Bailout exit depends on moves in Europe, says IMF


The Irish State’s prospects of exiting its international bailout “depend importantly on the delivery of European commitments”, the International Monetary Fund has said.

Stressing the fragility of Ireland’s position, the fund’s staff said that financial market doubts about the State’s capacity to repay its debt “could easily re-emerge”. It also said risks to economic growth in Ireland “have profound adverse implications for debt sustainability”.

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 IMF sent a strongly worded signal to other members of the troika and euro-zone member states.

“Delivery on European commitments, especially direct bank recapitalisation, 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”.

Thinly veiled criticism

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 June 29th EU summit 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.

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.

“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.

Speaking from IMF headquarters in Washington DC yesterday, mission head to Ireland Craig Beaumont said he would “hope and encourage” a deal with European authorities on restructuring the promissory note by next March, when principal and interest payments on it fall due.

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 June 29th EU summit, but it noted “a September 25th German-Dutch-Finnish statement on direct ESM bank recapitalisation interrupted this rally”.

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

The IMF has lowered its projections for expansion in 2013-2014. “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 IMF warned.

Noting the very low level of mortgage foreclosures, the fund advocated “an effective repossessions process to facilitate durable loan resolution”.

Relief valve

On jobs, the report said “outward migration continued to act as a relief valve for unemployment”, noting that “had all employees who lost their jobs since the outset of the crisis remained in the labour force, the unemployment rate would stand at around 20 per cent”.

It implicitly criticised the deal with the pharmaceutical industry to lower the high medicines spend: “more substantial savings on drug costs are needed by sharply raising usage of generics”. It noted “Ireland’s health spending is one of the highest in OECD, but health outcomes are near average”.