IMF says State less likely to default on its debts

Wed, Dec 21, 2011, 00:00

THE PROSPECT of the Irish State defaulting on its debts has receded over the past three months, according to the International Monetary Fund in a report published yesterday.

Lower interest rates on the European portion of the EU-IMF bailout funds and the correcting of an accounting error by the Department of Finance have had the effect of lowering projections for the national debt.

These effects have been partially offset, the report said, by lower economic growth projections and additional Government outlays, including the costs of bailing out credit unions.

However, the report concluded that “on balance, the debt outlook has improved somewhat” over the past three months.

This conclusion is reached despite a heavy emphasis in the report on the risks posed by the crisis in the euro zone.

In the report on the Irish economy compiled by staff members of the IMF, economic growth forecasts for 2012 were lowered.

Three months ago the IMF expected Irish gross domestic product (GDP) to rise by 1.9 per cent next year. Now, it expects growth of just 1 per cent.

The change is identical to the revision announced by the European Commission last week in its quarterly assessment of the Irish economy, but is lower than the Government’s current projection of 1.3 per cent.

The forecasts were finalised before last Friday’s publication of third-quarter GDP figures, which showed a larger than expected contraction in the economy.

The IMF stressed the “large downside risks” to its forecast flowing from external developments, most notably the crisis in the euro area.

The crisis in the euro area is also likely to affect the on-going shrinking of the banking system. This is on target, according to the report, with Bank of Ireland ahead of schedule in the sale of its assets and AIB expected to meet its targets for the year.

However, the report notes that the widening euro area crisis is negatively affecting the wider European market for bank assets and this will make the meeting of deleveraging targets “more challenging”.

Of its other forecasts, the IMF expects unemployment to fall only very gradually, from 14.2 per cent next year to 10.5 per cent in 2016.

The report estimates 36 per cent of owner-occupied households with mortgages were in negative equity as of September 2011.

This figure is likely to have risen since as separate figures from the Central Statistics Office, published yesterday, show that residential property prices fell a further 3.7 per cent between September and November.

It was announced yesterday that the executive board of the IMF, at a meeting on December 14th, cleared the disbursement of the latest tranche of bailout funds of €3.9 billion. This brings the amount the Irish State has thus far received from the IMF to €13 billion.

The total amount of bailout funds received from all sources to date stands at €29.7 billion.

The bailout foresees €67.5 billion being disbursed over a three-year period.

The IMF board also agreed to bring forward disbursements due to be made later in 2012 to the first quarter of the year.

An IMF spokesman said yesterday that this would improve the Government’s cash position and enhance its ability to regain access to the bond market.

Agreement had earlier been reached with European contributors to Ireland’s bailout to bring forward disbursements to the first quarter of the year.

IMF support for Ireland: Turning words into action

A RANGE of actions to support Ireland's growth, debt sustainability and prospects to regain market access at manageable cost can be considered, and preliminary technical discussions in some areas are underway. For example, enhanced support for appropriate public investment, or for SME lending, could underpin growth and job creation.

Banks' ability to regain market access and return to private ownership would be aided by guarantees for term funding, conversion of short-term eurosystem liquidity support into medium-term funding, capital support for vehicles designed to reduce deleveraging costs and spillovers, and temporary equity participation in banks by European partners. The latter would also enhance debt sustainability, which could potentially be reinforced by refinancing prior recapitalisation of banks, or by use of enhanced European Financial Stability Facility flexibility to facilitate Ireland regaining market access at reasonable cost. By enhancing the robustness of Ireland's programme, these and other potential steps would also provide a firewall protecting the euro area against potential shocks.

Source:IMF staff report on Ireland