BERLIN (MNI) – Ireland will likely be able to repay the financial
aid to the International Monetary Fund but risks remain high, the IMF
said in a staff report on the extended IMF facility for Ireland,
released Friday.

“Ireland’s capacity to repay the Fund will remain satisfactory,”
the report states. Outstanding credit to the Fund is expected to peak in
2013-14 at about 2.32% of quota, and peak debt service to the Fund as a
ratio of exports of goods and services will be 2.0% in 2017, it said.

Fiscal adjustment and the resumption of growth in Ireland are
expected to place debt on a declining path from 2013 onwards, the IMF
said. “Lower bank capitalization needs than projected in the staff’s
conservative baseline scenario would also lower the peak debt ratio,” it

IMF staff estimates suggest it is unlikely that bank capitalization
needs will exceed E35 billion, the report observed. If that amount is
needed, the Irish authorities would use their own resources of up to
E17.5 billion, and E17.5 billion would be added to sovereign debt, it

The Irish economy is expected to stabilize and begin to recover in
2011, the Fund said. The IMF staff projects growth to recover from -0.2%
in 2010 to +0.9% in 2011. Looking ahead, the Fund tables GDP growth of
1.9% in 2012, 2.4% in 2013, 3.0% in 2014 and 3.4% in 2015.

Still, the IMF cautioned that “risks to the program remain high,”
noting that economic growth may be weaker than projected.

“Although the debt sustainability analysis indicates that a
moderate shock could be accommodated, a prolonged period of deep
recession could weaken loan repayment capacity of households and
businesses and increase bank losses beyond current projections, leading
the economy into a negative spiral,” the report warned.

Wage and price deflation — coupled with a contraction in economic
activity — could have a powerful negative effect on debt dynamics, it

Moreover, the fiscal outlook might deteriorate, opening a larger
financing gap, the IMF said. The side effects of the adjustment could
make fiscal consolidation more difficult than currently envisaged and
lead to sharp reductions in tax revenue.

The Fund also cautioned that reversing the financial sector
deterioration might be difficult.

“Low growth, deteriorating asset quality, and higher funding costs
could all weigh on the banking sector,” it said. “There is also a real
risk of a disorderly disruption of financial pressures, which might
delay the expected recovery.”

Furthermore, political risks are considerable, the IMF asserted,
pointing to the likely change in government in early 2011.

There is also a risk that access to capital markets might take
longer than expected, the Fund said.

The “substantial risks” to the program will need to be actively
managed, the IMF stressed.

“The key risk is that implementation will be delayed or faced with
unanticipated challenges. This execution risk is particularly salient
given the extreme technical delicacy of the many tasks that lie ahead.
Execution is also subject to market and political developments. The
principal risk mitigation strategy is to proceed in an adaptive and
deliberate manner with appropriate consultation with the relevant

In the IMF’s baseline scenario for Ireland, debt is expected to
peak at 124.5% of GDP in 2013. “The combination of low growth and
inflation, a high fiscal deficit, and additional bank support will
continue to weigh on public indebtedness in the medium term,” the report

The Fund tables debt of 98.9% in 2010, 112.8% in 2011, 120.0% in
2012, 124.5% in 2013, 124.1% in 2014 and 123.0% in 2015. The primary
balance is expected to improve from a deficit of 9.5% of GDP in 2010
(excluding bank support) to a 1.5% surplus in 2015.

Economic growth is expected to average 2.25% over 2011-14, and
inflation is projected to remain below that of other Eurozone countries.

“Economic recovery and fiscal consolidation would put the debt
ratio on a downward path after 2013, but risks remain,” the report
stated, noting that the “risks to the baseline scenario are

With a standardized permanent shock to growth, the debt ratio would
reach 155% of GDP by 2015 and not stabilize, the Fund said.

In the absence of fiscal consolidation, debt would continue to
increase, it noted. In a standardized scenario with the primary balance
at its 2010 level (excluding bank support), the debt ratio would reach
159% of GDP by 2015.

The debt trajectory also remains vulnerable to interest rate
developments, the Fund pointed out. Should interest rates be 1.5
percentage points higher, the debt ratio would stabilize at 132% of GDP,
it said.

–Berlin bureau: +49-30-22 62 05 80; email:

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