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IMF Report on Ireland June 2009 and critique (see doc description)

IMF Report on Ireland June 2009 and critique (see doc description)

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Published by James Dwyer
"One of the classic techniques of government spin-doctoring is to brief the press prior to a bad news announcement to the effect that the announcement is actually good news.

Today the Irish Independent reported that the soon-to-be-released IMF Article IV staff report enthusiastically praises the government’s approach to the banking crisis. The Indo reported that “the IMF says the Government is right in the action it has taken on the two key areas of banking and the public finances … The IMF backs the setting up of the National Asset Management Agency … It says NAMA offers the chance of taking bad assets from the banks, which is a precondition for their return to health. And the IMF agrees NAMA can be self-financing”

Sounds like a strong endorsement for the govenment, huh? Well, the report has now been released. It has lots of interesting stuff in it, which I’m sure our contributors will have more to say about later. Naturally, however, I was drawn to page 19 of the report:

25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.

26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.

What do people think? A ringing endorsement of the government’s approach?
By Karl Whelan
June 24th, 2009"

Rapid progress on bank restructuring is critical to reestablishing a healthy financial sector. With banks facing liquidity pressures and sizeable losses, the authorities have taken important steps to stabilize the financial system—through the blanket guarantee to depositors and creditors and the recapitalization of banks. ECB credit lines have provided valuable liquidity. The proposed National Asset Management Agency is potentially the right mechanism to separate the good from the bad assets. Its success requires a comprehensive and realistic assessment of impaired assets. The authorities’ efforts to press ahead with supportive regulatory and supervisory measures will help manage the current stress and lower the risk of future crises. Fiscal consolidation has begun—and requires a sustained effort. The authorities’ sense o
"One of the classic techniques of government spin-doctoring is to brief the press prior to a bad news announcement to the effect that the announcement is actually good news.

Today the Irish Independent reported that the soon-to-be-released IMF Article IV staff report enthusiastically praises the government’s approach to the banking crisis. The Indo reported that “the IMF says the Government is right in the action it has taken on the two key areas of banking and the public finances … The IMF backs the setting up of the National Asset Management Agency … It says NAMA offers the chance of taking bad assets from the banks, which is a precondition for their return to health. And the IMF agrees NAMA can be self-financing”

Sounds like a strong endorsement for the govenment, huh? Well, the report has now been released. It has lots of interesting stuff in it, which I’m sure our contributors will have more to say about later. Naturally, however, I was drawn to page 19 of the report:

25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.

26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.

What do people think? A ringing endorsement of the government’s approach?
By Karl Whelan
June 24th, 2009"

Rapid progress on bank restructuring is critical to reestablishing a healthy financial sector. With banks facing liquidity pressures and sizeable losses, the authorities have taken important steps to stabilize the financial system—through the blanket guarantee to depositors and creditors and the recapitalization of banks. ECB credit lines have provided valuable liquidity. The proposed National Asset Management Agency is potentially the right mechanism to separate the good from the bad assets. Its success requires a comprehensive and realistic assessment of impaired assets. The authorities’ efforts to press ahead with supportive regulatory and supervisory measures will help manage the current stress and lower the risk of future crises. Fiscal consolidation has begun—and requires a sustained effort. The authorities’ sense o

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Published by: James Dwyer on Jun 25, 2009
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© 2009 International Monetary Fund
June 2009IMF Country Report No. 09/
195
 [Month, Day], 201 August 2, 2001
Ireland: 2009 Article IV Consultation—Staff Report; and Public Information Notice onthe Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions withmembers, usually every year. In the context of the 2009 Article IV consultation with Ireland, thefollowing documents have been released and are included in this package:
 
The staff report for the 2009 Article IV consultation, prepared by a staff team of the IMF,following discussions that ended on May 1, 2009, with the officials of Ireland on economicdevelopments and policies.
 
Based on information available at the time of these discussions,the staff report was completed on May 20, 2009. The views expressed in the staff report arethose of the staff team and do not necessarily reflect the views of the Executive Board of theIMF.
 
A Public Information Notice (PIN) summarizing the views of the Executive Board asexpressed during its June 15, 2009, discussion of the staff report that concluded the Article IVconsultation.The policy of publication of staff reports and other documents allows for the deletion of market-sensitiveinformation.
Copies of this report are available to the public fromInternational Monetary Fund
Publication Services700 19
th
Street, N.W.
Washington, D.C. 20431Telephone: (202) 623-7430
Telefax: (202) 623-7201E-mail:publications@imf.org 
Internet: http://www.imf.org
International Monetary FundWashington, D.C.
 
 
 
 
 
INTERNATIONAL MONETARY FUNDIRELAND
Staff Report for the 2009 Article IV Consultation
Prepared by the Staff Representatives for the 2009 Consultation with IrelandApproved by Ajai Chopra and Martin MühleisenMay 20, 2009
Executive SummaryGiven its serious internal imbalances, Ireland was especially vulnerable to the recentglobal shocks.
Overextension in construction and financial intermediation, along with loss of international competitiveness, has meant that the impact will be sizeable. Cumulatively, GDPis projected to contract by 13½ percent through 2010, the largest among advanced economies.Thereafter, as the present dislocations gradually correct themselves, only a modestly-pacedrecovery is foreseen. The incipient decline in wages will need to be sustained to help redressIreland’s cost disadvantage.
Rapid progress on bank restructuring is critical to reestablishing a healthy financialsector.
With banks facing liquidity pressures and sizeable losses, the authorities have takenimportant steps to stabilize the financial system—through the blanket guarantee to depositorsand creditors and the recapitalization of banks. ECB credit lines have provided valuableliquidity. The proposed National Asset Management Agency is potentially the rightmechanism to separate the good from the bad assets. Its success requires a comprehensiveand realistic assessment of impaired assets. The authorities’ efforts to press ahead withsupportive regulatory and supervisory measures will help manage the current stress and lower the risk of future crises.
Fiscal consolidation has begun—and requires a sustained effort.
The authorities’ sense of urgency is welcome. Such, however, has been the collapse of revenues that the 2009 deficitcould reach 12 percent of GDP. The authorities recognize that the execution of their ambitious consolidation plan will require a continuing commitment to address sensitiveexpenditures, including the public wage bill and the scope of social welfare programs. Theconsolidation will be more credible the more tightly it is tied to monitorable goals.

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