Ireland meeting bailout terms

The European Commission has given a positive assessment of the Irish economy and the progress the Irish Government is making in meeting the terms of its bailout.

The commission is one of a troika of institutions - along with the European Central Bank and the International Monetary Fund - that oversees the implementation of the terms of Ireland’s EU-IMF bailout.

The assessment echoes in most respects the assessment published by the IMF on Wednesday.

The commission describes the economic recovery as “timid” but expects gross domestic product to expand in 2011, the first year of growth since 2007, and it has not revised its forecast down from 0.6 per cent, unlike the IMF which pared its forecast back to 0.4 per cent.

The commission has also maintained its growth forecast for 2011, at a relatively robust 1.9 per cent. The IMF had agreed with that assessment up to the end of August but then lowered its 2012 growth projection to 1.5 per cent on the basis of weaker than previously anticipated export growth.

The report is also positive about progress in rebalancing the public finances, saying “the government deficit for 2011 as a whole is projected to be well below the 10.6 per cent of GDP programme ceiling”. Its new forecast is for a deficit of 10.2 per cent of GDP this year falling to 8.6 per cent next year.

As debt servicing costs are rising in line with the growing stock of debt, interest payments next year are expected to account for more than half of the total budget deficit, at 4.6 per cent of GDP.

On rebuilding the banking system the report says that “the authorities have begun implementing their financial sector strategy in earnest, securing significant progress towards the recapitalisation, restructuring and deleveraging objectives of the programme”.

It goes on to note the Government has flagged a more aggressive approach to downsizing the banks saying it has informed the commission of a “much more active and ‘hands-on’ approach when it comes to their divestiture of non-core assets”, but that an "arms-length" approach to banks' core activities will be maintained.

Strong export growth is attributed to “productivity improvements stemming from the sharp fall in employment and the reductions in both hours worked and hourly labour costs.” However, it goes on to say that “hourly earnings contracted by only 0.1% in the year to the first quarter, suggestive of some rigidities in the labour market”.

Inspectors from the European Commission, the European Central Bank and the International Monetary Fund have reported the 2012 deficit was likely to be 8.6 per cent of GDP.

"Moreover, the minister for finance has publicly stated that the government may aim for a larger consolidation effort in the 2012 budget, without however being able to commit to specifics in advance of the conclusion of the ongoing expenditure review, which is expected for September," said inspectors from the European Commission, the European Central Bank and the IMF

They also noted, however, the implementation of the reform of the Irish financial sector, the collapse of which forced Dublin to seek emergency lending from the EU and the IMF, would continue to be challenging in the near term.

"The deleveraging of non-core assets is expected to accelerate, helped by an apparently stronger than previously expected demand for assets held abroad by the Irish banks," their report said.

The IMF followed up its review earlier this week by urging the Government to move on plans to sell off State assets and called for up to €5 billion worth of privatisation.

The most high profile targets for consideration were sales of a portion of the Electricity Supply Board (ESB) and the publicly-owned 25 per cent of Aer Lingus, although the airline’s share price could indicate that option is a non-starter.

The report said a list of assets for sale and a timeline for deals should be announced by the end of the year.

Taoiseach Enda Kenny said the report was positive but the Government was not clapping itself on the back.

“A fundamental of the report is that there is now international recognition that the decisions taken by the Government and the EU are having a material and beneficial effect on our country,” he said.

“It’s positive but I recognise the scale of the challenge facing the country. I recognise the difficult challenges that face a Government and the people and from that perspective we do not clap ourselves on the back.”

The Taoiseach said Minister for Finance Michael Noonan will approach Europe again in the coming weeks over negotiations on forcing more bondholders to take a hit on deals they have with Irish banks.

“The ECB have been very strident in this area but I think the ECB also recognise that Ireland is making stringent efforts to become the first country in Europe with difficulties here to actually emerge from this,” Mr Kenny said.

“So the signs are of confidence. They are important signs. But I understand we have a long way to go.”

Chambers Ireland welcomed the report but said the Government must move to deliver on reforms to the labour market, including wage setting mechanisms such as the Joint Labour Committees and Registered Employment Agreements.

“We need labour market reforms urgently to secure employment and open up new opportunities to those most affected by the downturn," chief executive Seán Murphy said.

"While new measures have been announced, these need to be implemented urgently with a view to speeding up ongoing improvements in our competitiveness and securing a positive outlook for businesses and jobs in the future."

Additional reporting: Reuters, PA