Exports, critical to the small country’s success, are declining. And the weight of outstanding bank debt is making it hard for Ireland to meet the financial targets laid out under the joint IMF-European Union rescue program, which has been a by-the-book success.
To shore up faith in the country’s banking system, Irish officials have insisted on honoring most of the bonds issued by Irish banks. The IMF said that commitment makes sense and allows the nation to rebuild a healthy core of private banks. A default on the bonds probably would leave the banks unable to raise money from private investors in the future.
But the commitment also is starting to crimp Ireland’s finances, and the IMF suggested that other European nations step up with more help for the country. That could come through investment in Irish banks, programs to ensure that banks have access to longer-term sources of money or a boost in lending to small businesses in the country.
“We have not ruled out success at this point,” Craig Beaumont, the IMF’s mission chief for Ireland, said in a conference call. But “additional support would reinforce the program and improve the prospects.”
The overall outlook is “fragile, despite strong policy implementation by the Irish authorities,” IMF staff wrote in an overview of the Irish program. The report cleared the way for the agency to make the latest, $5 billion loan to the country.
Ireland is one of three countries, along with Greece and Portugal, in the 17-nation euro zone that are operating under international rescue programs.
But the Irish program stands out. The country’s problems had less to do with overspending or poor economic growth than with a real-estate investment bubble that threatened its overextended banks.
As the bubble burst, Irish officials provided a blank guarantee on bank deposits and debts. That last-ditch attempt to save the country’s financial system ended up bankrupting the government.
Quick to recover a modicum of growth, officials hoped they might begin selling long-term bonds next year — which would make Ireland the first of the crisis countries to attempt a return to the international bond markets.
The new fear over Ireland’s financial state bodes ill for the rest of the euro zone. Even as other nations slash public spending and raise taxes — including Italy and Spain, which have not yet needed bailouts — lagging growth and the specter of recession make balancing the books that much more difficult.