‘Banks need better crash warnings’ – economists

IRELAND’S vulnerability to adverse changes in its external financing environment is still so great that new research from two Central Bank economists recommends a dramatically lower level at which warnings should be triggered over potential vulnerabilities in the banking sector, whose borrowing and lending binge in the 2000s cost the taxpayer €64bn in bailouts.

Had the new lower levels of bank exposure been in place, warning signs would have flashed in 2004, well before Ireland started its painful economic adjustment in 2006 and before the collapse of the US banking sector plunged the country into its worst ever financial crisis that led to it going cap in hand to the International Monetary Fund and European Central Bank.

The warning came a day after AIB chairman Richard Pym attacked controls on top executive pay at banks, saying that people had to “move on” from the hatred of the crisis era as he chided the State for its continued ownership of the financial sector.

A long and painful period of austerity and a resumption of economic growth has seen Ireland move from a peak debt of 119.5pc of GDP to 68.4pc at the end of 2017.

Data from the Central Statistical Office released yesterday showed the budget deficit rose to €2.2bn in the first half of this year from €1.3bn a year earlier, as Government spending surged by almost 6pc. Those numbers are subject to what could be hefty revisions and the Government is forecasting the full-year figures will show budget deficit of 0.1pc of gross domestic product against the 1.4pc recorded in the first half of the year, and that the debt to GDP ratio will fall to 64pc.

Ireland’s blistering pace of economic growth has eaten into Government debt ratios despite a rise in nominal debt in the second quarter of the year, the CSO data showed.

Despite its improving finances and the strongest economic growth in the EU, Ireland still sits near the top of global debt tables and remains vulnerable to shifts in market sentiment and global interest rates as well as rising protectionism and the threat of a “hard Brexit”.

Irish Central Bank economists Vahagn Galstyan and Valerie Herzberg said in a research paper published yesterday that the country was still heavily exposed with a negative net external investment position of 150pc of GDP at the end of 2017, or 242pc of modified gross national income.

Those high levels of external exposure mean banks’ overseas borrowing exposure warrants closer attention, the two economists wrote, as they would help warn of a rerun of the bank lending spree financed by overseas borrowing that led to Ireland’s close encounter with default and economic collapse.