Friday 25 May 2018

Ireland is unlikely to renege on its debts, says IMF report

Finance Minister Brian Lenihan. Photo: Tom Burke
Finance Minister Brian Lenihan. Photo: Tom Burke
Thomas Molloy

Thomas Molloy

IRELAND is poorly insulated against further financial shocks -- but we are unlikely to renege on our debts, the International Monetary Fund (IMF) says in a series of reports published today.

Ranking nations by how well protected they are against a further unforeseen shock to their economic systems, the IMF puts Ireland above Greece, Italy, Japan and Portugal and alongside Iceland, Spain, Britain and the US in a list of countries where national debt is likely to become unsustainable based on past performance.

The IMF also praises Ireland's efforts to restore competitiveness, saying it had been painful but returned the economy to growth. "Ireland faced a significant competitiveness disadvantage in 2009, but its real effective exchange rate is currently viewed broadly in line with medium-term fundamentals. This improvement was associated with a deep recession, but Ireland has recently returned to relatively rapid growth," the IMF says.

Despite the rising cost of borrowing for Ireland and Greece on the bond markets, the IMF says highly-indebted states are unlikely to default on bond payments as they struggle to tame their deficits.

"In our view, the risk of debt restructuring is currently significantly overestimated," the IMF adds. Defaulting on debt would make little sense for countries such as Ireland.

Despite this optimism, the IMF warns that the most indebted economies are approaching a "debt limit" beyond which their fiscal positions may become unsustainable. "Debt limits are not etched in stone, but they show that a fundamental change in behaviour relative to historical patterns will be needed to restore sustainability. In other words, 'business as usual' won't cut it," said IMF official Jonathan Ostry.

Countries should target debt levels well below their debt limits because governments may get little or no warning about imminent spikes in borrowing costs or curtailed access to markets as public debt rises or as views about fiscal risks or the reliability of fiscal data change, Mr Ostry adds.

Long-term action

The IMF urges long-term action to reduce borrowing and debt in advanced economies.

"Advanced economies must pursue long-term policy reforms to reduce public debt levels over the coming decades and ensure future fiscal sustainability," according to the IMF. "In order to protect the fragile economic recovery, support growth and job creation and provide reassurance to capital markets, fiscal adjustment plans must be clearly defined -- but with a focus on the medium term rather than seeking a quick fix.

"Public debt levels among advanced economies have reached levels not seen before in the absence of a major war," said Carlo Cottarelli, the director of the IMF's fiscal affairs department and an author of two of the reports.

Mr Cottarelli blames high public debt on weak fiscal policy over the last few decades, when debt levels ratcheted up during hard times but failed to fall in better years.

"The task ahead is all the more complicated because aging societies and global warming are putting additional pressure on public finances. This calls attention to the critical need for long-term fiscal reforms that will guarantee a gradual but sustained improvement in debt positions over the coming decades," he added.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business