THE IRISH banks face losses of €35 billion to the end of 2010, the economy will shrink by 13.5 per cent from 2008 to 2010 and unemployment will climb to 15.5 per cent next year, according to a bleak assessment by the International Monetary Fund (IMF).
The global financial watchdog’s annual report on Ireland offers a gloomy picture of the State’s economic prospects, predicting only a “modestly-paced recovery” after further contraction next year.
The report identifies bank restructuring, restored competitiveness and fiscal consolidation as critical to ensuring that the economy recovers and acknowledges the Government’s actions to address these priorities.
“The proposed National Asset Management Agency (Nama) is potentially the right mechanism to separate the good from the bad assets. Its success requires a comprehensive and realistic assessment of impaired assets,” says the report.
The Government responded to the IMF’s estimate of the losses facing the Irish banks, which equate to 20 per cent of Ireland’s gross domestic product, saying the “vast majority” of the losses would be absorbed by the banks’ own risk capital and operating profits.
The IMF said it might be easier to price toxic bank assets moving to the State’s “bad bank” Nama, if the banks were temporarily nationalised. “An advantage would be that prices at which these assets are transferred would become less of an issue,” said the IMF, adding that such a move could also be used as a step towards mergers and the restructuring of the banking sector.
The IMF suggested that “risk-sharing” measures be considered on pricing bad loans so that taxpayers do not bear “a disproportionate burden of the costs cleaning up the banks”. It recommended that the Government be flexible on designing Nama so that it can include other types of bad loans beyond the €80 billion to €90 billion in money lent for property development.
“The option of relieving banks of those additional assets within a year or so will continue the process of ‘cleaning’ up the banks. Absent that, banks may remain hobbled,” IMF staff said. The fund said the Government was open to exploring the merits of “a special bank resolution regime” such as the creation of a “bridge bank” to take over old banks temporarily as a means of preventing future banking crises.
Predicting that the budget deficit for 2009 could reach 12 per cent, the IMF notes the policy dilemma facing the Government.
The fund calls for further cuts in public sector pay and employment, and a shift away from universal social welfare benefits towards assistance targeted at the most vulnerable.
“Reducing fiscal deficits is needed to maintain credibility with markets but deepens the economic contraction,” says the IMF. “Expenditure reduction, as distinct from raising taxes, is the superior approach to fiscal consolidation but, unless carefully managed and prioritised, risks hurting the most vulnerable.”
Minister for Finance Brian Lenihan welcomed the report as a “balanced and realistic” assessment of the economic challenges facing Ireland.
IMF: main points
- The economy will contract by about 13.5 per cent from 2008 until the end of next year.
- Unemployment will reach 15.5 per cent in 2010.
- Bank losses could rise to €35 billion by the end of 2010.
- Bank nationalisation could become necessary but not as an alternative to Nama.
- Further cuts in the public service wage bill likely to be inevitable. A review of public service employment is needed.