Sunday, May 30, 2010

Top economist 'inaccurate and pessimistic'

Top economist 'inaccurate and pessimistic'

Department of Finance slams Professor Morgan Kelly's prediction that the country will 'go bust' Shane Coleman, Political Editor - Sunday Tribune


CLAIMS by an eminent economist that it is no longer a question of if but when Ireland "will go bust" have been strongly rejected by the Department of Finance, which says the comments are "extremely pessimistic and based on a number of very serious inaccuracies".

UCD economics professor Morgan Kelly – who correctly predicted the banking and property collapse some years ago – wrote an article in yesterday's Irish Times stating that the government's open-ended bank guarantee would trigger a "borrowing crisis" for Ireland which would represent "an early test of the shaky EU commitment to bail out its more spendthrift members".

A spokesman for the Department of Finance said Kelly had rightly recognised that the new governor of the Central Bank, Patrick Honohan, and the financial regulator, Mathew Elderfield, are first rate, "but yet he then goes on to completely ignore all of their comments in his key points".

"The governor of the Central Bank and the financial regulator are the two leading independent banking experts in the state and both of them have stated that they believed the bank guarantee was a necessary step to protect the Irish economy," the department spokesman said.

He added that Kelly's calculation of losses in the financial sector – the professor said the banks are on track to lose nearly €50bn and more likely closer to €70bn – was "completely undermined" by comments made by Honohan two weeks ago. Honohan has said most of the banks started the boom "with such a comfortable cushion of shareholders' funds that they would be able to repay their debts on the basis of their own resources. This includes the two big banks". He added: "The government's capital injections of last year into these two institutions look like being well remunerated". Honohan has also said the state's exposure to the banking crisis was entirely manageable.

Kelly's proposal for a default on financial institution bonds – "as the institutions that bought them did so in full knowledge that they could default and charged an appropriate rate of interest to compensate themselves for this risk – was "incorrect", the spokesman said. The vast majority of bonds were so-called senior bonds – equivalent to deposits and on which no risk premium was paid.

"Professor Kelly cites Uruguay as an example of how his policy works. Would Irish citizens, public servants and social welfare recipients be satisfied with Uruguayan levels of public services, pay and social welfare? I think not."

And the spokesman described as "completely false" Kelly's suggestion of a "direct power struggle between the financial regulator and the minister for finance", arguing that it was the minister who "set in train the process to recruit Mr Elderfield as financial regulator and has fully supported him since his appointment".

Comment:

Now that the Irish economy is beginning to show faint glimmers of a turnaround from the disastrous collapse of recent years, perhaps it would be advisable to listen to Professor Kelly. The fact that he correctly predicted the property and banking fiasco would warrant a closer look at his theory. After all, the government doesn’t have an enviable track record in these matters and Professor Kelly might be right once again. If so, Ireland would owe him a great debt of gratitude.

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