Ireland: Next stop – IMF

Ireland has made heroic strides in trying to deal with its economic problem after a spectacular property bust. But it is looking increasingly like it will not be enough. According to a senior Irish minister, the next stop for Ireland could be the International Monetary Fund (IMF) for a bailout.

The crisis has been building for some time and I have documented some of the milestones here over the last 16-odd months.

• Jun 2008: Ireland: government blew the boom
• Sep 2008: Ireland guarantees bank deposits at six banks
• Nov 2008: Is Ireland the next Iceland?
• Dec 2008: Irish equities suffer largest losses in 215 years
• Feb 2009: Do BRICs (and Germans) Eat PIGS?
• Jul 2009: Depressionary bust in Ireland is echoed in California
• Aug 2009: Government banking Irish edition

Its bad bank – called the National Asset Management Agency (NAMA) – is the most ambitious of its kind and harkens back to the Swedish crisis solution of the early 1990s.  They are truly trying everything they can to revive their economy.  But, a fiscal crisis is looming.

A Fistful of Euros reports:

In April, a supplemental budget that was supposed to settle things for the rest of 2009 forecast a general government balance of -10.75 percent (of GDP) for 2009 and 2010.  Assuming the same package of cuts as the April budget did, the respected Economic and Social Research Institute has just forecast deficits of close to 13 percent for 2009 and 2010.  2 percent of GDP went missing from revenue projections over a few months.  To give credit where it’s due, the IMF never believed the government’s deficit forecasts even at the time they were formulated and forecast deficits of 12 percent in 2009 and 13 percent in 2010.

How big a deal is 2 percent of GDP?  Well, the Irish government has told the European Commission that it will have the deficit down to the Maastricht level of 3 percent of GDP by 2013.   Since the macroeconomic framework for Budget 2010 has already been set, that’s 3 budgets to achieve a fiscal adjustment of 10 percent of GDP, and formulated in the context of inability to reliably forecast tax revenue even 6 months ahead of time.   And the new forecasts allow for a relatively benign global environment relative to the dire projections of earlier in the year, so this is specifically a crisis within the Irish Exchequer.

There is zero chance the Irish are going to be able you make a fiscal adjustment of 10% of GDP in 3 years in a weak economic environment. And we know where this type of policy leads by looking at Latvia.  So, now it seems government officials are finally coming clean and admitting, much as Latvia has done, that the only way out of this fiscal crisis is a bailout plain and simple.

The FT reports:

A senior Irish minister has for the first time warned Ireland could be forced to go to the International Monetary Fund for help if the country cannot implement the necessary cuts in the December budget.

The bleak assessment by Mary Harney, health minister, and former deputy prime minister, was one of several ministerial warnings on Friday choreographed to bolster public opinion for what is set to be harshest budget in the country’s 88-year history.

Mrs Harney, a leading economic reformer, said: “We’re spending €500m a week more than we’re raising. That’s an unsustainable situation.

“If the government hasn’t the capacity to do what’s needed, then others will come in like the IMF and overnight they will make decisions.”

Given the fixed exchange rate into which Ireland is locked via the Euro, there will be no competitive currency devaluation.  So the spectre of banking collapse is still a force with which to reckon. Monies from the IMF will certainly reduce the risk.