By Lesley Wroughton
WASHINGTON, June 24 (Reuters) - The International Monetary Fund on Wednesday said Ireland's recovery from a sharp economic contraction and financial crisis will be slow and painful and estimated that bank losses could reach 35 billion euros.
IMF Mission Chief to Ireland Ashoka Mody said repairing Ireland's financial sector, addressing rising public debt and making the economy more competitive were essential for a solid and sustained recovery.
He said the Irish authorities have responded appropriately to the crisis but cautioned that 'the size of the problem is such that the road ahead is a long one.'
In an annual health-check of the economy, the IMF forecast Ireland's economy will contract by 13.5 percent between 2008 and 2010, and start to grow around 1 percent in 2011 before it stabilizes around 2.5 percent for several years.
The IMF said a proposed agency, the National Asset Management Agency (NAMA), to carve out bad loans on banks' balance sheets was the right vehicle to begin Ireland's bank restructuring process.
But it said NAMA's responsibilities should include all classes of soured bank debt and not just commercial property loans, since bank losses are likely to extend beyond the property development sector as the economy weakens.
'NAMA should be given the legal and operational flexibility to address all classes of distressed bank assets,' the IMF said, adding 'A number of (IMF) directors considered that, for bank restructuring, other options including a greater equity interest by the government should not be ruled out.'
Mody said NAMA's success will depend on complex decisions that will need to be taken in coming months, including how to price toxic bank assets.
He said the IMF's estimate of 35 billion euros in bank losses was not based on any specific analysis or stress testing and covered several years through the end of 2010, but was an overall assessment derived from different sources of information.
TO NATIONALIZE OR NOT
As the economic contraction continues in Ireland some banks 'are likely to be well served by thinking in terms of merging their operations,' he added.
Mody said temporary nationalization of insolvent banks should not be completely ruled out:
'If there was a sense that the bank was so severely undercapitalized that its functioning was compromised then nationalization should be part of the policy tool kit.'
IMF staff papers detailing discussions with Irish authorities reveal disagreement over nationalization, with the authorities saying they prefer banks to stay partly in private ownership.
'They disagreed with the staff's view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks,' the papers said.
It said Ireland's large fiscal deficit and rising public debt will require sustained adjustment efforts over several years. The Fund said spending cuts, including further reduction of the public sector wage bill, was the best approach to cut the fiscal deficit to maintain credibility with markets.
Still, the IMF said unless carefully managed, such cuts could hurt the poor.
In response, Irish Finance Minister Brian Lenihan said the IMF report was 'balanced and realistic assessment' and was an endorsement of the government's policies to deal with the 'twin crises' in the economy and financial sector.
'The government is continuing to take the right steps to resolve our financial difficulties and to stabilize and restore our economy,' he said.
(Additional reporting by Padraic Halpin in Dublin; Editing by James Dalgleish)
((lesley.wroughton@thomsonreuters.com; Tel: 1-202-898-8317; Reuters Messaging: lesley.wroughton.reuters.com@reuters.net)) Keywords: IMF/IRELAND (Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com * BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
WASHINGTON, June 24 (Reuters) - The International Monetary Fund on Wednesday said Ireland's recovery from a sharp economic contraction and financial crisis will be slow and painful and estimated that bank losses could reach 35 billion euros.
IMF Mission Chief to Ireland Ashoka Mody said repairing Ireland's financial sector, addressing rising public debt and making the economy more competitive were essential for a solid and sustained recovery.
He said the Irish authorities have responded appropriately to the crisis but cautioned that 'the size of the problem is such that the road ahead is a long one.'
In an annual health-check of the economy, the IMF forecast Ireland's economy will contract by 13.5 percent between 2008 and 2010, and start to grow around 1 percent in 2011 before it stabilizes around 2.5 percent for several years.
The IMF said a proposed agency, the National Asset Management Agency (NAMA), to carve out bad loans on banks' balance sheets was the right vehicle to begin Ireland's bank restructuring process.
But it said NAMA's responsibilities should include all classes of soured bank debt and not just commercial property loans, since bank losses are likely to extend beyond the property development sector as the economy weakens.
'NAMA should be given the legal and operational flexibility to address all classes of distressed bank assets,' the IMF said, adding 'A number of (IMF) directors considered that, for bank restructuring, other options including a greater equity interest by the government should not be ruled out.'
Mody said NAMA's success will depend on complex decisions that will need to be taken in coming months, including how to price toxic bank assets.
He said the IMF's estimate of 35 billion euros in bank losses was not based on any specific analysis or stress testing and covered several years through the end of 2010, but was an overall assessment derived from different sources of information.
TO NATIONALIZE OR NOT
As the economic contraction continues in Ireland some banks 'are likely to be well served by thinking in terms of merging their operations,' he added.
Mody said temporary nationalization of insolvent banks should not be completely ruled out:
'If there was a sense that the bank was so severely undercapitalized that its functioning was compromised then nationalization should be part of the policy tool kit.'
IMF staff papers detailing discussions with Irish authorities reveal disagreement over nationalization, with the authorities saying they prefer banks to stay partly in private ownership.
'They disagreed with the staff's view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks,' the papers said.
It said Ireland's large fiscal deficit and rising public debt will require sustained adjustment efforts over several years. The Fund said spending cuts, including further reduction of the public sector wage bill, was the best approach to cut the fiscal deficit to maintain credibility with markets.
Still, the IMF said unless carefully managed, such cuts could hurt the poor.
In response, Irish Finance Minister Brian Lenihan said the IMF report was 'balanced and realistic assessment' and was an endorsement of the government's policies to deal with the 'twin crises' in the economy and financial sector.
'The government is continuing to take the right steps to resolve our financial difficulties and to stabilize and restore our economy,' he said.
(Additional reporting by Padraic Halpin in Dublin; Editing by James Dalgleish)
((lesley.wroughton@thomsonreuters.com; Tel: 1-202-898-8317; Reuters Messaging: lesley.wroughton.reuters.com@reuters.net)) Keywords: IMF/IRELAND (Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com * BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.