Transcript of a Conference Call on the Third Review under Extended Fund Facility Arrangement for Ireland
September 7, 2011with Craig Beaumont, Mission Chief for Ireland, European Department, and
Olga Stankova, Senior Press Officer, External Relations Department
September 7, 2011
MS. STANKOVA: Good morning to everybody. Welcome to the conference call on Ireland on the occasion of the publication of the Staff Report and associated documents on the third review under the Extended Fund Facility with Ireland.
You probably have seen the press release that was issued after the Board discussion on September 2, and today we are releasing the package of documents that were made available to the press under embargo at 8:00 a.m., Washington time. Craig Beaumont, Mission Chief for Ireland will make introductory remarks summarizing the main conclusions of the report and then will answer your questions. You probably know Craig has been working with Ajai Chopra and the Ireland team for about six months.
MR. BEAUMONT: Thanks very much, Olga. Good morning or good afternoon, depending on where you are today. The report we are publishing today contains the IMF staff’s analysis that forms the basis for the Executive Board's regular quarterly review of the EU/IMF supported program for Ireland.
The Board approved the completion of the review on Friday, September 2nd, which made Ireland eligible to borrow an additional 1.5 billion Euros from the IMF. Let me highlight some key points from the Board's discussion and then we can turn to your questions.
Executive Directors commended the Irish authorities for maintaining resolute implementation of their program with all performance criteria and structural benchmarks for the review being met. They noted that fiscal consolidation is on track, financial sector reforms are advancing, and the economy is beginning to show signs of stabilization. All these factors contributed to the large decline in Ireland's bond spreads since July.
Directors recognized, however, that Ireland's economy faces challenges from uncertainties in the region and weakening economic growth in major trading partners. This slow down of trading partner growth will likely affect Ireland's exports, and staff issued a supplement to its report to the Board with revised GDP growth projections. You'll find this supplement at the very end of the package published today.
The new projections are for real GDP growth of 0.4 percent in 2011 and 1.5 percent in 2012, which are revised down from 0.6 and 1.9 percent, respectively. So we are still projecting a gradual recovery in the Irish economy, but the pace of the recovery is dampened by slower global growth.
The impact of this slower economic growth on the outlook for public debt is modest. It is also offset by the expected reduction in the interest rate charged on EU financing that was announced by European leaders on July 21.
Turning back to Director's views, they welcomed the progress in implementing financial sector reforms to restore the health of banks. They noted that the mergers of the banks have been completed ahead of schedule and that recapitalization of the banks is also completed. And there, they viewed the recent private investor equity participation in the Bank of Ireland as a sign of success of the reform strategy the Irish authorities adopted back in March.
Directors also supported further reforms underway that would help build the capacity of the financial system to contribute to the economic recovery and return to private ownership. Let me just mention a few of these further reforms. They underscored the need to ensure that banks’ core businesses are managed on a commercial basis, especially now that banks are state-owned with the exception of Bank of Ireland. They considered that efforts to further strengthen banking supervision are critical and they supported well executed restructuring of the credit union sector. They emphasized the need for continued progress on legislation to underpin the soundness of the financial sector, which includes enhancing the supervisory powers of the central bank, strengthening the resolution framework for financial institutions, modernizing household insolvency and establishing a credit registry to improve credit information.
Turning to the budget, Directors commended the Irish authorities’ effective implementation of the major fiscal consolidation in 2011, which is keeping the budget on track for the program targets. Directors urged the authorities to develop strong consensus on a medium-term fiscal plan for 2012 to 2015 in order to reinforce confidence in financial markets that the substantial further fiscal consolidation needed will be achieved. Directors also welcomed the establishment of the Irish Fiscal Advisory Council and emphasized the importance of anchoring its independence in the planned fiscal responsibility bill.
Directors welcomed the strengthened European support for Ireland that was announced on July 21. At the same time, they emphasized the importance of early implementation by the European authorities and also the need to restore broader stability in the euro area.
Finally, directors urged the Irish authorities to continue the strong implementation of their program, to support economic recovery, limit contagion risks, ensure debt sustainability and restore market access.
That’s enough by way of background I think, and I'd welcome questions at this stage. Thank you.
MS. STANKOVA: Now we can move to questions.
QUESTIONER: Thank you. I have a question on market access. You do not have a forecast as to when Ireland could borrow under medium and long-term. Could you give us a sense on where the authorities stand on this and where you would see a possibility for Ireland to borrow through private sector?
MR. BEAUMONT: We do have some assumptions on market access in the report, including a chart in Section V on financing, and also Table 6 which provides more details.
Very little market financing is assumed in 2012, at only 4½ billion euros, and that includes a significant component of retail debt. So the program does not depend on regaining market access in 2012. There is a greater need for market financing in 2013, so we do need to make progress to regain market access over time. Probably the authorities will initially enter at the shorter end of the market and rebuild that access, and then later turn to medium-term and long-term debt.
