Tuesday 20 March 2018

IMF is too polite to say, but this bailout pushes us further into the red zone

The cost of the bank rescue and the onus on taxpayers means we have no chance to service our own debt, writes Colm McCarthy

The team from the International Monetary Fund which conducted the bailout negotiations released their conclusions on Ireland's financial rescue package on Friday. The report is detailed and authoritative. Two conclusions stand out, one clear and unambiguous, the second a little muted.

The clear and unambiguous conclusion is that Ireland's debt burden when the programme concludes -- and assuming all goes reasonably well -- will be at the absolute limits of sustainability. This is not what the IMF team says (they are international diplomats), it is what they mean. I infer from the language they use that they are not convinced that this bailout for Ireland is sure to be the last. On exit from the programme in 2013, the ratio of debt to GDP on the IMF's figures will be so high as to raise questions about Ireland's ability to re-enter the sovereign debt markets at reasonable interest rates. The IMF economists are too polite to say this in so many words, but it is the inescapable implication of their figures.

The second, more muted conclusion from the IMF is that it is the costs of the bank rescue that will push the exit debt ratio into the red zone. Reading between the lines, it seems that the IMF team would have preferred a decisive resolution of the banking mess through allocating a greater share of costs to bank bondholders and a smaller share to Irish taxpayers. Our EU partners have won this argument with the IMF for now. Bank bondholders will be protected at the expense of taxpayers but also at the expense of sovereign bondholders. It is not in the interests of sovereign bondholders to have their security diminished through the State diluting its financial capacity by underwriting non-sovereign debt. The notion that being kind to bank bondholders would somehow add to the attractions of government debt was peddled assiduously around Dublin over the past couple of years. This piece of bad advice has been tested at considerable cost and, unsurprisingly, it has not worked.

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