Euro Zone Crisis

Ireland passes IMF/EU bailout review

PUBLISHED : Friday, 19 July, 2013, 11:59am
UPDATED : Friday, 19 July, 2013, 11:59am


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Ireland is on track to exit its bailout later this year after passing its penultimate review by lenders, even with the economy in recession and uncertainty about the country’s banking sector persisting.

Completing the 85 billion euro (HK$863.9 billion) aid deal it was forced into after its biggest banks collapsed in 2010 would represent a much-needed success story for the euro zone and the austerity it has prescribed for crisis-hit states.

In 11 reviews by its European Union and International Monetary Fund rescuers, Ireland has consistently hit targets. It will be the first of the four countries bailed out to date by their euro zone peers to wean itself off emergency aid if it exits the scheme on schedule in December this year.

The EU is desperate for a smooth completion to show its tough-love approach can succeed, given the struggles of fellow aid recipients Greece and Portugal and deep public dissatisfaction with spending cuts and tax hikes across the bloc.

“It is remarkable that a fiscal framework is still intact,” an EU official told Reuters, noting the significant deterioration in the euro zone economy since the Irish programme was agreed.

Ireland sought help after a property crash left its banks massively under-capitalised and blew a hole in the nation’s finances. It has agreed to a detailed review of its troubled banks’ loan books this year, before Europe-wide stress tests next year, to reassure international lenders that the banks which plunged Ireland into crisis are finally fixed.

Craig Beaumont, the IMF’s mission chief for Ireland, said that while the review would not reveal how much capital the banks need, it would show whether they had faced up to the extent of bad loans on their books.

Ireland is also trying to find a cheaper way to fund loss-making tracker mortgages that were granted at low interest rates and are dragging down lenders. The EU official said there had been good progress on this issue and that all sides hoped for a solution before next year’s European stress tests, lessening any possible capital demands for the banks.

Ireland has met nearly all its funding needs through next year by issuing debt periodically over the last 12 months, having sold a 10-year bond in March for the first time since being locked out of markets in late 2010.

Last week, Standard & Poor’s changed the outlook on its BBB+ credit rating to positive from stable, saying Ireland’s debt may fall faster than forecast from 122 per cent of GDP this year.

But given its export-dependent and open economy, Ireland is reliant for growth on stronger demand from trading partners, particularly the euro zone, which has itself spent more than a year in recession.

The IMF says European help in cleaning up the banking sector would ease Ireland’s long-term return to debt markets.

As the current bailout nears its end, Dublin will seek some kind of successor arrangement to insulate it against further market turbulence. It may also qualify for support from the European Central Bank’s as-yet untested bond-buying programme.

“We won’t reach a view on the exact facility that will be utilised until later in the year, when we know what the conditions will be at the time,” said Beaumont.

The finance ministry said it has now drawn down about 91 per cent of the funding available under the bailout programme.