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 said today.
Slower economic growth, higher unemployment and deepening problems in fellow euro zone struggler 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,' Ajai Chopra, the IMF mission chief to Ireland, said.
'But we do need to recognise that they may not be sufficient,' he added. 'This is why we have put emphasis on support from a more comprehensive and consistent European plan,' he said.
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 yesterday.
The IMF said greater confidence around the availability of European Central Bank medium-term funding for Irish banks, at the root of the country's economic woes, would help the lenders 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 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 GDP to peak at 120% in 2013, down from a previous estimate of 125%, after recent stress tests showed Ireland's banks needed €24 billion in additional capital less than the €35 billion earmarked under the bail-out.
The IMF said the funds left over after the bank recapitalisation could be used by the sovereign if necessary.
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 bail-out.
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% 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.
Ajai Chopra, the head of the Ireland team at the IMF, said the problems facing Ireland are not just Irish problems, but are shared European problems.
He urged the European Central Bank to put in place medium term financing mechanism for the Irish banks, as a means to ensure confidence.
Mr Chopra also rejected any further belt-tightening than that already envisaged in the programme. He said accelerating the pace of adjustment is not the answer.
Mr Chopra said for the whole package of measures to work, Ireland needs to deliver on its commitments, but Europe must also make it clear that it will respond with the right amount of financing, on the right terms at the right time.
His comments may well be seen as a stinging rebuke to European countries, which have spent the last months arguing among each other about the problems of Ireland, Greece and Portugal.
