The International Monetary Fund has warned the EU needs to take steps to create a firewall around Ireland its economic prospects remain "fragile" amid the escalating euro zone debt crisis.
The crisis may hamper Irish economic growth, increase the cost of re-entering bond markets and make it harder for the country's banks to sell off assets, the Washington-based fund said today in its fourth review of Ireland's bailout programme.
"Stronger European support for Ireland's recovery would help sustain fiscal consolidation efforts and reinforce prospects for program success, with positive spillovers for European stability," the IMF said. "By enhancing the robustness of Ireland's program, these and other potential steps would also provide a firewall protecting the euro area against potential shocks."
Ireland sought a €67.5 billion international rescue last year, amid concern that its banking troubles would push it into bankruptcy. With the state seeking to test bond markets in 2012 after a two-year hiatus, Ireland's partners should consider a range of extra measures, the IMF said.
"The main thing that would be desirable would be to break this link between the sovereign and the financial system more effectively than has been done so far," Craig Beaumont, IMF's mission chief for Ireland, said today. "The prospects for the programme's success remain positive."
European leaders could help Ireland's banks re-enter debt markets again and return to private ownership through guarantees for term funding and switching short-term European Central Bank liquidity for medium-term funding, the IMF said.
In addition, European institutions could take temporary stakes in Ireland's banks and refinance the state's capital injections into the financial system, the IMF said.
Mr Beaumont, who said he was not advocating imposing losses on senior bank bondholders, said it was too early to say how much such measures would cost.
The IMF estimates Ireland's gross domestic product will expand by 1 per cent next year, compared to the Government's 1.3 per cent forecast. The economy will expand 1.1 per cent this year, the IMF said.
Irish bonds due in 2020 yielded 8.52 per cent today, down from 9.83 on November 24th and a euro-era peak of 15.6 per cent on July 18th.
The country's debt outlook improved "on balance" since it's the third EU-IMF review, with general government gross debt expected to fall to 111 per cent of GDP by 2016 from a peak of 118 per cent in 2013, the IMF said.
The IMF previously estimated the ratio would be 115 per cent in 2016.
The IMF, which is accelerating payments to Ireland in the first half 2012, said a cut in interest rates on the nation's European aid and the Government's recent downward revision of its 2010 debt level helped the debt figure.
"Deepening strains in the euro area have, however, increased risks to Ireland's debt sustainability, so prospects for program success remain fragile despite strong policy implementation by the Irish authorities," the IMF said
Bloomberg