IMF doles out ‘tough love’ to frail nations

WHAT the IMF does when it comes in to assist a country is the “economic equivalent of tough love”, a former member of the fund’s board has said.

Michael Casey, also a former chief economist with the Central Bank, maintains negative views of the IMF, a specialised agency of the UN which was set up in 1944 to help countries in difficulty, are unjustified

According to Mr Casey, its role is to encourage countries to do the right thing — even though it may be deeply unpopular.

He said during his time on the executive board of the IMF — from 1980 to 1983 — he had first-hand experience of 50 countries that benefited from IMF programmes.

That time — the early 1980s — was also a period of financial crisis. The markets had lent to countries without any risk analysis and seemed to have no worries about getting their money back.

Indeed at the time, heads of US banks maintained it was safe to lend to countries as they could not possibly go bankrupt.

When the inevitable happened and countries could not pay back the sums lent to them, it was the job of the IMF to step in and prevent an international crisis.

Mr Casey says it is a given that austerity in any country the IMF goes into is badly needed, but it perhaps suits the country in question to blame the IMF for harsh measures taken.

Another fallacy, he says, is that entering an IMF programme causes reputational damage. “This is not true if the country in question completes the programme successfully,” he said.

“There was very little, if any, reputational damage done to the British economy after its Fund programme in the mid-1970s. After a suitable course of treatment, administered by experts, the patient emerges, completely cured and with head held high,” he said.

“The government — and public — of the country will also have learned a valuable lesson and will be less likely to jeopardise national sovereignty in the future.”

According to Mr Casey, an IMF programme for Ireland is a no-brainer — we get the resources we need and the cost is well below market rates.

However, Mr Casey stresses that we need an expert and tough negotiating team to get the best deal possible for Ireland.

Several things that must not be allowed, however, are tampering with Ireland’s preferential profits tax regime and any further passing of banking problems onto the shoulders of taxpayers

Your key to the economic crisis jargon

By Fiachra Ó Cionnaith

- PIIGS:

The eurozone countries that are seen as weak links for the single currency. They are Portugal, Italy, Ireland, Greece and Spain.

- Market contagion:

The reality is that if Ireland’s problems are not resolved they could infect other eurozone countries’ internal economies due to the damage it would do to the euro’s image, and potentially bring down the currency itself.

IMF and ECB-led bailouts of countries in difficulty are seen as a way of preventing this scenario.

- GDP:

The amount of goods or produce developed by a country in a single year.

In the Irish context, this has most recently been used to explain how our income has dropped below our level of expenditure, leading to the need for a national bailout.

- Sovereign debt:

A level of debt guaranteed by a government in an attempt to ensure financial stability, for example the Fianna Fáil-Green coalition’s bank guarantee decision.

- International Monetary Fund/European Central Bank bailout:

The step taken by the other eurozone countries to ensure a member state does not go bankrupt, a move which could potentially cause havoc to the euro’s reputation and lead to panic in other member economies.

To date, Greece and Ireland are the only eurozone countries to have applied for a bailout, although Portugal has this week been forced to deny rumours it may be in need of a similar investment.

- Austerity/hair-shirt budget:

Labels used to describe the reality of what ordinary people will be facing as a result of the country’s financial difficulties.

- Default:

A move some are advocating Ireland take in order to prevent being burdened with billions of euro in loan repayment debt to other eurozone nations, the IMF and the ECB over the coming years.

Ireland rejecting the international bailout and defaulting on its debt would mean that we would not have as much debt for as long a period.

The people who are owed money by the country would be told we can only pay a certain amount and would have to take the financial gap themselves.

However, our credibility on the world markets would be damaged even more than the position we are in today.

- Solvency and liquidity:

Solvency is the ability of an entity or individual to pay debts.

Liquidity involves the availability of cash over the short-term and the ability to address short-term debt.

- Turning the corner:

Used over the past two years to describe the reasons for numerous economic recovery plans.

But as one commentator recently noted, if you are in a car and the person driving tells you three times you’ve turned the corner, it doesn’t mean you’re back where you started.

It means you’re lost.