The International Monetary Fund expects Ireland to grow 0.9 percent in 2011 and 1.9 percent in 2012 as the country strives to overhaul its banking sector, reduce its budget deficit and recover from crisis.
“Even this modest recovery is subject to downside risks,” the IMF said today in a staff report accompanying its agreement to contribute 22.5 billion euros ($30 billion) to an 85 billion euro rescue effort with European authorities. The IMF’s board approved the funds yesterday after Ireland’s parliament approved the bailout.
Ireland faces “significant” spillover risks from its financial woes that could affect Greece, Portgual, Spain and other euro-area economies, the Washington-based fund said. Financial contagion also could affect countries like the U.K., Germany, France and the U.S that have large portfolio investments in Ireland, the IMF said.
European Union leaders grappled this week with how to fix the current crisis and prevent future debt shocks in Brussels talks. German officials, driven by public outcry against propping up fiscally reckless countries, have resisted enlarging a 750 billion euro emergency fund or developing joint bond sales.
Ireland has pledged to shrink its financial sector and increase banks’ ability to withstand economic stresses as a condition of receiving aid. Irish banks are slated to undergo new stress testing in the first half of 2011, starting with the six biggest banks followed by credit unions and subsidiaries of foreign banks.
The Irish banking sector remains vulnerable to “constant funding concerns” and heavy exposure to the Irish property market, the IMF said in today’s report. Another factor is the government’s ongoing costs in managing Anglo-Irish Bank, which was nationalized two years ago and has “sucked in ever-increasing public funds,” the IMF said.
Ireland plans to require holders of subordinated debt to share in the banking system’s losses. At this time there are no plans to require losses from senior bondholders, and the IMF concurs with that decision, said Ajai Chopra, deputy director of the IMF’s European Department, on a conference call with reporters today.
Exports will continue to lead Ireland’s recovery, the fund said. Government budget cuts will hamper growth, and “subdued” inflation will help competitiveness and also act as a “short-term drag” on the recovery, the IMF said.
Ireland’s ratio of debt to gross domestic product is expected to reach 99 percent by the end of 2010, up from 25 percent in 2007 at the onset of the financial crisis, the IMF said. Debt is expected to peak at 125 percent of GDP in 2013, and it could go higher if the shocks to Ireland’s economy become permanent, the fund said.
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