Transcript of a Conference Call on Ireland Tenth Review Under the EFF ArrangementWashington, D.C.
Wednesday, June 19, 2013
MR. SILVESTRE: Good morning, my name is Bruno Silvestre, and I'm the Senior Officer at the Communications Department of the IMF. I would like to welcome you to this conference call for the release of the staff report on the 10th review under the EFF, the Extended Fund Facility arrangement.
With me today is Craig Beaumont, the mission chief for Ireland. Craig will start with some opening remarks which will put the staff report in perspective, and then answer questions. Before asking your question, I'd appreciate it if you could introduce yourself and the media you represent. Let me also remind you that publication of the staff report, which has been posted late yesterday online, is embargoed until 11:00 a.m. Washington time, that is an hour from now.
Craig, you have the floor.
MR. BEAUMONT: Thanks, Bruno.
Ireland has continued its track-record of strong program implementation. We can see this as the fiscal targets for the first quarter were met with a margin and in the first five months the budget is on track for the 2013 targets. Financial and structural reforms have also continued, including an update of the central bank's guidelines on impaired loans and provisioning. Welcome news is the agreement to extend maturities on EFSF and EFSM loans, which much reduces market financing needs in coming years.
Just a few highlights from the staff report I'd note is that our macroeconomic outlook is little changed from the last review. Our baseline outlook is for a gradual economic recovery, with growth at just over 1 percent in 2013, and just over 2 percent in 2014.
We continue to see a range of risks to that baseline, including to trading partner growth, international financial market conditions, and the strength and timing of a revival of bank lending. If these factors hinder the gradual pickup in growth in coming years, Ireland's debt outlook would be significantly affected, and rather than peaking at just over 123 percent of GDP this year, and then declining, debt could continue rising. There are also risks to the debt outlook from various contingent liabilities. In the near term, there's a possible budgetary cost in selling the IBRC loan portfolios. Looking forward, there are also possible costs from bank recapitalization, credit union restructuring, and the operations of the National Asset Management Agency.
This review agreed some changes in policy plans to best achieve program goals for recovery and financial stability.
On the banking side, in the light of the transition to the European Banking Union, it was agreed to align Irish stress test with the next joint European exercise in 2014. A final schedule for that exercise is still to be announced. Our current expectation is that the Irish stress test would be in about March 2014. Having a single stress test on a common European methodology is the best way to predict financial stability.
In the interim, the authorities will make a range of preparations. They will continue to work on resolving non-performing loans by monitoring banks' performance relative to the mortgage resolution targets, and moving to establish suitable targets for resolving SME loans in arrears. In addition, they will be undertaking work on bank profitability, including exploring options to reduce the funding costs of tracker mortgages. They will also be performing a comprehensive balance sheet assessment, which includes a review of bank loan classification and provisioning and also of their risk-weighted assets.
On the fiscal side, we encourage full implementation of Budget 2013 measures to keep on target for 2013. Looking ahead, we recommend only reassessing the consolidation in 2014-2015 at the time of Budget 2014, when there will be more information on budget performance and growth prospects. The aim would be to achieve a deficit less than 3 percent of GDP by 2015 in as growth-friendly a way as possible, and to keep a buffer against potential shocks.
In terms of the high level of unemployment, we welcome the direction of reforms of employment services such as setting up one-stop shops, where job seekers also have access to advice on training. But these employment services need to be supported by adequate redeployment of staff to meet the needs of the long-term unemployed if they're going to be fully effective.
With that, I'll take questions. Thank you.
QUESTIONER: Joe Brennan, here, of Bloomberg News. Just in relation to the tracker mortgages and the attempts to reduce the funding costs of those, it just mentioned in the report about exploring options to defray the potential costs of reducing tracker mortgage costs, including the elimination of tax deductibility of mortgage interest, on such low tracker rates. What exactly are we talking about here?
MR. BEAUMONT: We don't have a specific idea in mind on that though we realize that some of the actions that are still being explored on how to reduce tracker mortgage costs could have their own costs and the options to defray those for the budget should also be explored. It's notable that tracker mortgage interest rates are very low, and there's a question whether there is also a need for tax deductibility on those very low interest rates. But that's certainly not a policy at this stage, it's an option to be explored.
QUESTIONER: And how would some of the options actually end up with a cost for the Exchequer? I don't understand that.
MR. BEAUMONT: Well, some options could involve guarantees of portfolios, and there's always a possible cost to such guarantees.
