Transcript

Transcript of a Conference Call on the Eight Review under Extended Fund Facility Arrangement with Ireland

October 25, 2012

MS. STANKOVA: Good afternoon everybody and welcome to the conference call on the conclusion of a mission for the eight review under the Extended Fund Arrangement with Ireland. The conference call will be held by Craig Beaumont, IMF mission chief for Ireland and the conference call is under embargo until 9:30 a.m. Eastern time which is 2:30 p.m. Dublin time. With this brief statement I will pass the microphone over to Craig for his opening remarks.

MR. BEAUMONT: Thanks very much, Olga. For the eighth review Ireland's policy implementation has remained strong. Its budget is on track towards the 2012 targets and financial sector and structural reforms are continuing to advance.

Our outlook for growth in 2012 is unchanged from that we had back in the Sixth Review, which is for low growth of only half a percent this year. This outlook is supported by the growth that we've seen in the first half of 2012, which was half of a percent, and it mostly relies on high net exports because domestic demand continue to decline.

If we look ahead to 2013 we have lowered our projection to about 1.1 percent which is down by one quarter of a percentage point from our previous forecast of 1.4 percent. The main factor there is that the World Economic Outlook has revised down growth in Ireland's trading partners from 1.3 percent to 0.9 percent in 2013, which will be a drag on Ireland's export growth.

There are also some downward revisions on the domestic demand side. Consumption and investment will contract a little more in 2013 than we had expected at the seventh review, before returning to growth in 2014.

Thinking about the risks around this outlook, there are some upsides, as possible emerging stability in the housing market could support confidence and spending in 2013. On the downside, however, we can see risks to growth in Ireland's major trading partners and it's possible that renewed stress could emerge in the Euro area. While the banks are well capitalized, they face profitability and asset quality challenges, so an even more gradual revival of lending than we currently envisage is possible.

Turning to fiscal policy, which was a major point of discussion on this review given the forthcoming budget for 2013, it's important that we're starting from the budget in 2012 being on track overall.

But within the budget there are some overruns in both the health sector and social welfare.

The overruns in social welfare mostly reflect higher than budgeted unemployment. But there are more structural issues in the health sector, and the government is committed to take durable measures to bring health spending within its ceiling in 2013.

Budget 2013 is aimed at an unchanged target of a 7.5 percent of GDP deficit. This will require measures, both revenue and spending, of just over 2 percent of GDP. It is certainly a difficult adjustment to undertake but it's also critical to keep on track for the government to return to relying on market funding.

The government will determine the composition of the actual measures included in the budget. We have encouraged a focus on durable measures that are as growth friendly as possible and that minimize the impact on low income groups. A tax on residential properties meets the requirements I just mentioned. It broadens the tax base and tends to be progressive in its impact.

At this point I'd like to make an aside on the topic of the fiscal multiplier. In Ireland, reducing the budget deficit is needed to return to market. But concerns about the impact of the necessary adjustment on growth are built into the design of the program. The first concern is the direct impact on spending and unemployment and then there's also the concern about knock on effects on loan arrears.

The main response to these concerns is that the fiscal consolidation path agreed with the authorities spreads the adjustment over five years from 2011 to 2015. This path aims to leave room for the economy to recover which is also important for debt to be sustainable. An even longer adjustment period would mean that the peak in debt is higher and comes later so it could be more difficult for the government to return to the markets.

Looking back there is no strong evidence that multiplier was underestimated in the case of Ireland. In the box in the recent World Economic Outlook that prompted this discussion, it was anticipated that there would be a large fiscal consolidation in 2010-2011 in Ireland. But there was no error in the projection for average growth in that period in the case of Ireland. In 2011, the first year of the EU-IMF program, growth of 1.4 percent actually exceeded the original program projection of 0.9 percent. This year growth is notably lower at only half a percent as I mentioned, compared with the original program projection of 1.9 percent. But much has changed externally since that projection was made back in December 2010. Domestically it's difficult to separate out the impact of other factors including the large uncertainty facing households and firms who are often highly indebted, and the low level of lending to which they have had access, from the impact of fiscal consolidation.

So at this time we consider the impact of fiscal adjustment has been properly allowed for in the Irish program, but going forward we will update our analysis in this and other issues as we do at each review.

Looking ahead, the key goals of the program are to sustain Ireland's recovery and lasting market access. It's very welcome that Ireland was able to regain access to market funding in recent months. This benefits from Ireland's strong performance under the program, but it's also notable that the terms of the access were significantly improved by the June 29th statement by Euro area leaders on strengthening the sustainability of the program, and also after the ECB's announcement of OMT, which had broader positive implications for bond spreads across the Euro area including Ireland.

Even with these much improved market conditions, Ireland continues to face significant sovereign-bank linkages owing to the high cost of bank recapitalization and its impact on Ireland's debt. So, delivering on European commitments, especially direct bank recapitalization, is critical to ensure Ireland continues to deepen its access to markets. Disappointing market expectations could risk Ireland needing ongoing reliance on official financing, which would miss an opportunity for a much needed success in Europe.

