IN its first review of the Irish economic programme, the IMF has praised the Government for resolutely following the terms of the deal while criticising the EC and ECB for a lack of support.
"Risks to the programme," which according to the IMF were "already high at approval, have risen in some respects." And this applies in particular to "risks to regaining market access".
The fiscal plan is on track and the immediate financing need is actually lower than previously assumed, primarily reflecting a smaller net recapitalisation expense for banks.
Also, as a result of this, the debt path is below the one projected in the initial programme by about 5 percentage points of GDP; Government debt is now expected to peak at 120pc of GDP in 2013 instead of at 125pc.
The IMF goes further by saying the Government cannot be expected to do much more, noting concisely that "accelerating the already substantial fiscal adjustment that has been programmed in the medium term would not mitigate . . . risks as it would further retard growth".
Despite these efforts, there has been a persistent lack of market credibility in the plan. This could deny critical market financing in coming years; and the reasons for this lack of credibility are mainly attributed by the IMF to a lack of adequate support from the EC and ECB.
In particular, three elements are identified:
A combination of slower growth and higher unemployment rates, together with higher bond spreads and rating agency downgrades that are associated with a weak European response, have increased the risk that the plan will fail -- at least, as currently structured according to the IMF. Those with an interest in detail might want to compare Table 6 in the updated plan with Table 6 in the original programme (both available at www.IMF.org).
The tables outline the financing required by the economy over the medium term, and the planned sources of that financing. The updated plan is interesting in at least two respects.
Firstly, projected market funding for the Government is pushed back into 2013, instead of 2012, and is reduced in magnitude in recognition that Ireland's return to the markets will be slower than anticipated.
Secondly, and even more strikingly, the projected financing for -- and by -- the banks is substantially reduced.
More generally, the vastly smaller numbers for projected financing over the next three years in these tables -- reduced by €150bn per annum on average -- reflect a sense the economy will operate at a much lower level of activity than originally planned. The revised documents give the impression of an economy that will struggle to return to growth without more support. And that is why the IMF is worried.
Gary O'Callaghan is Professor of Economics at Dubrovnik International University. He was a member of the staff of the IMF and has advised various governments on macroeconomic policies. He writes a column in the Irish Independent every Thursday.