The IMF Report on Ireland: Reading the small print

RTÉ and the Irish press report fairly regularly about the workings of the Troika and the discussions Enda Kenny (leader of Fine Gael) and Michael Noonan (Minister of Finance) hold with European Union and the IMF, although the edited highlights and the “communiqués” don’t mention the small print. As many people behind on the mortgage will have found out to their cost over the last few years, the devil is in the detail.

For the IMF even the worst bad news is couched in the polite language of diplomacy. Why? Well it would be most unfortunate if the truth got out. After all, working people might be listening and who knows what might happen then?

One fine example of this sort of diplomacy is the finely entitled “2012 Article IV Consultation with Ireland - Concluding Statement of the IMF Mission”. This was published on July 18th 2012. The title of the document might sound a little like a scientific paper about a mission to Mars, but the finely chosen words of the statement are an assessment of the economic and political perspectives of the Bourgeois in respect of Ireland.

"The Irish authorities have made steadfast efforts to address an exceptionally deep banking crisis, establishing strong credibility in policy implementation despite an adverse external environment that has tested confidence and delayed recovery. Key medium-term priorities are enhancing financial sector health to help revive lending, putting the budget on a sound footing, and advancing structural reforms to facilitate growth and job creation. Difficult challenges remain in the context of persistent euro area uncertainties, and a further strengthening of European support to Ireland is required to weaken bank-sovereign linkages and improve the sustainability of the well-performing adjustment program, thereby facilitating a durable return of the sovereign to market financing."

Translated, that amounts to:

The Irish Government have been thrashing around for a few years after the collapse of the banks in the crash, there is a new government with a working majority who will do anything we tell them even though Europe is in deep trouble and it looks like it’ll get worse. We’ve told them to keep feeding the banks, make billions worth of cuts and slash welfare while attacking the public sector workers and fiddling around with some workfare schemes. Europe is on the edge of the abyss and the Taoiseach wants some deal that stops them having to keep bailing out the banks so much and reduce the interest rate on the bailout thereby allowing them to pay us back all of our money.

But maybe we are exaggerating? Perhaps not, what does the small print say? The sections of the IMF report are in italics:

1. The Irish authorities have made impressive progress to restore stability in the face of an exceptionally deep banking crisis. Determined actions have been taken to restructure and downsize banks, and the recapitalization exercise in early 2011was rigorous and transparent. Budgetary efforts have been substantial in recent years, containing the fiscal damage from the severe economic collapse in 2008-10 while maintaining social cohesion. These and other steps have together helped rebuild confidence, as seen in declining spreads on Irish bonds, the recent successful return to the Treasury bill market, and continuing substantial inflows of foreign direct investment. The underlying strengths of Ireland’s highly open economy delivered export-focused GDP growth of 1.4 percent in 2011, although domestic demand and GNP continued to decline.

What this amounts to is that the Government have been trying to shift all of the toxic debt to NAMA and that they have bailed out the banks, as we know to the tune of €63billion. There have been some vicious budgets which have tried to shift the burden onto the poor, the pensioners, the youth and the public sector workers. The last government was forced to make a concession through the Croke Park Deal, “And other steps” is presumably a reference to the bailout, which is why the “spread on Irish bonds” which is the difference between the interest rates that the German and Irish governments are forced to pay the speculators, has fallen as a result of the bailout. Ireland has seen a growth in foreign investment but Gross Domestic Product only rose by 1.4% in 2011, Gross National product GNP – which excludes production by foreign owned companies – continued to fall.

2. Yet major challenges remain. At around 40 percent of GDP, the cumulative cost of supporting the financial sector accounts for half of the sharp increase in net public debt in recent years. The sustainability of public debt—expected to be 116 percent of GDP by year end on a gross general government basis—depends heavily on continued economic recovery. Real GDP growth is, however, expected to slow to about ½ percent in 2012 owing to weak trading partner activity. A rise in growth in coming years must overcome the drag from the ongoing fiscal consolidation and high private sector debt burdens, and must also serve to reduce unemployment, which at 14.8 percent, is at levels not seen since the 1980s.

