Transcript of a Conference Call on the First Post Program Monitoring Discussion with Ireland
June 20, 2014Washington, D.C.
June 18, 2014
Craig Beaumont, Mission Chief for Ireland, European Department; and
Olga Stankova, Senior Communications Officer, Communications Department
MS. STANKOVA: Good afternoon everybody and welcome to the conference call on the release of the first post-monitoring discussion for Ireland. The conference call will be held by the Mission Chief for Ireland, Craig Beaumont. With this introduction I will pass the microphone to Craig for his remarks, and then we will take your questions.
MR. BEAUMONT: Thanks very much, Olga. Today we're publishing the staff report for the First Post-Program Monitoring Discussion with Ireland. The IMF Board Meeting was held last Friday, June 13th, close to six months after the conclusion of the EU-IMF supported program for Ireland.
This post-program monitoring discussion is part of the new semi-annual cycle of policy discussions going forward. It will be followed by the annual Article IV consultation later in the year. The main difference from the annual consultation is that post-program monitoring is more focused on economic and policy developments relevant to a country's ability to repay its outstanding credit to the IMF over time.
Since the end of the program we've seen a range of indicators that Ireland's economic recovery is broadening. Employment growth has continued, helping to bring down unemployment, although it's still high at 11.8 percent. Industrial production, which is mostly export driven, has strengthened. At the same time, there are signs of domestic demand revival such as firming retail sales. Financial market conditions have also been favorable with Irish bond yields hitting new all-time lows.
Consistent with these economic developments, the government's revenue performance in the first five months has been solid. The authorities have also kept spending within aggregate cielings despite pressures in the health sector. So the overall fiscal deficit remains on track to meet the 2014 budget target of 4.8 percent of GDP. Public debt is expected to ease modestly this year to a still high 122 percent of GDP.
Against this background, the IMF made a number of recommendations to support sustained recovery across fiscal, financial sector, and structural policies.
On fiscal policy, the core goal is to put debt on a downward path while protecting growth. The Fund fully supports the Irish authorities’ determination to adhere to the aggregate expenditure cielings this year.
Looking to 2015, the Fund favors sticking to plans for the amount of adjustment to protect hard won credibility which has helped to lower Irish interest rates. We indicated in the report about 1-1/4 percent of GDP in adjustment, which would be consistent with the €2 billion that the authorities’ have included in their recent stability program, and in previous medium-term fiscal statements. This approach of anchoring the quantum of adjustment also avoids a pro-cyclical response to revisions in growth projections which remain subject to substantial uncertainty.
On the financial sector, the aim is to strength banks' capacity to lend, so that Ireland’s recovery is not impeded in coming years as rising investment requires financing. On this front we call for banking supervision to maintain pressure on banks to durably resolve nonperforming mortgage and SME loans. In addition, we see room to broaden these resolution efforts to include impaired commercial real estate loans.
The ECB's ongoing comprehensive assessment is important to reinforce improved confidence in the banks, supporting their access to funding on good terms. In case capital needs arise and adequate private capital is not available, the Fund sees a valuable role for a common Euro Area backstop, possibly direct recapitalization by the European Stability Mechanism.
We also support removing any remaining impediments to growth, including by helping the long-term unemployed return to work, especially by strengthening training to meet labor market needs. We also note the recently established Irish Strategic Investment Fund to support investment, although it's taking on a more complex private investment role which needs to be managed carefully to contain fiscal risks.
That concludes my opening remarks and I welcome questions.
MS. STANKOVA: Thank you, Craig. Now we will take your questions.
QUESTIONNER: Morning, good morning, Craig. Just looking at last year we've seen the government overhauling bankruptcy laws and also bringing the insolvency service upon. Are you guys surprised by the low level of bankruptcy and the fraction of the insolvency's going through? Or do you see that more as a sign that banks are actually doing what they're supposed to be doing and restructuring soured loans?
MR. BEAUMONT: Good morning. Thanks The bankruptcy law, which I think was passed in late 2012 and implementation went through the first part of 2013, became fully operational in the third and fourth quarters of last year. So it's early days for the bankruptcy law and the new procedures that came with that, including the personal insolvency arrangements. I understand there has recently been work on developing a protocol amongst the practitioners involved in this process that will make it more standardized, and should improve the take up of those procedures. Maybe it's just early days in terms of people waiting and seeing how the whole process works in practice before deciding whether to go down the legal process or to continue to work with their banks.
