Bank guarantee was double-edged sword – IMF
THE controversial bank guarantee was good for the financial sector but bad for the rest of the Irish economy, an IMF study has found.
In the opening chapter of the twice-yearly World Economic Outlook, the body said the move to guarantee all deposits had a negative impact on domestic firms fearing higher taxes as a result.
Those fears were offset in the financial sector by the immediate benefits of the bank bailout, the study said.
The hugely controversial scheme announced in September 2008 left taxpayers on the hook for losses at six banks and was blamed by many for plunging the country into the EU/IMF bailout two years later.
The IMF study said that a bank bailout should help an economy in the short term.
But in Ireland's case, the State took on large amounts of liabilities to foreigners and the effect differed widely across firms, according to the IMF.
"Firms in the financial sector exhibit positive abnormal returns," the report said.
"For them, any expectation of future higher taxation appears to be offset by the immediate benefits of the bailout. Domestic firms and firms dependent on government demand, however, experience strongly negative abnormal returns."
The guarantee on bank deposits above €100,000 ended last month, marking a sign of improved conditions for the State's financial sector. The banks paid a fee for the benefit of being guaranteed by the State and this amounted to €1bn last year.
Despite being put in place to bring stability to the banking sector, investors realised the state could not cover the liability and the IMF and Europe eventually stepped in with a rescue package.
The study comes as the IMF revised down its prospects for the global economy to growth of 3.3pc this year, stating that the world was now facing a three-speed economy.
Growth in the US will rise 1.9pc this year and 3pc next year.
The Washington-based finance body warned the Eurozone would contract 0.3pc in 2013, and grow just 1.1pc in 2014. And it suggested the UK should ease its austerity, downgrading its projections for the British economy by 0.3pc to 0.7pc this year and 1.5pc in 2014.
"The worry that we have is that if Europe is really to continue to do badly, that the world is so interconnected it would end up being bad news," Olivier Blanchard, IMF chief economist said.
The IMF said that while global economic prospects have improved, the road to recovery in the advance economies will remain "bumpy".