THE HEAD of the IMF’s mission to Ireland has stressed the urgency of European leaders following up on their decision to break the link between banking and sovereign debts – saying failure to do so could put its scheduled return to the bond markets at risk.
Craig Beaumont has said EU leaders needed to deliver on commitments “particularly with regard to direct bank recapitalisation” from the Eurozone’s new bailout fund, the ESM – which is “critical to ensure Ireland continues to deepen its access to markets”.
€24 billion of Ireland’s total bailout kitty was provided to help recapitalise the banking sector. Beaumont said a previous IMF report had suggested this could be directly substituted with money from the ESM, meaning Ireland could immediately reduce its debt levels by up to 15 per cent of GDP.
Asked by TheJournal.ie what options were available for Ireland to recoup its losses from the ESM, Beaumont said one option would be “simply for the ESM to purchase… the equity stakes [the government's shareholding] with cash, and then use that cash to reduce debt”.
Another option would be a debt-equity swap where Ireland’s €22.5 billion in loans from the EFSF could be written off in exchange for handing over the equivalent amount of bank shares to the ESM.
Though Beaumont said the IMF did not have a particular preference for which option could be used, either option would not only improve Ireland’s debt levels, and help it to get back to markets, but also stimulate the economy in general.
This was because having ESM ownership of either AIB or Bank of Ireland would mean those banks could also get market funding at lower costs. Beaumont said this, in turn, would “enhance their ability to lend, and feed back positively into economic growth”.
Beaumont also ruled out the possibility – which had been floated by a junior minister, but swiftly ruled out by Eamon Gilmore – that Ireland should be given extra time to meet its deficit deadline of 2015.
“We couldn’t extend fiscal adjustment over an even longer period,” Beaumont told reports on a conference call. ”It would increase the risk that market access would be difficult to obtain.”
Beaumont said although the IMF had recently uncovered an error in its ‘multiplier’, meaning the effects of government spending cuts were actually larger than first anticipated, the projections given for Ireland’s growth had remained accurate.
“An even longer adjustment period could mean the peak in debt is higher, and it comes later – so it could become more difficult for Ireland to return to the markets,” he said.
Beaumont said the Irish programme was designed to take account of the drag that government spending cuts would create on economic growth, which was why the measures had been scheduled over a five-year period from 2011 to 2015.
Beaumont further commented that the current focus of the Troika was on ensuring that the 2013 Budget met the deficit targets laid down, arguing that meeting those targets would greatly enhance the prospect of Ireland being able to make a full return to the bond markets.
There had not yet been any discussions about a so-called ‘exit strategy’ for Ireland, though Beaumont said previous examples used by the IMF included some kind of “fall-back or backstop” to encourage investors to lend to each country.
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