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IMF &OECD reports put government in dock

Issued : Wednesday 24 June, 2009

Today’s IMF and OECD reports are a damning indictment of the Government’s handling of the economy.

The IMF refers to ‘serious internal imbalances’ in the Irish economy. They pull no punches in identifying the Government’s stoking of an unsustainable construction bubble as being a critical factor in creating the current downturn.

Both these major international reports indicate that the Irish economy will decline by as much as 14% from its peak over the 2008-2010 period. Ireland is declining more than any other advanced economy because the Government left us so dangerously exposed to the property sector, allowing competitiveness to evaporate.

Both reports note ominously that economy will recover slowly rather than bouncing back to rapid growth as had been previously hoped. This L-shaped depression is what we had all hoped to avoid.

Reading between the lines, the IMF are none too impressed with the Government’s handling of the banking crisis. They note that the blanket bank guarantee is much larger than in other countries, covering over 200% of GDP (page 16, section 19).

The IMF disagrees sharply with the Government approach in relation to the banks (page 19, relevant extract below). Like the Labour Party, they advocate ‘temporary nationalisation’ of the banks in order to clean up their balance sheets. While they acknowledge that NAMA is ‘potentially the right mechanism to separate the good from the bad assets’, they argue that ‘temporary nationalisation’ is the best way to make NAMA work, both in terms of pricing the assets fairly and restructuring the banking sector.

This thinly veiled criticism of the Government approach is devastating given that their report was drafted in consultation with Irish officials.

Both reports also suggest that the Government’s deficit targets for both 2009 and 2010 are hopelessly optimistic even without including the cost of the bank bailout. The IMF expects total bank losses to reach €35bn, or 20% of GDP, by the end of next year (page 16, section 20). To put it into perspective, this is more than the total expected tax revenue for 2009.

IMF Staff Paper on Ireland, Page 19, Section 25:

Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed ... there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.”6 Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far
reaching resolution techniques.