Divisions within troika may be to Ireland’s advantage in bailout exit

In just over six weeks' time Ireland will become the first European country to exit an IMF-EU bailout programme. It's an important milestone for Europe as it seeks to prove its policy response to the crisis is
working.

But it is also a significant moment for the IMF. For the first time, a country in receipt of joint EU-IMF finance is preparing to return fully to private markets.

The IMF has financed troubled countries for years, but the euro-zone crisis marked the first time the fund intervened to help a country in Europe's currency union. The first wave of IMF involvement in Europe occurred in the early stages of the global financial crisis, with the fund providing finance to eastern European countries such as Hungary, Latvia and Romania. With the Greek bailout in early 2010, the IMF became involved in a joint rescue programme for a euro zone country for the first time, followed swiftly by
programmes for Ireland, Portugal and Cyprus.

Founded in the wake of the second World War, the regulation of currency exchange rates and focus on balance of payments has been a fundamental doctrine of the IMF since the outset. With the euro-zone crisis, the organisation found itself faced with a situation where currency devaluation was not an option.

Angry response
Since embarking on joint rescue programmes, the relationship between the IMF and its euro-zone partners has not always been smooth.

In its report on the first Greek bailout earlier this year, the IMF criticised the handling of the first euro-zone rescue, arguing there should have been a debt write-down and more emphasis on structural reforms in Greece. The report prompted an angry response from the European Commission, which said it "fundamentally disagreed" with the report, arguing that a debt write-down could have triggered systemic contagion across the euro zone. The IMF's comments on structural reforms were "plainly wrong and unfounded", it said.

The IMF has of course an obligation to European countries, many of which – including Ireland – are contributing members. The fund's European credentials are underlined at the highest level of the organisation – both Christine Lagarde and her predecessor Dominique Strauss Kahn are French.

Nonetheless, a number of European figures, including head of the ESM fund Klaus Regling, have questioned the IMF's future involvement in euro zone rescue packages. In July, European Commission vice-president Viviane Reding called for the troika to be dissolved, declaring "the time of the troika is over", while the European Parliament has been leading calls for the troika to become more accountable.

The tripartite structure of the troika is an important dimension of the ongoing talks on Ireland's exit strategy from the bailout. This week, Minister for Finance Michael Noonan met senior IMF officials in Washington following meetings with the ECB and the European Commission last week. Next week, talks will resume on the European side when the Minister travels to The Hague for a meeting with the head of the euro group,R Jeroen Dijsellbloen.

Representatives from Brussels, Frankfurt and Washington are working together in Dublin until the end of next week for the final troika visit.

Ireland's success
How far Ireland can exploit any differences between the troika members is unclear. Officials have played down any divisions regarding the troika's position, but the IMF has previously taken strong positions on a number of issues relating to Ireland. Most significantly, it has argued that Irish banks should receive ESM direct recapitalisation, which is opposed by many countries in the euro group, including Germany. While ironically, Ireland's perceived success in implementing the programme has lessened its case for further debt relief in Europe, the IMF believes that Ireland's debt levels means it needs further help. As Ireland continues to make the case for retrospective direct recapitalisation for AIB and Bank of Ireland, IMF support for the measure could be a useful card to play.

In many ways, Ireland has reason to be confident as it negotiates an exit strategy over the next month. In contrast to the dire situation it faced when it was forced to seek a bailout three years ago, it is in a relatively strong negotiating position, with €25 billion in reserve at the NTMA and low bond yields. Further, Europe needs the Irish exit to be a success. With the IMF consistently calling on Europe to shoulder more of the burden throughout the crisis – its priority is generally the debt sustainability of each individual country, not necessarily the overall health of the euro zone – Ireland may find a useful ally in the Washington-based institute as it seeks to negotiate an exit strategy that will prioritise Ireland’s needs rather than Europe’s.