is closer to what would be normal ). for over a decade the budget was in surplus ( averaging over 1½ per cent of gdp ) almost every year. no need, it seemed, for restraint in spending, and so, after years of relatively disciplined government budgeting, there was a relaxation of spending controls – one i will say which was broadly welcomed across most of the political spectrum. alas, that the apparent solidity of the public finances was all a mirage was brutally exposed when global financial confidence collapsed. already the irish boom was well over : house prices were falling and the government deficit widening from early 2007. the global recession did its damage to the budget also through the direct effect on world trade and accordingly on economic activity, given the very open nature of the irish economy. but a more direct effect on the budget was yet to become manifest. the progressive tightening of short - term financial markets during the second half of 2007 and through 2008, peaking in those dramatic weeks after the bankruptcy of lehman brothers, eventually exposed the fact that, not only had the banks fuelled an unsustainable property bubble, but they had not safeguarded their own solvency through adequate collateral and guarantees. the government had little alternative to announcing an extensive guarantee of bank liabilities. this has proved not to be costless, and is imposing a net cost which will place a heavy burden on taxpayers and the users of public services in ireland for several years – though, as i have repeatedly stated since the broad magnitudes became clearer in march of this year, it is manageable from the point of view of the national public finances and a good deal less than some alarmist commentary had suggested. to be specific, every one of the top eight retail lenders – three of them subsidiaries or branches of well - known international banking groups – have been recording loan losses which would eventually eat substantially into their capital were it not for the fact that this is in the process of being replenished. thus the entire banking sector got caught up in an unreal scenario. each firm was looking over its shoulder at the others and reluctant both to miss out on a seemingly profitable growth business and fearful of the shareholders ’ reaction to declining market share. in an ideal world, the prudential regulator would have called a halt, but – as i have recently documented in my detailed report to the minister for finance on the matter – despite some misgivings about the growing exposure, the regulatory apparatus did not fully appreciate the scale and im

phase of this exercise, as is well known, involved the implementation of nama. this allowed the transfer of hard to value and poorly performing commercial property assets out of the banking system to improve the balance sheet strength of the irish banks. the second phase of this exercise, which is now well progressed, has involved the identification and disposal of so - called non - core portfolios. this has less to do with cleaning out poor quality assets – although there are some in this category – but rather reducing leverage in the balance sheet and reliance on central bank funding, by rightsizing the banks ’ balance sheets to a sensible proportion relative to their on - going ability to fund themselves. progress in the disposal of non - core assets has been impressive, with most banks hitting or exceeding their targets and doing so at a lower cost to capital, by achieving better prices, than had been budgeted in our stress test exercise. the environment for asset disposals has, however, been getting more difficult, as the eurozone crisis has widened and the imperative to deleverage has touched other banks as well. the remaining challenge, then, in this space is to make sure that the asset disposal process remains on track and is concluded successfully. however, the irish authorities have been keen to emphasise that this process should not be at the expense of fire sale prices, so the current market environment may provide a constraint on the ability to reach the endpoint to a predefined schedule. should that be the end of balance sheet restructuring? one area of debate is whether it is advisable to undertake a third phase of restructuring involving a select number of banks and certain portions of their core portfolios. the objective here would be to trim back the core balance sheets by identifying poor performing or hard to value mortgage assets for transfer out of the banking system. however, important technical issues remain to be solved regarding the suitable vehicle for these assets, and how that would be funded. in short, there may be an opportunity for a new phase of balance sheet restructuring to provide a further strengthening of the banking system – but this is not yet assured. profitability the profitability challenge should, i hope, be obvious. it is important that the banks regain profitability in their core businesses so that they can stand on their own feet and no longer bis central bankers ’ speeches rely on taxpayer support. in post - crisis ireland, where it often seems that regard for the banks among the general public is at an all - time low, the