Ireland to need more European aid

September 10, 2012

Ireland may need a further round of European help to keep its financial bailout program on track as it faces fallout from the region’s deepening recession, the International Monetary Fund reported Monday.

The euro zone’s slowdown prompted the IMF to cut its forecast for growth in Ireland, which is the only bailed-out country to see its economy start expanding again. The other two, Greece and Portugal, have continued to slide.

The IMF said European countries should step forward with more help for Ireland. In particular, the agency said, a regional bailout fund should be used to help defray Ireland’s cost of rescuing its banks, estimated at about $70 billion.

That would follow a precedent recently set with emergency help for Spanish banks. At a European summit in June, officials agreed that money from the new bailout fund, the European Stability Mechanism, could be plowed directly into troubled banks. Without that provision, the Spanish government would have been forced to borrow money and, in turn, lend it to the country’s ailing banks, adding to Spain’s spiraling debt load.

As with Spain, Ireland’s financial troubles were closely linked to problems in its banking system. European officials agreed in June to study whether Ireland’s “well-performing adjustment program” also should be given the benefit of direct European support for its financial system. “Similar cases will be treated equally,” European leaders said in a statement.

The IMF said European leaders needed to move on that commitment. The fund forecast, for example, that an injection of about $30 billion in European cash into Ireland’s banks would allow the country to cut its government debts by an amount equal to about 15 percent of its annual economic output. That could mean the difference between a debt burden that gradually declines or one that becomes unsustainable.

“Material investments in Irish banks . . . could transform the public debt outlook . . . and cement a needed win for Europe,” the IMF wrote in its latest review of the Irish economy.

Craig Beaumont, the IMF mission chief to Ireland, said international markets expect the extra aid to come through. That helped Ireland in a successful bond sale in July, the first such foray by a bailed-out country back into international bond markets.

If there is trouble delivering that help for the banks, “there is some room for markets to be disappointed” and throw off Ireland’s ability to finance itself in the future, Beaumont said.

Ireland’s progress is being followed closely. The Irish government is largely meeting deficit targets and other conditions for its international rescue, which is halfway through its three-year term. Ireland also had been buoyed by a jump in its exports.

But the renewed recession in the euro zone has put that export boost at risk, at a time when the Irish government is still aggressively cutting public spending to meet its deficit targets.

Approving loans or investments for Irish banks would take time. The future of the ESM itself remains in doubt pending a German court ruling this week, and a $125 billion bailout of Spain’s banks is still to be negotiated.

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