, especially from those more familiar with any point I raise, but if remarks are peppered with immature, rude displays, I’ll simply ignore, and refuse to interact in future.

Play the ball, man 🙂

@ Bond
This is an idea but if its wrong just say so.
They can’t really have Ireland doing as its told and getting downgraded – could they?
The market need us to continue as we are doing – quietly paying back debts. They see us now as a Baltic nation.

On the subject of ‘boll&x’ have you seen the EZ retail figures this morning. As in: “The retail sector in the EZ looks boll&x’d”.

Oops, actually I did write,

“he should indicate why our interest rate is 5% + on bailout repayments to the EFSF while borrowing “costs for EFSF of 2.89%.”

should have been ‘why our interest rate was negotiated at…’

so, mucho gratias for that 🙂 Plus that post above would have been a little shorter if I had more time.

@ Eureka,

“They can’t really have Ireland doing as its told and getting downgraded – could they?”

Unfortunately, they can. This is a feature of the European austerity road to perdition; countries get downgraded if they impose austerity, they get downgraded if they do, its a self reinforcing cycle.

I believe underlying this is loss of confidence in the euro project by the markets allied to loss of confidence in the measures adopted to rescue the euro.


my point exactly…

But for me the bigger question is how he could have voted for not one, but two rate hikes last year, knowing the impact this would have on tracker mortgage holders and the wider economy. This is all the more puzzling when the ECB’s policy last year under Trichet was clearly misguided given the chaos that ensued in Italy last summer.

It seems PH prefers to be seen to do the “credible” or “agreeable” or “serious” thing, rather than act in the state’s interest.

@ Eureka

they’ver tried the political pressure thing on the ratings agencies, but hasn’t worked so far. Moodys likely go postal on bank ratings over the next two months.

U see story that BBVA and Santander have said they are limit-up on their holdings of Spanish govt bonds per their own internal risk management rules?

@ bazza

I’m reading Walter Isaacson bio of Steve Jobs at the moment,

P142 “Jobs kept a tight rein on the hiring process. The goal was to get people who were creative, wickedly smart. and slightly rebellious.”

They g3t apples while we g3t pear shaped crony bananas 🙂

Did the guvnor outline a new theory of the guarantee as argued on Fistful of Euros?

Restructuring of the banks as long as the guarantee was in effect was inhibited by the fact that any significant restructuring was likely to trigger an immediate entitlement for immediate payment in cash of all bondholders under the terms of the guarantee. This reason alone can explain why steps to deal definitively with even the two weakest banks were deferred to the end of the guarantee period.

The overall message seems to be one of doubt – Official Ireland has tried all these (austerity) measures to rectify the situation, but why haven’t they and why aren’t they working? Then, in he rolls the FC as the next initiative to provide the solution. What tosh.

PH “After five straight years of decline in, for example, employment and in aggregate personal consumption expenditure, the Irish economic correction is proving to be quite long-drawn out. Even if, on these indicators the turnaround will come in 2013, as is forecast by most analysts…….”

Official Ireland has been wrong on forecasting everytime since the start of the crisis. 2013 turnaround in employment and personal consumption is fantasy and will be proven to be so.

The surprise is that PH appears surprised that property prices continue to decline. PH “Why is it that prices have been taking so long to reach their new equilibrium?” Official Ireland’s attempts to artifically manipulate the property market have clearly exacerbated the situation e.g. NAMA being the worst offender in this regard. Essentially, Ireland’s currency was /is property and the continuing fall in property prices reflects the deletion of confidence in that currency. It also inherently reflects the population’s lack of confidence in the Official Ireland programme which is now utterly discredited and disbelieved in the eyes of the people. Based on the hard experience of the last few years, nothing that Official Ireland now says can be trusted.

On banks, ” “Decide speedily on loss allocation, remove failed management, insist on prompt and ample recapitalization.” These are the standard policy recommendations for resolution of failed banks.”

Part of the credibility issue relates to the non removal of failed management. The absence of comment by PH on this speaks for itself. Clearly too, they have failed on loss allocation by putting the articial NAMA construct in place which has completely distorted the property market and has (politically) stymied the asset sale process, and is at the epicentre of the current downward spiral of prices. PH “The slimming-down of the banks’ balance sheets is progressing: this is guided by two principles: avoid fire-sale losses and protect the core business of the bank”…..Inherent in that sentence is a denial of reality re property in Ireland…..and is the direct policy cause of the lack of NAMA, bank, etc.property disposals.

NAMA in turn also screwed up the “ample recapitalization” of the banks, given that it is now clear that the banks require far more capital….but the State is out of bullets on that. PH “getting unassailable estimates in this matter of loan losses has proved to be very challenging.”….So Patrick, are you saying that you don’t have confidence in your figures? How much more capital do the banks need?

Blaming the falling property market for the present and increasing ‘additional’ shortage of capital in the banks is laughable….It merely blames the illness on the symptoms.

PH “Though there is much to criticize about that guarantee, it is quite clear that, absent the guarantee, similar pressure would have been exerted by external partners to ensure that bank creditors were all paid.”

What a load of rubbish.

Sorry Patrick – you and teh CB have been at the centre of Official Ireland’s dismal ‘performance’ over the last few years. You no longer command credibility with the people of Ireland.

@bazza on the Guvnor

It seems PH prefers to be seen to do the “credible” or “agreeable” or “serious” thing, rather than act in the state’s interest.


The culture of deference is a key part of the Irish failure to deal with the effects of the European component of the global financial crisis.

This problem runs through all strata of our society, a proportion of the population and media will feel the need to follow Honohan’s line (there is a status hierarchy to be observed, otherwise the lower orders might get ideas) but it is a line which he swallowed from our EU larger ‘partners’ and the ECB, even though intellectually he grasps that the interests of the ECB and the currently dominant powers in the EU are directly opposed to Ireland’s.

The situation we are in requires something other than submission to authority and that is anathema to the current Irish establishment. Other than rejecting the Fiscal Compact one could hope for a parliamentary rebellion but Labour and Fianna Fail are too old and tired to challenge the status quo – they just want to stay a part of it.

Where are our rebels?

@Bond Eoin Bond

“U see story that BBVA and Santander have said they are limit-up on their holdings of Spanish govt bonds per their own internal risk management rules?”

That’s interesting – do you have a link please?

I’ll manage. This bad boy has a beautiful French colleague who speaks six languages. Why have a google and bark at yourself… or whatever the phrase is. This interweb thing will never catch on.

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