Transcript of a Conference Call on the First and Second Reviews under Extended Fund Facility Arrangement for Ireland
May 20, 2011
with Ajai Chopra, Deputy Director, European Department,
Craig Beaumont, Mission Chief for Ireland, European Department, and
Olga Stankova, Senior Press Officer, External Relations Department
May 20, 2011
MS. STANKOVA: Good morning, everybody, and good afternoon for those who join us from Europe for this conference call on the first and second reviews under the Extended Fund Facility arrangement for Ireland. You probably already have a copy of the press release that was issued following the IMF Executive Board’s approval of the reviews on Monday, May 16. We are now releasing the staff report and hold this conference call in conjunction with the release. I’d like to remind you that the conference call and the staff report are under embargo until 9:30 a.m. EST which is 1330 GMT.
I would like to pass the microphone over to Ajai Chopra, Deputy Director in the IMF European Department who also leads the IMF program on Ireland.
MR. CHOPRA: Thank you very much, Olga. Good morning or good afternoon depending on your location. The report we are publishing today contains the IMF staff’s analysis and the justification for completing the review of the EU/IMF supported program for Ireland. As you know, the Executive Board endorsed the completion of the review on Monday, May 16. This made Ireland eligible to borrow an additional 1.6 billion euros from the IMF. I’m going to highlight a few key points from the report and the Board discussion and then turn to your questions.
First, the Executive Directors have welcomed the new government’s full ownership of the goals and key elements of the program. Despite challenges program implementation is off to a strong start.
Second, the Directors have endorsed the decisive approach to banking sector reforms. As we’ve said all along, restoring the health of the banking system is crucial to economic recovery. The banking reforms are moving from a design phase to an implementation phase and this implementation process will require careful management. We are confident that the Irish authorities are up to this task.
Third, the fiscal program is on track for the appropriately ambitious 2011 targets. We support the priorities that the government is putting on job creation, including through its recently announced Jobs Initiative. The tasks for the months ahead will be to identify high quality measures to underpin the fiscal targets for 2012 and beyond.
Fourth, notwithstanding the strong policy implementation, risks to the program have risen in some respects. Specifically, financial market conditions are more adverse with spreads at unsustainable levels. This is in large part due to external developments. To mitigate these risks continued strong policy implementation to reform the banking system, reduce fiscal deficits, and increase competiveness and job creation will be critical. But it will be just as important that these efforts are supported by a comprehensive and consistent European plan to help overcome market doubts, regain market access, reduce the threat of spillovers, and bring about a recovery of the Irish economy. Later, if you wish, I can elaborate on what constitutes a comprehensive and consistent European plan.
Finally, on a different note, I would like to introduce my colleague Craig Beaumont who has been supervising the day-to-day work of the Ireland team of the IMF. He is the principle author of the report in front of you, organizing the inputs from various members of the team. Craig will be answering many of the questions you might have and I expect you might be seeing and hearing more from him as time goes on. Thank you.
MS. STANKOVA: Thank you. Now we will take your questions. Please introduce yourself and your affiliation when asking a question.
QUESTIONER: A number of points please, Mr. Chopra. The risks which you identify to Ireland’s program -- you appear to be saying that the program for Ireland can only succeed if there is wider reform, wider changes, a wider deal almost in Europe. Could you elaborate on that?
Two other points. The growth prospect which you identify -– you say that there’s a divergence between what the IMF expects and what you believe the Irish authorities are expecting. Can you elaborate on that and talk to us about why you have differences about, as you call it, medium-term growth prospect?
And then finally, if you have a comment I’d appreciate it on the recent debate in Ireland -- which I think probably happened while you were there -– kicked off by Professor Morgan Kelly who effectively has been saying that Ireland is ruined and that we are on the way to default and that the numbers are unquestionable. And you seem to be implying that you also understand or believe this and that without burden sharing from bondholders, be they bank bondholders or people involved in the bank bailout or whatever, without that Ireland’s prospects are very grim.
MR. CHOPRA: Okay, thank you very much. I’ll take the question on risks and the nature of a comprehensive and consistent European plan that could support Ireland’s efforts. And that naturally dovetails with your questions about the debate going on in Ireland, including the points made by Professor Kelly. My colleague Craig Beaumont will handle the question on growth.
Now, on the first part I should say that this is a complicated question and you’re going to have to bear with me because it requires a fairly detailed answer. I’ve already highlighted that for policy matters that are under their control the Irish authorities have been decisive and are doing all they can to get ahead of problems, especially in the banking sector. Given the depths of the crisis and the size of the private and public debt overhang it will take time for confidence to be restored. And we need to recognize that these crises take time to resolve. The authorities recognize this and we do not detect any wavering in their commitment to the policies under the program. They’re in it for the long haul.