The cost of bailing out the banks came to 40% of GDP which is why the state debt has gone through the roof since 2008. Unless the economy grows, the state will continue to be caught in a vice. Real GDP growth (excluding inflation that is) will fall to 0.5% in 2012 because most of the European Countries are more or less in recession. Any future growth will have to overcome not only the debt from bailing out AIB and the rest, but also be sufficient for workers to pay off their debts and start spending money. Unemployment at 14.8% represents a further obstacle at a level not seen for 30 years. We have called the current crisis a structural crisis of capitalism; what else does this represent?

3. Ensuring a lasting recovery will require further strong policy action. Financial sector health needs to be strengthened so that domestic demand can be supported by sound lending. Phased fiscal adjustment must be completed in a growth-friendly manner. Continued reforms are needed to head off structural unemployment.

This seems to suggest that the Government will have to continue to bail out the banks so that they can lend to people. “Phased fiscal adjustment” presumably means the gradual introduction of the Household Tax starting now with the thin end of the wedge. Growth friendly? Sure, that will mean being light on the boss and heavy on the worker.

4. Success will hinge on euro area stability and recovery, and strengthened European support is also required. Ireland’s small open economy has regained much of the competitiveness lost during the boom. Yet prospects for recovery, and for the resumption of market financing for the sovereign, rely on a revival of trading partner growth and calmer euro area financial conditions. Against that backdrop, euro area leaders have recently made welcome commitments to break the vicious circle between banks and sovereigns by enabling the ESM to recapitalize banks directly, to treat similar cases equally, and to examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment program. These commitments represent key stepping stones towards the mutually beneficial goals of ensuring Ireland’s economic recovery and its durable return to the bond market, thereby avoiding continuing dependence on official financing.

What exactly does this sentence mean? “Ireland’s small open economy has regained much of the competitiveness lost during the boom.” Well, prices fell by 6% in 2010 and went up by about 2.5% last year. Since then they have gone up by about 2% this year so far. So Irish goods are cheaper and of course the bosses have been forcing down wages throughout the economy. So all of the competiveness comes from the dire state of the economy and attacks on the working class. But, “prospects for recovery” are tied up with the European crisis as is the return of Ireland to the bond markets.

The EU is now bailing out the banks directly and is looking at the Irish banks. They see this as the way out of the crisis and therefore a way for Ireland to pay the EU their money back.

5. Reforms of the banking sector have made substantial progress. A comprehensive strategy was adopted in March 2011 to return to a fully functioning banking sector that serves the needs of the Irish economy. A rigorous analysis of capital needs at that time gained market credibility through independent loan loss estimates, stringent scenarios and capital thresholds, and transparent reporting. Downsizing of the banks has proceeded on schedule while avoiding fire sales.

By creating NAMA and moving as much toxic debt as possible, the Government bailed out the banks and reduced their liabilities. They increased the capitalization of the banks and reduced their size.

6. However, a number of interrelated challenges need to be addressed to restore banks’ ability to support Ireland’s economic recovery. In particular, arresting deteriorating asset quality and restoring profitability, together with regaining access to market funding, are each central to a resumption of lending:

• Arresting the deterioration in bank assets is essential. As residential mortgage arrears rose during 2011, the Central Bank of Ireland identified banks’ operational weaknesses in distressed credit operations and required the banks to develop mortgage arrears resolution strategies. Banks are now accelerating work to build their credit collection and workout functions. Similar supervision of workout efforts for loans to SMEs should continue to proceed apace considering the importance of this sector for job creation. The authorities also recently introduced to parliament a reform of the personal insolvency framework to help address borrower financial distress while maintaining debt service discipline. Consistent implementation and close monitoring of these combined efforts should enable a much needed transition toward long-term solutions that are tailored to borrowers in difficulties. In parallel, it will be important to ensure that the repossession framework complements the personal insolvency reforms.

“Arresting the deterioration of bank assets is essential” – this all sounds very nice. But of course what it really means is dealing with the huge rise in mortgage arrears. Our liabilities are their assets. “Operational weaknesses in distressed credit operations” – this sounds very much like the IMF doesn’t think that the banks are chasing debtors hard enough. However, they are pleased that the banks are strengthening their credit collection services, which means no doubt that they’ll be knocking on the door sooner rather than later demanding money. The same goes for small businesses, who have suffered as a consequence of the banking crisis.

