IMF Warns of Irish Austerity Fatigue as Bailout Exit Looms

Ireland’s government should stick to planned budget cuts as the nation heads for the bailout exit door, the International Monetary Fund said, warning of growing weariness with austerity across the economy.

The Irish government estimates an accord in February to restructure the bailout of former Anglo Irish Bank Corp. will yield 1 billion euros ($1.3 billion) in annual savings from next year. These shouldn’t be used to temper budget cuts as the state may face once-off costs from the deal or be forced to inject more capital into its surviving banks following stress tests early next year, the Washington-based IMF said in a report today.

“After six budgets, adjustment fatigue is growing,” the IMF said. “Steady budgetary adjustment should be maintained to safely reach the medium-term fiscal targets.”

Irish Prime Minister Enda Kenny is aiming to exit the country’s three-year international bailout on time at the end of the year. As a safety measure to underpin the nation’s full return to bond markets, Ireland is expected to seek support from the IMF if it decided to avail of a possible precautionary credit line with the euro-area permanent rescue fund to bolster its “durable return to market financing,” the Washington-based fund said.

“We and the authorities can see certain advantages to having a backstop,” Craig Beaumont, the IMF mission chief for Ireland, said on a call with reporters today.

An European Stability Mechanism “backstop could cushion financing against a range of potential risks in the intermediate post-program period, and would also meet one of the conditions for Ireland to qualify for” the European Central Bank Outright Monetary Transactions bond-buying program, the IMF said.

Bank Tests

Separately, Ireland has pledged to carry out a thorough assessment of its banks’ assets by November in preparation for broader European bank stress tests, which have been delayed to 2014, the IMF said.

The country’s banks were ordered to raise 24 billion euros following the last round of tests in 2011, most of which came from the state, bringing its bank bailout bill to a gross 64 billion euros.