Transcript of a Conference Call on IrelandWashington, D.C.
Friday, June 15, 2012<
MR. OUDEJANS: Good day everybody. Thank you for dialing into this conference call on the IMF’s Sixth Review on Ireland. You’ve probably noticed the press release we issued on Wednesday, and this morning we made the report itself available to press, under embargo. We have here with us Mr. Craig Beaumont, Mission Chief for Ireland, and in his opening remarks he’ll walk you through the main conclusions of the report. Okay, Craig, over to you.
MR. BEAUMONT: Thanks very much, Tobias. 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 Irish authorities have maintained strong implementation of the program, meeting all the budget and debt targets for the first quarter of 2012, and financial and structural reforms continue to advance as envisaged.
In that context, the Executive Board of the IMF approved the completion of this review on Wednesday, June 13, which made Ireland eligible to borrow an additional 1.4 billion Euros, which brings the Fund’s total disbursements to about 18.2 billion Euros.
Let me highlight some key points in the report and then we can turn to your questions.
The outlook for real growth in 2012 at 0.5 percent has not changed from the previous review concluded in late February this year. Half a percent growth is a slow down from 0.7 percent in 2011, which is driven by a weaker outlook for trading partner growth, especially in the Euro Area. Even so, Ireland’s growth continues to be led by net exports as domestic demand is still declining.
Ireland’s fiscal consolidation remains on track. Updated data show the general deficit in 2011 was 9.4 percent of GDP, well below the program target of 10.6 percent. Budget 2012 targets further fiscal consolidation to lower the deficit to 8.6 percent of GDP. In the first five months of the year, the budget is on track, with solid revenue collection outweighing modest expenditure overruns. The current projection is for a full year deficit of about 8.3 percent of GDP.
It’s welcome that the government is committed to keeping expenditure within budget by end year. As in recent reports, we recommend that in case growth does weaken significantly, to not take measures to offset a potential decline in revenues within 2012. This accommodation of revenue shortfalls aims to help protect the fragile recovery.
At the same time, we encourage the authorities to continue work on the specific expenditure and revenue measures to underpin the fiscal consolidation in 2013 to 2015. Setting these measures out at the time of Budget 2013 will help Ireland regain access to market funding. Further advancing the authorities’ fiscal institutional reform plans through the fiscal responsibility law will also help support confidence in prudent fiscal policy over time.
Financial sector reforms have also continued to progress and further efforts in this area are critical to ensure that banks become healthy enough to start to contribute to recovery and domestic demand. The Irish authorities are working on a range of financial issues which include:
- Improving banks’ capacity to manage distressed loans, where the Central Bank has reviewed banks’ resources and skills in this area, is evaluating their strategies for resolving arrears, and will monitor closely the implementation of loan workouts and restructuring going forward.
- In relation to the Permanent TSB, a restructuring strategy has been developed to create a viable retail bank through the segregation of the bank into three units. A separation of the Asset Management Unit with about one-third of the assets would be needed as part of this restructuring, and the funding of that step will need to be arranged at coming reviews of the program.
- Reforming the personal insolvency framework is now in the legislative drafting stage. Careful design is needed to ensure this serves to address household’s debt distress while protecting debt service discipline. A key issue is to get the eligibility criteria right. Other important preparations include the applicable income and expenditure thresholds, and setting up the Insolvency Service and the other infrastructure for the system to operate effectively in practice.
Strengthening growth and job creation is critical to the success of the program. Stronger support for job seekers in obtaining jobs is needed, where private providers of case management and employment services may have a useful role to play. It is also important to make sure that the structure of social payments does not contribute to long-term unemployment, and this is the topic of a cross-departmental review.
Proceeds from the state asset disposal program will partly be reinvested in viable projects, which will help expand employment. The strengthening of competition enforcement is important to get the full benefits of these divestments for reductions in energy costs and improvements in growth.
In view of the challenging external environment, the authorities are reviewing and adapting their strategy for growth and job creation. Revising and improving the program in this area will be discussed at coming reviews.
In relation to regaining market access, developments in the Euro Area have increased the challenges, as seen in the rise in Ireland’s bond yields by about 50 basis points since the last review in late February to about 7.4 percent, and the larger increase in spreads over Bunds of about 85 basis points to just under 600 basis points on nine-year bonds.
