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News : Irish Last Updated: Apr 24, 2009 - 5:31:05 PM

Irish Economy: Central bank forecasts recessions in 2008 and 2009; Hurley says bad debts and loan losses were not the key issues in discussions on State guarantee for Irish bank system
By Finfacts Team
Oct 3, 2008 - 3:55:34 PM

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Property-related activities accounted for almost two-thirds of outstanding private sector lending in June.

Irish Economy: The Central Bank said today in its Quarterly Bulletin that the performance of the Irish economy has deteriorated significantly over the last year as the impact of a sharp correction in the construction sector has spread to most other sectors of the domestic economy and faltering external demand has given rise to a significant moderation in exports. The Bank said that thevolume of output now seems likely to contract this year by about 0.8 per cent in GDP terms while GNP is projected to decline by about 1.4 per cent. The weak trend is likely to persist through next year with GDP forecast to decline in real terms by about 0.9 per cent while GNP is expected to decline by about 1.3 per cent.

The contraction in output is being reflected in deteriorating labour market conditions with total employment on a downward trend since the second quarter of 2008. Domestic inflationary pressures have also eased although the headline rate of inflation has remained elevated due to the carryover effect of previous increases in energy and other raw material prices. As these external pressures wane in the year ahead the inflation rate will decline.

The Bank warns that difficult choices need to be made, and the nature of any recovery would depend on how we responded to the current situation. On the Budget, the bank warned against "significant expansionary measures", adding that running high budget deficits would damage the country's strong reputation. But it acknowledged that this year's deficit would breach EU limits, "perhaps significantly".

The bank also warned against measures designed to prop up the property market, saying there are already considerable tax supports and incentives by international standards. It also says it may be time to look at broadening the tax base.

The Central Bank Governor John Hurley said today that the Government decision to guarantee depositors and debts at Irish financial institutions was taken "to protect the stability of the domestic financial system".

"I had to inform the Minister that the risks to financial stability were becoming unacceptably high with knock-on effects for the wider economy.   A major consideration was that the highly concentrated nature of the Irish banking system created a high risk of contagion.   Decisive action to protect the stability of the economy and its financial system was needed'," Hurley said.

"While the decision was difficult, it was aimed at ensuring renewed access to funding for Irish financial institutions. The Irish banking system, unlike many of its international peers, has not to date had to write-off significant losses on loans and investments so that bad debts and loan losses were not the key issues for our financial system last Monday evening.   The issue then was the unprecedented shortage of liquidity in financial markets and the urgent need to implement a solution that targeted that issue directly," he added. 

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