The IMF has just released its assessment of its field work in Ireland and the subsequent programme proposal. It is 105 pages and is still being digested but it seems clear that the banking crisis is at the heart of its field work and program and future bank losses would appear to be a key risk in what is assessed as a high risk programme (or “program” if you’re American).
Analysis will appear here later.
(1) The IMF, like the EU , has a less optimistic outlook for our growth over the next five years. They see our GDP contracting by 0.25% in 2010 and growing by just 0.9% in 2011. The table below compares the IMF, EU and official projections of GDP.
A consequence of the IMF estimates of GDP is that they project the deficit:GDP ratio % to be 4.8% in 2015 whereas the official Four Year Plan predicts it will be 3% a year earlier in 2014. I think this puts us on notice that when Budget 2012 is being put together a greater adjustment might be needed.
(2) The IMF puts the banking crisis “at the fulcrum” of our difficulties. There is to be a top-down and bottom-up review of non-NAMA loans and off-balance sheet exposures at banks in Q1, 2011. Auditors of the banks in the past three years (see below) are to be excluded from providing the audit so that the figures are assessed independently fresh eyes.
(3) The document in written in diplomatic language and avoids criticism and is forward looking. It pays tribute to measures already taken and highlights some of Ireland’s positive qualities such as our business-friendly environment. It is encouraging to see the IMF in the 21st century acknowledging that the stakeholders in this bailout will go beyond the government and include the Opposition, public sector and general public, not to mention the bailout partners in the EU and ECB. Of course a casualty of this diplomacy might be the IMF’s own views where they clash with the EU’s or ECB’s.
(4) For all the detail included in the document (the tables from page 34 onwards should be studied by any economics student to understand the significant predictions for our economy), the document is light on what is planned for the banks. With some €136bn of ECB emergency liquidity assistance in our banks and a further €45bn guaranteed by the State via the Central Bank of Ireland, the elephant in the room with the pink tutu giving a rendition of the Prodigy’s “Firestarter”is the fact that our banks are illiquid (and in some cases insolvent) and there is precious little detail to explain how the various stakeholders (EU/ECB and IMF) will rescue the sector and what effect their efforts will have on the wider economy. The need for a new review of bank losses just reinforces the view that we don’t even have a credible starting point. Those looking to see how Irish banks will be able to avoid mortgage rates of 8% in three years time when the base ECB rate might still be 1% will be disappointed. And those who are fearful that deleveraging the banks will severely contract the money supply with nasty consequences in the real economy will also not see how the proposed massive deleveraging will take place.
(5) I found the debt sustainability modeling in the Staff Report from page 44 to be novel in the scenarios it examined in calculating various debt:GDP ratio %s in 2015. I notice that unlike the ratings agencies the IMF is expecting a neutral outcome from NAMA (the agencies are taking an extreme view that all of NAMA’s purchases will be a draw on national debt until such time that the costs are recovered). With NAMA now buying some €90bn of loans for an estimated €40bn, there is clearly risk with the agency. I thought the debt sustainability model might have examined the effect of dealing with a 125%+ debt:GDP but no the report does not do that. Presumably you’d need to include the rationale used to specify the 60% debt:GDP in the Growth and Stability Pact that is supposed to govern our membership of the euro. Presumably any discussion of the 60% cap would involve some restructuring of senior debt. Was it diplomacy that saw this excluded? Looking at other country staff reports there seems to be a standard format for producing information and that doesn’t examine the debt repayment burden. That said there can’t be many IMF bailouts where a 158% debt:GDP is a scenario in the deal.
(6) Despite the warning on page 6 that “The largely selfcontained IFSC has limited links to domestic banks and has not been a source of instability” and that the Bank of International Settlement statistics are of limited value because they don’t differentiate between IFSC banks and domestic banks, the report goes on to merrily quote on page 7 foreign exposures to all banks (including IFSC banks). What we really want to know is what is the foreign exposure of domestic banks which are being bailed out so that we can form a view on whether the 5.8-6% interest rate charged by our neighbours in the EU is fair – after all if we are borrowing at 6% to repay German banks when Germany can borrow 10-year money at 3% then that just isn’t right if a major part of the foreign exposure is to German banks.