In this area, the report favors steps that would have the effect of extending the debt service schedule on the promissory notes that were used to recapitalize banks in 2010. It also supports placing certain legacy assets of banks into a recovery vehicle so that banks can put more emphasis on sound lending rather than deleveraging.
Together these steps would significantly improve Ireland’s potential to regain access to market funding and the prospects for economic recovery, which would both contribute to overall European economic stability. There are different options to achieve these goals and we will be seeking to make progress in the coming program reviews.
At this point I will be happy to take questions.
MR. OUDEJANS: Thank you Craig. Are there any questions?
QUESTIONER: Hello. Just reading the staff report and listening to the last of your comments, I have two questions. One, realistically speaking, in the absence of any major step forward in the Euro Zone’s crisis resolution, Ireland looks set for a second bailout. Is that sort of basically what you’re hinting at? And secondly, I’m quite interested in the observation you make in the staff report about the linkage between political support for the program and the issue of the promissory notes. You know, it looks like sort of an unusual observation for the IMF to make. And I’m wondering who you’re directing that to. Are you talking there to Irish people? Or are you talking there to other members of the Euro Zone?
MR. BEAUMONT: On the first point, it’s certainly the case that Ireland’s ability to regain market access depends very much on broader financial conditions in the Euro Area, especially in 2013, and so that remains a risk.
In terms of the point about political support and the promissory notes, in fact, everything we write is directed to our Board, so we’re helping our Executive Board understand the domestic situation in Ireland.
These promissory notes used to recapitalize failed banks entail repayments of 3.1 billion euros annually, which is quite similar to the amount of fiscal consolidation that is done annually. These notes are very difficult politically to keep servicing in the current manner, and that’s what we saw at the end of March where instead of making the repayment in cash, the repayment was made in the form of a long-term government security.
QUESTIONER: Hi there. Thank you for the call and for the question. I just wanted to just elaborate on two of the points. Firstly, when you speak of helping the banks to get rid of some of their legacy assets so that they can concentrate more on lending rather than deleveraging, I’m wondering first of all if you have anything in mind with regard to any particular legacy assets. And in terms of the bodies that they should be spun off to, are you thinking of NAMA or are you thinking of something a bit more bespoke for this purpose?
And also secondly, just in regard to the unemployment levels that are referenced in the written reports, you discussed in the report the growth in Q4 of about half a percentage point in employment. Just in light of the fact that, since the inspection team came to Dublin, the Q1 figures for unemployment have been revised up from 14.4 to 14.8 percent, I was wondering if you think that is symptomatic of anything in Ireland and whether that puts any of Ireland’s progress or anything else in the firing line of whether anything needs to be reexamined in light of that extra unemployment figure. Thank you.
MR. BEAUMONT: On the legacy assets, there’s actually a box in the report, Box 3, that goes through that in a little bit more detail. It’s also mentioned in a box on PTSB in relation to the assets that would go into the Asset Management Unit. It’s a combination of non-performing assets and assets that structurally have very low profits, which is in particular the tracker mortgages of the banks.
There’s still flexibility in the particular vehicle that could be used. The one that’s been most under discussion is the Irish Bank Resolution Company.
On unemployment, the increase in the first quarter only reinforces the importance of stronger efforts to reduce unemployment under the program, and that will be something that we will keep working on at each review.
QUESTIONER: Can I just ask for one other clarification as well? I think that I heard you saying that, as with all of the other reports, you’re advising not to take any extra corrective action ahead of the 2013 budget. I just want to clarify that that is what you said, because the phone line crackled a little bit just there.
MR. BEAUMONT: Yes, this is specifically in relation to a potential shortfall in growth in 2012. Currently we have no signs that, but if it were to happen, we would support accommodating a revenue shortfall rather than trying to offset it within the current year.
QUESTIONER: I just want to ask about a line that says “temporary European equity participation in state owned banks would greatly reinforce these benefits”-- it’s in the context of the promissory note deal. I was just wondering if you’d give a little bit of detail on that, what kind of equity participation and by who and what kind of timeframe? Thanks.
