IMF: Euro boosts Ireland

The weak euro is boosting debtor countries like Ireland, but will likely make worse “imbalances” across the eurozone and will fail to increase domestic demand in creditor countries, the IMF said in a major report yesterday.

The report on the economy of the single currency bloc also highlighted the potential for the disposals of non-performing loans by banks to “unlock” new lending across the eurozone, and said Portugal, Italy, Spain and Ireland were best placed to benefit from such a policy.

In its so-called Article IV on the eurozone, the IMF said that the economy of the currency bloc is improving, but only at a modest pace, and that unemployment in many countries would stay at elevated levels.

“The recovery is strengthening, driven by rising domestic demand and supported by lower oil prices, the ECB’s quantitative easing under the expanded asset purchase programme, and a weaker euro,” the IMF said.

It predicted that a range of indicators suggested that GDP growth across the bloc would accelerate from 1.5% this year to 1.7% in 2016.

However, it warned that the outlook was less rosy. “A chronic lack of demand, impaired corporate and bank balance sheets, and weak productivity continue to hold back employment and investment.

“Potential growth, estimated to average around only 1% over the medium term, is well below what is needed to reduce unemployment to acceptable levels in many countries.

“Because growth prospects are subdued and policy space is limited, the euro area is vulnerable to negative shocks and prolonged low growth, with negative spillovers,” it said.

The IMF estimated that dealing with a huge overhang of non-performing loans on the books of eurozone banks would free up lending across the bloc.

“High non-performing loans erode bank profitability and hold back new lending, limiting the effectiveness of monetary policy.

Rising asset impairments tie up substantial amounts of capital due to diminished retained earnings and higher provisioning requirements, restricting banks’ ability to support economic recovery.

“And a deteriorating balance sheet raises a bank’s cost of capital, resulting in some combination of higher lending rates, reduced lending volumes, and increased risk aversion.”