There have been promising signs from the decline in spreads recently, but there's still need for further progress to regain market access. To a large extent, this will depend on the authorities continuing to implement the program effectively, but there is also the need for the broader situation in the euro area to be stabilized to facilitate Ireland also regaining market access.
QUESTIONER: Yeah, good morning. You mentioned in report, and it's been mentioned many times in recent times by IMF people that they believe that Europe needs to do more. And in the context of the July 21 meeting you say again that much remains to be done. Could you give us some specifics on that? What exactly you believe should be done, in addition to the declining interest rates?
And the second question is in connection with this year's budget. The aim, as we understand it, is for reduction of expenditure of the order of 3.6 billion. A lot of debate in Ireland as to whether it should be 3.6 billion or as to whether it should be accelerated to the order of 4 billion or thereabout. What's the IMF's view on that? So, a two-part question, please.
MR. BEAUMONT: On the first question regarding what remains to be done; all the decisions taken on July 21, which are very welcome in terms of lower interest rate, the extended maturities and the greater flexibility in the EFSF, all those important decisions need to move towards implementation. That’s the most important thing to be done, and we understand the European authorities are working to make progress in this area.
On the fiscal question, as we have noted, the program is on track for the 2011 fiscal targets, and the government is in the process of developing a medium-term fiscal plan to get to the 3 percent of GDP deficit target by 2015.
Under the program, the fiscal adjustment for the coming year, 2012, is to be at least 3.6 billion euros. Now, the precise amount of the adjustment in the consolidation plan will need to take into account the economic outlook at the time, and this will be discussed with the authorities and the European Commission, ECB and IMF staff at the next program review in October, so I don’t want to prejudge the outcome of that discussion. We need to work through the change in the economic outlook and reconsider what the appropriate amount of adjustment is in the circumstances.
QUESTIONER: If I could just follow-up on that, you seem to be saying that -- you seem to be hinting that, in the context of declining expectations in terms of GDP growth, that the 3.6 billion consolidation may not be enough; it may need to go further.
MR. BEAUMONT: Well, we need to strike a balance in a slower growth environment, as one also has to take into account the impact of fiscal consolidation on growth. So we'd like to strike a balance between advancing the fiscal consolidation and preserving the recovery, which is also important for debt sustainability.
QUESTIONER: Good afternoon. There's a reference in the report to the sale of 5 billion euros of state assets and a two-fold question relates to that; one, where does that figure originate from? I haven't heard the Irish government mentioning that specific figure. And how will the proceeds of asset sales be used? Will they be used to offset against national debt or will they be used for some other purpose, like some stimulus plan, which some of the government representatives have talked about?
MR. BEAUMONT: The 5 billion euros is the figure that the Review of State Assets and Liabilities developed--I think this report came out in May 2011. The government has indicated it is committed to a robust privatization program.
QUESTIONER: My memory though was their figure was, I think -- I could be corrected on this, but I thought it was 2.5 billion, in the immediate term. The report you put out says the mission have made representations that sale of assets to a total of 5 billion could be considered.
MR. BEAUMONT: A footnote refers to the review group that identified the 5 billion euro of assets of potential privatization, so it's not the IMF staff's figure.
QUESTIONER: Right. But that was just the source of the report. And since that emerged, the government can obviously have discretion whether they accept that figure or not. So, I'm just wondering, does the IMF have its own view on how much the state of sale assets would be and why at this time?
MR. BEAUMONT: The authorities are currently following up by reviewing this earlier report and developing their own privatization plans, and that process is scheduled to be completed by the end of this year. We will have discussions in advance of the end of the year when the authorities have developed a draft plan. And the same --
QUESTIONER: I had a second --
MR. BEAUMONT: I'm sorry. The same consideration applies to exactly how the funds are used.
QUESTIONER: Right. So at this point, at least, there's no precondition that it must be used for debt reduction? It's just possible it could be used in a variety of ways?
MR. BEAUMONT: That element of the program is yet to be fully specified, and it will be discussed in coming months.
QUESTIONER: Hi and thank you all for doing this. I have really two questions. One is, there's been a bit of a debate opened up here in the last couple of weeks about debt forgiveness for homeowners, home mortgages on a potentially very large scale.
Now, I know that, officially, the banks are in charge of this process and are expected to work through all of the residential mortgages, but the political debate here has been very open-ended, it seems. And I'm wondering if the IMF has a perspective on that process and whether or not you regard that as posing any kind of a new risk to the banking sector that's been opened up here–is question number one--or whether, for example, provisions in the existing book are enough to account for whatever process they're going to undertake.
