Transcript of a Press Conference Call on the International Monetary Fund’s 2012 Article IV Consultation and the Seventh Review of the Extended Arrangement with Ireland
September 11, 2012Monday, September 10, 2012
MR. SILVESTRE: Good morning, Washington, and good afternoon, Dublin. My name is Bruno Silvestre. I’m the senior officer of the External Relations Department of the IMF and I would like to welcome you to this conference call on the publication of the 2012 Article IV Consultation Staff Report and PIN, and the Extended Fund Facility Seventh Review Staff Report. With me today is Craig Beaumont, the mission chief for Ireland.
Let me confirm this call is on the record with full attribution and is expected to last for about half an hour. Craig will start with some introductory remarks which will put the staff report in perspective and then take a few questions.
Before I give the floor and the microphone to Craig, let me remind you that the publication of these reports, which have been posted online at 8 a.m., are embargoed until 11 a.m. D.C. Time, i.e., one hour from now.
Craig, you have the floor.
MR. BEAUMONT: Thanks very much, Bruno. As you’ve seen, unlike our normal quarterly release, we have two reports today: the first being the 2012 Article IV Consultation and the second being the usual quarterly review report. These reports have quite different purposes. The Article IV discusses economic problems and policies from a medium-term perspective, setting out staff’s recommendations and also the Irish authorities’ views. The Seventh Review as usual focuses on assessing progress under the program in the quarter to June and agreeing the next steps in the coming quarters.
A key point I’d like to make is that the Article IV policy recommendations are distinct from the EU-IMF supported program. For example, under the program the government is leading the design of Budget 2013, including the specific spending and revenue measures. So while the IMF is encouraging the authorities to consider the policy recommendations made in the Article IV, in assessing the budget in the coming program reviews we will mostly focus on whether the government’s plans will reach the agreed targets in a durable way. And this distinction also applies to other policy discussions in the Article IV report.
I’ll just make some summary remarks on the main themes of that report before making a few points on the Seventh Review.
The Article IV sets out a macroeconomic outlook for a gradual economic recovery with growth of about 1/2 percent in 2012, rising to 1-1/2 percent in 2013, and almost 3 percent by 2015. Yet Ireland’s growth is expected to remain export-led with a more protracted revival of domestic demand, so it depends very much on external growth strengthening and on a resolution of the euro area crisis.
The report discusses a range of risks to this economic recovery. These risks also threaten Ireland’s debt sustainability and, therefore, the feasibility of retaining the access to market funding that was recently regained by the government. In this context it’s very important to move forward with implementing the June 29 commitments by the euro area leaders to further improve the sustainability of Ireland’s program. As we note in the report, a key step would be for the ESM to invest in the equity of Irish banks.
It’s also important for domestic policies to support economic revival. In the financial sector the priority is to get the system to a point where it can lend adequately in support of the recovery. This entails a combination of arresting the deterioration in the asset quality of banks, rebuilding their profitability, and relaxing their funding constraints. Here I’d note that ESM ownership can also help address these issues by improving market willingness to fund the banks.
On the fiscal side, there is still a substantial fiscal consolidation needed in the coming years, with a total of about 5 percent of GDP needed during 2013 through to 2015. This is a difficult process and IMF staff offer recommendations on how to achieve the consolidation while containing the impact on growth and protecting those on low incomes. The key elements are better targeting social supports to ensure support is directed to those who need it; reforming key government services, especially health and education, to generate medium-term savings; and focusing revenue efforts on base-broadening rather than tax rate increases. An example here is the introduction of the property tax.
Turning to the Seventh Review of the program, the Irish authorities have maintained strong policy implementation, meeting all the quantitative targets for June, plus they have met two structural benchmarks: the first being the restructuring plan for Permanent TSB and they have also met a benchmark that was not due until the end of September, regarding legislation on the fiscal responsibility law. Looking ahead for the rest of the year, the fiscal consolidation remains on track, as we expect a fiscal deficit somewhat below the ceiling of 8.6 percent of GDP.
Against this background, the board approved the completion of the seventh review on Wednesday the 5th, which made Ireland eligible to borrow an additional 0.9 billion euros from the IMF, bringing the total disbursements to about 19 billion euros.
To conclude, the Seventh Review also emphasizes the importance of timely approval of a strengthening of European support, including the ESM equity investments I mentioned, to help put the program on a clear path to successful completion.
Thanks very much and I’ll be happy to take questions at this point.
MR. SILVESTRE: Thank you, Craig. Please, before you have a question, I would appreciate if you identify yourself and give us the media you represent.
QUESTIONER: Hi, Craig. Could I ask you just a bit about the importance of implementing the 29th June agreement on the bank debt? Do you have an idea of what slice of the 64 billion in bank debt it would be to make Ireland’s debt more sustainable? And what are the dangers if this -- you know, if there’s a delay or the European leaders aren’t able to implement an agreement to cut the bank debt? Thanks.
