Debt burden could grow to ‘unsustainable’ levels: IMF

Ireland’s debt burden could climb to unsustainable levels if economic growth fails to materialise over the next few years and the banks need to be recapitalised, according to the IMF in its latest review of the economy.

As it stands, debt is forecast to peak at 122%, however, if the economy was to grow at an average rate of just 0.5% over the coming years, then debt would spiral to 134% by 2018. Bank of Ireland, AIB and Permanent TSB all face stress tests later this year. If the results find that the banks need fresh capital to withstand future losses, then that could add to government debt levels.

“Were such a scenario to arise, Ireland’s ability to rely fully on the market to cover its large post-programme financing needs could easily become strained,” said the IMF.

The agency forecasts that Irish GDP will grow by 1.1% this year and 2.2% next year.

The Government estimates that it will save €1bn through the restructuring of the promissory notes. Both the Taoiseach Enda Kenny and the Tánaiste Eamon Gilmore want the savings to be used to ease the budget tightening needed to meet the 3% deficit target agreed with the troika by 2015.

IMF mission chief to Ireland, Craig Beaumont, said his team would “take a fresh look” at Ireland’s position later this year before agreeing to the Government’s proposal. Meeting the budget deficit target by 2015 was the main priority and the Government had to stick to this commitment, he added.

Even though Ireland still has many challenges, the view was that it was the most successful of the bailout countries, said Mr Beaumont. And that is because this country “has taken ownership” of the bailout programme by designing and implementing many of its reform packages.

Mr Beaumont welcomed the liquidation of IBRC because it was an effective way of restructuring the promissory notes, which put Ireland in a more sustainable debt position.

The IMF has been in discussions with its troika partners about putting in place support mechanisms for when the country exits the bailout programme.

However, the Irish mission chief declined to say what these supports may consist of or how much might be put in place. But there had been no discussions with the ECB about using the outright monetary transaction programme to help Ireland, he added

Unemployment is forecast to remain at elevated levels for the foreseeable future, according to the IMF. Structural reforms remain on target. Initiatives such as water charges and selling state assets “are at an advanced stage” and remain on schedule.

The covered bonds issued by the Irish banks in recent months had seen an increase in yields since the controversial bailout of the Cypriot banking system. But there had been no other impact on the Irish financial sector.