Governments need to convince investors that they will deliver on commitments to cut their budget deficits, Central Bank governor Patrick Honohan said today in Beijing.
"The sooner the markets are convinced, the sooner the interest spreads will shrink to the benefit of all," Patrick Honohan, who is also a member of the European Central Bank's governing council, said in a speech at Renmin University.
"There is, for these stressed sovereigns, no question as to whether national growth is best served by bringing the public finances back promptly to a convergent path; the impact on funding costs and confidence surely more than offsets any short-term adverse impact on domestic demand from lower net public spending."
Ireland's deficit has been swelled by a the bank bailout, which Mr Honohan said could cost the State up to €29 billion.
"The overall net figure that is in prospect has not changed by much since the initial calculations made in March," Mr Honohan said.
Anglo Irish "may impose a net cost to the government of about €22-€25 billion, to which can be added about €4 billion mainly to cover one small building society", in reference to the Government's bailout of Irish Nationwide. The initial estimates said Irish Nationwide would require €2.7 billion of capital.
Mr Honohan said there would be a "sizable step jump" in Irish government debt and a sharp transient spike in government borrowing in 2010.
"Actually, though, these exceptional financial injections into banks are smaller than the rest of the government deficit in 2009-10. Just as expansive credit conditions filled the coffers in the good years, so the unwinding of an unsustainable domestic boom is draining the coffers in much the same way and to a similar magnitude," he said.
He said the Government had taken steps to readjust it spending and tax profile, and if economic growth is consistent with projections, the deficit would return to 3 per cent of GDP by 2014.
Bloomberg, Reuters