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Transcript of a Conference Call on the Eleventh Review under Extended Fund Facility Arrangement for Ireland, Washington, D.C., October 4, 2013
October 4, 2013
MS. STANKOVA: Good morning, and good afternoon. Thank you for joining us for this call on the eleventh review of the Extended Fund Facility Arrangement for Ireland.
The IMF’s Executive Board completed the review on September 25th, and the press release on the Board decisions was issued. Today, we are releasing staff report, and some associated documents, supplementary information to the staff report in the review, and hold the conference call to answer your questions in more detail. I would like to remind you, of course, that the press call is still under embargo, as well as documents are, until 11:30 a.m. Eastern Standard Time. I will pass the microphone over to Craig Beaumont, who will make introductory remarks, and then we will take your questions. Thank you.
MR. BEAUMONT: Thanks very much, Olga.
This is the eleventh quarterly review of the program with Ireland that has been completed on schedule. We've lowered our growth projections a little. A significant factor was the patent cliff that affected pharmaceuticals exports, but domestic demand was also weak in the first half of this year.
We see signs of a recovery coming through in the second half. For example, employment growth was 1.8 percent year-on-year, and overall we see modest growth in 2013 at about 0.6 percent. Trading partners are expected to recover in 2014, which is expected to help Ireland's growth pick up to about 1.8 percent.
The program remains on track. Budget management is strong. This needs to continue for the remainder of the year because the margins in the budget are tight.
We're also seeing some improvement in banks' profitability, but nonperforming loans are continuing to rise. Both these factors need to improve to help revive bank lending, which is important for a recovery to become sustainable by promoting investments and job creation, and helping start to reduce the very high level of unemployment. Thank you very much.
MS. STANKOVA: Thank you, Craig. With that, we will take your questions.
QUESTIONER: I just want to get your thoughts on the budget coming up. Are happy that the government has indicated that they're going to be going for less than 3.1 billion euro in the budget?
And also, I just want to get your views on tracker mortgages. I know there was some data in the report you put out today. I haven't gone through it in detail. But I just wanted to get your thoughts on where you are with the prospect of getting removed from the banks.
MR. BEAUMONT: On the budget we start from the point that the path of fiscal consolidation was set out by the government in its medium-term fiscal statement, in both 2011 and 2012, and again in April this year in its stability program. And this path was agreed with the troika at the 4th and 8th reviews of the program. So, naturally, we start from what has been already agreed, which is a 3.1 billion euro consolidation in 2014, and 2 billion euro in 2015.
At the conclusion of this review, the Fund indicated Ireland should maintain its track record of steady fiscal consolidation, and including that the cumulative amount of consolidation, we combine 2014 and 2015, should be 5.1 billion euro.
MR. BEAUMONT: Okay, let me just repeat that last point, which was what the Executive Board expressed at this review, is that Ireland should maintain its track record of steady fiscal consolidation, and that the cumulative amount of consolidation in 2014 and 2015 should be 5.1 billion euro. And that's our position on the budget. Discussions with the authorities are continuing.
The other question was on the tracker mortgages, which we have stated in a number of reports are a significant drag on banks' profitability, which means that they have more difficulty building the capital which is needed for them to expand their credit and support the economy. We've had discussions on a range of options to address that issue. There has been further technical work by the authorities on this issue, and we'll have more discussions on the coming mission later this month.
QUESTIONER: Hi there. Thanks very much. And my two questions.
The first was just about the scale of the consolidation required over the coming years. The finance minister this morning, when we put the findings of the IMF report to him, commented that perhaps by softening off on the 3.1 billion euro this year, and then agreeing to implement the remainder next year, that the softening off might hopefully coincide with some economic improvement, therefore mitigating the need for the remainder of the full 5.1 billion. So I'd just like to get Craig's thoughts on that.
And then, secondly, the other point that was made by the minister is that the comments in relation to the less-than-ambitious targets from the central bank as regards mortgage resolution, he said that subsequent to the report being compiled, the IMF represented this would have been in further discussions with the central bank, and that those would have been revised upward. So I just wanted to confirm that was the case, and just to get some commentary on that, please.
MR. BEAUMONT: On the budget, the Fund's position is that we should allow the automatic fiscal stabilizers to work, which means that you adopt a consolidation path, and then if growth is stronger or weaker, you don't change the amount of measures that are already working through the system. If, for example, growth is weaker, you don't adopt more measures because you'll make the economy even weaker still. Similarly, on the upside, if growth is stronger, you don't cut back measures, you maintain the same effort as planned.
So that's the preferred approach to fiscal policy--we would rather adopt a plan and implement it consistently, and then allow some flexibility on the headline deficit if growth turned out to be substantially weaker than expected.
On the mortgage-arrears targets, the actual targets were agreed with the central bank. It's a quite complex area, and we initially had a view that a more ambitious set of targets would have been appropriate, because we see the resolution of nonperforming loans as very important to Ireland's recovery. At the same time, it's essential that the resolutions be durable, that there not be a high rate of re-default on restructured loans. So it's important to get the quality of the solutions that are adopted high. So we saw some tradeoff, between quality and quantity, and, in the end, we agreed that the targets envisaged were appropriate.
QUESTIONER: Hi, Craig. Three questions here. Could you say a few words about what impact you see from your lower growth estimates for Ireland to manage its debts into the future. And could you say a few words about what you expect to happen and, indeed, when, on the precautionary credit lines.
And do you think Irish banks will require new capitalizations from now through next year?
MR. BEAUMONT: On the growth side, overall their revisions are relatively modest, and don't fundamentally change the revenue outlook and the fiscal outlook more generally. So we don't see that as has having a significant impact on fiscal targets or consolidation or the deficit.
