IMF urges Government to adhere to €3.1bn adjustment

The Government should stick with its plan for a €3.1 billion adjustment in the October budget, the International Monetary Fund has stressed.

This is in spite of savings on Ireland’s debt repayments that will reduce its borrowing costs by €40 billion over the next decade and yield substantial savings in the cost of servicing our national debt.

In a conference call following the completion of its 11th review of Ireland's bailout programme, Craig Beaumont, head of the IMF's mission here, said it "would attach priority to the amount of adjustment" rather than percentage deficit target that Ireland is aiming to hit. He said discussions on this figure were "ongoing" with the Government.

This year’s budget is due to reduce our deficit target to 5.1 per cent of gross domestic product (GDP). Initially, that was the equivalent of a €3.1 billion financial adjustment. The deals this year with our European partners on adjusting the maturity profiles on our debts has eased the strain on the exchequer. So a €3.1 billion adjustment now equates to a deficit target of about 4.5 per cent.

However, Minister for Finance Michael Noonan indicated yesterday the Government would not be easing up on austerity, in spite of the savings yielded by the deals on our debts. "I wouldn't think it gives us any scope at all [to ease up on austerity in this year's budget]," Mr Noonan said as we were still having to borrow money to pay our bills.

Mr Beaumont’s remarks come amid pressure within the Coalition to dilute the €3.1 billion adjustment in the budget. Ministers believe they have scope to do this because forecasts suggest the Government is on track to beat their deficit target.

Parallel talks with the troika on a credit line for any post-bailout emergency are set to advance in the autumn.

Mr Noonan said yesterday he would like to see a "back-stop" arrangement agreed with the IMF and EU when Ireland exits its bailout programme in December to "give additional confidence to the [capital]". He hoped Ireland would never have to utilise this facility. Mr Noonan said such an arrangement would typically last for no more than 12 months.

Expectation
The expectation in Government circles is he will seek an "enhanced conditions credit line" from the ESM fund and separate line of precautionary credit from the IMF.

Dublin would be obliged to accept policy conditions in return for such aid. However, Irish negotiators are arguing that the Government should not have to take on any obligations over and above its existing commitments to its international partners under EU law.

“They don’t want any conditions. This cannot be seen as some kind of a second [bailout] programme,” said a Government source.

In European circles, there is some sympathy for the argument that the Ireland’s obligations under the “European Semester” budget co-ordination process may be sufficient.

Still, a senior EU official said it was too early to pinpoint whether any new policy demands would be required. The EU official also said the troika, the Government and the banks were working to finalise discussions on tracker mortgages before a pan-European stress test early next year.

The banks are losing money on these loans as the interest is tied to the historically-low ECB rate, driving their own borrowing costs higher.

The official said options include aid from the ESM bailout fund, some new form of Government guarantee to the banks or private sector investment.