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IMF doesn't want to throw the baby out with the bath water in sorting out Ireland

You could be forgiven for wondering what Askoka Mody, the IMF economist who is in Ireland this week, makes of our politicians' election promises.

Is he telling Ajai Chopra, the man who is heading the IMF mission to Ireland, that he should brace himself for a set of fresh negotiations on the terms of the bailout with the new Government, or are they both laughing heartily at the very notion?

All we do know is that for all the talk on the hustings about re-negotiating the bailout deal and burning the bondholders, the men from the IMF will be satisfied they have an agreement with the Irish state to run down its debts over the next four years.

The fact that the bailout was negotiated with the outgoing Fianna Fail-led Government is to some extent irrelevant. Taoiseach Brian Cowen and Finance Minister Brian Lenihan signed the deal on behalf of the Irish nation, and the IMF, the European Union and the European Central Bank will expect the politicians who form the next Government to honour it.

That's not to say there isn't some leeway for Fine Gael, the Labour Party or others who win office to tinker around with some aspects of the agreement, but their options are limited.

Mr Chopra has said the IMF, which could see the political fragility in the months leading up to the bailout deal, could not be "completely rigid" in this regard.

He has suggested that policies could be adapted as long as they were consistent with the overall targets of the plan and acknowledged that different political parties would have different priorities.

Diplomatically, he signalled that there was always room for discussion, and the politicians have seized on this to suggest they have the power to cut a better deal when they get into power.

The truth is that they will be able to change some aspects of the deal, but it would be dishonest to suggest it can be radically renegotiated.

The bottom line is that Ireland and the IMF/EU have agreed to radically reduce the country's debt over the next four years and the means to do this has been broadly agreed in the National Recovery Plan 2011-14.

Framework

It set the framework for the last Budget, that brought cuts of €6bn this year, and which will bring further pain in the next three Budgets.

The next Government is committed to this plan whether it likes it or not. The best it can do is alter some of the measures to achieve these targets.

The parties have now all outlined different ways to achieve the spending cuts they must deliver in government.

Fine Gael wants to make 73pc of all savings from spending cuts, Fianna Fail prefers 62pc, while Labour's target is 50pc.

The IMF will be agnostic on the various ways they do this, so long as Ireland continues to meet its debt reduction target and that the measures adopted don't dampen the economy's fragile growth prospects.

Professor John McHale, who is head of economics at the National University of Ireland, Galway, says the IMF wants to see the Irish economy grow.

"It wants to see the mix of policies and it will expect the new Government to follow through on these commitments."

So far the election debate has been divorced from reality in terms of the strength of Ireland's bailout commitments, he says.

"Our politicians shouldn't be making demands and threats. They should be careful about the policies they are proposing, so as not to not dissipate goodwill," he warns.

Other observers caution that by even talking about re-negotiation, this implies the agreement is under threat, and further aggravates Ireland's problems with potential investors.

Whatever the politicians are promising, it is realistic to expect that Ireland will ultimately get a better bailout deal at some stage. The truth is, though, that it is unlikely to have much to do with the negotiating skills of the new Government. Already there are suggestions that the IMF's executive board is reviewing the rate of interest on loans it issues to countries like Ireland.

So far it has extended just €4bn of €22.5bn it has committed to this economy at a low rate of interest, so if it cuts its rates, the next batch of money that comes to the Irish economy will be significantly cheaper.

"Everyone expects the interest rate to fall," says Professor Karl Whelan of University College Dublin.

"The proposal hasn't been passed yet, but it could knock 1pc off the overall rate of interest on these loans," he says.

While this is not being done for Ireland's benefit, it would help us and may also set a precedent that the ECB must follow and force its interest rate on Ireland's loans lower.

Other opportunities to improve Ireland's financial commitments will arise when Europe's own bailout fund, the European Financial Stability Facility, is itself restructured.

And as for burning the bondholders, well, this may also become a reality, but again this is likely to be tied to a wider European effort to address bank debt, rather than a solo run by Ireland's new Government.

Irish Independent