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Austerity-only policy for Ireland was a mistake, admits former IMF chief

Ashoka Mody says the Troika chose to go down an austerity-only route instead of conceding on terms and conditions.

Ashoka Mody (left), seen here with IMF colleague Ajai Chopra, says an austerity-only policy in restoring Ireland's finances was a mistake.
Ashoka Mody (left), seen here with IMF colleague Ajai Chopra, says an austerity-only policy in restoring Ireland's finances was a mistake.
Image: Photocall Ireland

THE FORMER HEAD of the IMF mission to Ireland has admitted that the austerity-only policy chosen for the handling of Ireland’s EU-IMF bailout was a mistake.

Ashoka Mody said there were three options available to the EU and IMF when arriving in Ireland – burn bondholders, offer easy terms and conditions for loans, or pursue austerity measures – and the Troika had opted for the latter option.

Mody said recent moves to make the terms of the loans more manageable was an indication that the tactics chosen for dealing with Ireland were the wrong ones.

Having secured a reduction in the interest rate on its bailout loans in 2011 – bringing down the original interest rate of 5.83 per cent – Ireland is now seeking an extension in the repayment deadlines for its EU loans.

“Since there is no view currently on how much burden of this crisis should be borne by the private bondholders, we are now left with only one choice – and that choice is to increasingly make the official financing easier and more concessional,” Mody told RTÉ’s Morning Ireland.

“The risks of the programme succeeding were such that the complete reliance on austerity was not a reasonable way to go,” he said.

Mody added that “something has to give”, because in the absence of the decision to burn bondholders, the only options available to Ireland’s lenders were to ease the terms of their loans, or to stimulate growth.

He said while many people presumed sovereign defaults were “extremely costly”, this had historically not been the case.

“We know from the evidence that we have that in a way bondholders treat that as almost welcome because it reduces the uncertainty – and normally there is a very quick return to market, the output losses are relatively minor. And so the history is very clear on the cost of doing so.”

Read: Troika recommends ‘giving Ireland seven more years to repay loans’

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Gavan Reilly

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