Kelly has claimed that Ireland Inc faces bankruptcy unless the government defaults on the bail-out and it’s punitive interest rate.
But Honohan, accused of failing to recognize the crisis in the banking sector he controls on behalf of the people, has warned that Ireland simply cannot afford a default.
His view has been backed up in a strongly worded statement from the Department of Finance in response to the well publicised claims from UCD economist Kelly.
The government argues that any default would see state pensions, child benefit and the wages of 300,000 public sector workers slashed by 33 per cent.
Minister for Finance Michael Noonan’s department also outlined government plans to continue with the bail-out and negotiate for a one per cent reduction in the interest rate charged to Ireland by the EU and the IMF.
Officials from Noonan’s department also claimed that a walk-out from the deal would result in:
- The Government would have to immediately slash €18bn off public spending to be able to fund itself because it would no longer have financial support from the EU/IMF.
- Such a move would knock the jobseekers’ allowance from €188 to €126 a week, child benefit from €140 to €94 and the old-age pension from €219 to €146.
- Public sector workers earning €40,000 a year would face cuts of more than €13,000 in their annual salary.
- The Government would be forced to secure all its money from the international markets and could face interest rates of more than 10pc, double what it gets with the bailout loans.
Department officials have also claimed that the impact of a withdrawal from the bail-out would plunge the country into deep recession for many years.
The statement came after Professor Honohan issued a strongly worded rebuttal to Kelly and the critics who had suggested that the Central Bank Governor took the side of the ECB in talks that led to the original deal.
Professor Honohan has strongly denied that he sided with the European Central Bank.
He said: “I was playing for Ireland. I was not involved in any of the discussions that the lenders would have had in their teams. I was never involved in the ECB side.”
Kelly, the man credited with predicting the Irish property crash, has maintained his radical stance however and insisted a default is Ireland’s only option.
“The government should walk away from the banking industry’s debt and leave it to the European Central Bank,” claimed Kelly.
“This action would leave the country with a survivable €110billion debt. The government could then work to bring the domestic budget into balance with immediate draconian cuts.
“To do this the government would have to immediately slash €18billion off public spending to be able to fund itself without outside financial support.”
As the government looks to secure a one per cent cut in the bail-out interest rates, to bring it in line with deals for Portugal and Greece, Ministers have also attacked the Kelly plan.
Transport Minister Leo Varadkar said: “In my view, that’s not a solution. If you do that, first of all you impose personal bankruptcy on a lot of people, horrendous social consequences on working people and people on social welfare.”
Varadkar did confirm that his government is still committed to introducing €3.6bn of spending cuts and tax hikes in the forthcoming Budget.