IMF hints EU should share cost of Irish banks

 

THE INTERNATIONAL Monetary Fund has issued its strongest hint yet that other European countries and EU institutions should share the costs of Ireland’s banking crisis.

During a telephone conference yesterday, Ajai Chopra – the most senior fund official dealing with the Ireland brief – said Ireland’s problems were “a shared European problem that requires a shared European solution”.

He said more European funding needed to be made available for bailed-out countries if the euro area crisis is to be contained.

The bailout mechanism needed to provide the “right amount of financing, on the right terms and for the right duration”.

The countries concerned “cannot do it alone”, he said, and a “disproportionate burden” was being placed upon them by budgetary cuts that “may not be economically or politically feasible”.

He also suggested that the European Central Bank should provide medium-term funding to the Irish banking system.

He described proposals made by some EU states to have Ireland raise its rate of corporation tax as “not consistent with the goals of the programme in restoring growth”.

Yesterday’s report and statements mark a clear difference between the IMF and the European Commission on the budgetary stance in the future.

This week the Brussels-based institution hinted that a larger budget adjustment next year might by advisable.

The IMF yesterday opposed any further austerity beyond the measures already planned, saying an acceleration of the fiscal adjustment would not mitigate risks Ireland faced and would “further retard growth in an already weak economic environment”.

On all contentious issues the IMF sided clearly with the Irish authorities.

The IMF is, however, the least influential member of the troika of organisations overseeing the bailout.

While he praised the Irish authorities for their “decisive” actions, Mr Chopra warned that even if all the bailout terms were implemented they might not be sufficient to ensure their objective – allowing the State to return to the bond market – will be met.

He noted a number of negative developments since the package was put in place half a year ago.

These included lower economic growth, a worsening unemployment picture, further downgrades to the State’s credit rating and a deterioration in the wider euro area crisis.

An accompanying IMF report also noted the destabilising effect the withdrawal of deposits has had on the banking system.

Despite considerable successes in downsizing the banking system, its loan-to-deposit ratio had deteriorated because of these withdrawals. The report said the value of outstanding bank loans at the end of December 2010 was double the banks’ total deposits.

More positively, the report says the sustainability of the State’s debt has improved “somewhat” over the past six months because the cost of recapitalising the banking system will require an additional €19 billion of borrowings, rather than the previously envisaged €35 billion.

The IMF now expects public indebtedness to peak at 120 per cent of gross domestic product, rather than 125 per cent.

The new projections are, however, subject to continued risks, according to the report, most notably from lower economic growth and higher interest rates.

On the euro area response, Mr Chopra was critical of both short-term and long-term responses.

The temporary rescue facility, which will be in place until 2013, requires an “upgrade”, he said.

The permanent facility, to come into being in 2013, has worried investors and makes solving the crisis an “uphill battle”.

“Europe needs more integration, not less,” Mr Chopra concluded.