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Rescue plans focus on Irish banking system

19 November 2010 02:13 (UTC +04:00)

Baku â€“ APA. International Monetary Fund and European Union experts are expected to focus on measures to clean up the banking sector, strengthen the public finances and overhaul the tax system as they draw up a rescue plan for Ireland, APA reports quoting â€œFinancial Timesâ€.
The officials spent Thursday, the first day of their hastily arranged visit to Dublin, in discussions at the Irish central bank, the finance ministry and the local headquarters of the European Commission. The talks will go on at least until early next week, according to Irish ministers.
The measures will differ from a reform programme prepared for Greece in May, in that the main problems identified there were gross mismanagement of the public finances, unreliable official statistics, public sector corruption and a lack of business competitiveness.
Because the banks are regarded as the heart of Irelandâ€™s problem, one chief goal of the multibillion-euro rescue package will be to enable lenders to build bigger capital buffers to protect them against huge losses on property deals.
â€œThis is money that is supposed to go in as capital â€“ in other words, something goes in as a buffer and comes out again when itâ€™s not needed,â€ said Patrick Honohan, Irelandâ€™s central bank governor.
According to several Irish bankers and economists, the IMF-European team may press for Irish banks to raise their core tier one capital ratio, a measure of a bankâ€™s financial strength, as high as 12 per cent.
Under measures taken since the financial crisis swept over Ireland in 2008, the nationâ€™s banks are obliged to raise their tier one capital ratio to 8 per cent by the end of this year.
The banks may also be told to improve their liquidity positions by selling packaged blocks of loans to international investment funds. If, as seems likely, the IMF and European experts determine that the Irish governmentâ€™s economic growth forecasts for 2012-2014 are too optimistic, they may recommend public sector wage cuts above the 15 per cent reduction already adopted since 2008.
This move would be justified on the grounds that Irelandâ€™s public sector wage bill soared 145 per cent between 2000 and 2008 â€“ even more than the 92 per cent recorded in Greece. A cut in Irelandâ€™s minimum wage â€“ which, at â‚¬8.65 an hour for experienced adult workers, is the eurozoneâ€™s second highest after Luxembourg â€“ is also possible.
To judge from the experience of Greece, which was required to raise value added tax to 23 from 19 per cent as a condition of its â‚¬110bn rescue six months ago, Ireland may have to raise VAT from its present level of 21 per cent.
But some economists predict a one-year holiday next year on stamp duty, a tax levied on property sales, in an attempt to revive activity in Irelandâ€™s depressed housing market.
Elimination of tax breaks, and changes to Irelandâ€™s income tax system so that more low-paid workers are brought into the tax net, are likely. However, enormous resistance can be expected if Irelandâ€™s European partners continue to press the government to raise corporation tax from 12.5 per cent, one of the eurozoneâ€™s lowest rates.
Irish politicians and businesspeople say US companies such as Google and Pfizer, the internet and pharmaceutical groups, would not have considered investing in Ireland if it had not been for the attractive tax conditions.
â€œItâ€™s been the basis of Irelandâ€™s prosperity,â€ said John Bruton, who served as prime minister from 1994 to 1997 and whose government set the tax at its present level. â€œThere are other areas of taxation where we can raise money.â€
Speaking on Irish radio, Mr Bruton observed that the average Irish taxpayer paid about half as much tax as the average German taxpayer on the same income.
Prominent Irish economists agree. Philip Lane, professor of international macroeconomics at Trinity College Dublin, told the Financial Times: â€œIn terms of income tax, Ireland is basically an undertaxed country.â€
However, even increases in income tax and VAT are sensitive propositions for a deeply unpopular government that is on the brink of a desperate fight for re-election next year.