MR. BEAUMONT: Thanks very much. In terms of the amounts, this is very much a matter that’s under continuing discussion. In the report we signal that a significant amount could make a substantial difference to ensuring Ireland regains durable access to market funding, which would be needed for it to exit official financing. We also discuss the dangers of delay or inadequate action in terms of this access to market funding not proving to be sufficient; a continuing reliance on official financing mean a rising share of official debt in terms of Ireland’s total debt, which makes it ever harder for Ireland to regain market access and exit official support.
QUESTIONER: Yeah, hi, thanks. Kind of a follow-up to that. I’m just wondering what types of conversations you’ve had with the folks in Europe about this, what kind of timetable you think they’re all on. Is there any doubt in your mind that they intend to pursue this course?
MR. BEAUMONT: These discussions are conducted in the normal way with our counterparts in the European Commission, the European Central Bank, and, of course, the Irish authorities as a group discussing how to address these issues. I can’t speak for the European authorities, but I think we’re all working together in the direction needed to follow-up on euro area leaders’ commitments, which were to break the link between the sovereign and the banks, and to further improve the sustainability of Ireland’s program.
QUESTIONER: I guess if I could just pursue that a second. I mean, is there -- how strong is the argument, you think, going to be that, well, listen, they’re already selling five-year in the debt. They seem to be doing plenty well on their own. Why should we expose the ESM to their problem if they’re working out of this on their own?
MR. BEAUMONT: Here I’d note that the June 29 statement, with its specific reference to Ireland, did have quite an immediate impact on Ireland’s bond spreads. Only a week later the government issued Treasury bills for the first time since the start of the program, and roughly a month later five- and eight-year government bonds were issued. So there’s a very strong connection between that market access and market expectations regarding the follow-up to the June 29 statement. This means there is some room for markets to be disappointed if those expectations are not met.
QUESTIONER: Hello, Craig. Just another follow-up question in terms of the banking deal. It seems that the EU objective of having a deal hammered out in October has been pushed out. How important do you think it is that a deal is done before the next budget is brought in in December of this year? And do you think it is necessary to have some sort of a deal to maintain social cohesion as the government brings forward what it considers to be its most difficult budget in its five-year cycle?
MR. BEAUMONT: I would certainly agree that it would be helpful to have a timely agreement, especially, as you say, given the difficulty of the budget. But it’s also very important to have an agreement which is going to achieve the objectives that the euro area leaders set out and also the ultimate goal of the program, which is to return Ireland to durable market access. So while we are working to achieve timely progress, the main priority is to make sure that this opportunity for the Irish program to succeed is fully realized.
QUESTIONER: Okay, can you add a follow up question as well, just in relation to GDP forecasts? I think you mentioned just earlier on in the call GDP forecast for this year 0.5 percent and for next year 1.5 percent where the document itself speaks of a forecast of 0.4 percent for this year and 1.4 percent. I just want to absolute on that.
MR. BEAUMONT: I didn’t go to the last decimal place in terms of the oral presentation, but those are the specifically correct numbers, 0.4 percent in 2012 and 1.4 percent in 2013. There’s hardly any change in the 2012 projection. There’s a modest reduction in the projection for 2013, mostly reflecting lower external growth than we had previously built into the projection.
QUESTIONER: And the deficit target is 7.5 percent, that remains the case, but you’re saying it’s challenging?
MR. BEAUMONT: It’s more challenging with slightly weaker growth as naturally revenues would be affected. At the same time there has been an improvement in the base for projections, as revenues performed on target last year and they’re a little bit ahead of target this year, so there are some offsetting factors as well.
QUESTIONER: Hi, thanks. And just on the bank deal again, I mean, I’m just wondering when you -- the IMF and the government have proposals ready to go to European finance ministers and in terms of the promissory notes you mentioned, so, two means of doing it, in the taxes on long-term government securities or ESM/EFSF funding of which obviously the former would be preferable. Is that the case that you think maybe a long-term government security would be better than the EFSF funding because of the seniority issue?
MR. BEAUMONT: In terms of the timetable, there are significant discussions ongoing and it’s hard to pin down the exact timetable for those to be concluded. The point you make on the mechanism by which the maturity schedule of the promissory notes could be addressed is exactly as we put it in the text. Either approach could work, but we see the advantage of a long-term government security being that it’s not a senior debt compared with the regular debts issued by the government, so this approach improves the overall debt structure in terms of regaining market access.
QUESTIONER: Hi, Craig, just to double check on your 2013 GDP forecast of 1.4 percent, that’s been cut from 2 percent, is that correct, from your previous forecast?
MR. BEAUMONT: It’s been cut from 1.9, so as you said, pretty close to 2. And it’s explained in the report that there is quite a significant reduction in trading partner growth outlook, which was the main factor driving that production.
