Tuesday 23 January 2018

IMF warns high debt, bad loans and unemployment still pose risk

Christine Lagarde
Christine Lagarde
Colm Kelpie

Colm Kelpie

The IMF has warned that high public and private debt, bad loans and high unemployment leaves Ireland's banking sector particularly vulnerable.

The Washington-based fund also said the Central Bank's mortgage deposit rules seems to have stabilised house prices, but said more information was needed before any changes could be considered.

An IMF mission visited Ireland during December and March focusing on the financial sector and held talks with the Central Bank, the Department of Finance as well as representatives of the European Central Bank, European Banking Authority, and the European Systemic Risk Board.

"The context is of an Irish economy that is clearly rebounding. Since the crisis that began in 2008, the banking system has consolidated and shrunk," the fund said.

"The internationally-oriented funds management sector has grown significantly. The regulatory and supervisory environment has been transformed by post-crisis reforms, notably the establishment of the European Banking Union."

The fund said the vulnerabilities of the Irish financial system reflect in large part the significant openness of the sector and the economy in general.

"Recent indicators of economic slowdown in some major countries must be of concern to a country such as Ireland that is dependent on trade in goods and services, and foreign direct investment. In particular, the tight linkages with the UK financial system warrant the ongoing attention of the authorities," it said.

The IMF added that the crisis legacies of heavy private and public debt burdens, a persistent stock of impaired loans, and high, albeit, declining unemployment mean that a large negative external shock could have a significant impact on the financial system.

"Purely domestic risks are, for the moment, contained, but there may be pockets of vulnerabilities: commercial real estate prices have been rising rapidly, though the prevalence of funding by foreign investors reduces domestic financial linkages," it said. "Domestic risks could regain importance if an economic boom accelerates."

The IMF said it worked with the Central Bank to study aspects of the Irish funds management industry, which it said was not closely linked with the rest of the Irish financial system.

"But interconnections with the rest of the global financial system pose reputational risk," it added.

Money market and bond funds, it said, have sufficient liquidity to enable them to meet a sharp increase in redemptions without disrupting underlying markets, it noted. The fund also said the Central Bank has increased its resources and deployed them in on- and off-site supervision "that is more pro-active than in the past."

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