The IMF speaks...

The latest report is out from the IMF on our straits.

The Irish Times notes that:

Irish banks could provide support to struggling homeowners, the International Monetary Fund (IMF) said today but warned weaker economic growth could hinder plans to reduce the country’s budget deficit.

It has now mentioned that some measures to help those in danger of defaulting of their mortgages are now appropriate…

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.

However, the earlier point about weak growth impacting on deficit reduction is a bit confused. Let’s see what it says about these matters…

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.

And…

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.

Hmmmm… so, keep on keeping on.

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 4½ 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.

When I first read the IT report I interpreted it as suggesting that due to lower than expected growth fiscal consolidation wouldn’t be feasible at the planned level. But reading the above what the IMF appears to be saying is that weaker growth shouldn’t be allowed to block further consolidation measures, even in the face of ‘consolidation fatigue’.

I wonder how [or if] that will work.

About these ads