Too much austerity, says former IMF mission chief

Updated: Thursday, 11 Apr 2013 23:11

Professor Ashoka Mody, one of the architects of Ireland's IMF bailout, said that mistakes were made when so many austerity measures were imposed as part the deal.

Mr Mody also said that the construction of the country's rescue package was wrong.

Speaking on RTÉ's Morning Ireland, Mr Mody said that the Troika had other choices apart from austerity, adding that bondholders could have been brought in to bear some of the cost of the "sovereign distress".

"We are seeing a belated recognition of the fact that the constraint imposed only by austerity was untenable," he stated.

"Clearly the experience, if experience was needed, has demonstrated that reliance on austerity is counterproductive."

The professor said that imposing losses on bondholders was not considered when the bailout programme was started because the view was that failing to honour sovereign debt would create financial instability. 

"That was the decision made at the time and that continues to be the view today," he stated.

However, for Ireland and Portugal, the official terms of the sovereign debts have been relaxed because it is now recognised that the countries' debt burdens are still very large.

It is now also realised that growth needs to start to emerge in a very dynamic way so as to get these economies back on track.

Mr Mody said he is concerned that some of the growth projections have proven to be overly optimistic.

"Given that Europe is dragging itself down the austerity process, some of the growth projections are not likely to be meet. In that case these debt burdens will remain higher for longer than we currently think. Something has to give," he said.

He said that not burning bond holders was a mistake, adding that the authorities were worried that such a move would result in catastrophic implications.

But his reading of defaults shows that some can be well managed in a way that accommodates the interest of various parties.

"The notion that a sovereign default is extremely costly is historically not true," he stated.

In some cases, an ordered default actually reduces uncertainty, ensures a normally quick return to markets, and results in relatively minor output losses.

Professor Mody predicted that Ireland will likely see more more extensions for its bailout loan terms, however he remains concerned at the slow pace of these extensions.

On Irish growth prospects, he said that the world's growth prospects are crucial to Ireland.

Professor Mody said he is concerned at the fact that world economic growth, and more pertinent to Ireland, world trade growth has been growing very slowly over the last year, reflecting the general weakness in Europe.

"There is not a lot Ireland can do, in my view, to engineer its own growth prospects," he said.

Looking forward, the former IMF mission chief said there are two strategic decisions that need to be taken: quicker and more decisive action on the official concessions, such as the extension of the maturities of the loans, and the creation of a template for the management of eurozone crisis.