Patrick Honohan: a voice of calm amidst the hysteria

AT the risk of sounding like one of the characters from Harry Enfield's famous 'Scousers' sketch, we as a nation seriously need to "calm down".

It would be plain stupid to deny that the country is facing huge difficulties. And it would be naïve to argue that there isn't at least a 50-50 chance that some form of outside intervention will be required from the EU/IMF. But the hysteria of recent days is definitely not helping matters.

A year ago, 99% of the population didn't know what a bond was. Now watching the hourly movements in bond yield spreads has almost become a national pastime. It's become the financial equivalent of the patient's family staring at the hospital heart rate monitor anticipating it flatlining at any moment.

Reading Morgan Kelly's missives from the sanctified surrounds of UCD is a somewhat more refined taste, but it's very much de rigueur. His latest apocalyptic pronouncements in the Irish Times were the talk of the chattering classes last week.

Kelly is clearly an outstanding economist and deserves credit for being one of the few people – UCG's Alan Ahearne was another – who called the property crash. His views then were, unfortunately, too quickly dismissed.

But to answer the rhetorical question reportedly posed by Mary O'Rourke on Thursday, he is not God. Just because he was right on the property crash and the banks, does not make him infallible. Unemployment did not reach 20% this year, as he predicted in 2009. And the less said about Kelly's political predictions the better – last week he was forecasting that in five years' time Fine Gael and Fianna Fáil would be brushed aside by "a hard right, anti-Europe, anti-Traveller party". Hmmm.

Kelly unquestionably has serious credibility on economic and banking matters, of that there is no question. But that doesn't mean his views aren't open to challenge.

He must be listened to as an important part of the debate on our economic and banking crisis, but his views deserve the same scrutiny that is given to others, including Brian Lenihan and Patrick Honohan, instead of being treated as a virtual 'gospel according to Morgan'.

In contrast to the hullabaloo that surrounded Kelly's analysis, a speech by Central Bank governor Patrick Honohan on Irish banks last week went largely ignored.

Honohan's copy doesn't lend itself to jump-off-the-page headlines but, as well as being the governor of the Central Bank, he has long been regarded in economist circles as the leading expert on banking in the country. While Kelly was emotionally predicting a mortgage crisis that put Ireland "on the cusp of a social conflict on the scale of the Land War", Honohan was quietly pointing out that, although "undoubtedly there are many stressed households with burdensome mortgage debts", allowances "well in excess of the banks' own accounting provisions" have been made for this. There is as yet no indication, he added, that the stress levels provided for would be exceeded.

Time will tell which man will be proven correct – and the Central Bank and the regulator will look again at the banks' capital requirements in the new year. But surely Honohan's views demand equal consideration to Kelly's. And surely there should be much greater scrutiny of Kelly's claims that AIB and Bank of Ireland will cost the state at least €30bn extra; that at least 100,000 mortgages are "already under water"; that people are borrowing heavily from their parents to meet mortgage repayments (is there data to back this up or is this purely based on anecdotal evidence?) and that the banking crisis would have been ended "at a stroke" by the termination of the bank guarantee before September and legislation to turn €75bn of outstanding bank debt into shares in those banks.

While the state of our banks continues to be a serious weak spot, the more immediate concerns are the upcoming four-year plan, budget and the state's re-entry into the bond market.

And this is where a strong collective nerve is required. There is little point worrying about matters that cannot be controlled.

Yes, the current interest rates for Irish bonds on secondary markets are extremely high and would simply be unaffordable. But the reality is that the state doesn't need to go into the markets to borrow money until March or April. That buys us some time and when it comes to the financial markets, five months can be an eternity.

A huge amount depends on the Germans and the French – any repeat of Angela Merkel's recent comments about bond holders sharing the burden of the euro debt crisis could render redundant any actions taken by the government here to sort out the budgetary situation. In that regard, Friday's statements from EU leaders expressing solidarity and support for Ireland were hugely important.

Rates are unlikely to be at 9% when Ireland does go back into the debt markets next year. That rate appears ridiculous for a state which, because of EU backing, is highly unlikely to default on its debt. But even a rate of 7% would be too high for the Irish state and would probably mean we have to resort to outside assistance.

But that is next year's problem. In the meantime, it is essential that a credible four-year plan is agreed and that the budget, with €6bn of cuts, is passed.

While it will not be enough in itself, it will help steady nerves, domestically as well as internationally.

It would also help matters if, while not ignoring the massive challenges that lie ahead, there was also some focus on some of the positives that do exist. The data from the real economy – particularly the export sector – is encouraging, offering the kind of potential for growth that does not exist in the less flexible economies of Spain, Portugal and Greece.

And that brings us to the one point on which Morgan Kelly is fundamentally wrong: when he writes that there is no prospect that the "Irish patient" will recover. As Kelly, an expert on economic history, must know, whatever happens (and a short-term loss of economic sovereignty is unfortunately a very real possibility) the Irish patient will ultimately recover. We need to 'calm down' and remember that.