Bloomberg News

IMF Urges European Firewall Around Ireland as Prospects Fragile

December 20, 2011

Dec. 20 (Bloomberg) -- Ireland’s European benefactors should take steps to create a firewall around the nation, as its prospects remain “fragile” amid the escalating euro-region debt crisis, the International Monetary Fund said.

The crisis may hamper Irish economic growth, increase the cost of re-entering bond markets and make it harder for the country’s banks to sell off assets, the Washington-based fund said today in its fourth review of Ireland’s bailout program.

“Stronger European support for Ireland’s recovery would help sustain fiscal consolidation efforts and reinforce prospects for program success, with positive spillovers for European stability,” the IMF said. “By enhancing the robustness of Ireland’s program, these and other potential steps would also provide a firewall protecting the euro area against potential shocks.”

Ireland sought a 67.5 billion euro ($88.5 billion) international rescue last year, amid concern that the nation’s banking woes would push it into bankruptcy. With the state seeking to test bond markets in 2012 after a two-year hiatus, Ireland’s partners should consider a range of extra measures, the IMF said.

“The main thing that would be desirable would be to break this link between the sovereign and the financial system more effectively than has been done so far,” Craig Beaumont, IMF’s mission chief for Ireland, said on a call with reporters today. “The prospects for the program’s success remain positive.”

Stakes

European leaders could help Ireland’s banks tap debt markets again and return to private ownership through guarantees for term funding and switching short-term European Central Bank liquidity for medium-term funding, the IMF said.

In addition, European institutions could take temporary stakes in the nations’ banks and refinance the state’s capital injections into the financial system, the IMF said. Beaumont, who said he wasn’t advocating imposing losses on senior bank bondholders, said it was too early to say how much such measures would cost.

In all, the government has pumped about 62 billion euros into its lenders, after a real-estate crash pushed the banks to the brink of collapse.

The IMF estimates Ireland’s gross domestic product will expand by 1 percent next year, compared to the government’s 1.3 percent forecast. The economy will expand 1.1 percent this year, the IMF said.

Irish bonds due in 2020 yielded 8.52 percent today, down from 9.83 on Nov. 24 and a euro-era peak of 15.6 percent on July 18.

Debt

The country’s debt outlook improved “on balance” since its aid partners’ third review, with general government gross debt expected to fall to 111 percent of GDP by 2016 from a peak of 118 percent in 2013, the IMF said. The IMF previously estimated the ratio would be 115 percent in 2016.

The IMF, which is accelerating payments to Ireland in the first half 2012, said a cut in interest rates on the nation’s European aid and the government’s recent downward revision of its 2010 debt level helped the debt figure.

“Deepening strains in the euro area have, however, increased risks to Ireland’s debt sustainability, so prospects for program success remain fragile despite strong policy implementation by the Irish authorities,” the IMF said.

--Editors: Dara Doyle, Kevin Costelloe

To contact the reporters on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net;

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net


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