IMF says transfer of banks to ESM could aid recovery

Tue, Sep 11, 2012, 01:00

THE TEMPORARY transfer of ownership of Ireland’s banks to the European Stability Mechanism could reduce funding costs, boost profitability and support economic recovery, the IMF said yesterday.

In a staff report on Ireland, it called on Europe to help the State to lower the cost of rescuing the banking system, which has to date cost some €64 billion, by making good on a June 29th commitment by euro area leaders to break the link between sovereign and banking debt.

“Timely agreement on such steps, especially ESM investments in the equity of Irish banks, offers real prospects for Ireland to durably exit its reliance on official financing, benefiting Europe as well as Ireland.”

The IMF also revised downwards its estimates for growth in the Irish economy this year and next, and said the success of the State’s bailout programme hinges on external economic recovery and further support from Europe.

It forecasted that gross domestic product would expand by 0.4 per cent this year and 1.4 per cent in 2013, down from 0.5 per cent and 1.9 per cent respectively on forecasts issued in June.

The revision was attributed to a weakening in growth among the State’s trading partners and a slower than expected rebound in exports and domestic demand.

The IMF said Ireland, now at the halfway point in its bailout program, must continue to deliver on three main fronts: reform of the financial sector; growth-friendly fiscal consolidation in order to stabilise the public debt; and reducing unemployment.

In a conference call with reporters, the IMF’s Irish mission chief, Craig Beaumont, said the June 29th announcement on bank debt was “very much under continuing discussion” between the IMF, European Commission, European Central Bank and Irish authorities but that a timetable for the conclusion of talks was not yet clear.

Mr Beaumont said it would be helpful to have a timely agreement given “the difficulty” of the decisions the Government would have to take in preparing the budget.

However, it was also very important to reach a deal that met the objectives set out by the euro zone leaders and also achieved the ultimate goal of the bailout plan.

A significant announcement on breaking links between sovereign and banking debt could make “a substantial difference” in regaining durable access to the markets.

The IMF also said the €28 billion in promissory notes, relating to the bank rescue, could be replaced by long-term government securities or funds from the European Financial Stability Facility or the ESM, which would avoid adding debts to the Irish balance sheet that markets could consider to be senior. “While this refinancing would only modestly lower Ireland’s debt path, it would significantly reduce financing needs in coming years,” it said.

The IMF said an “intensification of stresses” in Europe would impact Ireland’s growth outlook through exports, by undermining household and business confidence and domestic spending.

“Adverse effects on debt trajectories and on financial sector health could also result in higher Irish spreads and rating downgrades, thwarting market access.”

In a separate review of Ireland’s bailout progress, the IMF said the budget deficit target for 2012 of under 8.6 per cent of GDP, with the IMF projecting a figure of 8.3 per cent, remained on track but that the challenges to reaching targets set for 2013 have increased.

“The markdown in growth projections makes the nominal deficit targets harder to attain, and exacerbates concerns around pro-cyclical tightening,” it said.

“Should the growth outlook deteriorate further, any significant additional fiscal adjustment need should be spread over 2014/2015 to avoid stifling the still nascent recovery, while still respecting the medium-term fiscal anchor of a 3 per cent of GDP general government deficit in 2015.”

The IMF said bailout policy implementation remained vigorous and that the Irish authorities had “pressed forward and delivered on all key milestones under the program” despite external economic challenges.