QUESTIONER: Just maybe a follow-up question. In terms of review of bank fees -- I'm talking about maybe just looking at the restrictive regime around approval for bank fees to customers. I suppose the implication there is that we're likely to see, the outcome of the (inaudible) review to see an (inaudible) across the board.
MR. BEAUMONT: Well, I think that's a little bit of a premature conclusion. You have to go through the review first. Certainly there seems to be, on the face of it, signs that it does take quite a long time for changes in fees to be approved. It's not clear to me yet that the levels themselves are an issue. That would be one of the first topics for the review.
QUESTIONER: I was just wondering about the issue of bank recapitalization, and also you've mentioned the possible costs of IBRC liquidation.
Where might the government go looking for cash if they need extra for recapitalization? Would you consider dipping into the cash buffers that exist, and which you're so keen to preserve, as a way of recapitalizing banks?
MR. BEAUMONT: I think the first point on that is that we don't have any firm expectation that there could or would be a need for recapitalization. Our understanding of the process for the European stress test exercise is that it would lead to the agreement on capital plans for the banks. Under those plans, a range of sources would be accessed to complete the process, and, that would include a mixture of private sources as well as possible government sources. So it's not the case that any particular sources are being set aside for use for bank capital needs. It would be necessary to design a plan based on the needs, if they arise, at the time.
QUESTIONER: And, just to follow on with that, Craig, would that cover any potential deficit in the IBRC? Is there enough slack in the system to cover any potential costs there, you think? This year? In the budget?
MR. BEAUMONT: We don't know that there would be a need for any budgetary payments in relation to the IBRC loan portfolio. At this stage, it's a matter of the budget compensating NAMA for the amounts that may possibly have paid in excess of the ultimate value of these assets. The potential amounts, if they were to arise, don't seem unmanageable.
QUESTIONER: Hi, Craig. I have a quick question on the asset quality review which will be done ahead of the European-wide stress test. If that produces negative results, or shows the banks' asset quality is worse than they have said, will the banks or, indeed, the government have to take corrective action? And what would that corrective action be?
MR. BEAUMONT: What we would expect is that the results of the asset quality review would be shared with the banks, and they would inform their end-of-year provisioning and that would have implications for their capital ratios. We're not expecting that this would lead to needs for capital injections. The whole stress test process is the time when any final decisions on capital needs would be made.
QUESTIONER: Just one other question, on a different topic.
You've obviously said in the report that you wouldn't support a reduction to the fiscal consolidation in 2014 and 2015, and you kind of want Ireland to maintain the buffer. Obviously the government is discussing this at the moment, and the minister for finance is keen to reinvest that money in capital projects.
What would IMF think of that plan, to take the savings and to reinvest them?
MR. BEAUMONT: This is ahead of a discussion we will likely have with the authorities. We are suggesting it's good to stick with the existing targets that have been in place and which have provided good guidance to Ireland's fiscal consolidation. Having a buffer there improves the chances of meeting those targets in the face of possible shocks. As we have indicated quite a number of times, we're flexible on the exact composition of the fiscal adjustment, that's a matter for the government to determine. But we're encouraging reaching those fiscal targets with a reasonable degree of safety.
QUESTIONER: If I might just ask you, actually, one more. It's only mentioned briefly in the paper, in terms of exit strategies for the bailout. And you obviously discuss the idea of some sort of backstop that Europe might provide, and the IMF might be involved in. I know that's obviously going to be discussed in the coming months. But, you know, from the experience of previous IMF programs, I think some countries have decided to take a sort of a contingent credit line. You know, at this stage of where Ireland stands, it goes with quite a lot of cash raised. What would the IMF be suggesting on this? And also, when do you think this will come to a head? When does Ireland actually have to decide what it's going to do on this? It is more in autumn rather than, obviously, this summer?
MR. BEAUMONT: I think the decision would be taken later, probably in the autumn, and it would take into account market conditions and other circumstances at the time. We and the authorities can see some of advantages to having a backstop there as there are still uncertainties in the euro area. It would just be something that gave you that extra layer of confidence that Ireland's market funding would be stable and affordable. It is quite a common process for countries leaving programs, to transition with a backstop in place, and we'll keep on discussing that in both this coming review and the next one.
MR. SILVESTRE: Okay, well if there is no further question, I think this will conclude our conference call on Ireland. Thank you and good bye.