The thought of the IMF involving itself in Ireland’s economic affairs fills many with dread, but such fears are misguided.
AS THE GOVERNMENT initiated consultations earlier this month with the international brokers of the IMF, EU and ECB it may be useful to describe some of the realities of life with outside inspectors such as the IMF.
It’s understandable that there is a great deal of angst about outsiders involving themselves in our economic plans, most probably for the next three years. Many people have a very negative view of the IMF, for example. But these views are unjustified. Of the various agencies, it’s the IMF (or the ‘Fund’) that seems to provoke the greatest fear. Yet it’s worth remembering just what it is: a specialised agency of the UN, which was set up in 1944 to help countries in difficulty. This often means encouraging countries to do the right things even if they are unpopular. In some ways this is the economic equivalent of ‘tough love’ and it does help many countries get back on the rails.
In my time on the executive board of the IMF (1980-1983) I had first-hand experience of some 50 countries that benefited from IMF programmes. This was also a period of financial crisis: the markets, awash with petrodollars, had lent them to to any country with a pulse without any kind of risk analysis. No one worried about risk spreads back then. Indeed many heads of large US banks argued that it was quite safe to lend to governments. After all, they argued, countries could not go bankrupt.
When it became clear that many countries would not be able to service their debts, the markets and the indebted countries panicked and came to the Fund, which played a major role in preventing a major international crisis.
What often happens is that countries leave it very late before approaching the IMF. At that late stage, rigorous structural adjustments are required. This usually means that a degree of austerity is needed and it is often convenient for the country in question to blame the IMF.
The Fund, however, does not worry unduly about a bad press as long as it does a professional job. Good economic policies are almost always unpopular. We know this better than most, since our economic policies during the Celtic Tiger period seemed to have been created with popularity ratings as the primary concern.
The governments of developed countries are often reluctant to access the Fund because it might signal failure on their part. They frquently continue to borrow from the markets for long periods, hoping they can repair their economies and banking systems themselves.
Often it’s simply a form of denial. The reality is that many governments have failed and they should seek help sooner rather than later. There is no point in hobbling around on a home-made crutch when you can have a bed in the Mayo Clinic. In fact the bed is subsidised. The Fund is only charging a little over 3 per cent on the €30 billion it lent to Greece. Compare that to the 8 per cent or higher the markets were demanding on Irish Government debt earlier this month.
Some commentators believe that entering a Fund programme causes reputational damage. This is not true if the country in question completes the programme successfully. There was very little, if any, reputational damage done to the British economy after its Fund programme in the mid-1970s. After a suitable course of treatment, administered by experts, the patient emerges, completely cured and with head held high. The government – and public – of the country will also have learned a valuable lesson and will be less likely to jeopardise national sovereignty in the future.
Soon after a country applies for assistance, negotiations begin. An IMF ‘mission’ will visit the country and will have discussions with technical and policy people, including ministers. The Fund will already have a good understanding of the country in question. For example, there is a permanent ‘Irish desk’ in the IMF in Washington DC, and teams come over almost every year to have routine discussions about the economy. There is also a senior Irish public official on the board of the Fund.
How long negotiations might take is anyone’s guess. There have been very fraught year-long negotiations in the past whereby the governments concerned tried to use political influence to have the conditionality watered down. In such cases, even if the programmes are eventually agreed, they rarely succeed because the country concerned is not really committed to taking any corrective action.
It is most likely that negotiations with Ireland would proceed smoothly, could be completed in a matter of weeks, and the ‘Letter of Intent’ signed immediately thereafter. This would be followed by an executive board discussion which would usually endorse the programme. The reason for such expedition in Ireland’s case is because much of the work has already been done by the Department of Finance, Colm McCarthy, and others. Moreover, the sort of fiscal adjustment planned by the Government (€15 billion over four years, of which €6 billion would be effected in the first year) would chime with the IMF’s general approach.
It is probable that Ireland could make its first drawing from the IMF within a few days of the relevant board endorsement. The amount and phasing of the drawings would also be the result of negotiations but there is every reason to believe that Ireland would be in a position to defer borrowing from the markets until well beyond next July, unless of course some miracle resulted in lower bond yields. (The existence of a Fund programme could of course be just such a miracle.)
One of the other advantages of being in an IMF programme is that it is almost like sanctuary in a church. The country is protected from the markets. Even if Ireland decided to claw back some funds from the bondholders in the troubled banks there would be very little the markets could do about it.
While the IMF would probably accept the general fiscal parameters we have set for ourselves, there might be some differences of emphasis. For example, the preference for expenditure cuts over tax increases might be a little stronger than that of our Government. But because of the IMF emphasis on structural reform there would probably be a strong push for property taxes and other means of widening the tax base. Genuine reform of the public sector would probably go further than the Croke Park deal and several quangos would be closed down.
The labour market would probably be revamped as well, especially the relationship between unemployment benefit and the minimum wage. There would be considerable emphasis on wage competitiveness (in lieu of currency devaluation), and on job creation.
It is likely that the various conditions would be monitored every quarter. In some countries, used to Fund programmes, this is known as ‘Test Time’, and people often make bets on whether the criteria will be met or not. If Ireland failed to meet a condition, the matter would be brought back to the board for discussion. Usually, a compromise would be found. But in the event of serious or serial breaches, the funding could be withdrawn. This is the real downside, because the country would then be at the mercy of the markets and there would be serious austerity of an automatic, unavoidable kind. However, the danger of Ireland not successfully completing a Fund programme is negligible.
In many ways an IMF programme for Ireland is a no-brainer. We get the resources; the cost is well below market rates; the austerity measures would be no more severe than those planned already; we would have more freedom to deal with bondholders without suffering a backlash from the markets; we would be an ideal patient and emerge after a few years, sound in wind and limb, sadder but a lot wiser.
The inclusion of the EU and the ECB in the arrangement gives rise to additional resources but also more drawn out negotiations. If it is the case that the ECB wants to throttle back on lending directly to Irish banks and to place the debt burden on the Irish Government, and hence taxpayers, this could be a contentious point. It is possible the IMF would side with the Irish government in that respect. The key to all of this is that Ireland puts forward a negotiating team of tough,expert negotiators.
There are several things that must not be allowed. These include: tampering with Ireland’s preferential profits tax regime, any further passing of banking problems on to the shoulders of taxpayers and any fiscal measures that would cause further deflation and unemployment in the economy.
The Government may be shamed by having to seek help. So what? They will be more careful about ruining the economy in the future.
Michael Casey is former chief economist with the Central Bank and a former member of the board of the IMF. He is author of Ireland's Malaise: The Troubled Personality of the Irish Economy, Liffey Press, October 2010
