IMF finds Government is complying with bailout terms

REPORT:THE INTERNATIONAL Monetary Fund (IMF) yesterday said it had found no failures on the part of the outgoing Government in its compliance with the bailout package, up to the end of December.

Within an hour of publishing its assessment, however, the Government announced it was postponing forthcoming bank recapitalisations until after the election, to be held on February 25th, despite an end-February deadline to complete the process.

The IMF responded quickly, saying, “Ireland has the resources to recapitalise its banks and it is important that this delay is temporary and the Irish authorities recapitalise the banks as agreed under the programme.”

While the decision to postpone the recapitalisations superseded the IMF’s report somewhat, the document foresaw the risk of delay owing to the changed political circumstances. “The fragile political environment could create unwarranted delays,” it stated.

The report also attributed on-going market uncertainty in part to “concerns regarding the ability to maintain policy momentum during the political transition”.

Commenting on public opinion in Ireland towards the bailout, the report states that “a lingering domestic perception of inequitable burden sharing persists”.

The report was compiled in January after several trips to Dublin by IMF teams. It was completed on February 2nd.

The main challenges identified by the report related to the banking system.

That system, the report notes, has “virtually no access to market funding” and is dependent on central bank support.

The need to shrink the banking system to a size more appropriate for the economy needs to be traded off against the risks of losses generated by “fire sales” of assets and of exacerbating the credit crunch.

The report concludes that stress in the banking system is such that “implementing a comprehensive and coherent strategy” will be a “major operational challenge.”

The fund acknowledged that the Government’s budgetary targets were met up to the end of December, including those for the budget deficit, the public debt and the repayment of foreign loans.

The report also included a slight improvement in the IMF’s expectations for gross domestic product (GDP) compared to its last report in early December.

The previous estimates took account of the growth-dampening austerity measures introduced in the budget, but not the better-than-expected third quarter GDP results, which were published later.

The IMF now believes that GDP contracted by 2.4 per cent last year. In December its estimate was for a 3 per cent contraction.

The Fund is now also less pessimistic about joblessness in 2010, cutting its estimate of the unemployment rate to 13.3 per cent, from 13.5 per cent just two months ago.

As happens in all cases when IMF funds are advanced to a country, the Central Bank is being assessed to ensure its procedures and mechanisms are adequate to use the loans effectively. Although that assessment has not been completed, yesterday’s report said that an IMF team visiting Dublin found the Central Bank to have a “generally sound framework”.

According to the report, the Department of Finance has established a unit devoted to monitoring implementation of the bailout conditions.

This unit will co-ordinate with other institutions, such as the Central Bank.

The report urged that monitoring mechanisms be “as streamlined as possible”, but said that its establishment “bodes well for the the implementation of the programme”.