The precautionary credit line is a matter that we will discuss on the next review. The decision on whether to have a precautionary credit line is very much with the Irish authorities, and so the timing is in their hands, as well.
In terms of bank capital needs, this is an issue for the exercises that are expected in 2014 as part of the movement to a Single Supervisory Mechanism which will be overseen by the European Central Bank and the European Banking Authority. I won't hazard any estimate of what might come from those exercises.
QUESTIONER: A follow-on question in relation to the tracker mortgage solutions that are being weighed at the moment -- you talk in the report about Irish banks' potentially borrowing the high-quality balance sheet of a European institution. Are you talking about the ESM here, or another official institution? You're not talking about a private institution like an investment bank here.
MR. BEAUMONT: From a technical perspective, this really only needs to be a high-quality balance sheet that can access funding at lower cost. So, there's no specific institution that's being established as a potential counterpart at this stage.
QUESTIONER: So, you could also include in a potential solution a private back, as such, with a high-rated balance sheet?
MR. BEAUMONT: Technically, that would be an option -- but the question would be, whether you would find a suitable counterpart.
QUESTIONER: So, the more likely kind of scenario, it would be an official institution then?
MR. BEAUMONT: We're still working on the technical side of it, and then there would be a matter of finding a way to bring it towards implementation, which would obviously require further discussion.
QUESTIONER: And just to be clear, when you talk about "borrowing" a balance sheet, you're talking about some sort of guarantee-type arrangements from an institution.
MR. BEAUMONT: We called it a "credit enhancement." That's a fairly general term which would include a guarantee.
QUESTIONER: Just a follow-on question: With regarding to a precautionary line, will the IMF be part of such a potential line?
MR. BEAUMONT: The Managing Director, Ms. Lagarde, was in Dublin earlier this year, in March, and she indicated that we were open to that possibility.
QUESTIONER: But you're not -- in terms of the terms that are being discussed at the moment, you can't say whether the IMF will be?
MR. BEAUMONT: Not at this stage, no. We're discussing the range of options, which would include the IMF participating in a credit line.
QUESTIONER: All right. Just in a scenario where there may not be a kind of European commitment toward backing a precautionary line -- because I think it has to go through the various parliaments to be passed -- in that event, would the IMF, or could the IMF go it alone in terms of providing a backstop for Ireland?
MR. BEAUMONT: From a technical perspective, we could go it alone. We can have a credit line with any member country under our normal policies. But, in practice, in the euro area, all the engagements have been jointly with the European authorities.
QUESTIONER: To continue on the credit line -- do you think that the government's decisions on the current budget will have any impact on that. And you're saying that it's okay if they do the 5.1 over two years. Are you suggesting there that if growth is, as you expect, higher next year, that there's more room for perhaps doing more consolidation next year, rather than this year?
MR. BEAUMONT: Normally when we discuss a new program, we take a forward-looking approach to the policies that would be needed in that context. Certainly, there will be a need for continued fiscal consolidation in Ireland. On the cumulative nature of fiscal consolidation, as you point out, there is that possibility to substitute from one year to the other. But certainly you would want to keep consolidation still on a downward path to promote Ireland's recovery.
QUESTIONER: In previous reports, the IMF was quite hard the issue of retrospective recapitalization, and saying to you that they should fill the promise of breaking that link.
And in this report, it doesn't even give any mention of that. I know the ESM is mentioned in terms of the direct bank recapitalization, the backstop for next year.
Does that mean, you know, you've kind of given up hope on some sort of retrospective arrangement coming forth? Or what are your thoughts on that now?
MR. BEAUMONT: I think the agreement on the ESM direct bank recapitalization guideline does include the option for retroactive recapitalization mentioned a few times in the past. And certainly, we remain open to that idea. It would be a way to jump-start Ireland's recovery.
In this report, we focused on two items, one being the backstop to be available as a last resort during the forthcoming stress-test, to help protect financial stability during those stress-tests. And we also flagged the concept of dealing with banks' funding costs.
QUESTIONER: And if I could just ask one follow-up, also on the budget. I mean, the government's already said it's going to be 3 points, 3.1 this year. And, presumably, when they update the medium-term fiscal plan and budget, they'll also have a figure in there for next year.
I mean, if it's less than 5.1 billion, (inaudible) savings for the next two years, I mean what can the IMF do in that case?
MR. BEAUMONT: Well, we still have one more review of the program to discuss Ireland's policies. So that's our normal way of doing business.
QUESTIONER: One was to do with the ESM direct bank recapitalization backstop arrangement. I was just wondering if you could flesh that out for me a little bit. How would it work? And, in your view, how would it be beneficial to the Irish banks for the purposes of their stress-tests?
And, secondly, in relation to Permanent TSB, you seem pretty negative on Permanent TSB, about its prospects of returning to profitability anytime soon. Just wondering if you feel that maybe Permanent TSB might be beyond saving at this point?
MR. BEAUMONT: On the direct bank recapitalization, the ESM policy guideline is that it's a last-resort measure, that only once you've exhausted private equity options and domestic government options, is there the scope to make a request to the ESM for support that would share the burden of the recapitalization. It would be useful for markets to be aware that this was a possibility, as this would help reduce concerns about tail risks, which can add to uncertainty and volatility during the stress-test.
MR. BEAUMONT: On PTSB, we say it's returning to profitability rather slowly. We haven't indicated that it's a bank that has a capital issue, so we're not saying it's beyond hope, though it does take a long time to regain profitability.
MS. STANKOVA: With that, we conclude the conference call on the eleventh review of the Ireland Program. Thank you.
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