MS. STANKOVA: Thank you Craig. Now we will take questions from participants.

QUESTIONNER: Thank you very much. I wanted to ask please about the impact we've spoken about GDP which is mainly the growth that's looked at. But really in Ireland's case should it not be GNI and does this change the profile in any way? And my second question is you've mentioned about how important it is that there is some sort of deal on the bank loans. But how important is it to decrease the debt and the debt charges of the two major bank debts, the Promo Notes and the capitalization and is one more important than the other? And if you can go a little into what the effect of it would be, thank you.

MR. BEAUMONT: Thanks very much. We do track GNP, in particular we look at GNP and domestic demand when analyzing the budget as these are the main sources of the revenue side of the budget. GNP unfortunately seems to be more volatile than GDP. It actually rose in 2010 even though GDP was declining and then correspondingly in 2011 it fell quite sharply. This reflects, I think, the volatility in income outflows to multinational enterprises. So, we do try to track it but it's more volatile and more difficult to project.

On the issue of the bank recapitalization debts, we outlined in the previous staff report how a potential ESM direct bank recapitalization could benefit Ireland. We assumed for illustrative purposes that €24 billion--which is the amount of the bank recapitalization under the program--could be instead funded by the ESM. This would immediately reduce Ireland's debt by about 14 or 15 percent of GDP, which would significantly reinforce its ability to access market funding on reasonable terms.

QUESTIONNER: Hi, Craig thanks for doing this, and Olga.

It's sort of a follow up on that. I'm just wondering what's the state of play in terms of getting the rest of Europe to agree to the ESM funding of the Irish bank debt?

MR. BEAUMONT: On this issue we are still in continuing discussions with both the Irish authorities and our counterparts in the European Commission and the ECB, following up on the Euro area leader's statement of June 29 on improving the sustainability of the program. Those discussions are continuing and they're taking place in a context of broader discussions on the design of the ESM instruments that are linked to the progress on banking union.

QUESTIONNER: If I could just follow up in that regard. Is it basically down to a choice now you feel between doing that, i.e. getting ESM money into the banks and taking that debt off the sovereign's books, or as you suggested restructuring the program and giving them more time and let the debt creep a little higher, giving them more time and finding some more official funding?

MR. BEAUMONT: No, I never suggested that was an option. I was using that to explain that we couldn’t extend fiscal adjustment over an even longer period, or it would be unwise to do so, because it would increase the risk that market access would be difficult to obtain.

QUESTIONNER: Okay, so just to be clear you still feel that they could absorb that €24 billion on their own and get out of this program on time?

MR. BEAUMONT: No, we're saying it would greatly enhance the prospects for Ireland to exit as planned by the end of 2013 if ESM recapitalization was arranged. It would benefit both Ireland's debt sustainability and it would also strengthen the banks. Having the ESM as an owner would enable the banks to obtain access to market funding at lower cost and enhance their ability to lend, which would feed back positively into economic growth. So there are two angles for the benefit from that operation and it would have a quite significant value for regaining market access.

QUESTIONNER: Have you begun talking about possible exit supports for Ireland with the other members of the Troika and what form might they take?

MR. BEAUMONT: No, at this stage we haven't begun discussions about that. At some stage there would be a need as we get closer to the time, we would need to think about the whole exit strategy, but at this stage we're very much focused on the budget for 2013 and the financial and structural reforms to restart and revive growth. So, we haven't begun those discussions.

QUESTIONNER: Just a brief follow up on that, what would be the normal exit strategies you would help countries with?

MR. BEAUMONT: There's a range of past experience on this in the Fund in terms of possible arrangements to facilitate a fallback or a backstop. Now, this is a different situation because we're talking about a country that's also supported by the European Union so things may need to be arranged differently.

QUESTIONNER: I just wanted to follow up on a point that's been raised by a couple of the previous questions. You mentioned a discussion with regard of the need to enforce that the European promises from June 29 and elsewhere with particular regard to the direct recapitalization of banks from the ESM. This is almost complicated to some degree by Ireland having already recapitalized those banks from its cash and from the cash it's getting from under the program. So, the banks themselves aren't in need of any more funding from a standalone point of view.

So, with that in mind what does the IMF foresee as being the most likely way in which Ireland's so-called special case could be recognized? Would it be through the sales of Ireland's state holdings in the pillar banks to the ESM or does the IMF foresee some other sort of direction substitution? And in particular what would it have in mind?

MR. BEAUMONT: Well, one option would be simply for the ESM to purchase with cash the equity stakes in the banks, and for the Irish authorities to then to use the cash to reduce debt. Another option would be a debt-equity swap where the ESM would acquire equity in the banks and simultaneously there would be a corresponding reduction in Ireland's EFSF debt. There's no decision on the exact modalities but those are some options.

QUESTIONNER: And does the IMF have any particular preferences to which it would like to see being used?

MR. BEAUMONT: No.

QUESTIONNER: Okay. Thank you very much.

MS. STANKOVA: There are no other questions in queue. Thank you very much Craig and thank you everybody for participating. The conference call is under embargo until 9:30 a.m. Washington time, 2:30 p.m. Dublin time.