Financial sector must be boosted, says IMF
THE International Monetary Fund has said more must be done to strengthen Ireland’s financial sector to revive lending and spur economic growth.
This was one of the main conclusions arising from the fund’s annual consultation process with the Irish authorities, conducted separately to last week’s troika review.
“The work will need to focus on issues such as enhancing banks’ asset quality, regaining profitability and securing affordable and stable funding,” said Ajai Chopra, deputy director of the fund’s European division.
Mr Chopra also made a pointed reference to the recent euro group summit, at which a commitment was made to reduce Ireland’s bank debt burden.
“Even though our focus is on the consultation discussions, I would be remiss if I didn’t take particular notice of the June 29th summit statement from euro area leaders, which, in our view, offers a welcome path forward to help improve Ireland’s economic prospects in the future,” he said. “What’s striking about the commitment was the point that similar cases will be treated equally as policy options are developed and applied in other possible country cases.”
Mr Chopra said it was vital to break the “vicious circle between banks and the sovereign”.
The IMF has long advocated that Europe’s bailout fund take direct stakes in struggling banks rather than channelling the funds through national governments.
“The second objective is to improve debt sustainability and prospects to regain market access for the sovereign,” he said. “The third is to strengthen the capacity of banks to lend and support the economy.” All of this was necessary to facilitate growth and job creation, “both of which are essential in Ireland”.
Mr Chopra acknowledged that Ireland’s recovery was dependent on external factors, and that the fund had this week revised its forecasts for global and euro area growth.
“We have emphasised that risks are to the downside,” he said. “We have said quite clearly that success in Ireland will hinge on euro area stability and recovery . . . There’s no question but the task becomes more difficult if the external environment does not improve.”
Mr Chopra praised the Governments performance in delivering on spending cuts, saying the authorities had shown “a remarkable ability and grit”. However, he stressed the importance of “a more strategic approach”, as the fund advocated better targeting of spending, including means-testing for child benefit payments and medical cards.
When asked for his view on a rumoured shift in policy by the European Central Bank to burden-sharing between senior bondholders in failed banks and the taxpayer, Mr Chopra said the focus should be on the “path forward” of the June 29th summit.
“The IMF staff’s position on burden sharing in the case of the failed banks in Ireland is well-known. Much of this debt has been repaid. What we now need to do is look ahead. I’ve already outlined how we see the work that will need to be done to make the June 29th summit commitment into something that helps Ireland . . . and that’s what the focus of our work is at this point,” he said.