Monday 20 May 2019

IMF warns that Ireland needs more support from Europe

Gary O'Callaghan

AS the fallout out from the arrest of IMF managing director Dominique Strauss-Kahn continues, it is now increasingly likely that he will be forced to step down. The impact of his departure for the future path of the Irish bailout plan should not be underestimated.

We must remember that Mr Strauss-Khan secured the direct involvement of the IMF in the rescue programmes for Greece, Ireland and Portugal and the IMF has, of late, become more-openly critical of the role played by ECB and others in the bailout programmes.

A summary review of Ireland's bailout plan released on Monday by the IMF expressed frustration with Europe's failure to fully support Ireland's economic programme.

While it concluded that "Ireland's economic programme is off to a strong start" and complimented the Government for "resolute policy implementation" that had "kept the programme on track" during a difficult period, the IMF went on to admonish the ECB and other European institutions for a lack of adequate support for the recovery effort.

The unusual rebuke -- contained in a press release -- is clearly expressed but its impact was diminished when the messenger was detained on his way to Europe.

After an IMF board meeting on Monday, the deputy managing director noted that the Government had taken a "major step towards restoring the Irish banking system to health".

He described the announcement of "comprehensive reforms and recapitalisation of the domestic banks" as "crucial for economic recovery" and warned that it would be difficult to implement the bank reform agenda. In this context, he noted that the "medium-term availability of euro-system financing would support this process" and help to "regain market-based funding".

This is a clear reference to the Government's request for medium-term bank financing from the ECB to replace the existing short-term funding that needs to be continually rolled over.

The request was made in mid-March but was reportedly vetoed by a small number of council members.

Instead, the ECB made an informal commitment to continue to support Irish banks, but the IMF clearly views this as inadequate and has now made its frustration public.

Remember, the IMF programme for Ireland is all about the banks. In the words of the IMF document from last December, it "aims to restore the banking system to health and, thus, snap the pernicious feedback loops between growth, fiscal, and financial instability."

But the banks cannot get access to market funding -- and begin to lend to a suffocating economy -- when they do not have a formal medium-term commitment from the ECB. Who would lend to the Irish banks on a medium-term basis when the ECB could withdraw its massive support at any time?

A second rebuke concerns the fact that the Irish plan also depends on a government return to market financing next year.

While noting that the Government was "committed" to the programme, the press release said that "supporting these efforts with a more comprehensive European plan would help overcome market doubts, regain market access, reduce the threat of spillovers, and bring about a recovery of the Irish economy."

This is very strong language for the IMF to use and one can expect that the full review document on the progress of Ireland's bailout will contain some stark warnings when it is released -- perhaps as early as today.

The IMF has basically said that the Irish programme needs more support from Europe if it is to succeed.

And that's where the importance of Mr Strauss-Kahn comes in. One can safely assume that Mr Strauss-Kahn, who was arrested in New York on his way to attend a meeting of euro-zone finance ministers, intended to deliver these warnings in person.

Mr Strauss-Kahn had enormous respect in this forum and was known to be closely involved in the detail of the IMF programmes for European countries -- far more closely involved than is normal for a managing director. Therefore, his removal from the process of trying to resolve the euro crisis will be a major loss to Europe in general and -- given the nature of the comments in the press release -- to Ireland in particular. He would surely have demanded increased European support for Ireland.

The IMF is in a difficult position with regard to Ireland because it has committed massive funds, but the recovery effort relies to a significant degree on a return to market financing for banks and Government.

The markets have not been sufficiently convinced by the level of European support and this could undermine growth and, at the same time, Ireland's ability to repay the IMF.

The only good news from a turbulent gathering of EU finance ministers was that the Irish programme is, thus far, on track.

A new financing package was approved for Portugal, of course, but this has yet to prove its worth and the programme for Greece is so far off course that ministers could not even agree on where to redirect it.

So the only concrete achievement to date in the struggle to save the euro has been an early review of Ireland's role.

This limited success is in danger of being reversed and it will not, according to the IMF, be Ireland's fault.

With our European partners in disarray, and seemingly unable to participate in a coherent debate, it is probably best for the Government to keep a cool head, stand firm, and let others do our talking for us.

The markets have been vocal from the beginning, the IMF has now issued a stern warning, and a restructuring of the Greek programme will further attest to the need for a massive change in the European response to the crisis.

We can only hope that the message is received in time.

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