And then, secondly, I'm wondering -- given the Managing Director's comments about this sort of urgent recapitalization needed throughout Europe, there seems to be a sense -- and I want to make sure you agree with this -- that Ireland has successfully put a floor underneath the system here. And I'm wondering what you feel distinguishes Ireland's process in that regard from what's happened in the other 16 Euro area nations?
MR. BEAUMONT: On the mortgage debt issue, we think the Government has taken positive helpful steps already on this issue by developing a Code of Conduct on Mortgage Arrears to encourage borrowers and lenders to work together to address repayment difficulties. But, as you know, mortgage arrears have continued to rise, so we welcome continued attention to addressing this issue, which is important for the quality of banks’ loan books and also, obviously, for households.
In terms of the broad approach, which is your question, we share the views recently expressed by Finance Minister Noonan and Governor Honohan that a case-by-case approach is needed because each household’s situation is different and the appropriate solution will vary.
Relatedly, we are supporting moving ahead with the reforms of the personal insolvency regime and the creation of out-of-court debt settlement and enforcement arrangements to help resolve these household debt challenges. The program includes the finalization of the authorities' strategy in this area by the end of the year, and the submission of a new insolvency legislation to Parliament before the end of March 2012.
The big picture is that we support the case-by-case approach to the mortgage debt issue, and following their recapitalization, the banks are in an appropriately strong position to take this sort of case-by-case approach.
On the recapitalization, we feel very strongly that the authorities have succeeded in establishing a ceiling on the capital needs for the banks, and they've now completed the process of meeting those recapitalization needs.
The distinguishing feature of the recapitalization in Ireland was the depth of the analysis and the use of independent consultants to assist in ensuring this analysis was credible and transparent. Once the Financial Markets Programme report was released at the end of March all the commentators and analysts including rating agencies agreed that it was a strong piece of work that was very carefully done. It has stringent stress scenarios, a longer period for the stress test, allows buffers for losses even after the period of the stress test, and a relatively high threshold for the core tier 1 capital to be achieved by the end of the stress test. All in all, it was a very robust analysis which has been convincing to financial markets.
QUESTIONER: Good morning. Just a few questions, if I may. And the first one, the reference to the supplementary information on the substantial worsening of the outlook for Ireland’s main trading partners. Is the IMF preparing to revise the forecast for these countries this month? And if so, to what extent?
And secondly, what is the IMF's evaluation of the present government's performance on the fiscal front since they came into power in March? And also, maybe thirdly, in the event of a Greek default and what is the IMF's view on the impact that would have on Ireland and its potential access to the markets?
MR. BEAUMONT: Regarding the projections, I won't comment on the specifics there because the World Economic Outlook is going to be released in the next few weeks, so you'll get the full details at that time.
On the government’s fiscal performance, we are very impressed and pleased with the consistency of the fiscal performance during this year. The authorities’ revenue and expenditure outcomes are both very close to the projected profile, which indicates a very good capacity to control expenditures and also to collect revenues, and which is a critical foundation for achieving a successful fiscal consolidation.
I don’t think it's my position to speculate on the effects of a Greek default. The main point currently is that Ireland has a well financed program that would ensure that they continue to receive the funding needed to avoid any difficulties, which provides a very important protection against any type of shock.
MS. STANKOVA: We have time, perhaps, for one more question, if there is one.
QUESTIONER: Thank you. I was wondering if you could expand on -- you know, you referred to the EFSF perhaps requiring additional flexibility above and beyond what was agreed in July 21. Perhaps you can just expand on what you mean there.
And second of all, just in relation to the downgrade for the Irish GDP forecast, what impact would that have on the debt to GDP dynamics?
MR. BEAUMONT: On the additional EFSF flexibility, first we should emphasize the decisions taken on July 21 are very welcome steps that will help Ireland, including the proposals to increase the flexibility of the EFSF to provide precautionary financing and debt buy-backs, and we support swift implementation of those decisions.
At the same time, there could be a scenario where it remains difficult for Ireland to regain market access, if, for some reason, there continue to be doubts about whether private sector involvement will only be limited to Greece. These doubts may now be less than when we wrote the main report, given the recent declines in spreads, but we think it's still useful to keep the options for additional flexibility under active consideration just in case they’re needed to facilitate Ireland regaining market access.
Such flexibility could be provided in a range of ways, and it is really a matter for the European authorities to consider what is most effective and feasible from their perspective, and we didn't want to focus attention on one solution if that would prove difficult to implement in practice.
And there was a second question on the impact of lower growth on the debt path. We said it was modest in the supplement to the staff report. Very roughly, the peak in the debt ratio may be increased by about one percentage point owing to the slower growth rate, but that’s actually going to be more than offset by the effects of the reductions in the EU interest rate.
MS. STANKOVA: All right. And thanks very much for joining the conference call. The embargo will be lifted at 11:00 a.m., D.C. time. Goodbye.