Ireland faces big risks to pay back loan: IMF

DUBLIN (BestGrowthStock) – The International Monetary Fund warned on Friday that Ireland faced significant risks that could affect its ability to repay an aid loan, and it forecast the country would miss achieving a 3 percent deficit of GDP by 2015.

The IMF made the comments in a staff report issued a day after it approved a 22.5 billion euro loan for Ireland as part of an 85 billion euro ($113.1 billion) rescue bailout package.

The rest of the bailout, put together after a banking crisis brought the former “Celtic Tiger” economy to its knees, includes 45 billion euros from Europe and 17.5 billion euros which Ireland will contribute itself.

“The pace of recovery is projected to be modest. Downside risks are significant, stemming from deflationary tendencies, overstretched balance sheets and adverse fiscal and financial feedback loops,” the IMF said in its latest staff report.

“There are significant risks to the program that could affect Ireland’s capacity to repay the Fund,” the IMF said in a December 8 document outlining an assessment of risks to the world body from bailing out Ireland.

Ireland has pledged to shrink and radically restructure its banks and tackle the worst deficit in Europe by 2015 at the latest in order to access the funding.

It will squeeze 15 billion euros — equivalent to around 10 percent of annual economic output — from its deficit over four years starting with the 2011 budget’s record package of 6 billion euros in spending cuts and tax hikes.

The EU is giving Ireland until 2015 to get its budget deficit below a bloc limit of 3 percent of GDP, but the IMF said it forecast the deficit to reach 5.1 percent of GDP by 2014 and 4.8 percent by 2015, without further fiscal measures.

“Under staff’s current projections, achieving the new target is likely to need further measures in the medium term,” the document said. It however, said the economy was likely to stabilize and start recovering next year, from -0.2 percent in 2010 to 0.9 percent in 2011.

The IMF said that while Irish authorities had taken major measures to strengthen the banking sector, “vulnerabilities remain acute.”

The IMF’s sobering assessment came on the same day Moody’s rating agency downgraded Ireland’s credit rating five notches to Baa1 — three notches above junk status — with a negative outlook, warning that further downgrades could follow if Dublin was unable to stabilize its debt situation.

Particularly worrying was the IMF’s assessment that the contagion threat from Ireland is “significant.”

“Given market perceptions, spillover effects to other peripheral euro-area economies could be large. Greece, Portugal and Spain are the most vulnerable to volatility spillovers from an event in Ireland.”

“Other euro-area sovereigns show negative country-specific cross-correlations, while Italy and Belgium appear like borderline cases,” the staff report said.

By restoring financial stability, however, the threat to other countries could be contained.

The IMF warned that political risks remained considerable in Ireland. The next election, expected in February or March, is expected to bring a new coalition government in control, which wants to alter some terms of the bailout, including allowing it to impose losses on some senior bondholders.

(Reporting by Padraic Halpin and Yara Bayoumy)

Ireland faces big risks to pay back loan: IMF