These policies are necessary for success but we do need to recognize that they may not be sufficient. Specifically, we need to recognize that slower growth at the end of 2010, higher unemployment, further rating downgrades, and developments in other Euro area countries have contributed to a rise in bond spreads. This hinders Ireland’s prospects for regaining market access on affordable terms in the near future. And if the sovereign remains shut out of markets, the banks’ ability to tap market funding will also remain elusive even if the banks deliver on their deleveraging goals.
Now this is why we have put emphasis on support from a comprehensive consistent European plan. Our Acting Managing Director, John Lipsky, made some public remarks at the Bretton Woods Committee here in Washington yesterday, on Thursday. What he notes was that although EU leaders have taken some important steps, the crisis in the euro area is not over. More needs to be done to implement a cooperative and shared solution. So what might such a cooperative and shared solution look like? First, as I’ve already noted, Ireland needs to deliver the necessary policy action. It’s difficult but it will pay off. Indeed, the authorities fully recognize that banking reforms and fiscal consolidation are needed under any scenario.
Second, European partners need to make clear that for countries currently with programs there will be the right amount of financing on the right terms and for the right duration to foster success. In other words, the countries cannot do it alone and putting a disproportionate burden of the cost of adjustment on the country may not be economically or politically feasible. The resulting uncertainty affects not only these countries but through the high spreads and lack of market access it increases the threat of spillovers and creates downside risks to the broader euro area. Hence, these costs need to be shared including through additional financing if necessary.
Thus, a key element of a comprehensive solution is a stronger area-wide crisis management framework. This is a prime example of a cooperative response to a common good problem. The priority here is to put into effect quickly an EFSF upgrade that can deal more flexibly with the crisis we face today. In addition, continued availability of ECB liquidity support for countries that are addressing their banking system problems is critical. In Ireland’s case, the effectiveness of deleveraging and enabling banks to regain market-based funding would be supported by medium-term availability of Eurosystem financing.
Third, all euro zone countries need to support a comprehensive approach with accelerated repair and reform of financial systems through rigorous and transparent stress tests. These stress tests need to be followed where appropriate with bank recapitalization. In some cases banks may need to be restructured or closed down. It will also be necessary to upgrade EU governance frameworks in support of enhanced crisis management, notably through an EU-wide approach to bank resolution.
Finally, looking at these issues through the lens of investors, they’re understandably concerned about the implications of the advent of the European Stability Mechanism, the ESM, which starts operations in 2013. Against this background it is an uphill battle to bring back private creditors to countries that are now out of markets. This returns me to my earlier point about the need for additional financing at appropriate terms. Specifically, the magnitude and terms of the financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and, hence, debt restructuring is off the table.
Putting in place such a comprehensive and consistent approach is now a matter of urgency, not just for the crisis countries but for all countries in the euro zone. Countries that are implementing their required policies to address their problems need the support of their European partners and the international community. As a result of the crisis, Europe needs more integration, not less.
To conclude, the problems that Ireland faces are not just an Irish problem. They’re a shared European problem that requires a shared solution.
On your question about growth I’m going to ask Craig Beaumont to answer.
MR. BEAUMONT: Thanks, Ajai. The authorities most recent projections were released in the Jobs Initiative. If we compare the IMF projections with those we see a very similar outlook in 2011. The IMF projection is for 0.6 percent growth and the Department of Finance has 0.8 percent, and the composition is very similar. So the difference only opens up in 2012/2013 and is really quite modest at half a percentage point in the growth rate. Whereas, the Department of Finance’s growth projections is 2.5 percent in 2012, the IMF has approximately 2 percent. And this difference can be attributed to the net export contribution where the authorities allow for a somewhat stronger benefit from improved competitiveness. But we should note, this really is quite a modest difference.
In the outer years, from 2014 on, actually the IMF projections are a little bit higher at around 3.25 percent compared with the authorities’ 3 percent. So at the end of the process we have a very similar overall growth outlook.
QUESTIONER: I just wanted to follow up if I could on Professor Morgan Kelly’s points– his wider points that we are ruined, as I mentioned earlier, and that the program can only work with burden sharing from bondholders to gain relation to banks, and that you don’t believe that the program can succeed, Mr. Chopra, without such an eventuality.
MR. CHOPRA: Look, I’ve already laid out some of the key ingredients of what will be required for success. Ireland does have difficult banking, macro and fiscal adjustments to make; this will take many years. We need to give it more time but Ireland is well on the way. Also, I would emphasize that this government is determined to pay its debts and to honor its guarantees. So the program is designed around these assumptions. What the program does is that it provides a lifeline so that Ireland does not need to rely on market finance for some time.
Now, it’s going to take some time for the uncertainty to be reduced and the sort of comprehensive European plan that I just talked about would be an important ingredient in reducing this uncertainty.
MS. STANKOVA: This is all we can offer on the three questions. We can make it to the next question.
QUESTIONER: You anticipated my first question which was on the comprehensive European plan. Second question is, obviously you’re aware that Ireland is under pressure from France in particular to raise its corporation tax in order to get a cut in the bailout from the European Union. What do you make of this proposal from France? And second of all, in terms of the possibility of having more formal and medium-term support program from the ECB for Irish banks, when do you think such a support program should be put in place?
