Saturday 24 March 2018

Ireland staying on course while Greece veers way off track

A smiling Ajai Chopra delivered another sunny assessment of Ireland's performance under its recovery programme yesterday. At the same time, in Greece, fires burned on the streets and a two-day general strike turned ugly.

At the very outset of the two austerity programmes, the mathematics were similar; Ireland was expected to experience a larger economic contraction (10.5pc) than Greece (8.5pc) but Greece needed to make a larger five-year fiscal adjustment (to achieve a correction in its government balance of 11pc of GDP) than Ireland (a 7pc correction).

Reflecting a far larger starting point, Greek debt was expected to reach a maximum of 150pc of GDP compared with Ireland's 120pc. So the challenges were similar, if daunting.

But the Greek programme seemed to go wrong from the start, while Ireland has not put a foot wrong.

Greece has veered seriously off track despite many corrective adjustments in its favour. And Greece will still not meet its revised fiscal targets for 2011.

Ireland, meanwhile, has met all of its targets to date and is expected to continue to do so. From the IMF's perspective, Ireland is actually highly unusual in having no slippage whatever in implementation or adjustment to targets.

Of course, there are still some dangers. And developments in the rest of the eurozone, including Greece, have made the external environment more difficult than anticipated. There is an appetite for reform in Ireland, and people can see the end of the tunnel, even if it is still a long way off. Falling interest rates on Irish debt reflect this.

In Greece, the momentum is backward. In the words of the troika report: "There is no doubt that Greece is undergoing a recession that is deepening with employment falling much faster than expected. Uncertainties of political and financial nature, social unrest and industrial action have weighed on supply and on domestic demand."

The IMF is a very forward-looking and practical institution. Its team will leave Athens with a sense of regret and disappointment that the country is not turning round.

Greater assistance and an earlier restructuring of Greek debt might have allowed the programme to be more gradual at the start -- and given it a better chance of success -- but it will be difficult to change direction now.

These programmes are unusual, of course, because the IMF is just one member of the troika with the EU and ECB. Their thinking isn't always in line with that of the IMF.

In the Irish case, it has long been clear that the IMF does not think senior bondholders in the banks should be repaid. This was made evident again yesterday when a bemused Mr Chopra passed a question from the press concerning bond holders to his ECB colleague. At the Dublin Economics Workshop in Kenmare last week, Mr Chopra suggested that bank losses should borne "first, by shareholders and holders of equity-like instruments, and second by uninsured creditors, including senior creditors". He raised his voice on the last three words to send his thinly-disguised message home.

The IMF is made up of practical people who realise that problems can only be resolved when economic growth is restored and people can get back to work. It feels Ireland has a lot of work to do but is going in the right direction.

Gary O'Callaghan is Professor of Economics at Dubrovnik International University. He was a member of the staff of the IMF and has advised numerous governments on macro-economic policies.

Irish Independent

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