Warnings that Ireland’s economy could stagnate, leaving the country in a distressed state for years, came from the IMF yesterday as it insisted the EU must help cut the burden of bank debt.
It urged agreement to restructure the €31bn Anglo Irish promissory notes well before next March when the next tranche of €3.1bn becomes due, and gave a very sizeable and unusual nudge to the ECB on this issue.
But it stressed that the country also needs a deal on the additional €31bn it ploughed into its pillar banks before the bailout, and suggested the EU’s rescue fund, the ESM, give full value for them of around €24bn — compared with the €8bn current value mooted.
“To be effective, the ESM needs to act as the quintessential patient investor while exercising prudence in asset valuations,” it said. The timing of ESM recapitalisation could be anytime after March to mid-2014. The IMF urges a resolution in the shorter term, saying a bridge should be provided in the meantime.
In its most alarming report yet on the country’s rescue programme, the Washington-based body warned there was very little margin for manoeuvre. The budget announced earlier this month must be implemented in full, it said, adding that the kind of buffers of previous years had been reduced considerably leaving less room for missing targets.
Growth was weak in the first half of the year although exports continued to grow.
It cut growth prospects over the next two years by 0.3 percentage points to 1.1% and 2.2% but emphasised that growth could be even less depending on the country’s trading partners recovery.
There was significant risks to the gradual recovery and these had “profound adverse implications for debt sustainability”. If the economy was to grow at just 0.5% a year — essentially to stagnate — the debt ratio would continue to rise rather than drop after 2013. The country’s debt would then be 146% of GDP by 2021, which the country could not bear. This could see the return in earnest of the banks bringing down the sovereign, and affect the euro itself.
The IMF pointed out that while the official unemployment rate was around 14.8%, the figure would be closer to 20% without the valve of immigration.
It questioned some of the budget details including in relation to the health overspend and how exactly the Government tended to recoup this and bring the spend back on target over the coming 12 months.
It returned to the issue of public sector pay, saying that public servants such as teachers and nurses were paid more than in other countries, and that public pay generally had not fallen as much as pay in the private sector.
A substantial part of the 106 page report was devoted to the ongoing banking weaknesses and came with several suggestions and recommendations on how to improve the health of the banks so that they could lend again to the real economy.
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