IMF Approves €22.5 Billion Loan For Ireland

International rescue package totaling €85 billion

Program aims to restore banking system to health

Fiscal package to reduce deficit and public debt

The main goal of the EU/IMF-supported package is to restore confidence and financial stability. The package includes plans to fundamentally restructure Ireland’s banking system and safeguard public finances. Reforms to restore the long-term growth potential of Ireland’s economy are also part of the program.

“The Irish authorities have designed an ambitious package to address the economic crisis facing the nation,” IMF Managing Director Dominique Strauss-Kahn said.

In recent months, the economic and financial pressures facing Ireland have been intense, leaving the country with little choice but to turn to the international community for help. A preliminary agreement with the European Union and the IMF was announced November 28.

Repairing the banking system

Ireland’s banks are at the heart of the current crisis. Massive lending during the boom years left banks heavily exposed to the Irish property market, which has yet to stabilize despite a steep fall in housing prices of 36 percent since the peak in 2008. At the height of the boom, the assets of domestic banks amounted to five times Ireland’s gross domestic product, with real estate loans making up close to 30 percent of all loans in 2006.

Such an oversized banking system is no longer sustainable, not least because of the ongoing weakness of the property market in Ireland. The problems have resulted in a loss of deposits and market funding, and have made Irish banks overly dependent on financing from the European Central Bank. The banking sector therefore needs to be restructured and recapitalized.

“Swift and sustained implementation of this program will create a smaller banking sector that is robust and well capitalized, and able to serve the needs of Ireland’s economy,” EU Commissioner Olli Rehn and Strauss-Kahn said in their joint statement on November 28.

The EU/IMF-supported package has three key objectives:

•Identify those banks that remain viable and return them to health through downsizing and reorganization.

•Recapitalize banks and encourage them to rely on deposit inflows and market-based funding.

•Strengthen bank supervision and introduce a comprehensive bank resolution framework.

The joint financing will provide the funds necessary for the recapitalization. Under the program, the government will have a notional buffer of...