Business World

Monday 11 December 2017

Deal won't be negotiable, says former IMF director

Brendan Keenan

THE International Monetary Fund (IMF) charges a uniform interest rate to all countries, and it will not be possible to re-negotiate the cost of its bailout funds, a former senior official of the IMF said yesterday.

Donal Donovan, who retired as a deputy director of the IMF in 2005, said arguments about whether the EU/IMF deal was a good one had to take account of the alternatives at the time.

"The Irish banks would have run out of liquidity without a deal, had Jean-Claude Trichet stuck to his veiled threats," he told a meeting at the Institute for International and European Affairs (IIEA) in Dublin.

The IMF is contributing €25bn of the €85bn rescue fund and interest is charged at the IMF's "standard draw- down rate". This can vary, but is understood to be around 5.8pc at present. This is the same as the average cost of the loan, with some EU funds costing less, and some more.

EU leaders are discussing whether lower rates could be offered as part of a wider euro stabilisation programme, but Germany has indicated that this would be conditional on binding rules on budget deficits in the rescued countries -- or perhaps the whole euro area.

Mr Donovan, who is now adjunct professor at the University of Limerick and a visiting lecturer at Trinity College Dublin, said it was unlikely that any single issue could cause the rescue deal to break down.

But any changes that were made to it would probably have to be seen as in the interests of the euro area as a whole, and not just Ireland's own interests.

The IMF's "baseline" forecast sees Ireland's national debt peaking at 125pc of GDP in 2013. This assumes that a further €25bn is needed to re-finance the banks.

"Such a debt ratio is probably too high for a member of a monetary union like the euro," he said. There might have to be debt re-structuring, but there could also be more inflation than is currently expected.

"No-one will ever admit to that, but there is plenty of historical precedent," he said.

"Inflation is a tax, but it is one that it is easier to get away with politically."

Mr Donovan said there would be "unimaginable" legal and technical problems associated with any break-up of the euro.

The signs of hostility to the EU in Ireland seemed strange, when EU money had rescued the country. "But it is always more complicated to borrow from friends or relatives. You expect more from them, and the EU is less remote than the IMF in Washington."

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