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IMF: Move debt burden to bondholders

Ajai Chopra

It is unfair to impose bank losses on the ordinary citizens, and budget cuts in a time of crisis should be gradual — these are the two main lessons arising from Ireland’s bailout programme, according to the IMF’s Ajai Chopra.

"It is unfair to impose the burden of supporting banks primarily on domestic taxpayers while senior unguaranteed bank bondholders get paid out," he said.

"This not only adds to sovereign debt, but it also creates political problems, making it harder to sustain fiscal adjustment.

"Eurozone partners precluded the Irish from imposing haircuts on senior creditors of insolvent banks. But subsequent developments in the principles of orderly resolution of banks, after Ireland had paid off these creditors at great cost, have shown that imposing losses on senior bank bondholders is now becoming more accepted," he added.

The IMF released its 12th and final review of the Irish economy as part of the bailout programme. Mr Chopra said that it was very important that fiscal consolidation should be done over a medium-term timeframe.

"There are some who wanted Ireland to move even faster with fiscal consolidation. This would have been a grave mistake. Investors also care about growth."

Other lessons from the Irish bailout programme included the need to quickly resolve bank problems and to move swiftly to break the "pernicious feedback loop" between a bank meltdown and the sovereign.

Overall, the IMF gave Ireland a positive review of the bailout programme, but the Washington-headquartered institution highlighted some of the remaining challenges. It is forecasting GDP growth of 1.75% next year and 2.5% over 2015 and 2016.

The main threats to growth stem from weakness among Ireland’s main trading partners, which would hit exports, and an inability to return the banking sector to profitability.

The banks are still struggling with very high levels of non-performing loans. Moreover, the three domestic banks hold €48bn of tracker mortgages in this country and €21bn in the UK.

IMF Ireland Mission chief, Craig Beaumont, said that the troika had looked at a number of options aimed at securing a cheap funding line for these mortgages, including a guarantee from the Government and support from either the ESM or ECB, but these negotiations had failed to reached an agreement.

"Further technical analysis by the authorities of options to lower these funding costs explored the potential to pool loans indexed to policy rates into government-guaranteed asset backed security structures for repurchase with various counterparties. The analysis suggested that maximising net income benefits would require the inclusion of all of these assets in the repurchase structure. However, attracting funding from private counterparties at sufficiently low rates will be challenging."

Ireland’s ability to make a sustained exit from the programme hinged reducing the high debt levels maintaining fiscal discipline.