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Banks biggest economic recovery threat

Friday, December 06 12:43:57

Despite "tentative" signs of recovery, the economy is open to a number of threats, not least being the continued debt and arrears mountain that the banks have yet to get over, the Central Bank said today.

In its latest macro-financial review - which pulls together recent economic and financial data and is aimed at foreign investors - the bank said the economy is set for growth of about 2pc of GDP next year.

However it said that if growth rates are lower than expected, the state could miss its medium term economic targets, particularly in relation to debt and deficit reduction.

It warned that the pace and effectiveness of loan arrears resolution and the related ability of the banking system to support the recovery may impact domestic demand and the capacity of the Irish economy to benefit from any improvement in the external environment.

The report said that the overall value of impaired loans continues to rise at Irish banks, albeit at a declining rate.

This impacts the real economy and the financial system, through a reduction in asset values on banks' balance sheets and, thus, affects banks' willingness to lend to the private sector.

The level of distress among small and medium enterprise (SME) borrowers is particularly acute, it said.

"This endangers not only the profitability of the banking sector, but also has far-reaching consequences for the viability of corporates and the employment they generate."

"Credit risk is, therefore, a key concern for the domestic banking sector. While the coverage ratio, which shows the value of provisions for impaired loans relative to the value of impaired loans, increased in the third quarter of 2013, uncertainties remain about whether banks are sufficiently provisioned to cope with the outstanding stock of distressed loans. The long-term viability of the banking sector depends on its ability to return to profitability," the report said.

It added that the combination of further austerity budgets and high levels of private sector debt will hold back domestic demand by constraining consumption and investment activities.