• Regaining profitability is necessary for banks to sustain new lending. At present, interest margins are compressed by high deposit interest rates and fees on the Eligible Liabilities Guarantee (ELG) scheme. The authorities’ intention to phase out the ELG scheme in an orderly manner, while preserving access to funding, is appropriate. Moreover, banks’ remain burdened by cost structures that are too high; plans to reduce operational expenses will need to be fully implemented.

The IMF believes that the terms of the ELG scheme are reducing bank profitability, so they want to phase it out. Reducing bank cost structures and operational expenses will mean slashing the number of bank branches and cutting staff.

• In common with banks in other euro area countries, accessing material volumes of secured market funding to support new lending faces difficulties. The Irish deposit base has recovered somewhat recently, and banks have obtained repo funding secured on UK collateral. However, looking ahead, the banks face further bond maturities that may increase their reliance on Eurosystem funding, which results in substantial encumbrance of their assets. These circumstances undermine prospects for a revival of lending, and a sustainable solution to this problem will need to be found.

The Irish banks are still in trouble as are the rest of the European banks. It is difficult for them to attract funds and bailing out the bondholders is unpopular. The ECB seems to have changed its line on making bondholders “take a hair cut”, but they have already paid off almost all of the AIB bonds.

7. Ireland has implemented substantial fiscal consolidation since the onset of the crisis. Cumulative budget measures during 2009-12 strengthened the structural primary balance by just over 8 percent of GDP. This effort has been expenditure-led, including cuts in public wages, social welfare rates, personnel numbers and capital spending. Revenue contributions have included income tax base broadening, higher taxes on capital and savings, and an increase in the standard VAT rate. Careful design has enabled this consolidation to be achieved during a deep economic slump without compromising social cohesion or key public services.

The government has slashed wages, attacked welfare, sacked Public Sector workers and stopped capital programmes. They’ve increased taxes also. By “careful design” no doubt the IMF mean gradual introduction of household taxes, the pension levy, all of the emergency budgets and NAMA. The “social cohesion” referred to is only relative. Sure, there hasn’t been a series of General Strikes in Ireland, unlike Greece where there have been 19.

The fact is that the Croke Park Deal bought the Fianna Fáil government some relief from the large scale industrial struggles in the public sector that had dogged them throughout 2009. “Key public services” have been attacked, despite the rosy glow the IMF gives. The main reason that the Public Services have not been attacked further lies in the weakness of the Fianna Fáil/Green Coalition in the first instance and the strength of the working class. The full extent of an Bord Snip has not been implemented for example.

Fianna Fáil were routed in last year’s general election, as the working class moved from the industrial front onto the political front. FF and the Greens served their purpose, now Fine Gael and Eamon Gilmore have stepped in as the reserve team. The very fact that FG and Labour weren’t FF and the Greens gave them a certain amount of breathing space.

But the austerity is here to stay, full implementation of Croke Park, or even the ditching of the agreement as advocated by the FG TDs would open a new period of class struggle. Of course, emigration has played an important role also in the so called social cohesion. The unemployment rate is fairly stable but over 70,000 people emigrated in 2010/2011.

8. However, with the deficit still in excess of 8 percent of GDP, significant further medium-term consolidation is required. After five years of consolidation, few low-hanging fruit remain, especially on the expenditure side. A strategic approach focused on the efficiency and fairness of measures, that keeps all high-quality expenditure and revenue options on the table, is needed to complete the consolidation in a durable manner. While avoiding imposing excessive fiscal drag in any particular year, the multi-annual expenditure ceilings and the Comprehensive Review of Expenditure provide confidence that the medium-term targets will be achieved despite implementation risks associated with large expenditure adjustments, demographic pressures, and risks to the macroeconomic baseline.

The public sector has been slashed over the last few years. So we would agree that there is no “low hanging fruit”, but what is being outlined here seems like a coded message to say that the Bord Snip report is back on the agenda, What else does a “strategic approach focused on the efficiency and fairness of measures, that keeps all high-quality expenditure and revenue options on the table, is needed to complete the consolidation in a durable manner” mean? Colm McCarthy advocated the closure of whole government departments, in other words, strategic high quality services. “Implementation risks associated with large expenditure adjustments” that would be the reaction of the working class and the trade unions. So, what else do they have in mind? Huge scale sell offs of state and semi-state sponsored bodies?

