IMF Review

The Third Review by the IMF can be read here.

20 replies on “IMF Review”

Is it really only 10 months since Ireland became an IMF basket-case? Anyway I’m glad to see things are improving, albeit from a very low base. JTO will be along presently to tell us that this proves he was right all along.

The big risks now are to the Eurozone in general, which can still swamp us. Nick Rowe’s comments are worth a look.

RTE are not so positive about the IMF Review. They are running a story under the headline “IMF cuts Irish economic growth rate“.

They claim that the IMF has reduced the 2011 and 2012 growth rates to 0.4% and 1.5% from 0.6% and 1.9%. This was repeated during the Six One news programme.

From what I can tell the IMF Review does not downgrade Ireland’s growth for 2011 and 2012. The figures in Table 2 on page 26 confirm the 0.6% and 1.9% growth rates.

Am I missing something?

Found it!

On Page 82 of the pdf contains the following:

5. A global slowdown is expected to dampen the pace of recovery in Ireland. The growth outlook for key trading partners—the euro area, the U.S. and the U.K.—has worsened substantially since the staff report was issued. Indeed, the services sector PMI indicates falling new export business, and the PMI for manufacturing suggests a slowdown in the growth of new export orders. Staff have therefore lowered projections for growth in demand for Irish exports, especially in 2012, although the impact on activity will be cushioned by the high import-content of Irish exports. For the September World Economic Outlook, staff will lower the projected Irish growth rate to 0.4 percent in 2011 and to about 1½ percent in 2012.The impact on the public debt outlook is modest, and is also offset by the expected interest rate reduction on EU financing. These macroeconomic projections will be updated following the release of national accounts data for the second quarter in late September in preparation for the fourth review.

It looks like they will downgrade our growth but are waiting a few weeks to do it!

@Seamus Coffey
The IMF say it won’t make a lot of difference due to reduction in rates in the July deal…let’s hope S&P and the others see it the same way. 1.5% growth for 2012 is a fragile number given the current EU, UK and USA recent economic performance and forecasts.

@Kevin Donoghue

JTO will be along presently to tell us that this proves he was right all along.

JTO again:

I wouldn’t go that far yet. I am somewhat disappointed in the performance of Obama and had hoped that US growth would be higher by now. I’m afraid that he isn’t a patch on Ronald Reagan who led the US triumphantly out of its last recession.

But, what I said repeatedly last year was that the panic in relation to the Irish economy and its possibility of going bust was being whipped up out of all proportion to the reality. This view is now becoming the consensus. ESRI yesterday, IMF today. From the Brendan Keenan column in yesterday’s Irish Independent:

“It is clear that many people are living in fear of some kind of catastrophe, where they will awake one morning to find their currency abolished, their life savings devalued, and the Government seizing what is left. Such fears have already emptied the Irish banks of a large chunk of their deposits from ordinary customers. We are unlikely to make much progress in restoring confidence unless such fears are allayed. THE ESRI REPORT ARGUES THAT THE PANIC IS GREATLY OVERDONE.”

Exactly what I have been saying. Those media commentators and economists who whipped up the panic should be held to account. It is now clear that Ireland isn’t going to go bust and isn’t going to exit the euro and devalue. There isn’t going to be the catastrope that people were led to believe was going to happen, and fear of which drove them to shift their savings out of the country, where it has been earning a far lower real rate of return than if they had left them in Ireland.

With inflation at 1%, Ireland government bonds yielding 8.5% are one of the best investments in the world, if not as good as a few months ago when they yielded 14%. Those people who turned their noses up at them, and bought UK bonds at 2% instead, must be kicking themselves. As for the morons who transferred their savings to UK banks from 2007 on, unable to resist the unbeatable UK combination of BofE 0.5% interest rates and 5% inflation, they fully deserve the losses they have incurred.

The government should aim to bring about a complete collapse in bond interest rates. Given Ireland’s inflation rate and balance of payments surplus, I can’t see any justfication for interest rates of more than 1% on Irish government bonds at present. UK bonds have an interest of 2%, and Ireland’s inflation rate is 3.5% lower than the UK’s, plus Ireland has a balance of payments surplus and the UK hasn’t. Anything in excess of this figure on Irish bonds, is simply based on the fear of a catastrophe that every day is becoming increasingly unlikely to happen.

It comes as financial markets also show signs of being a lot less worried about an Irish bankruptcy.

Oops. The last line from my post is in the wrong place. It should be part of the quote from the Irish Independent.


If I live in country E (a member of the eurozone) and inflation in country E is running at 10% surely my real return on Irish government bonds (yielding 8.5%) is negative and has nothing to do with the 1% Irish inflation rate?

You have made this point a number of times but I still don’t understand it. If someone from the UK has invested in Ireland surely the only things they are interested in are the interest rate on the Irish asset, the euro/sterling exchange rate and the UK inflation rate. I cannot see how the Irish inflation rate has any direct effect on the real return for a UK resident who is planning to spend their money in the UK?

