A Fund staff report says the Irish government has been making good progress in addressing the country’s deep-seated economic problems since it took office March 9. But without comprehensive action from the European Union, Ireland and other Eurozone countries with programs will struggle to restore their access to the markets.
“The problems that Ireland face are not just an Irish problem, they are a shared European problem that requires a shared solution,” Chopra said. “European partners need to make clear that for all countries currently with programs there will be the right amount of financing, on the right terms, and for the right duration to foster success.”
The report says that under the current European crisis arrangements, it has been difficult for Ireland to make headway in restoring economic growth and regaining market access, even though the government has assumed full responsibility for implementing the measures agreed under the international rescue package worth €85bn that also involves the European Union, European bilateral lenders, and financing from Ireland’s own cash reserves.
“Risks to the program have risen in some respects,” Chopra said. Financial market conditions are more adverse, with spreads at unsustainable levels. This is due in large part to external developments, he added, referring to the continued uncertainty surrounding other Eurozone countries, most notably Greece.
The report says the Irish economy continues to suffer from the fallout of the spectacular collapse of its banking system. The economy contracted by 1% in 2010, and close to 15% of the workforce are unable to find jobs. Banking reforms are moving to a more complex implementation phase, and meanwhile Irish banks continue to rely almost entirely on support from the European Central Bank (ECB) to finance their operations.
The government has taken decisive action to address the crisis. Bank stress tests were completed in March, and a comprehensive plan to reorganize and recapitalize the financial system is now being implemented.
“Given the depth of the crisis and the size of the private and public debt overhang, it will take time for confidence to be restored. The authorities recognize this and we do not detect any wavering in their commitment to the policies under the program,” Chopra said.
The government has also reaffirmed the commitment to reduce the fiscal deficit to 3% of GDP by 2015 while fostering jobs and economic growth. “We support the priority that the government is putting on job creation, including through its recently announced Jobs Initiative. The tasks for the months ahead will be to identify high-quality measures to underpin the fiscal targets for 2012 and beyond,” he said.
National response will not suffice
Despite a solid policy response from the government, Ireland may require further assistance from its European partners to overcome the crisis. “These policies are necessary for success but may not be sufficient,” Chopra said. “We need to recognize that slower growth and higher unemployment, further rating downgrades, and developments in other Eurozone countries have contributed to a rise in bond spreads. This hinders Ireland’s prospects for regaining market access on affordable terms in the near future.”
Echoing comments made by acting managing director John Lipsky on May 19 for a cooperative and comprehensive approach to Europe’s crisis, Chopra called for European policymakers to make additional financing available, and to quickly put into effect an upgrade of the European Financial Stability Facility that would make it possible to implement a more flexible approach to the crisis in the Eurozone. Continued liquidity support from the ECB was also of critical importance.
“The magnitude and terms of financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and hence debt restructuring is off the table,” he said.
At the national level, the IMF says all Eurozone member countries should accelerate the repair and reform of their financial systems. This would entail rigorous and transparent stress tests followed, where appropriate, by bank recapitalization. In some cases banks may need to be restructured or closed down, Chopra said.
At the European level, institutions must be strengthened to facilitate effective crisis management, notably by adopting an EU-wide approach to bank resolution.
“Putting in place such a comprehensive and consistent approach is now a matter of urgency not just for the crisis countries, but for all the countries in the Eurozone,” Chopra said.