IMF says Irish economy to fall the hardest

IRELAND’S economy is the most “overheated” of the advanced countries in Europe and is experiencing the same shock as European countries in the immediate aftermath of World War II.

The International Monetary Fund said the Government allowed too much easy credit to the property sector and that it was now paying the penalty.

It also forecast the country’s unemployment figure could reach 15% and its deficit could reach 12% by next year.

The IMF said Ireland would suffer the largest contraction of any advanced economy – a decline of 13.5% by the end of 2010. After that, “only a modestly paced recovery is foreseen,” the organisation said in a report.

It also warned existing risks – such as the banks’ potential losses – remain “significant” and could yet derail the recovery.

“The risks arise from the continuing interaction of slowing growth, financial sector stress, and the state of the public finances, with each threatening to pull the other down.”

An OECD forecast was even gloomier, suggesting the overall contraction would hit 14% by the time the recession ended.

“Substantial spending cuts and increases in taxation are required,” the advisory agency said, predicting like the IMF that recovery would be “sluggish”.

But while both organisations painted a bleaker picture than the Government, there was some good news for Taoiseach Brian Cowen’s administration.

The IMF, which has had to bail out troubled countries in the past, praised the Government’s “sense of urgency” in tackling the economic problems, saying it had “moved with resolve”. But that resolve would need to be sustained “over several years” if Ireland was to emerge from the crisis, it warned.

The IMF also backed the Government’s proposals to deal with property loans on the books of the banks.

It said that NAMA – the body being established by the Government to take over the property loans – was “potentially the right mechanism” to help restore the banks to health.

But it warned the key to its success would be the prices at which the assets were bought, as this would “determine the extent to which the banks’ losses are transferred to the taxpayer”.

It also said losses at some banks might be so large that temporary nationalisation may be “the only real option” – although the Government firmly disagrees.

The banks could ultimately lose up to €35 billion collectively, with their losses extending beyond the property development sector, the IMF said.

Both it and the OECD said a fall in wages across the economy would help restore competitiveness. And the IMF said that further cuts in the public service wage bill, in particular, were “likely to be inevitable”, with salaries and staff numbers both needing to be reduced.

Finance Minister Brian Lenihan welcomed the IMF report, saying it was a “realistic assessment” and endorsed the actions the Government was taking.

But the Opposition claimed the report was a “damning indictment” of the Government’s record, as the document identified the property bubble and other “serious imbalances” that had been allowed develop since the start of the decade.

The report said Ireland had been “perhaps the most overheated” of all advanced economies, and Fine Gael’s Richard Bruton said this proved the crash was “largely driven by Fianna Fáil’s mistakes”. Labour’s Joan Burton said the report put the Government “in the dock”.