MR. CHOPRA: On the corporate income tax, let me just make three points over here. Firstly, an increase in the corporate income tax is not a part of the EU/IMF supported program because we did not see such a tax increase as consistent with the overall goals of the program in restoring growth.
Secondly, we are not a party to the discussions between Ireland and its European partners on the corporate income tax issues, and the possibility of reducing the interest rate that Ireland pays on its loans from the EU facilities.
The third point that I’d like to make is to just draw your attention to the fact that in the IMF we have a single interest rate formula that applies equally for all countries. The only exception is that we have a special facility for low-income countries where they pay a concessional interest rate, but for all other countries it’s the same interest rate formula that applies to them. It is not a formula that gets negotiated with different countries. That’s all that I have to say on that.
On the issue of ECB financing, again, I simply will repeat what I said earlier. The point that we’ve been making is that in Ireland’s case the effectiveness of deleveraging and enabling banks to regain market-based funding would be supported by medium-term availability of euro system financing and as long as Ireland is delivering on its commitments on banking reform we do hope that such financing will be available.
QUESTIONER: Perhaps just a follow up in relation to the interest rate and the idea that obviously the IMF has made it according to a formula. Just to link that to your previous comments about the idea that Europeans have a comprehensive approach to dealing with the debt crisis -– would you like to see Europe adopt sort of a similar approach to pricing its loans for countries that are in trouble?
MR. CHOPRA: I have nothing more to say on this matter.
QUESTIONER: Some of my questions have already been asked so I’ll maybe just go ahead with a few others. In terms of the cost of recapitalizing the banks it’s come in as 10 billion below what was originally earmarked in the plan. Is there a chance that this money could be diverted to the sovereign if the sovereign continues to struggle to get access to the markets? Also, is there a situation or any room –- any situation in which the scheduled repayments over seven-and-a-half years could be extended?
MR. CHOPRA: I’m going to ask Craig to answer these questions.
MR. BEAUMONT: On the cost of recapitalization you do note the correct figure that it is somewhat lower than we had previously allowed for, and we note in the staff report that this gives a somewhat larger contingency available in case it’s needed, and that could indeed cover the possibility that there could be some delay in regaining market access compared with what we had previously allowed for. In terms of the maturities of the extended arrangement, or EFF, it has a repayment schedule that starts at four-and-a-half years and ends after ten years, and there is really no rescheduling of that maturity schedule once it’s adopted.
QUESTIONER: Good morning. Just in relation to the fiscal consolidation plan that the government has, a number of well-respected economists in Ireland are suggesting that it would be advisable in this stage considering these elevated spreads that you refer to –- that it would be advisable to speed up the pace of the fiscal consolidation via expenditure reductions or tax raisings. Do you think that would be something that the government should look at and is it something that you would support?
MR. CHOPRA: I would point to a particular paragraph in our staff report. This is paragraph 35 -– the very last sentence of paragraph 35 says, and I’ll quote it, “Responding to downside shocks by accelerating the already substantial fiscal adjustment that has been programmed in the medium-term would not mitigate these risks as it would further retard growth in an already weak economic environment.” And that’s our view on this. We think that the pace of adjustment that has been laid out remains the appropriate pace and accelerating the pace of adjustment is not the answer.
QUESTIONER: And just a related question: the composition of this year’s deficit reduction as in 2012 which will be announced in December of 2011, the government has so far not actually spelled out the composition between taxation and expenditure reductions. Do you think that the markets might gain some confidence if there was a more specific breakdown of those fears even this early on in the year because there is a lot of worry and concern from people that I talk to that there will be a dispute among the two governing parties about where the weight of those changes and adjustments should be made?
MR. BEAUMONT: I don’t think there is a need to announce it at this early stage. It’s clear the government is committed to the fiscal consolidation that was set out in the program. As you know, the authorities are going to work through the details via comprehensive review of expenditure and I’m sure they’re thinking about the composition of the other measures. We’ll discuss this in the coming reviews and build a sound package of measures that will achieve the consolidation, ideally at the least impact on growth and most benefit for competiveness.
MS. STANKOVA: I think that was well-answered. Maybe we’ll have time for one more question. You also need time to finalize your stories before the embargo will be lifted at 9:30 a.m. So please go ahead with another question if you have one.
QUESTIONER: Just wondering about your debt sustainability analysis. You’re saying that the debt GDP ratio is now a little bit better than at program approval because of the lower bank recapitalization charges. Are you saying here that the debt is sustainable at 120 percent of GDP?
MR. BEAUMONT: We’re saying that certainly the debt path is now lower, and that the peak is in 2013 at 120 percent of GDP, and after that it’s on a downward path, which is the key indicator of the debt being sustainable.
MS. STANKOVA: With that we will conclude the conference call. I remind everybody that the conference call and the staff report are under embargo until 9:30 a.m. EST which is 1330 GMT. I wish you a good day and look forward to reading your reports.