The European Commission has completed the fifth review of the EU-IMF supported financial assistance program for Ireland. In this context, the Commission authorized on Thursday the disbursement of EUR5.8 billion to the country, bringing total EU funding to Ireland to EUR32.2 billion since the launch of the financial assistance program in late 2010.
The joint review by the troika of creditors - European Commission, the European Central Bank and the International Monetary Fund - took place in Dublin during January 10-19. It concluded that program implementation by Ireland remains strong and on track, while some challenges remain.
Ireland's real GDP is estimated to have returned to positive growth in 2011 (0.9%) on account of strong exports, aided by recovering cost competitiveness. Domestic demand remains subdued, as households and firms (as well as the public sector) try to reduce their indebtedness. For this year, the real GDP growth forecast has been revised down (to 0.5%, from the 1% foreseen in the fourth review in Autumn 2011), reflecting the growth slowdown in Ireland's main trading partners, particularly those in the euro area.
The fiscal deficit in 2011 is estimated to have been kept at around 10% of GDP, well below the ceiling set out in the program. The 2012 budget is in line with the deficit ceiling for this year (8.6% of GDP). Binding ceilings on expenditure for each line ministry offer further credibility to the Irish government's commitment to bring the fiscal deficit down to below 3% of GDP by 2015 in line with the EU's excessive deficit procedure.
The European Commission said that major progress has been made in strengthening and downsizing the banking system. The recapitalization of banks is largely completed and banks have met their deleveraging targets for 2011, despite an increasingly challenging market environment. The Irish authorities have also been proactive in addressing the major problem of household debt through a reform of the personal insolvency framework, which is designed to enable out-of-court settlements of unsustainable mortgage debts.
Labor market reforms are progressing well, particularly reforms of sectoral wage agreements to make wage-setting in occupations hard hit by the recession more responsive to economic conditions. A privatization plan has also been drawn up by the government to reduce public debt, increase the economy's overall efficiency, and fund some job-creating investments.
The Commission observed that on the back of this strong performance, yields on Irish government bonds have continued to decline. The financial assistance program is expected to cover financing needs until the second half of 2013, although Ireland intends to re-enter the financial market sooner, including in order to strengthen its cash buffers for the period after the end of the program, foreseen for the end of 2013.
In this respect, the Commission welcomed the recent debt swap, which effectively postpones some repayments originally due in early 2014 to early 2015, as it reduces the government's financing needs immediately after the end of the program.
The Commission reminded that despite this significant progress, much remains to be done. Future challenges and risks would depend on any further financial turbulence in the euro area, with potential knock-on effects on bank deleveraging and the availability of credit to the domestic economy.
A further drop in the demand for Irish exports could also weigh on budget performance through its spillover effect on Ireland's overall growth. The Commission told the Irish authorities that it is essential to remain steadfast and pursue full implementation of the program in the interest of boosting competitiveness, growth and much needed jobs.
by RTT Staff Writer
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