WASHINGTON (MNI) – The following is the full text of the statement
by the International Monetary Fund with preliminary findings of IMF
staff at the conclusion of its Article IV consultation with Ireland:

1. Through assertive steps to deal with the most potent sources of
vulnerability, Irish policymakers have gained significant credibility.
Measures to stabilize the banking sector and achieve substantial fiscal
consolidation have demonstrated the authorities’ resolve to alleviate
short-term risks while beginning to tackle their considerable long-term
challenges. These actions have reassured the global policy community and
international financial markets. Over the past months, Irish sovereign
bond spreads have tended to rise significantly on the days of intensely
adverse international market sentiment but otherwise Ireland has been
accorded the space to pursue its planned policy trajectory.

2. Along the complex and long-haul path to normalcy, retaining
policy credibility will require active risk management. The
appropriately ambitious fiscal consolidation plan demands years of tight
budgetary control. Likewise, the weaning of the banking sector from
public support and its eventual return to good health will proceed at
only a measured pace. In the interim, unforeseen fiscal demands may
occur. In this context, at times heavily bunched banks’ funding needs
and episodes of market volatility could generate unwelcome pressures and
disruption. With limited fiscal resources for dealing with
contingencies, maintaining a steady policy course will require
mechanisms for oversight and transparency, and high-quality
communication to minimize risks and sustain the political consensus and
market confidence.

A Modestly-Paced Recovery

3. Ireland is likely to emerge from its output contraction into a
period of relatively modest growth potential and high unemployment.
Current Irish and global conditions make forecasts subject to much
uncertainty. Various indicators point to a return to economic growth
during this year, but following its earlier steep fall, GDP in 2010 is
projected to be about 0.5 percent lower than in 2009. As the post-crisis
dislocations are undone, annual growth rates should rise gradually to
about 3 percent by 2015. After peaking around 13.5 percent this year
and, absent additional policy measures, a sizeable structural component
will likely keep unemployment at around 9 percent in 2015.

4. The improved global outlook will help, but to a limited extent.
With some reversal in the earlier loss of competitiveness and
improvements in the global economy, exports will lead the recovery. But
spillovers to the domestic economy will be limited because of exports’
heavy reliance on imports, their tendency to employ capital-intensive
processes, and the sizeable repatriation of profits generated by
multinational exporters.

5. Moreover, home-grown imbalances from the boom years will act as
a drag on growth. The unwinding of these imbalances — arising from
rapid credit growth, inflated property prices, and high wage and price
levels — will limit the upside potential.

* Financial sector weakness, fall in real estate prices, and high
unemployment could continue to reinforce each other. For this reason,
current policy efforts to boost banks’ capital-ratios are important and
will help counter these tendencies.

* But deleveraging to reduce the loan-to-deposit ratio and banks’
risk aversion will constrain lending and the pace of economic recovery,
at least in 201011. Higher than expected losses, uncertainties in
global regulatory trends, and renewed financial market tensions — that
may restrict access to funding — create downside risks. In this
environment, the targets for SME lending need to be combined with strong
prudential safeguards as the non-performing loans of this sector have
grown rapidly.

* Prices and wages are declining, with beneficial long-term
effects. But deflationary tendencies would raise the real debt burden of
highly-leveraged businesses and households, impeding growth.

Restoring the Financial Sector to Healthy Functionality

6. Following recent measures to strengthen the banking sector, a
sizeable agenda remains. The transfer of banks’ property development and
commercial real estate assets to the National Asset Management Agency
(NAMA) and the complementary decision to raise the targets for core
Tier-1 capital of banks by year-end takes the banks closer toward
normalcy. The further policy agenda includes restructuring — to
continue dealing with the after effects of the crisis — and creating a
stronger framework for financial stability. Together, these measures
should help the phasing out of the guarantees of bank liabilities.

7. Three restructuring priorities deserve attention:

* NAMA should schedule an orderly disposal of the property assets
acquired aimed to reduce the large overhang of property in state hands,
restart market transactions and, thus, help normalize the property
market. Oversight of NAMA operations, which is provided for in the
legislation, is desirable.

* Mindful of the moral hazard risks, narrowly-targeted support
measures for vulnerable homeowners would limit the economic and social
fallout of the crisis. With their bolstered capital, banks could absorb
the initial costs, perhaps basing themselves on the welfare system to
identify eligible beneficiaries. This process will be aided by an
overdue shift to a more efficient and balanced personal insolvency
regime.

* From the current focus on bank-by-bank restructuring, the
authorities’ intent to proactively reshape the system is appropriate. A
strategic, but market-oriented, approach should be used to achieve a
future viable and competitive banking system.

8. With much progress achieved in creating a framework for future
stability, more immediate attention is needed to establish a special
bank resolution framework. The de facto consolidation of the Central
Bank and the Financial Regulator, the proposed bill to formalize this
arrangement (including more accountability of the Regulator), and the
new risk-based supervisory approach being proposed are all steps in the
right direction. The key challenge is to ensure implementation of these
plans through adequate resources and enforcement powers. This should be
complemented by early action to introduce a special bank resolution
mechanism which would strengthen the stability framework. The powers
under such a regime would be an important addition to the set of tools
available to the authorities to meet contingencies. Provision for bank
levies of the sort being discussed internationally also needs to be
considered.

Staying on the Fiscal Consolidation Path

9. The authorities moved early to establish a balanced
consolidation plan and have stayed on course. As the fiscal situation
deteriorated, the authorities acted repeatedly to take measures and
raise the ambition of their fiscal consolidation goals. This was
achieved in a remarkably socially-cohesive manner and represented a
balance of economic and social considerations. With their 2010 budget,
the authorities have adhered to the consolidation track leading towards
reducing the budget deficit to below 3 percent in 2014.

10. Looking ahead, substantial challenges remain. Following the
already sizeable consolidation in 2009 and 2010, further consolidation
measures, although not as large as that already achieved, of at least
4.5 percent of GDP are required to reach the 2014 target. If GDP growth
outcomes are weaker than those currently foreseen by the authorities — a
clear possibility within the current range of scenarios — the additional
effort needed may even be greater. Staying on target is critical to
retain the hard-earned credibility. But the risk of “consolidation
fatigue” and, hence, a fraying of the necessary social cohesion cannot
be ruled out. For this reason, greater specificity on further proposed
measures is necessary. Sustainable expenditure savings will be central,
including through efficiencies in public services. Broadening the tax
base for revenue enhancement will also be necessary.

11. Now is also a good moment to establish an institutional process
to reinforce the collective commitment to stable public finances. The
authorities have indicated the possibility of further developments in
the move to a medium-term budget framework. Adoption of such a framework
would provide the structure to reduce the uncertainties associated with
the consolidation process; in good times ahead, it would constrain
excesses. The authorities should also seriously consider adopting a
fiscal rule that creates a public metric for sound public finances and a
technocratic fiscal council to advise on risks underlying public
finances. Such mechanisms, despite their known limitations, would
enhance policy credibility now and in the future.

** Market News International Washington Bureau: 202-371-2121 **

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