29 January 2013

Central Bank of Ireland Quarterly Bulletin

The bulletin claims that weaker external demand is set to dampen Irish export growth in 2013, as compared to earlier expectations, while domestic demand is forecast to continue along its slow path towards stabilisation.

Adherence to EU/IMF Programme targets remains strong, and progress on the main policy challenges continues to be made. However, on some issues, more needs to be achieved. In the banking sector, the key issues revolve around the need for greater progress in addressing the problems in relation to asset quality and restoring profitability, both of which are essential if the sector is to be put back on a sustained sound footing and to be in a position to increase its lending capacity to support economic recovery.

With regard to asset quality issues, of particular concern is the growing long-term nature of the mortgage arrears problem. While banks have now started to develop and roll-out some long- term mortgage modification and resolution measures, the level of implementation, through either debt restructuring or loan recovery, has been far from adequate so far. While there is a delicate balance to be struck here, it is critical that financial institutions move to deal decisively with the issue of long-term mortgage arrears. Much more needs to be done, and in a timely manner. The Central Bank will continue its intensive step-by-step engagement with the banks on this matter until it is satisfied that it has sufficient policies and procedures in place and is making sufficient quantitative progress in ensuring that the growth in arrears is stemmed and that arrears are recovered or, where necessary, restructured or resolved.

On other banking issues, progress continues to be made. With deposits at domestic banks remaining relatively stable in recent months, deleveraging progressing and banks undertaking some market issuance, the dependence on central bank funding, while still elevated, has declined somewhat. Funding challenges remain, however, and allied to pressures from impaired assets and high funding and operating costs, are continuing to pressure profitability. In response, banks have continued to rationalise and restructure their operations and to make progress in reducing costs.

The latest fiscal data confirm that the public finances continued to improve last year and the General Government Deficit for 2012 now seems set to be below 8 per cent of GDP, lower than the level of 8.2 per cent signalled recently on Budget day and well below the 8.6 per cent target for 2012. While, in principle, this lessens the future burden of fiscal adjustment, it would not be appropriate to use the buffer this provides to ease back on the adjustment effort. It is important to continue to adhere to the planned consolidation effort of €8.6 billion between 2013 and 2015, which was reaffirmed in the Medium-Term Fiscal Statement (MTFS). Doing so would imply maintaining the 2012 gain in deficit reduction relative to the target over coming years. This would help to get the deficit down to 3 per cent more quickly and should serve to reduce uncertainty and, through this channel, contribute to a faster domestic recovery. By enhancing Ireland’s reputation for credible policymaking, it should also help to reinforce the confidence of official and private international lenders and further improve the access of the Irish Sovereign to market funding.

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