The International Monetary Fund warned today that Ireland faced significant risks that could affect its ability to repay an aid loan, and it forecast the country would miss the target of reducing its deficit to 3 per cent of GDP by 2015.
The IMF made the comments in a staff report issued a day after it approved a €22.5 billion loan for Ireland as part of an €85 billion rescue bailout package.
The rest of the bailout includes €45 billion from Europe and €17.5 billion which Ireland will contribute itself.
"The pace of recovery is projected to be modest. Downside risks are significant, stemming from deflationary tendencies, overstretched balance sheets and adverse fiscal and financial feedback loops," the IMF said in its latest report.
"There are significant risks to the programme that could affect Ireland's capacity to repay the Fund," the IMF said.
The Government has committed to shrink and restructure Irish banks and reduce the deficit in Europe by 2015 at the latest as part of the conditions for an EU-IMF bailout.
It will remove €15 billion - equivalent to around 10 per cent of annual economic output - from its deficit over four years starting with the 2011 budget's record package of €6 billion in spending cuts and tax hikes.
The EU is giving Ireland until 2015 to get its budget deficit below a bloc limit of 3 per cent of GDP, but the IMF said it forecast the deficit to reach 5.1 per cent of GDP by 2014 and 4.8 per cent by 2015, without further fiscal measures.
"Under staff's current projections, achieving the new target is likely to need further measures in the medium term," the document said.
It however, said the economy was likely to stabilise and start recovering next year, from -0.2 per cent in 2010 to 0.9 per cent in 2011.
The IMF said that while Irish authorities had taken major measures to strengthen the banking sector, "vulnerabilities remain acute".
The IMF's sobering assessment came on the same day Moody's rating agency downgraded Ireland's credit rating five notches to Baa1 - three notches above junk status - with a negative outlook, warning that further downgrades could follow if Dublin was unable to stabilise its debt situation.
Particularly worrying was the IMF's assessment that the contagion threat from Ireland is "significant". "Given market perceptions, spillover effects to other peripheral euro area economies could be large. Greece, Portugal and Spain are the most vulnerable to volatility spillovers from an event in Ireland."
"Other euro-area sovereigns show negative country-specific cross-correlations, while Italy and Belgium appear like borderline cases," the report said.
By restoring financial stability, however, the threat to other countries could be contained. The IMF warned that political risks remained considerable in Ireland.
Reuters
