First report on troubled Irish economy positive from the IMF

Ireland is moving forward with a comprehensive strategy to restore confidence in its banking sector after seeking a bailout from the International Monetary Fund and the European Union.

An interim report from the IMF said the implementation of the authorities’ economic programme is on target, with structural benchmarks and quantitative performance criteria having been met.

‘Economic indicators suggest a modest export led recovery is under way in Ireland. In the banking sector, progress is being made towards recapitalizing, deleveraging, resolving nonviable banks, and strengthening the bank resolution framework,’ the report says.

‘Fiscal performance has been in line with program targets and the passage of the Finance Bill will facilitate program implementation in 2011. The authorities have put in place robust procedures for programme implementation and monitoring,’ it adds.

Underway is the injection of fresh equity into the banks and a series of top down stress tests and bottom up diagnostic asset valuations on a bank by bank basis will provide a comprehensive picture of banks’ asset quality and vulnerabilities by the end of the March, the report points out.

It says the authorities have retained experienced consultants to provide the independent bottom up diagnostic asset valuation, as well as a thorough validation of bank data and evaluation of bank collateral and are working closely with their European partners and Fund staff to ensure that bank capital will be sufficient to meet the requirements of both the steady state and adverse case stress tests simultaneously.

The banks have been required to submit deleveraging plans by the end of February 2011 and the Irish authorities are working with a well known investment bank to assist them in assessing the plans against criteria agreed with the IMF, ECB and the EC.

Draft legislation for a special bank resolution regime has been developed, covering the agreed provisions for the appointment of a special manager; the Central Bank to transfer the troubled institution’s assets and liabilities to other institutions; and the establishment of bridge banks. Approval of the finalized legislation by the next government would pave the way for submission to parliament.

The programme objectives for the financial sector, while simple and straightforward, require complex strategies for implementation, the report also says. The objectives are to achieve a leaner, more robust banking system with a stable funding base not dependent on government support.

‘In practice, this requires a fundamental restructuring of the banking sector, which had grown disproportionately relative to the size of the Irish economy. The forthcoming deleveraging will therefore involve a careful calibration of tradeoffs, such as balancing objectives for banks’ liquidity ratios against the risks of asset fire sales and fuelling a credit crunch. The process will likely result in bank by bank deleveraging strategies taking into account potential losses on sales of non core assets and the resources available after meeting the new regulatory capital requirements,’ it adds.

Overall fiscal performance is in line with programme targets. The performance criterion on the exchequer primary balance at the end of December 2010 was met with a margin of 0.75% of Gross Domestic Product. On the revenue side, collections in November and December were higher than expected by 0.4% of GDP.

The next review will be delayed because of the forthcoming general election. In the meantime, technical discussion will continue to assess progress and discuss operational aspects of policy implementation to achieve the objectives under the programme, the IMF said.