EU support 'key to bailout exit'

Ireland's prospects of exiting its international bailout "depend importantly on the delivery of European commitments", the IMF has said.

In its latest quarterly report on the Government’s compliance with the terms of the bailout and its assessment of the state of the economy, the fund said risks to economic growth in Ireland “have profound adverse implications for [Government] debt sustainability”.

Stressing the fragility of Ireland’s position, the fund said doubts on financial markets about the State’s capacity to repay its debt “could easily reemerge”.

In its review, the IMF delivered a strongly worded signal to other members of the troika and euro zone member states.

“Delivery on European commitments, especially direct bank recapitalization, is critical” it said.

Doing so “would sever the sovereign‘s exposure to contingent liabilities from the banks, reduce public debt directly, resuscitate bank funding conditions and help revive domestic credit and economic growth, and thus underpin successful exit from the program”.

It also made thinly veiled criticisms of European institutions and euro zone member states for failing to live up to commitments made earlier in the year, most notably at the EU summit on June 29th when they committed to breaking the link between banks and sovereigns by, among other means, the use of their new collective permanent bailout fund, the European Stability Mechanism (ESM).

The fund also chided the European Central Bank for not clarifying the terms under which euro zone states can avail of its bond purchase programme unveiled in September, known as Outright Monetary Transactions (OMT).

“The feasibility of retroactive application of the ESM instrument for Ireland remains unclear as do the conditions for OMT qualification. Given Ireland's high public and private debt levels and uncertain growth prospects, inadequate or delayed delivery on these commitments poses a significant risk,” the report said.

The second prerequisite for exiting the bailout is the continued implementation of budget cuts, the IMF stressed.

The report attributes the fall in interest rates on Irish Government debt over the past six months to the declaration at the EU summit in June, but it noted that “a September 25 German-Dutch-Finnish statement on direct ESM bank recapitalization interrupted this rally”.

The statement made by the finance ministers of those three countries rowed back on the June 29th commitments and was perceived by financial markets as undermining the progress achieved at the June summit.

The IMF has also lowered its projections for the pace of economic expansion in 2013-13. “Near-term growth prospects are weak” it said.

One possible consequence of lower than projected growth is that the banks might require further injections of taxpayers’ money, the report added.