The latest jitters stem from the escalating costs of Ireland’s rescue of Anglo Irish Bank (AIB). The European Commission revealed this
week that it had approved government support worth €24.3bn (£20bn) for the bank, significantly higher than estimates by Dublin earlier this spring.
Dr Honohan fumed at the mere mention of AIB, which brought the country to its knees two years ago in much the same way the Icelandic banks crippled their host state.
“They were egregious, in a league of their own,” he said. “If it hadn’t been for them the losses would have been manageable. The net cost to the Irish state of recapitalising the banks is €25bn, or 15pc to 16pc of Irish GDP. It is nearly all the result of AIB.”
Dr Honohan is a poacher-turned-gamekeeper, an arch-critic brought in last year to clean house at the central bank. A professor at Trinity College Dublin, he used to work for both the IMF
and World Bank.
He had condemned the government just a few months before his appointment in a paper entitled "What went wrong in Ireland". His long-standing argument is that the genuine Celtic Tiger of the 1990s gave way to a foolish credit bubble over the next decade under “complacent and permissive” bank regulation and the failure of the political class to understand that a small economy on the edges of a currency union must use fiscal policy to prevent overheating.
“There was complacency about joining the single currency in a number of countries. People thought things would take care of themselves, and they have had more than a wake-up call,” he said.
The cardinal error in Ireland was to stand idly by as the ECB’s ultra-low interest rates set off an explosive property boom. Real rates averaged minus 1pc for almost a decade.
Instead, the government made matters worse by relying on “fair weather” taxes – capital gains, property, and corporate taxes – that created windfall revenues and flattered public accounts, until it all ended with a crash.
Dr Honohan knows as well as anybody that Ireland has little headroom for error. The IMF expects public debt to reach 96pc of GDP by 2012, near the tipping point when debt dynamics become unstable.