IMF ‘reluctant’ to contribute to €90bn bank bailout

THE IMF is reluctant to contribute towards bailing out Irish banks and as a result the major part of the estimated €90 billion loan is expected to come from the European Commission and member states, according to EU sources.

The Washington-based organisation is carrying out stress tests, including liquidity tests that measure the banks’ ability to pay their debts as they fall due. They were not included in the tests during the summer.

It is expected the new tests will also reveal the size of the bad debts not just from big borrowers, much of which have already been hived off to NAMA, but from those in smaller businesses and defaulting mortgage holders, according to economic analyst Kevin Newman.

There is disagreement between the ECB and the IMF on how to deal with the huge bank losses as the IMF would like to see bondholders — those who lent to the banks — taking a cut.

However the ECB is among the biggest creditors having lent €130bn in October to keep the banks in funds while close to €380bn has come from banks in EU member states, with most from Britain, Germany, France, Spain and Belgium.

According to estimates from the Bank of International Settlements and the IMF, the sums make up substantial parts of each country’s GDP, varying from 1% of Spain’s, 2% of France, more than 4% of Germany, 6.6% of Britain and a massive 11.7% of Belgium.

Economists argue forcing them to write off some of this money would increase the risk of contagion to other EU states such as Portugal and that it could have a devastating effect on the euro.

Germany is insisting that in any future bailout mechanism post 2013, creditors and bondholders would have to suffer losses that triggered the attack on the more vulnerable euro states, including Ireland.

An estimated 60% of the expected €90bn in loans to Ireland is expected to go towards restructuring the banks. This is now likely to come just from the money being raised from the European Commission, ECB, eurozone countries and bi-lateral loans from Britain, Sweden and Denmark. Denmark announced yesterday it would lend around €1bn, the same as Sweden, while Britain is ready to lend around €8bn to Ireland. The IMF money will likely go to fund the shortfall in the national budget.

MEPs raised the issue of what rate of interest the country will pay on the loans since it is expected to vary from around 2% for IMF and European Commission funds, about 3.5% from the bi-laterals and about 5% from the eurozone’s €440bn fund.

“We want the most of the money to come from the fund with the lowest interest rate,” said Fine Gael MEP Gay Mitchell, who met Economics Commissioner Olli Rehn with ten other Irish MEPs yesterday.

Labour’s Alan Kelly said the banking debt would cripple the country unless it was separated from the public debt. “I expect the Irish banks will undergo a vigorous examination to get to the bottom of the problem once and for all”.

Socialist Party MEP Joe Higgins refused to take part in the hour-long meeting with the commissioners as he said he refused to agree to keep the information confidential.