The €85 billion bailout Ireland received from the EU/IMF/ECB troika in late 2010 was effective in helping Ireland regain access to financial markets, fix its broken banks and return to sustainable growth, a new European Commission study has concluded.
The report, which provides an evaluation of the financial assistance programme over its life span, is largely positive in tone but does note that structural reforms remain incomplete and that legacy issues from the economic crisis continue to impact on the country’s recovery.
The 117-page study concludes that the fiscal programme, which “was put together in a climate of deep uncertainty for Ireland,” was “relevant, appropriate and effective.”
The report says that financing provided under the programme enabled a smooth and sustained return to full market access for the Irish sovereign and helped to return creditors’ confidence in the financial system.
“The fiscal targets were realistic, and meeting them with a margin added to the credibility of the programme, including with respect to its effectiveness in breaking the vicious financial-sovereign loop that had proven so damaging to the Irish economy,” the report says.
The evaluation states that Ireland’s fiscal targets proved to be realistic while reforms made to fiscal governance should eventually support durable debt reduction.
“The targeted structural reforms included in the programme were broadly appropriate but their implementation faced some political and technical challenges,” it adds.
The report concludes the blanket bank guarantee was a major contributing factor in triggering the need for assistance from the troika.
“With hindsight the bank guarantee appears too generous, and the fiscal impact could have probably been limited if banks had been subject to stricter requirements, as was the case in Sweden in 1991-92,” it says.
The report says the decision to grant the guarantee arose from a misunderstanding of the nature of the problem by the then government. It also states the decision to avoid a bail-in of creditors to the banking system was the right one, given the contagion risks and the lack of a supporting legal framework at the time.
The Commission’s study says bank restructuring was appropriately designed, noting that banks have downsized their balance sheets and stabilised their funding structures. However, it notes that deleveraging targets did not translate into a reduction in non-performing loans.
The study also notes that the banking sector has been slow to return to profitability and that a high stock of public and private debt continues to weigh on domestic demand.
Looking at the burden of adjustment, the report says this was widely shared across society though deprivation has risen.
“The programme avoided sharp across-the-board reductions in social support. As a result, the comprehensive social safety net that Ireland had in place prior to the programme remained intact,” it says.
However, the report concludes that many issues still remain to be addressed.
“Challenges remain in fully addressing the legacy of the crisis. Long-term unemployment and youth joblessness remain at high levels and the risk remains that some cyclical unemployment becomes structural,” it added.