QUESTIONER: Thanks, sir.
QUESTIONER: Thank you, Craig. Just in the context of all the uncertainty over the resolution of the bank debt issue and various other issues, do you have a plan B for further funding? In other words, will there be another program needed if there isn’t a revolution amidst some of the objections and certain quarters drag this out? Do you have a Plan B?
MR. BEAUMONT: No, we don’t have any plans beyond working on the existing program to help it succeed. It’s quite early days; actually, it’s only just the halfway mark in terms of the actual formal reviews, so we don’t have any specific alternative plans. We’re trying to ensure that this program works.
QUESTIONER: But bearing in mind how long discussions have taken in Europe over almost every issue involved, would it not be prudent for you to be looking at a plan B at this stage?
MR. BEAUMONT: I think it’s prudent to put all our efforts into making sure this significant commitment made by the Euro Area leaders can, to the benefit of both Ireland and Europe, help Ireland’s program succeed in its principal objective of regaining durable market access.
QUESTIONER: Yes, hi there. Gavin Riley from Journal.E. Thank you, Craig. I just wanted to ask if the IMF, given the importance that it stressed and how it says , you know, in its Plan A, that it would like the ESM to take an equity stake in the banks and I was just wondering, I suppose as a follow on to Richard’s last question, what the IMF had in mind by way of contingency if either the German Constitutional Court was to block German entry into ESM or if the European Court of Justice was, at a later date, as I know, it’s now been asked to rule on the legality of the ESM in the first place?
MR. BEAUMONT: I think that was covered by the previous question. We are working on Plan A very vigorously and that’s as far as I’m going.
QUESTIONER: Okay, so -- but even in spite of that, I mean, you can put 100 percent of your efforts into that and then still have a court come along and say that it’s not feasible, but you don’t have any comment beyond that?
MR. BEAUMONT: That’s correct. We’ll clear that hurdle when we reach it.
QUESTIONER: Okay, thank you.
QUESTIONER: Hi, Craig. How are you? I just wanted to ask, in the review you note that the Crocker agreement has brought industrial sector peace but that the public sector pay bill remains high and there’s been some discussion here in the last couple of days that the deal might be revisited. Is this something you think could help Ireland on the path to fiscal consolidation, as you’ve mentioned in your report?
MR. BEAUMONT: I think we heard that there are some discussions about what to do when the current arrangement comes to an end in 2014, rather than discussions about revising it. Our discussions with the government indicated quite broad support for the agreement from the agreement. We emphasize, therefore, the need to take maximum advantage of the provisions that facilitate structural reforms within the public sector, as we would see significant room for improvement in efficiency in terms of the health sector and in education.
QUESTIONER: And are there any particular matters in those areas that you would be concerned about specifically?
MR. BEAUMONT: There’s some discussion of this in a background paper that will be issued together with the Staff Reports.
QUESTIONER: Just one other question. Were you concerned at all by the disquiet among some of the government parties over the fresh health cuts that were announced? I know there was one newspaper, actually, that said the IMF had gotten in touch with the government to sort of see what was going on, I mean, just wanted to be able to confirm, was that the case? Is it a concern given it’s still early days in terms of government’s consolidation path?
MR. BEAUMONT: On the health sector, we are not micromanaging the approach here. We have emphasized the need to unwind these relatively modest overruns in the entire scheme of the budget, as it’s important to achieve the original budget target. In terms of our ongoing contacts, like any agency which has a representative in a country, they are always in contact with both officials and the private sector, and our experience is that work is continuing as normal.
MR. SILVESTRE: Gentlemen, I think we have time for one more question.
QUESTIONER: Hi, Craig. Just wondering, going back to your question earlier about a little bit of the detail on some of the spending rounds that you had, particularly on social welfare and health, you said you were going to be issuing another document in response to one of my colleagues there, but I’m just wondering, are we going to get that other document today and if we are, can you just give us a quick potted version of some of the things you’re recommending in that other document?
MR. BEAUMONT: There’s nothing new in terms of policy recommendations. It’s a background paper, which provides more detail on the underlying analysis, comparisons with other countries and trends over time. This will be part of a package of four papers that should be coming out jointly with the two main staff reports later this morning.
QUESTIONER: We’ve only got these two reports that have issued now, but there’d be other stuff -- we’ve all got -- later this morning is your time, but we’ve got like two hours to our main bulletin, so I’m just wondering if we’re going to see it before then.
MR. BEAUMONT: I think there’s an 11:00 o’clock (Washington DC time) release in terms of the issuance of the complete package.
QUESTIONER: Okay, that’s good enough. Thanks.
MR. SILVESTRE: Okay, well, I think it’s all the time we have, so this concludes our conference call. Thank you very much, Craig, for your time, and thank you, gentlemen, for your questions and your participation.