A voice of reason or talking out of turn?

It is a scene that haunts the memory, the sight of the earnest Indian executive from the IMF passing a Dublin beggar on an ice cold late November’s day in 2010, on a day of national financial surrender.

The courtly and dapper AJ Chopra soon became the public face of the fund’s rescue mission in Ireland.

Frequently by his side, was a man, also of Indian origin: Ashoka Mody, who would soon take over as IMF head of mission and it would become clear that the people from the fund were proving rather more accommodating from an Irish perspective than their fellow bailout representatives from the EU and the European Central Bank.

Mr Mody left the fund a year ago, to resume his career as an international academic. He has been speaking his mind and in the process, he has been stirring up something of a hornet’s nest.

The one time IMF troubleshooter made it clear in an RTÉ interview, last April, that in his view, bondholders should have been burned, leaving the Taoiseach, Enda Kenny, to mutter, a touch sarcastically, that “hindsight is a great thing”.

Last weekend, Mody gave another interview to RTÉ Radio, in which he suggested that the Irish Government would be well advised to ease off on the austerity medicine so as to allow the domestic economy a chance to recover.

The timing of the intervention was awkward from the perspective of a Government, now in the middle of the traditional estimates battle, ahead of a budget due in mid October.

In what is now an annual ritual, the plain speaking Social Welfare Minister, Joan Burton has taken to the airwaves this week to try and scare the fiscal axe-men off her patch.

The Mody intervention coincides with the re-entry of the economy, statistically, at least, into recession on the back of disappointing export figures.

The proponents of austerity would appear to be on the back foot, though the ESRI economist, Professor John FitzGerald, has warned of the dangers of throwing budgetary caution to the wind at a time of real financial uncertainty. (FitzGerald is believed to have been one of the ‘pinkos’ who tested the patience of former finance minister, Charlie McCreevy, during his time in office).

In his latest RTÉ interview, Mr Mody wondered out loud whether Ireland would “get out of its growth statis” after five years of austerity and called on policymakers to display more of an open mind towards the issues posed by tax increases and cutbacks. In his view, the Government should consider giving the country’s citizenry a holiday from fiscal consolidation for the next three years.

The idea being is that in the process, people would receive a “big psychological boost” and growth would be stimulated, eliminating some of the deficit in the process.

It is all pretty tempting — but then so is the offer of another large glass of wine at the end of the evening.

Unfortunately, Mr Mody did not go into specifics on the innovations he would like to see in policymaking. His view on legacy debt and retrospective capitalisation is certainly not lacking in rigour. He believes that Ireland has little hope of being compensated for its huge investment in the banks which had the effect of propping up the wider European system. In Mody’s view, “it is time to move on”.

The response been swift.

Professor John McHale of NUI Galway, a member of the Fiscal Council has argued that austerity policies are delivering real results, even if the benefits have yet to be felt on Main Street. The primary deficit has fallen from 9.3% of GDP in 2009 to a projected 2.5% this year.

“Reduced austerity might well improve growth performance, but it seems highly unlikely that it would improve Ireland’s debt dynamics,” he added.

The Irish Central Bank has called on the Government not to draw back from agreed cutbacks of €3.1bn pencilled in for October, a viewpoint repeated with just a hint of menace by Klaus Regling, head of the European Stability Mechanism.

In an interview with a newspaper the Irish Times yesterday, Mr Regling said that “it was very clear that another €3.1bn fiscal adjustment as foreseen and as previously agreed with the authorities is the important next step”.

And he added, “if the agreed target were not reached, I’m sure it would not be well received”. The hint being that the precautionary credit line from Europe seen as important if not crucial to Irish exit from the bailout might not be an offer.

We are in one of those games of bluff. Does the Troika really want the Irish Government to fall flat as it seeks to exit the bailout?

What is clear is that Mody’s intervention is music to the ears of those, such as the Union-backed Nevin Institute, who argue that the debt burden will not be sustainable without a growth strategy.

Many in the Cabinet may well privately agree. However, Klaus Regling was careful to dangle the carrot of retrospective bank recapitalisation.

There may still be some financial leeway to be gained by playing the good boy — and to be fair, the current Government did win a valuable deal on the promissory notes back in March, a deal which has counterbalanced the impact of the falloff in exports.

Mody’s intervention was slapped down by the IMF’s Craig Beaumont yet in many respects, the IMF is singing out of a similar hymn sheet.

Whatever about debt-laden Ireland, the view within the fund on Europe-wide austerity appears pretty negative.

In a report just out on the eurozone, the fund warned that a reversal by the US Federal Reserve of monetary easing could re-ignite the euro crisis.

The report contradicted the sunnier reports coming out of Brussels.

“The macro economic environment continues to deteriorate. Recovery remains elusive... the risks of prolonged stagnation and inflation undershooting are high. Mounting political and social tensions pose an increasing threat to reform momentum.”

And the IMF added, that the ECB must take action to prevent a “vicious circle setting in, ideally by cutting interest rates, setting a negative deposit rate and purchasing a targeted range of private assets”.

In other words: Once those elections in Germany are over, get the finger out, start up the helicopters and drop the money, or expect the streets of Europe to start looking pretty lively.

Alan McQuaid of Merrion Stockbrokers says that on balance he leans towards Mody’s view while respecting the caution favoured by the ESRI and the Fiscal Council.

He echoes the call by the business lobby group, IBEC, for an easing in austerity back to around €2.6bn, with an emphasis on no tax increases and a priming of the capital investment pump, with an emphasis on regional road building and better broadband services. The debate will run and run...


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