A new report on the Irish economy says that it was perhaps the most overheated of all advanced economies.

The detailed analysis by the International Monetary Fund says the collapse of tax revenue could push the deficit up to 12% of national income.

It warns Irish banks face losses of €35 billion by next year. The IMF says Ireland seemingly unstoppable economic growth of recent years masked serious problems, including the fragility of our public finances.

It says the economy was perhaps the most overheated of all advanced economies.

Generous rises in public sector wages pushed up wages elsewhere making Ireland less competitive.

In recent years the IMF says Ireland became the most expensive economy in the Eurozone with the possible exception of Luxembourg.

It says losses now faced by the banks could be about €35bn by 2010, although the bulk of that would be absorbed the banks' reserves.

The IMF is broadly supportive of the Government's NAMA project to buy back bank debt.

But it says pricing the purchase of those assets could be easier if the banks are nationalised, as not paying the right price opens the taxpayer to huge risks.

The IMF supports a property tax, cuts in public sector pay and reductions in Government spending.

Minister for Finance Brian Lenihan said the report was a realistic and fair assessment.

He said Government was taking steps to address the competitiveness and banking problems.

Irish economy to shrink almost 10% - OECD


Meanwhile, OECD has forecast that the Irish economy will shrink by almost 10% this year, one of the most pessimistic predictions so far.

The body also expects a further fall of 1.5% next year.

Its economic outlook says the Irish economy is experiencing a 'severe' contraction, and will recover only at a slow pace in 2010.

The OECD says substantial spending cuts and increases in tax will be needed in the coming years because of the severe pressure on the public finances.

'Problems in the banking sector must be resolved at a reasonable cost,' it adds. The OECD says competitiveness would be restored by lower wages and stronger competition.

However the OECD's overall predictions were more optimistic. It said the advanced economies of the world will soon hit the bottom of the recession and will begin the long haul towards a weak recovery by the end of the year.

The Paris-based organisation said its 30 advanced economy members would now see growth of 0.7% next year, revising its March forecast for a contraction of 0.1%.

Saying this was the first time in 24 months that it had raised, instead of lowered its forecasts, the OECD said member states' combined economic output this year would shrink 4.1% rather than 4.3%.

In a regular review it said: 'It looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom.

'Even if the subsequent recovery may be slow, such an outcome is a major achievement of economic policy.'

A massive effort by governments and central banks had pulled the world back from the brink of 'catastrophic events', it added.

The OECD said it expected the US economy to contract 2.8% this year and grow 0.9% in 2009.

Japan will be down 6.8% before returning to growth of 0.7% in 2010, while the Eurozone will shrink 4.8% this year, with zero growth next year.

20. Estimates of losses being faced by banks vary but are likely to be sizeable. On a
gross basis, staff’s review of available estimates and methodologies suggests that the losses
faced by banks through the end of 2010 could be about €35 billion, or about 20 percent of
GDP. The authorities did not formally produce any estimate for aggregate bank losses. They
have focused on the needed restructuring of property-development loans, which they rightly
view as at the heart of stress faced by banks. Staff noted that losses are likely to extend
beyond the property-development sector as the economy weakens and the design of NAMA
should incorporate that possibility

Where impaired assets renders a bank critically
undercapitalized or insolvent, the only real option may be temporary nationalization. Recent
Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be
closed, merged, or temporarily placed in public ownership until private sector solutions can
be developed ... there have been numerous instances (for example, Japan, Sweden and the
United States), where a period of public ownership has been used to cleanse balance sheets
and pave the way to sales back to the private sector.”6 Having taken control of the bank, the
shareholders would be fully diluted in the interest of protecting the taxpayer and thus
preserving the political legitimacy of the initiative. The bad assets would still be carved out,
but the thorny issue of purchase price would be less important, and the period of price
discovery longer, since the transactions are between two government-owned entities. The
management of the full range of bad assets would proceed under the NAMA structure.
Nationalization could also be used to effect needed mergers in the absence of more far
reaching resolution techniques.
26. The authorities prefer that banks stay partly in private ownership to provide
continued market pricing of their underlying assets. They disagreed with the staff’s view
that pricing of bad assets would be any easier under nationalization. They were also
concerned that nationalization may generate negative sentiment with implications for the
operational integrity of the banks. Staff emphasized nationalization would need to be
accompanied by a clear commitment to operate the banks in a transparent manner on a
commercial basis. In particular, nationalized banks should be subject to the same capital
requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy
to return the banks to private operation would be needed.

Has anyone read the detail of this. IT IS EXPLOSIVE. Especially as it is implied throughout the document that the government agree to all of it.

Highlights: Adjustment has to come through spending cuts, not increased taxation. Cut public spending by 9.5% of GDP, or circa €19billion. End universal access to social welfare including childrens allowance and unemployment payments. An end to the Family Income Supplement - use tax allowances instead. Age relate unemployment - so like with the UK a lower rate of unemployment payment to under 25's.

Public sector pay has to fall further and numbers cut as well. They were not impressed with the average 7.5% pension levy - it has to be a lot deeper.

On taxation there is nothing specific other than the broaden the base without hitting Income Taxes.

The Social partners are just going to love this.........NOT!

http://www.imf.org/external/pubs/ft/scr ... r09195.pdf

Keep in mind who the IMF are please. Two words "Shock Therapy".

Social welfare expenditures must better target the vulnerable. The authorities
recognize that it will be necessary to articulate a strategy that moves away from universalism
in social welfare to one that relies more on targeting and incentives. In this regard, means
testing or taxation of child benefits is under discussion. Consideration could also be given to
earned income tax credits as a way of supporting lower income families, as also to the
indexing of benefits to more appropriate price baskets. Also, a more nuanced minimum wage
structure that allows, for example, for age-related differentials could help competitiveness
and also reduce social transfers.

Keep in mind who the IMF are please. Two words "Shock Therapy".

Staff’s baseline implies stronger expenditure consolidation than that currently
projected by the authorities to reach their goals. Starting from a higher projected deficit in
2009 and using a more pessimistic forecast for revenues, staff’s baseline deficit in 2013
would be 4 percent of GDP versus the authorities target of 2½ percent of GDP in that year. A
further plausible consolidation in 2014 would bring the deficit below the authorities’ target to
1½ percent of GDP. In sum, over 2009-14, staff’s baseline would imply that primary
expenditures are brought down by 9½ percent of GDP while revenue measures of about
3¾ percent of GDP would offset further declines in property-related taxes and raise overall
revenues by about 2½ percent of GDP.

The Social partners are just going to love this.........NOT!

Can't wait to hear David Begg try explain this one.

Yeah this is shocking

Why do you guys find this amusing?

You are all, as far as I can tell, Irish yourselves and most of you claim to live here.
If I discuss the recession with friends or colleagues we do not start smirking or laughing as though it was an amusing joke.

Can anyone explain this to me? I am not trying to start a row, I genuinely cannot get my head around this kind of reaction.