Central Bank Governor Patrick Honohan said he believes the spread between Irish bonds and benchmark German bunds will ease from current "crisis" rates to the more sustainable levels seen in April of this year, if the Government's fiscal policies are implemented.
However he said that Ireland's bond yields will never return to the low levels seen in 2005 and 2006, because "the crisis has exposed the scale of the weaknesses, and investors will want to be compensated".
"But these are crisis levels," he told a sitting of the joint committee on economic regulatory affairs.
"They will not continue," he added.
When pressed repeatedly by a member of the committee as to exactly what bond rate would be sustainable for Ireland, he said that there was "no simple number". He said that the decision of when to re-enter the bond market is a "tactical" one which depends on many factors, not just the prevailing bond rates.
"There will be a point at which it makes sense to re-enter," he said.
Mr Honohan backed Ireland's "overall" approach to stabilising the deficit and banking system, saying it is "exactly right".
He said if external assistance was required from the International Monetary Fund (IMF), the IMF would not change the policies already being implemented by government.
"An IMF package would look the same," Mr Honohan said in response to a question from a member of the committee.
"I would argue that the IMF's view on the policies that have been proposed by government...they (the IMF) would sign up to those."
The governor of the central bank also said there's "no reason" why the country's sovereign spreads can't turn around and return to April levels as the government implements plans to rein in the budget deficit.
Speaking at the International Financial Services Summit in Dublin earlier today, Mr Honohan said the International Monetary Fund is "always there".
"My take would be that the sort of policy package that the IMF would want to see Ireland doing is very much the sort of policy package that the Government is putting together on the fiscal side and the banking side," he said. "At this juncture, it doesn't seem to me that what you're talking about would entail a change of direction."
Mr Honohan said loan losses at Irish lenders, including foreign-owned banks, come to no less than €85 billion.
"If we include the losses of the six main foreign-owned banks active in the domestic markets...as well as all six of the banks that were guaranteed at the end of September 2008, and if we include all loan losses that have been provided for in the accounts of the banks since 2007, as well as the Central Bank’s base case of the prospective losses through to 2012...the total loan losses come to no less than €85 billion, or about 55 per cent of this year’s GDP," he said.
He did not rule out the entry of foreign owners for some or all of the banks and he said this would help transfer credit and liquidity risk to those in a stronger position.
He said there was profitable banking business to be done in Ireland in the years to come, although "astute bankers" that recognised these opportunities would differ on the timing and pricing of entry.
However, he acknowledged that not enough had yet been done to win back investor confidence.
"Much of the reason for the slow return in confidence lies in the parallel weakness of the fiscal situation," he said.
Mr Honohan said the cost of recapitalising the banking system is often over-stated in terms of its contribution to the required fiscal adjustment. "The interest cost of servicing the notes injected to recapitalise the banks only accounts for about one-tenth of the adjustment likely over the next four years," he said.
Mr Honohan also said "costly outlays" for the State in strengthening the banking system in terms of capital and liquidity was a prerequisite for ensuring the credit of the State.
Additional reporting: Bloomberg