I am open to be corrected on this.

Ireland was bust. Ireland is bust. That was why Ireland had to apply to the Troika. It was so bust that it would be unable to pay its employees, and its obligations to its citizens, without outside help.
That is my definition of ‘bust’.
And there is a catastrope. Maybe not for you but for hundreds of thousands, the last three years have been a catastrophe.

Any person who can afford to boast ad nauseum of his investments in the current environment is unlikely to be able to empathise with the feeling of catastrophe.

The IMF to their small credit appear to recognise when an imposition is unfair, even if they are unlikely to do anything about it.
And in case you missed it, the have revised down the growth targets for Ireland.

There is so much data in this report. The IMF made a mess of predicting how things would go with Greece. There is a risk of some kind of ‘event’ happening in the Eurozone in the next year, like a Frecnh bank in big trouble or Greece getting no more funding etc. In my opinion the IMFs key error in Greece was not taking into account the possible risks properly and putting too much emphahis in short-term historical data.

@Seamus Coffey

Most of my comments on the matter have been related to people in Ireland moving their savings in a panic from banks in Ireland to banks in the UK, which is outside the eurozone.

If a country is outside the Eurozone, but has permanently higher inflation than Ireland and the rest of the Eurozone, then its currency is likely to devalue against the euro. Which is exactly what has happened the £sterling v the euro since 2007. In summer 2007, the £sterling was worth approximatelt 1.5 euros, now its approximately 1.1 euros. So, you neeed to factor this into account. Plus, in addition to its high inflation and depreciating currency, UK interest rates have been much lower than those in Ireland or the rest of the Eurozone. The continuing much higher inflation in the UK, along with their much more lax approach to the printing of money, means it is much more likely than not that the £sterling will continue to depreciate v the eurozone in years to come.

Another report out today highlighting how savers in the UK have been screwed in recent years by the combination of high inflation and negligible interest rates. Yet, Irish savers have been rushing in a panic since 2007 to move their savings to the UK to take ‘advantage’ of this combination.

The bottom line in all this is that, if we cut through the waffle on the subject (including my own), and do a few calculations, it will illustrate the point. Given your great statistical expertise, how about you doing the following calculations and posting them on your excellent website:

(a) A man in Cork (let’s call him Michael), had 100k euros in his savings in the Bank of Ireland in Patrick Street. In June 2007, he read a Morgan Kelly article in the Irish Times, panicked, and moved his 100k euros of savings from the Bank of Ireland in Cork to a bank in London.

(b) A man in Cork (let’s call him Seamus), had 100k euros in his savings in the Bank of Ireland in Patrick Street. In June 2007, he read a Morgan Kelly article in the Irish Times, decided to ignore it, and left his 100k euros of savings in the Bank of Ireland in Cork, where it remains to this day.

How much are Michael’s and Seamus’s savings worth in euros today?

Who made the wise decision: Michael or Seamus?

Perhaps you could do the calculations and let us know?

I am talking above about simply moving savings from one bank to another, which is what most people do, including myself (in the opposite direction), as I have said many times. If we look at the more complicated matter of buying government bonds, which is more relevant to the choice of investing in Ireland or in other Eurozone countries, then it is increasingly likely that people who bought Irish government bonds in recent years are going to make a whopping profit if they hold them to maturity. Regrettably, I am not among them. I wish now that I was. I might still do, although time is running out as their price is rising. To be honest, I don’t really know how the layman goes about buying government bonds. Back in early July, when Darren Clarke won the British Open, I posted on this site that he should invest his winnings in Irish government bonds. I bet he wishes now that he had. Someone will be posting in a minute that this is all nonsense, as the price of Irish bonds has fallen since June 2007, although the price has risen sharply since June 2011. But, I am talking about holding bonds to maturity, not wheeling and dealing, buying and selling them on a daily basis, according to the latest ‘rumour du jour’. The analogy I drew a few weeks ago was with betting on the result of a football match. If I do that, I do it on the basis of winning or losing on the final result of the match, not staying permanenly on my mobile while the match is in progress, buying and selling the bet 50 times. Taking this approach to Irish government bonds, the fact is that, as the risk of devaluation, default recedes, someone who bought an Irish government bond at the height of the panic, when all around him were losing their heads, is increasingly likely to make a whopping profit if he holds it to maturity. And especially so, if compared with the alternative of having bought UK government bonds at the same time.

@Kevin Donoghue

Thanks for that info. I may well do that.

Being a layman in these matters and having a day job that is totally unrelated, I have always been content to let my bank handle all my financial affairs, while I just gave general guidelines.

I just hope I haven’t missed the bus. Buying an Irish government bond at 14% interest rate back in June is an investment opportuniity I may never see again in my lifetime. More fool me for having missed it. Still 8.5% isn’t bad, given an inflation rate of 1%.

