IMF urges greater EU support to aid Ireland's financial woes

Wed, Dec 21, 2011, 00:00

THE INTERNATIONAL Monetary Fund has called on the EU to provide stronger support to Ireland in order to help tackle the costs of the banking crisis and boost economic growth.

The call was made yesterday in the quarterly staff report on Government compliance with the terms of the EU-IMF bailout and on the performance of the Irish economy.

It set out a range of possible supports, including European guarantees for Irish banks issuing bonds, direct investment into the banks, and “refinancing prior recapitalisation of banks”. If implemented, the latter suggestion would reduce the costs of the €31 billion in promissory notes used to rescue Anglo Irish Bank and Irish Nationwide Building Society.

The report said some talks on how support could be extended have already begun: “Preliminary technical discussions in some areas are under way.”

A spokesman for the IMF told The Irish Timeslast night these talks had involved the Irish Government, the European Commission, the European Central Bank and the IMF.

The support advocated would not only assist Ireland in avoiding default, but would have “positive spillovers for European stability”, the report said.

The IMF included in its list of possible additional European assistance “enhanced support for appropriate public investment, or for lending to small and medium-sized companies”.

The report went on to describe the risks to future economic growth as “large” and said that the capacity of the State to service its debts in the future is “fragile”.

The IMF cited the unresolved euro area crisis as the main reason for a downgrading of its economic growth prospects for the economy in 2012.

“The substantial deterioration in the regional economic outlook represents a major external drag on Ireland’s recovery, and also poses large downside risks,” the report stated.

Separately, the IMF also advised the Government against adding to the €3.8 billion in spending cuts and tax increases, to be implemented in 2012, in the event of weaker economic growth.

This may ease pressure on the Government to introduce additional cuts and/or taxes next year if budget targets are missed.

Among the members of the troika, the IMF has consistently been the most concerned about the effects of austerity on growth.

Despite this, the report suggested that Government commitments to adhere to the Croke Park Agreement on public sector pay and to maintain headline social welfare rates may have to be reassessed.

“The savings committed will be delivered, if necessary through fallback options in relation to public sector wages and primary social welfare rates,” the report stated.

It noted that the only major gap in the Government’s budget consolidation plan was how current spending would be cut in the medium term. However, it said that welfare spending “is expected to contribute the bulk of savings”.

The Government was praised for its “exceptional” record of compliance with the terms of the bailout.