THE COSTS of supporting Anglo Irish Bank must not “contaminate” the Irish State’s capacity to borrow internationally, the governor of the Central Bank said yesterday.

Professor Patrick Honohan acknowledged the likelihood that the Government’s budget deficit will be much larger than officially forecast because of the rescue of Anglo Irish, but stressed it was important to “interpret correctly” deficit data.

The governor, speaking at the launch of the Central Bank’s annual report, was referring to EU accounting rules which are likely to oblige the government to include in its deficit figures forthcoming multi-billion injections into Anglo Irish Bank and Irish Nationwide Building Society.

Prof Honohan said the bank costs were a one-off budget item, and should not distort the perception of Ireland’s fiscal position.

He added that it remains critical that the Government adhere firmly to the programme of fiscal adjustment it has embarked upon.

Separately, the governor said the inclusion of Ireland’s two largest banks – Allied Irish Banks and Bank of Ireland – in EU-wide “stress testing” was a positive development.

“It is a good idea. I think it will go some way to removing exaggerated concerns about some particular risks.”

He added that the banks had already passed domestically conducted stress tests which were more severe than those currently being carried out by the Committee of European Banking Supervisors to prepare them for loan transfers to Nama.

The results of the tests, covering 91 banks across the EU, are to be published next Friday, July 23rd.

The report incorporates issues related to the supervision and regulation of the financial services sector. This anticipates the merger of the Central Bank and the regulatory function, as planned under proposed legislation.

The Central Bank’s annual report shows that it made a profit of €933.8 million last year. After transfers to reserves, surplus income of €745.5 million will be paid to the exchequer.