* IMF gets tough on Europe over pledge on Irish bank debt
* Inaction could see doubts over debt sustainability return
* Says OMT would help, post-2013 backstops may be explored
By Padraic Halpin
DUBLIN, Dec 19 (Reuters) - The IMF turned up the heat on Europe to deliver on a pledge to ease the burden of Ireland’s bank debt, saying failure to do so could revive market doubts about Irish debt sustainability.
Euro zone leaders agreed six months ago to look at improving Ireland’s bank rescue, seemingly strengthening Dublin’s push to ease tough repayment terms tied to two failed lenders and for Europe’s rescue funds to take over its stakes in other lenders.
However progress has been slow and the International Monetary Fund, which in the two years since Ireland’s bailout has consistently pushed for Europe to do more, hardened its language markedly in its latest review of the country’s progress, published on Wednesday.
“Continued strong policy implementation is essential, yet timely exit from official support cannot be assured without forceful delivery of European pledges,” the IMF, one of Dublin’s so-called troika of lenders, said.
“Inadequate or delayed delivery on these commitments poses a significant risk that recently started market access could be curtailed, potentially hindering an exit from official financing at end-2013.”
The euro zone leaders’ accord in June helped push Irish bond yields down sharply. That allowed Ireland to become the first bailed-out euro country to return to long-term bond markets and begin to pre-fund a sizable chunk of the funding it will need once its 85-billion euro bailout ends next December.
However, Ireland is not yet in a position to resume monthly bond auctions. The IMF said prospects for durable market access depended greatly on the delivery of European commitments, particularly via a so-called retroactive recapitalisation of viable Irish banks with European rescue funds.
Since the June accord, euro zone creditor countries have proved reluctant to allow Dublin to tap precious rescue funds, while talks with the European Central Bank (ECB) to secure longer-term funding for its banks have made slow progress.
After cutting its growth forecast for 2013 for the fifth successive review, the IMF also raised the prospect that slower growth might leave the government on the hook to cover even more banking losses if the bank-sovereign loop is not broken.
“In this context, market doubts about debt sustainability could easily re-emerge, undermining the availability of the substantial market financing needed and resulting in prolonged dependence on official support,” the IMF said.
“The most definitive way to forestall such a scenario would be through decisive direct bank recapitalisation by the European Stability Mechanism, which would reduce public debt directly and insulate the sovereign from potential contingent liabilities from the banking sector ... The way forward is clear.”
Europe cannot put any of its rescue fund - the European Stability Mechanism - into any lender until its new banking supervisory system is up and running in March 2014 and the IMF said a bridge was needed for Ireland to safely reach that point.
The Irish government and its lenders are both putting together policy papers on measures that could smooth its exit from official funding on schedule next year, and the IMF laid out three specific elements that could help shore this up.
It renewed a call for an easing of the tough repayment terms attached to Ireland’s so-called promissory notes, and also suggested that the availability of the European Central Bank’s new bond-buying programme - or Outright Monetary Transactions (OMT) - for Ireland would help to cement its market access.
The scheme would buy potentially unlimited amounts of bonds of euro zone governments that sign a memorandum of understanding with the euro zone’s bailout fund or are regaining bond market access after an emergency loan programme.
ECB Executive Board member Joerg Asmussen said In October that Ireland was not yet regaining full bond market access.
Thirdly, the IMF said options for backstops to succeed the existing bailout programme could also be explored if needed to safeguard market access, including by ensuring qualification for OMT availability.
The Washington-based body - which cut its gross domestic product (GDP) forecast for the next two years by 0.3 percentage points to 1.1 percent in 2013 and 2.2 percent in 2014 - added that Ireland should not go beyond the austerity already promised between now and 2015 if growth were to further disappoint.
On the country’s still struggling banks, it said the reduction in average staff count per bank branch to 29 from 35 following widespread redundancies and branch closures, may still be insufficient to reduce operating costs as much as needed.