THE IMF has said that the progress of Ireland’s banks in dealing with troubled mortgage holders will have a make-or-break impact on whether Ireland can escape from its bailout on a long-term basis.
The latest quarterly report on Ireland’s bailout progress, published this afternoon, sees the IMF warn that the slow progress of the banks in returning to profitability is a key threat to Ireland’s ability to fund itself independently of the EU and IMF.
It also stresses that it is now vital for European leaders to follow through on their pledges to split banking and sovereign debts – asserting that high levels of debt for both the state and its banks compounds the difficulties that each faces in seeking independent financing.
The delay in dealing with customers struggling with mortgages, but who may not qualify for the new personal insolvency regime, means that households remain unsure about their immediate financial prospects while the loan books of the banks also remains open to question.
This means that households are unwilling to spend to any great degree, and instead increase the amount of their salary that they try to put aside, while banks find it more expensive to issue bonds because of investors’ unease about the scale of any mortgage losses they may incur.
The IMF says that progress in the mortgage sector could be crucial in helping to revive domestic demand by giving households a clearer picture of how much money they can afford to spend each month.
Achieving goals of making substantial progress on loan resolution “requires a dramatic shift from the slow progress on resolving NPLs [non-performing loans] to date,” it said.
While it is typical for banks to relay making deals with struggling borrowers, holding out for the prospect of an economic recovery that could help people to repay their loans, the accounting regime used by Irish banks “has facilitated banks recognising their loan losses at a slower pace than under other accounting regimes”.
The report reveals that the Central Bank’s code of conduct for lenders on how to deal with struggling mortgage holders will be reviewed by June, with a focus on trying to distinguish between households who are making tactical decisions not to make repayments, and those who are co-operating fully in attempts to stay on track.
The IMF staff consider a “thorough review of the [code of conduct] appropriate, as the emphasis shifts from forbearance to resolution, and notes in particular the need to ensure unsecured lenders are not advantaged in collections."
Elsewhere, the Washington-based fund suggests that a final decision on whether to apply some of the savings from the promissory note deal to the 2014 Budget - though makes subtle suggestions that some of the savings could be used.
It says a decision on the amount of consolidation measures needed in the next two Budgets should be made later in the year, when more is known about the impact of measures for 2013.
"This review should take into account that a buffer can be valuable to ensure the 2015 target can be safely achieved in the face of shocks," it says - while again warning off the prospect of any mini-budget if Ireland begins to slip behind its targets.
"Any significant additional consolidation to reach the 2015 deficit target should be deferred to 2015 where the adjustment burden is lighter," it says, while also noting that it may be easier politically to seek further adjustments after 2015 rather than when they are needed.
This hint about the prospect of political influence in the timing of budget corrections could hint that the estimated €1 billion in annual savings from the promissory note deal may be used to soften the edges of this October's Budget, which is currently due to impose adjustments worth €3.1 billion.
In the meantime, the IMF says, Ireland must continue to implement each year's Budget plans resolutely.
The strong out turn in 2012 improves prospects for 2013 but full implementation of budget measure remains necessary, especially concluding the proposed agreement with public service unions.Close monitoring of health spending is appropriate following overruns last year and successful introduction of the property tax is needed as a welcome broadening of Ireland‘s tax base.
The report meanwhile contains a suggestion that increasing loan losses at the banks - fuelled by a delay in getting unemployed people back to work, and therefore to make progress in paying off their debts - could see the banks absorb the buffers created through the government's recapitalisation.
"Were such a scenario to arise, Ireland‘s ability to rely fully on the market to cover its large post-program financing needs could easily become strained," the report warns.
The next round of banking stress tests, due in September, will also include an examination of the model used by banks to determine how much should be set aside as loan losses.
"These risks reinforce the importance of creating conditions for sustained economic recovery, through strong implementation of financial and structural reforms and careful design and execution of fiscal consolidation," the report states.
But even with rigorous implementation of these policies, the required balance sheet adjustments still leave Ireland vulnerable.
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