Tuesday 16 July 2019

Thomas Molloy: What we face if the IMF takes over the country

Medicine from abroad would mirror State's treatment plan

Thomas Molloy

WHAT will it actually mean for us if the country is forced to call in the International Monetary Fund (IMF)?

Central Bank governor Patrick Honohan took the markets by surprise last week by musing openly about this once taboo question. His conclusion was that it would make little difference and would not act as a "panacea" for our problems.

Speaking at the International Financial Services Summit 2010 in Dublin, the governor added that any IMF policies would be "very much" like the Government's present policies.

And the fund was unlikely to make any changes to the 12.5pc corporation tax rate.

It was a surprising intervention, and the Department of Finance was forced to deny the next day that the Central Bank was preparing for a default.

Since then, we have seen persistent reports that the Government is imminently about to call in the IMF in some shape or form.

What would such a decision mean and was Mr Honohan right to say that it would make little difference?

We don't have to look far within Europe to get a good idea of what it could mean for Ireland if the IMF arrives in Dublin. Greece, Iceland, Latvia and Hungary have all had to call in the IMF over the past two years -- with varying degrees of success and with varying levels of suffering among the population.

No two countries are the same. No matter how bad the Greek economy is, it simply cannot be compared with Iceland -- where the tiny economy was completely overwhelmed by a banking crisis unprecedented in modern times.

Some like to argue that Iceland is recovering quickly from the crisis but the truth is the tiny population of the volcanic island is still struggling with huge social problems and political unrest, which make it hard to swallow the IMF's bitter prescriptions.

At the other end of the scale, and somewhat closer to the Irish economy, Latvia and Hungary have taken their medicine and appear not to be doing too badly since the IMF took control. In fact, both appear to have weathered the worst of the crisis and to be poised to return to growth after two gruelling years of cuts. "I can't say the IMF made a huge difference from former times," says Liva Melbirde, a financial reporter with Latvian business daily 'Dienas Bizness' -- echoing Mr Honohan's comments.

"I think, on balance, it's been good for Latvia. At the time, we didn't have an option; we were spending too much money and we were not in control."

Few in Latvia blame the IMF for the inevitable suffering that has followed the cuts and most hold the government to account, she adds.

Turnaround

Part of Melbride's sanguine attitude stems from the fact that Latvia's gross domestic product is expected to grow 3pc next year. If this happens, it would mark a remarkable turnaround for the country, which saw an 18pc slump last year. Unemployment is now around 15pc from a peak of 17.3pc in March.

But that turnaround has come at great cost. The centre of Riga is full of beggars and empty shops -- much like Dublin these days. "No one is unaware of the fact that there are still too many people suffering," World Bank President Robert Zoellick admitted during a visit to the Baltic country in August.

Some idea of the level of pain can be seen by the fact that Zoellick was speaking after a meeting with Latvians working on a special jobs programme that pays 100 lati (€130) a month for clearing hogweed from fields.

"Those gentlemen are doing pretty tough work for 100 lati a month and I thought it was an excellent sign about the will of people in Latvia to work to try to earn a living for their families," he said.

Latvia's situation is instructive for Ireland because the currency is linked to the euro and the government, which wants to join the single currency in two years' time, took the decision not to devalue. Instead, Latvians have had to cut salaries and costs to bring spending under control -- just as we here in Ireland will in the years ahead.

While the IMF's intervention in Latvia could be described as immensely painful but perhaps successful because it helped the government and the population there to do what it wanted to do anyway, the same cannot be said of Iceland and Greece where a large part of the population is opposed to reforms.

In Greece, there seems to be little shame for the bombs that are landing in the post box of European Union leaders such as German Chancellor Angela Merkel, who helped put together a package of loans in May to bail out the country.

"Our lives in Greece virtually changed overnight, so it should be no surprise that we see such actions taking place," 34-year-old teacher Christina Angreou told Bloomberg this month. "Not that I'm for such actions, but it's a protest."

A poll released last month shows that two-thirds of Greeks think the country could have avoided asking for funds, up from 42pc in April.

The country's public sector union plans to strike later this month to protest against austerity policies and job cuts, which have pushed unemployment to 12pc -- high by Greek levels but still lower than Ireland's rate.

While the Greeks are protesting more than the Latvians, they are suffering less; the IMF has so far resisted imposing the sort of fiscal discipline on Greece as it has on Latvia.

But Greece, which has been a relatively wealthy country for decades and which has a strong tradition of protest, does not closely resemble Ireland despite a common currency.

It seems much more likely that life under the IMF in this country would feel closer to the Latvian or Hungarian experiences -- Latvia was not known as the Baltic Tiger for nothing. "If it wasn't for the IMF and the EU, Latvia would now be completely bankrupt," Jens Fischer, a Riga-based political and economic analyst, said earlier this year. "But it's not like Greece -- the people have seen worse times during the Soviet era and don't complain.

"There is also a big grey economy which remains unseen but keeps many people ticking over just as the grey economy here is keeping hunger at bay in many families."

The reluctance to complain -- also seen here in Ireland -- could be the key to understanding what the IMF will do.

The IMF has acted differently in each European country where it has a major say on government policy but its actions have largely mirrored each government's instincts. As Mr Honohan said last week, the IMF seems to work best when it helps governments to do what they already want to do rather than impose a new set of policies and beliefs.

Judging by the Irish Government and the mainstream opposition's eagerness to "do the right thing" in recent months it seems likely that any IMF intervention would be of the short-sharp-shock variety rather than the bailouts seen in Greece and Iceland.

That could translate as a few years of pain in return for a relatively quick return to economic growth. The problem is that the jury is out on whether such a remedy will work. While Latvia and Hungary are poised for growth, their fortunes, like ours, are intimately tied to the fortunes of the world economy.

Irish Independent

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