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Posted at 11:24 AM ET, 12/17/2010

IMF concerned about aid plan if Irish ruling party loses election

By Howard Schneider

The International Monetary Fund is predicting that Ireland's governing party will be tossed out in elections early next year, potentially unraveling the complex plan negotiated to secure IMF and European aid for the financially ailing country, according an IMF report.

As European leaders in Brussels grappled with how to create a longer-term crisis fund to undergird struggling European economies, the IMF released staff documents prepared as part of the recent $110 billion bailout of Ireland.

While crediting Irish officials with making difficult choices to curb public debt and rehabilitate the country's economy, the documents also noted that local politics could undermine the terms set for aid.

"The likely change in government in 2011 increases the political risks," that Ireland will not follow through on the deep budget cuts, bank restructuring and other measures promised to restore the economy, the report said in a section assessing the country's ability to repay IMF loans.

Irish Prime Minister Brian Cowen was forced to call early elections after one of his coalition partners pulled out in opposition to the IMF program - putting the IMF in the unusual position of having to factor a change of government into its planning. Cowen's Fianna Fail party has been the dominant force in Irish politics in recent decades, but opposition groups have strongly criticized Cowen's management of the recent economic crisis, as well as the severity and speed of budget cuts required to get international help.

Among the major opposition parties, the center-left Labor Party has been most critical of the budget cuts.

IMF Irish mission chief Ajai Chopra said in a conference call on Friday, however, that IMF staff members had met with other parties and political groups as part of the discussion and that the Irish Parliament's recent approval of a 2011 budget secured the upcoming round of promised changes.

And while opposition parties have resisted aspects of the program, Chopra said, they also "accept the deficit must be brought under control."

If a new government demands to renegotiate the terms of the aid, "we would just need in the context of reviews to have a discussion on the overall objective and see how any particular path of adjustment would fit in," Chopra said. "The content of this program was very much designed in Ireland by the Irish government. We see this as a national response" and one that is likely to be upheld by future governments.

Still, the IMF said that the political risks to the program are "considerable," adding uncertainty to a process that has roiled European markets and heightened the sense of confusion around how the continent - and particularly the 16 nations that share the euro as a currency - will settle a long list of economic problems.

European leaders in Brussels this week agreed to make permanent a crisis resolution fund that would rely on the combined credit worthiness of the euro nations - including major countries such as Germany and France - to help the others out in a crisis. The pact is potentially important, and leaders agreed to amend the European Union's central treaty to allow it. It will replace as of 2013 a temporary crisis fund established after Greece ran into trouble earlier this year.

But important details are still to be negotiated. Leaders are divided over issues such as how strict central oversight of each nation's spending should be, and whether private holders of government debts should have to accept losses in the event a nation runs into trouble.

By Howard Schneider  | December 17, 2010; 11:24 AM ET
Categories:  International Economics, International Monetary Fund  
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