A more comprehensive European approach to dealing with the region's debt crisis is needed to help Ireland regain access to debt markets, the International Monetary Fund (IMF) said today.
Ireland received an €85 billion EU-IMF bailout in November, making it the second euro zone country nation to get aid after Greece.
Slower economic growth, higher unemployment and deepening problems in Greece have helped keep Irish borrowing costs close to euro-era highs and the IMF said Europe needed to address the risk of financial stress in its periphery through a more "comprehensive" plan.
"For policy matters that are under their control, the Irish authorities have been decisive and are doing all they can to get ahead of their problems," said Ajai Chopra, IMF mission chief to Ireland. "But we do need to recognise that they may not be sufficient.
"Notwithstanding the strong policy implementation, risks to the programme have risen in some respect," said Mr Chopra. "Financial market conditions are more adverse, with spreads at unsustainable levels. This is due to external developments."
He said there is a need for an "upgrade" to the European Financial Stability Facility to deal more comprehensively with problems. He said greater confidence around the availability of European Central Bank medium-term funding for Irish banks would help them return to debt markets.
The ECB has removed the collateral requirements for Irish banks to ensure they can keep accessing emergency funding but Dublin would prefer a more formal medium-term lending facility.
The euro zone is considering a plan to prevent a Greek default under which private investors would be asked to maintain their exposure to its debt and Athens would receive a new package of EU-IMF aid, sources said on Thursday.
The ECB has raised the stakes in its bid to prevent a restructuring of Greek debt, saying it would refuse to accept the bonds as collateral in the event of such a move.
The IMF and the EU have cut the amount they plan to loan Ireland by €4.5 billion this year due to Dublin's lower financing requirement in 2011 and this adjustment will be offset later in the programme. The IMF said the change in the loan schedule would also allow for potential delays in Ireland regaining access to market financing.
The IMF now expects Ireland's debt to Gross Domestic Product (GDP) to peak at 120 per cent in 2013, down from a previous estimate of 125 per cent, after recent stress tests showed Ireland's banks needed €24 billion in additional capital less than the €35 billion earmarked under the bailout.
The IMF said the funds left over after the bank recapitalisation could be used by the sovereign if necessary.
"That could indeed cover the possibility that there could be some delay in regaining market access compared with what we had previously allowed for," said Craig Beaumont, an IMF official.
The IMF said Ireland had made a strong start on dealing with its budget deficit and bust banks and said the stress tests and recent elections had cut the risk from the banks and from political uncertainty.
But the fund said the outlook for Ireland's debt remained fragile and it noted some risks had risen due to weaker economic growth, higher unemployment, rating agency downgrades and problems in Europe's periphery, with Portugal joining Greece and Ireland in applying for a bailout.
Higher market interest rates and weaker prospects for growth in the medium-term are risks to Ireland's debt outlook but the IMF said accelerating Dublin's fiscal austerity programme would not mitigate such risks and would further retard growth.
The IMF inched up its forecast for GDP growth this year to 0.6 per cent from 0.5 and, crucially, it has not revised its medium-term outlook.
Ireland's medium term growth prospects are key for its ability to shoulder its debt burden and the IMF did warn that the export-dependent country's economic recovery, following a severe recession, was subject to considerable downside risk.
Separately, OECD head Angel Gurria said shareholders should pick the next head of the IMF based solely on merit, even if that means breaking with the tradition of always naming a European.
After Dominique Strauss-Kahn resigned yesterday as head of the IMF, some developing countries have called for the top IMF job to be opened up to non-Europeans.
Since the founding of the two Washington-based global financial institutions in 1945, the managing director of the IMF has always been a European and the president of the World Bank has always come from the United States.
"I totally agree that it's time to change something which is a tradition, not a rule or a law," Mr Gurria told reporters at the Paris headquarters of the Organisation for Economic Co-operation and Development, a group of 34 mainly rich countries.
"The question of merit is the most important, not nationality," Mr Gurria said.
Mr Gurria said French finance minister Christine Lagarde, who has emerged as a favourite for the post, had "without doubt" the right qualities to be good candidate.
Mr Strauss-Kahn's resignation, as he prepares to fight charges that he tried to sexually assault a New York hotel maid, has opened up a race for his succession at a critical time for the IMF as it helps euro zone states such as Greece, Ireland and Portugal cope with their debt problems.
Mr Gurria voiced confidence that the euro zone would be able to overcome its problems and that the euro would continue gaining importance as a reserve currency.
He said that the Spanish government had its public deficit under control and had taken other measures to ensure that it does not become the next country to have to seek a bailout.
Reuters
