Ireland’s EU/IMF Economic Adjustment Program

Friday, March 21

Mr. Peter Breuer, Resident Representative Ireland, International Monetary Fund

The successful completion of Ireland’s EU/IMF-supported program in December 2013 has left the country in a much stronger position than when its program began back in November 2010. Mr. Peter Breuer, the Resident Representative of the IMF in Ireland, presented a compelling lecture about Ireland’s financial crisis and its adjustment program. The public event was part of the IMF Course on Financial Programming and Policies (FPP).    

Ireland's economy was widely seen for some time as one of the most successful in the world, benefitting from high FDI inflows, yet it had been among the hardest hit by the global financial crisis. Its growth dynamic changed fundamentally in the 2000s:  high growth rates were increasingly based on the rapid expansion of credit and build-up of property-related indebtedness by Irish households and SMEs.

Mr. Breuer started by explaining how rising property prices led to the financial sector bubble and to a reinforcing dynamics between banks and the real economy. The credit-fuelled property bubble collapsed soon after the international financial crisis erupted in mid-2007. This had a huge adverse impact on growth and employment, leading to a further deterioration of household, SME, and banks’ balance sheets. At the same time, government finance deteriorated, given the cyclical nature of tax revenues and the large costs of recapitalizing banks. The government issued a blanket guarantee of banks’ liabilities, to prevent the crisis from becoming systemic.

Although the government began to implement austerity measures designed to restore sustainability, during 2010 international investors became worried about the impact of escalating bank losses on the government’s balance sheet. The financial sector crisis resulted in the loss of market access for sovereign. An EU/IMF program was negotiated in November 2010.

Given that the crisis in Ireland was primarily a banking crisis, the immediate priority was to recapitalize and stabilize the banking system, thus stemming the outflow of deposits, explained Mr. Breuer. He emphasized that protecting economic growth was the main objective of Ireland’s economic program.

The program mainly focused on financial sector policies to restore its healthy functioning (i.e., banks’ restructuring, deleveraging, loan resolution, supervision, etc.) and on frontloaded and phased fiscal consolidation, to contain procyclicality. One difficulty came from the fact that in 2012-13, the Euro Area crisis turned out worse than initially expected, dampening exports and delaying the reduction of uncertainty. Despite growth shortfalls, the fiscal deficit was kept on track and the sovereign regained access to markets in mid-2012.

Much has been achieved, but given the severity of the problems, some challenges remain, noted Mr. Breuer. Further efforts will be needed in the years ahead to complete the fiscal consolidation, ensure robust lending to the economy, revive domestic demand, and reduce unemployment.

Irina Bunda, Economist, JVI

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