9. Comprehensive targeting of spending is needed to deliver immediate reductions combined with reforms to underpin savings in the medium term. Maintaining expensive universal supports and subsidies is difficult to justify under present budgetary circumstances. Better targeting of the child benefit, medical card spending, the household benefits package and the expenditure on non-means tested pensions can generate significant savings while protecting the poor. The Croke Park Agreement has facilitated personnel reductions and efficiency savings, and has helped maintain the industrial peace needed to achieve broader reform goals. Continued monitoring of the adequacy of savings in the net pay and pensions bill, and of public service provision, is necessary. Deeper reforms in health and higher education are needed to identify service priorities and deliver them efficiently.

This speaks for itself, but, let’s spells it out. The IMF doesn’t think child benefit, health, welfare and pensions should stay as they are. They want the government to attack health and third level education. They’ll keep an eye on Croke Park and hold the government to task on their “targets”.

10. A base-broadening approach to raising revenue will mitigate adverse growth effects. Ireland’s combination of high personal and indirect tax rates, and relatively narrow tax bases, provides considerable scope for this approach. In this context, income tax reliefs could be better targeted to low-income taxpayers, and options to broaden the base for Pay- Related Social Insurance could be examined. The planned introduction of a value-based property tax in 2013 will provide a progressive and stable source of revenue. A suitably high level for this tax would maximize these benefits, while care is needed regarding collection modalities and lead times.

The IMF are encouraging the government to press ahead with the household charges, which will be much higher than any €100. They want to introduce a broader tax base. However, we can be sure that the low rates for corporation tax will remain and the working class will be expected to shoulder the burden, partly through “targeting” tax credits, which is code for cuts for most workers.

11. The growing problem of long-term unemployment requires firm implementation of a broad based approach. Although economic recovery will be the main vehicle to reduce unemployment, it is also important to ensure that jobseekers are willing and able to fill jobs when they become available. The Pathways to Work initiative sets a sound direction for engaging with and supporting the unemployed to get back into the workforce. Jobseekers’ adherence to the principle of mutual obligation should be ensured. Realizing the full benefits of this reform will take time and will require enhanced training for case workers. Involving private sector firms in the provision of activation services, especially for the long-term unemployed, could also play a useful role if well designed. Given the need to re-skill jobseekers to enable their mobility between sectors, the creation of SOLAS and the Education and Training Boards is a priority to provide regular monitoring of training outcomes and effective delivery of further education and training.

No one would be opposed to genuine training for genuine jobs. But the truth is that the welfare to work approach to solving unemployment is in reality a stick to beat the unemployed with. Over the water in Britain, the recent scandal over the workfare Jubilee security guards is an indication of the thinking of the ruling class. ICTU should be demanding a decent training on trade union rates of pay with a guaranteed job at the end of every course. But the IMF aren’t talking about this. They say that, “Involving private sector firms in the provision of activation services, especially for the long-term unemployed, could also play a useful role if well designed”. This would result in low quality profit driven programmes designed solely to force the unemployed off welfare, into temporary cheap labour programmes.

12. Reforms of social benefits can support this strategy. The flat structure of unemployment payments results in replacement rates for the long-term unemployed that are high by international standards, contributing to low exit rates from the Live Register. The highest replacement rates affect those also receiving housing benefits. To avoid unemployment and inactivity traps for this cohort, it is important to integrate the systems of social housing provision and rent supplement for those with long-term housing needs into a new means-tested Housing Assistance Payment.

This proposal suggests that unemployment payments are too high, Housing Benefits also. By a “flat structure” they mean that benefit rates don’t fall after a certain time. They claim this creates an “inactivity trap”. Our view is that it is capitalism that created this trap. Tens of thousands of Irish workers and youth are languishing without work, thousands are emigrating. It’s not the case that the state can’t afford the unemployed, the unemployed can’t afford capitalism.

We need a genuine socialist alternative, a fighting socialist programme linking the day to day struggles of the working class and the unemployed with the need to change society. We stand for a 32 County Socialist United Ireland, the nationalisation of the banks and the big industries under democratic workers control and a Socialist United States of Europe.