Ireland, the IMF and Future Credit

Nat O'Connor14/10/2013

Nat O'Connor: Ireland is a member of the IMF for the simple reason that by being a member we can seek loans from the IMF when we need them. The Irish Times has reported questions about Ireland exiting the bailout without a precautionary credit line from the EU and IMF.

Is Enda Kenny pulling Ireland out of the IMF? If so, he didn't mention it at the Fine Gael conference.

As long as Ireland remains in the IMF, we are entitled to seek credit from it in the normal way. The usual cap on credit is eight times a country's 'quota' (which is how much money we have deposited with the IMF to fund its global operations), although some credit facilities have no cap. Ireland has deposited $1,258 million with the IMF (in SDR, dollar value), so we are generally able to borrow just over $10 billion.

The IMF offers Stand-by Arrangements, Flexible Credit Lines and Precautionary and Liquidity Lines, among other forms of credit. Ireland is currently availing of an Extended Arrangement. A look at the current list of credit facilities active at the IMF shows the normal operation of their credit system.

What is currently different is that Ireland borrowed $19,466 million from the IMF, which goes beyond our normal entitlement to borrow. That's what brings the European Union into the issue and has required the creation of EU credit institutions. The IMF is constrained in its ability to lend to rich countries (and that still includes Ireland, and indeed any country in the Euro zone). Firstly, the IMF doesn't have enough money to lend into hard currency zones like the Euro zone, and secondly, developing countries with much greater economic problems take issue with the IMF bending its rules for countries in the rich developed world.

The conclusion I draw from this is that Ireland could probably take out a credit line of up to $10 billion from the IMF using the normal rules, which would probably be a relief to the IMF as it would normalise Ireland's relationship with the fund and end one instance of the IMF bending its own rules.

What is really at issue is whether Ireland needs a credit line of more than $10 billion (or c. €7.4 billion), which represents more than half of the deficit. In other words, is Ireland in sufficiently good economic shape - with capacity to borrow from the international markets - that we don't need a special deal from the EU institutions to underpin a larger precautionary loan?

That's the more interesting question. Ireland is already holding €25 billion in cash balances (held by the NTMA), which means that even if all tax revenue ceased overnight, the State has six months or so to reorganise itself.

Minister Noonan is also quoted as saying: Ireland cannot go back to “an economy built on the quicksand of a credit and property bubble”.

The debate is finally swinging around to where it should have been five years ago at the beginning of the crisis (and as discussed at length on this blog at that time and not least as outlined in TASC's industrial policy discussion papers). Ireland needs a credible strategy for economic growth that is not based on tax breaks or unsustainable debt-fuelled recovery. If we can present such a pathway to recovery to the world, we can convince international lenders that buying Irish government bonds is a safe investment with a reasonable rate of return.

Tomorrow's budget needs to present some convincing evidence that Ireland is on a pathway to full employment based on sustainable growth, but there is insufficient evidence (to date) that Ireland's model has shifted sufficiently away from a reliance on laissez faire approaches like tax incentives for multinationals and using poverty disincentives to squeeze people who are unemployed (into non-existant jobs!), rather than facing up to real and concrete issues like investment levels. (Currently Ireland has the lowest fixed capital formation - public and private combined - in the EU).

However, as argued in TASC's industrial policy papers and elsewhere, Ireland does have a lot of potential for a very different type of economy - we can harness our education levels and inventiveness, combined with global networks, to create growth based on innovation and new products and services. And the low levels of investment currently means that new investment is likely to have lots of options to find higher rates of return from credit-starved Irish businesses. But part of any new strategy to focus on real investment has to include a careful process of giving up our worst tactics (including facilitating global tax avoidance). These tactics are ultimately unsustainable, inequitable and have led to the systematic distortion of investment decisions in the economy away from productive sectors into financing short-term bubbles in construction and property.

Dr Nat O'Connor     @natpolicy

Nat O'Connor

Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.

Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.



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