MR. BEAUMONT: That’s a topic where staff are sending a broad signal that making such equity participation feasible would significantly contribute to the potential effectiveness of the tools that we have to deal with banking problems, especially where the banks and the sovereigns are highly interconnected already. There’s no specific institution or method envisaged--that would be a matter for discussion with the European authorities. We’re just making the observation that such a tool could be highly beneficial.
QUESTIONER: And just a follow up on that. You used the word critical in terms of, I think it was in terms of European help for Ireland. I mean, can Ireland get back into the markets without some significant help from Europe on the promissory notes or on the banks?
MR. BEAUMONT: I don’t think a definitive answer can be made. It all depends on market conditions. In an environment of greater stability in the Euro Area next year and a recovery in growth and continued strong policy implementation by the Irish authorities, I think it’s still feasible to regain market access, but the possibility to do so, we think, would be greatly enhanced by the types of measures that we talk about in relation to the promissory notes and the legacy assets of the banks.
QUESTIONER: Good morning. Two questions, if I may. You said three months ago that there was a lot of consensus among the Troika on how to restructure the notes. And three months later we haven’t seen much movement in terms of coming up with a technical report on that. What’s behind the delay there?
Secondly, in terms of a GDP growth forecast, you’ve kept them at 0.5 percent. Given the ongoing economic turmoil, financial turmoil in the Euro Zone, what are the risks that your growth forecast for this year and next may have to be re-cut?
MR. BEAUMONT: On the timetable for the work on the promissory notes, in fact, there is no firm timetable. We would like to move things along at a reasonable pace in order to lay a strong foundation for returning to the markets next year, but there’s no specific timetable.
In terms of the risks to growth, at this stage, we don’t have a strong reason to revise the forecast for 2012 as we don’t have even the first quarter GDP data this stage. Certainly the developments in the broader Euro Area seem to be on the downside compared to our earlier assumptions, and that could call for review of growth maybe in 2013, but we’d need to work with the authorities on that.
QUESTIONER: In relation to the promissory notes again, when you mentioned last time there was a good deal of consensus. Is there a lesser degree or a greater degree of consensus on the issue at this stage?
MR. BEAUMONT: I don’t think there’s been any change. I think the technical teams who work on this issue see the issue in a very common way.
QUESTIONER: And do you think that Irish voters, having supported the EU Fiscal Compact, could improve the chances of a deal being achieved at some stage?
MR. BEAUMONT: I don’t see a strong linkage. The Fiscal Compact is part of adopting the European fiscal framework, which is going to support Ireland’s long-term fiscal management. So, I wouldn’t speculate on whether there’s a linkage.
QUESTIONER: Good morning, Mr. Beaumont. Just a couple of things, I know you’ve touched on them extensively so far, some clarification. You talked about accommodating a fall in revenue would help to protect the fragile recovery. Are you saying that if things get worse in the Euro Zone that allowing kind of the budget deficit to widen a little bit is not a big problem bearing in mind that that’s already been overachieved?
And then, sorry to keep going back to the promissory notes, but on the promissory notes, what exactly are you waiting for? Are you waiting for a breakthrough at the European level? Are you waiting for the European Central Bank and your other partners in the Troika to agree and then you’ll go along with that? Is that where the logjam is? I’m just a bit confused because in the last call we had, you said there was a high degree of unanimity over the document that would be coming out, and yet we’ve heard or seen nothing about it. Thank you.
MR. BEAUMONT: On the latter point, moving forward in this area depends critically on gaining support from the European authorities and also from our Executive Board, and so we need to put together a package that will clear that threshold. That’s the main challenge to advancing the process.
And on the part on accommodating weaker growth, we would think that within the year, it wouldn’t be sensible–especially within a few months of the end of the year--to try and offset an emerging revenue shortfall. We would prefer a medium-term focused approach, where in Budget 2013 the path towards the 3 percent deficit goal by 2015 would be reevaluated and a smoother approach to adjusting for any growth deviation would be taken.
MR. OUDEJANS: Okay. So, if there are no other questions, let’s wrap up this conference call. Thank you all for dialing in, and thank you Craig for doing this.