Glad to be of assistance. I hope you don’t have to experience what I did — watching your “bargain” bonds become a better bargain week after week, as the EU pussyfoots around. But I’m a holder of the 2025 issue so I’m still hopeful it will come good in the end.

“Who made the wise decision: Michael or Seamus?”

Well Seamus is quids-in of course, thanks to the fact that taxpayers like me got saddled with the burden of rescuing his appallingly mismanaged bank. Which is also why my bonds have become such a bargain, please note. So if he foresaw all that, then you could say he was shrewd. That’s not how I look at it. For me, the wise decision I want to see is for the state to get that poxy bank into foreign ownership ASAP so that I don’t foot the bill for their future cock-ups. When BofI is owned by UBS or HSBC, they can drop Seamus in the manure for all I care. The main thing is that the ECB understands they are not saddling me with this bill again.

Let me amend that: foreign ownership will not suffice. I want them to become branches of foreign banks, so that there is no ambiguity as to where the buck stops.


If you live in Northern Ireland, I cannot see the relevance of the Irish inflation rate when analysing your return on Irish government bonds. If the Irish inflation rate changes, while that in Northern Ireland remains unchanged, has your real return changed? I still don’t see it.

We could do the calculation you request very easily but one variable that would not be included is the UK inflation rate. Michael and Seamus live in Cork, UK inflation has no direct effect on their return. Any effect will be picked up through the exchange rate, the actual inflation rate is irrelevant to the calculation.

Everyone knows the answer to this but if Michael took €1,000 in June 2007 he would have deposited around £660 into a sterling account. Earning a net rate of 2.5% per annum that would be around £730 now. Bringing that back to Ireland would give Michael around €820 in September 2011.

JtO self admittidly doesnt know/do banking. Glad you have helped him. I have to say theres a dreary tedium about his personal finance musings that makes this blog more akin to askaboutmoney.

Returning to the IMF Review. Here is a quick comparison between the annual interest costs from the May and September reviews taken from Table 3. Ireland: General Government Finances of each report

2011: 6.1 6.0
2012: 7.5 7.7
2013: 9.9 10.1
2014: 10.8 11.4
2015: 11.4 12.2

Apart from 2011 the IMF are forecasting an increase in interest expenditure for every year to 2015, with a cumulative increase of nearly €2 billion. And we are expecting our interest bill to go down!

I have just done a quick comparison between the cumulative figures from the IMF Review and the ESRI Research Article from this week.

First, the cumulative General Government Balance from 2011-2015

ESRI: €47.7 billion
IMF: €60.4 billion

The ESRI are almost €13 billion more “optimistic” of our deficit funding requirements over the next five years. That is quite a difference so next I looked at the forecasts of the cumualtive Primary Balance

ESRI: €8.7 billion
IMF: €12.9 billion

The difference is down by more than two-thirds and a cumualtive €4.2 billion difference over a five year forecast period is not that remarkable.

Finally I looked at the cumulative interest payments given that they must be explaining the differences

ESRI: €38.7 billion
IMF: €47.4 billion

There is a €9 billion difference between the cumulative interest costs used in each forecast. This explains a significant amount of the difference of the 2015 General Government Debt estimate of each body:

ESRI: €194.3 billion
IMF: €216.5 billion

There is a €22.2 billion gap between them the debt forecasts. €12.7 billion is explained by the difference in the annual deficits (with 75% of that due to interest). The remainder is explained by the €7 billion drawdown of our cash reserves that the ESRI recommend which is not included by the IMF (they leave us with more cash on reserve) and the €3 billion of “contingent capital” that the ESRI forecasts will be returned to the State in 2014. The IMF do not allow for this.

Excluding interest, cash and “contingent capital” the ESRI is more optismistic than the IMF by about €4 billion between now and 2015. That is of little significance but there is a surprising difference between the interest forecasts of both bodies.

@ Philip (Doh!)

Just don’t read JtO then (and preferably don’t post either), lots of people enjoy his contrarian views, and even learn from them at times.

@ Phillip ii

“JtO self admittidly doesnt know/do banking. Glad you have helped him”

Ah, sweet irony. No doubt selling JtO’s deposits would’ve saved us all…

@ Seamus

I think JtO’s point was this – people investing in low yielding, high inflation economies can expect a currency loss at some point. People investing in high yielding, low inflation economies can expect the opposite, even though obviously this doesn’t deal with the issue of “why is one yielding so high?”.

At a very base level, it is food for thought for those that have switched them out of Ireland and into the UK because of perceived credit risks. The high inflation rate can be expected to have some sort of negative impact on the currency’s value, ceterus paribus n all that. Focusing entirely on a credit event that never materialized and ignoring an inflation/currency debasement event that very much did is what those investors missed in the overall scheme of things.

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