Bailout review urges banks to receive direct recapitalisation from ESM

The IMF has urged that Irish banks receive direct recapitalisation from the European Stability Mechanism, which puts it on a collision course with the Eurogroup of finance ministers and the eurozone creditor nations.

In its ninth review of the Irish economy, as part of the bailout programme, the IMF said the restructuring of the €28bn in promissory notes in February will enhance Ireland’s debt sustainability over the near and medium term, but debt will remain high.

The banking sector remains fragile and, if growth in the economy undershoots, there will be renewed concerns over debt sustainability.

“Direct recapitalisation by the ESM remains the most definitive way to forestall such a scenario, by enabling financial sector challenges to be addressed while protecting debt sustainability and insulating the sovereign from potential contingent liabilities from the banking sector,” said the IMF review

“This should be structured in a manner that efficiently addresses banks’ remaining profitability challenges, thereby removing a key barrier to domestic demand recovery and job creation.”

IMF mission chief for Ireland, Craig Beaumont, said he expected EU leaders to follow through on the Jun 29 commitment to put Ireland’s debt position on a sustainable footing.

However, the European Commission, the Eurogroup of finance ministers, and the eurozone creditor nations have all said after the ‘bail-in’ of Cypriot bank depositors that there was no need to use the ESM to recapitalise the banking system.

The IMF welcomed recent moves by the Central Bank to impose targets on the Irish banks for offering solutions to distressed mortgage holders and for issuing a second set of targets for following through on these offers. However, progress on dealing with mortgage arrears and non-performing loans remains too slow, it added.

One of the main reasons banks struggle to return to profitability is the sizeable loss-making tracker mortgage books on their balance sheets.

Finding a solution was particularly important for the viability of Permanent TSB, said Mr Beaumont. Roughly half of PTSB’s loanbook is in tracker mortgages.

The IMF would like the Central Bank to complete the stress tests of the Irish banking system before the country exits the bailout programme in November.

Finance Minister Michael Noonan wants the stress tests to coincide with the EU-wide round of stress tests scheduled for Mar 2014. Mr Beaumont says it is important to understand the health of the banking system before returning to the markets.

The IMF urged the banks to deal with SME loan arrears. Transmission of credit to this sector was essential for the recovery of the domestic economy.