Irish banks could provide support to struggling homeowners, the International Monetary Fund (IMF) said today but warned weaker economic growth could hinder plans to reduce the country's budget deficit.
In its annual review of the State's finances, the IMF said the transfer of loans to the National Asset Management Agency (Nama) and the revised capital ratios imposed by the Financial Regulator had moved the banks towards normalcy.
It added that narrowly-targeted support measures for vulnerable homeowners, which were mindful of the moral hazard risks, would limit the economic and social fallout of the crisis. Moral hazard is a term describing a reduced perception of debt risk due to a company or person being bailed out.
"With their bolstered capital, [Irish] banks could absorb the initial costs, perhaps basing themselves on the welfare system to identify eligible beneficiaries," the IMF said. ?This process will be aided by an overdue shift to a more efficient and balanced personal insolvency regime.?
The IMF also said Nama should dispose of property assets it has acquired in an orderly manner to reduce the overhang of property in State hands and said these sales could kick-start the stalled property market.
The organisation praised the Government for its measures to stabilise the banking sector and cut spending.
?Through assertive steps to deal with the most potent sources of vulnerability, Irish policymakers have gained significant credibility,? it said.
?These actions have reassured the global policy community and international financial markets. Over the past months, Irish sovereign bond spreads have tended to rise significantly on the days of intensely adverse international market sentiment but otherwise Ireland has been accorded the space to pursue its planned policy trajectory.?
However, the IMF said meeting the targets - set out to the European Commission to bring borrowing under control by 2014 - would require years of budgetary restraint, and the possibility of weaker than anticipated growth could hinder its plans to reduce the budget deficit.
GDP is expected to fall by around 0.5 per cent this and will rise to about 3.5 per cent by 2015. This compares to Minister for Finance Brian Lenihan?s Budget forecast of a contraction of more than 1 per cent this year and growth of 3.3 per cent in 2011.
The Department of Finance is expecting this to increase to above 4 per cent in 2012.
"If GDP growth outcomes are weaker than those currently foreseen by the authorities - a clear possibility within the current range of scenarios - the additional effort needed may even be greater," the IMF said.
It said further consolidation measures of at least 4.5 per cent of GDP would be needed to reduce the deficit to 3 per cent of GDP by 2014, as planned, but warned "consolidation fatigue" could set in.
