Thursday, May 03, 2012

The IMF is no fairy Godmother - Hayes

We have already seen a number of canards thrown into the referendum debate. One of them was by the Sunday Times hinting last Sunday that Ireland may have a ready source of new and easy funding from the IMF if we needed a second bailout. For Ireland’s sake let us hope they don’t get what they wish for.
The IMF is the lender of last resort. It is a rules based organisation. As the IMF will tell you, the interest they charge on borrowed money can be seen on their shop front window. It’s higher than the blended European loans and they tend not to do, go it alone lending for states that cannot borrow elsewhere. If we lock ourselves out of the ESM by voting NO, the IMF are hardly likely to lend to us when we have decided to exclude ourselves from a new Euro lending facility. That’s particularly the case when you come looking for a second bailout.

According to IMF rules each country, including Ireland, has a quota of Special Drawing Rights [SDRs]. Under these rules funding to a country is capped by access limits of 200% of quota in any one year and to total lending of 600% of quota. The IMF does allow for exceptional access criteria when quotas can be exceeded.  

The €22.5 billion pledged by the IMF to Ireland in December 2010 was at that time 23 times Ireland’s lending quota. Ireland’s quota was increased in March 2011. Even so Ireland is still exceeding its IMF quota by 15 times.  The IMF rules were stretched to the limit by Ireland’s original bailout. Because the IMF was part of a wider troika of support the Board of the IMF, after taking extensive legal advice, decided to proceed to support Ireland.  But they did so on the basis that two thirds of the bailout money came from the European Authorities and where they had preferred creditor status over European Loans.
Of course it is technically correct to suggest that we could seek another loan from the IMF.  Any country can apply to the IMF for a loan. Just like anybody can apply to their bank manager for a large loan. If you have already exceeded by a very large margin your loan limits your bank manger is not likely to give you another loan. Ireland has already maxed out its IMF loan.

Are those on the No side seriously suggesting that the IMF are going to turn around and give us another large loan? The idea that the IMF is some kind of fairy godmother is frankly ludicrous. The IMF always insists on being the preferred lender when it makes a loan. It always insists on getting its money back first. That the IMF might lend Ireland additional support after we had cut ourselves off from EU funding is simply not credible. And we know from its history that when the IMF is the sole provider of finance it drives a very hard bargain. In a default situation the IMF might help. But their help would include some very nasty medicine indeed, much worse than anything seen so far.

As regards the approach being taken by Mr Hollande it is worth making the following points. Mr Hollande is still a candidate in electioneering mode. To see Mr Hollande as a white knight against fiscal consolidation is to totally misread the situation.

Mr Hollande and his chief financial adviser have both made it clear since the first round of voting that they intend to abide by the rules of the Fiscal Treaty. Both of them have stated their intention of bringing France’s budget deficit below 3% by 2013 and into balance by 2017. That is faster than even Ireland is planning. As a government we have a budget target of below 3% by 2015. And let us not forget one simple fact. There are 27 members in the European Union. In 2011 Ireland had the worst budget deficit in the whole of the EU. There is an economic and political imperative that we bring our budget into better balance and our debt levels on a downward trajectory.

It was too much debt that brought this country to its knees. Those who oppose this Treaty seem to believe that even more debt is the solution. If that remotely credible? We now know that too much debt is a vicious trap. We need to return to sound finances and sustainable development. The last thing we need is more debt that can be left to our children to pay off.

Of course Ireland supports a renewed emphasis at EU level on investment, growth and jobs. We have been pushing that agenda very strongly. We will have a clear opportunity to shape that debate when Ireland takes over the Presidency of the EU at the beginning of next year. Jobs continue to be at the centre of this government’s economic strategy. The government is prepared to listen closely to reasonable proposals. The government is prepared to engage directly with Trades Unions and other organisations on getting this country back on the road to recovery. But a vote against the Treaty will bring no benefits. It will only bring fear uncertainty and risks.  Voting no will tie the hands of the Irish government at EU level. It will mean Ireland continues to be a problem, not part of a solution.

Fundamentally this Treaty is about keeping the euro safe and strong. It is about restoring confidence. It is about bringing stability to the Eurozone. Peter O’Neill, Managing Director of IBM Ireland, put it very succinctly last Sunday. He wrote “without investment, there will be no growth. Growth is the only way out of the current situation”. I agree with his real world assessment as against believing in the magic of fairy godmothers.

BRIAN HAYES TD is Minister for State at the Dept of Finance

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