IMF distances itself from comments against austerity

The International Monetary Fund has distanced itself from comments by the fund's former mission chief to Ireland, Ashoka Mody, who said complete reliance on austerity was not "a reasonable" way to go.

“Choice one was to bring in the bondholders and they would bear some of the cost of the sovereign distress. A second choice was to offer extremely concessional official financing. Third choice was to impose austerity,” he had said.

The IMF pointed out that Mr Mody had retired from the IMF “and his views do not represent the fund’s position”.

Ireland's bailout programme, it said “has tackled major challenges in the banking sector and has steadily reduced the fiscal deficit from unsustainably high levels through a consolidation effort that is phased over time”.

The fund said it was “disappointing that growth in 2012 was not as high as originally projected, but this partly reflects the notably worse external environment, and Ireland is on track for positive growth in 2013 at a time when the euro area as a whole is in recession”.

It said strong policy implementation by the Irish authorities, “together with announcements by European leaders and the ECB”, had enabled Irish bond yields to fall to more manageable levels and for market access to be regained.

Construct wrong

Speaking on RTÉ’s Morning Ireland yesterday morning, Mr Mody said the construct for Ireland’s rescue was wrong. “We are seeing a belated recognition of the fact that the constraint imposed only by austerity was untenable.

"Clearly the experience, if experience was needed, has demonstrated that reliance on austerity is counterproductive."

Earlier this year, Mr Mody said the legacy burdens of the crisis must be addressed.

“The alternative is unending human pain, a culture of national dependency and a fraying European economic and social fabric.”

He said the debilitating consequence of delays in debt restructuring has been unrelenting fiscal austerity – a silent tragedy that has no champions.

In May 2011, upon completion of its second review, the ECB-EC-IMF troika projected that Irish GDP would grow by 1.9 per cent in 2012. Instead GDP grew by an estimated 0.9 per cent. Growth expectations for 2013 have fallen from 2.2 per cent to just over 1 per cent.

Separately, the IMF yesterday warned about the risks associated with the sustained unconventional measures central banks in the industialised world have been taking in order to boost economic growth and maintain financial stability.

The warning comes in the IMF’s Global Financial Stability Report, one of its flagship publications.

The unconventional measures referred to in the report include keeping interest rates at historic lows for prolonged periods,providing long-term liquidity provision to banks and buying large quantities of financial assets, including government bonds.

“Policymakers should be alert to the possibility, however, that fi nancial stability risks may be shifting to other parts of the fi nancial system, such as shadow banks, pension funds, and insurance companies. Th e central bank policy actions also carry the risk that their eff ects will spill over to other economies” the report states.