QUESTIONNER: Thank you very much and good morning, good afternoon, Craig. It's just a question about the projections that you have. Obviously, you've outlined the IMF would like to see a quantum of €2 billion in adjustments in the forthcoming budget. One of the arguments that the Irish government has put forth for perhaps not leading to commit to such a big adjustment would be that the GDP is getting bigger and we have projections now of 2 percent or more. Whereas, the IMF is sticking to 1.7 percent.
So I was wondering if your might, perhaps, go into where your two forecasts diverge. So why think that the Irish government might be over rigging the prospects for growth a bit, and consequently the need for the adjustment in the next budget?
MR. BEAUMONT: Thanks very much. I think the main divergence in our projections is on the domestic demand side. That tends to be the most revenue rich part of growth. Based on the fact that Ireland is recovering from a severe banking crisis, and the private sector is heavily indebted, experience elsewhere is that the recoveries tend to be rather gradual. Drawing on that experience we have a somewhat more conservative perspective of domestic demand.
This doesn't mean that the government's projections are outside the realm of feasibility, in fact, they've been endorsed by the Irish Fiscal Advisory Council. So I think a relatively modest and reasonable difference of views around domestic demand is the main difference.
QUESTIONNER: Just as a supplemental question to that, just as a follow-up then on the quantum of 2 billion, do you think that it is feasible that Irish authorities could, perhaps, continue to meet the deficit targets by implementing less than a quantum of 2 billion as you're suggesting?
MR. BEAUMONT: Our own projection is roughly that amount. We're not going to the last 0.1 billion, but roughly that amount would be needed to actually just meet the 3 percent deficit target. So clearly if you had somewhat stronger growth projections, you could meet the deficit target with a little bit less adjustment.
In our experience working with Ireland there is significant uncertainty around these growth figures. So we're reluctant to say that if you see signs of strengthening growth that's the time that you should ease back on fiscal adjustment. In fact, it's really the time when you should execute your plans fully because the economy's doing better.
QUESTIONNER: Great. Thank you very much.
QUESTIONNER: Hi, Craig. Just a question on permanent TSB. In the report you remarked that staff continues to see risks to its return out of a profitability in its current form.
But by that, would the IMF like to see the TSB possibly merge with other institutions? Do you think it could have a viable future as a standalone? Also, may its viability be questioned when the ECB assessed the Irish banks as part of the European tests later this year? Thank you.
MR. BEAUMONT: On PTSB we do remark that there are risks to it regaining profitability over a reasonable horizon. We're not questioning it ultimately being viable as a standalone institution, but we do see these risks. It's very much in the hands of the European Central Bank to do its own analysis of the supervisory risks as part of its Comprehensive Assessment. Then it's for the Central Bank and the ECB and the Irish authorities to work out any further actions needed to reinforce PTSB's health going forward.
QUESTIONNER: Just possibly as an additional question to ask, and I know it was discussed over the three years in the bailouts the sort of future of PTSB. The European Commission's certainly see it as an important player to keep competitiveness in the sector.
Would the IMF share that opinion that it should be maintained to keep competition or, you know, would the Irish banking system be okay without?
MR. BEAUMONT: We're not taking a view so much on competition in the system, but rather looking for a solution which has the least fiscal cost while still protecting financial stability fully. There is a significant fiscal cost to options involving a wind down of PTSB and that would have to be taken into account in how you approach a solution.
QUESTIONNER: Good morning. You say in the report that Joan Burton, the leading candidate for the Labour Leadership has indicated to you that she intends to remain in coalition and keep fiscal austerity until 2015 or fiscal targets. Did you talk to Alex White, the other contender? Did Miss Burton say anything else?
MR. BEAUMONT: Thank you. On that reference we were quoting her, I think her statement announcing that she was intending to run, or a comment she made very close to that time that she announced that she was intending to run for Leader of the Labour Party. We haven't talked directly with Ms. Burton nor with Mr. White around their intentions. This is very much quoting public remarks.
QUESTIONNER: Okay. So it's second hand. Thank you very much.
QUESTIONNER: Hey, Craig. Just a quick question about issues you seem to be flagging around ISIF, that's the former NPRF, and indeed, the mortgage lending plan that was announced by the government in the run in to the elections. Can you just put a bit more meat on those bones? I mean, maybe outline some of the issues that you see here?
MR. BEAUMONT: Thank you. On the Irish Strategic Investment Fund, this redeploys the remaining pension fund resources. What's happening is the public funds that were previously invested in a range of tradable securities or placed with a range of managers of financial assets are now going to be redeployed into equity and lending into the domestic economy, taking direct exposures to enterprises or similar exposures via funds managed by the private sector.
So it's quite a significant change in the investment mandate. It involves a completely different set of risks than was managed previously. So it's only reasonable to make sure that the staffing and the management and the processes needed to operate that effectively are put in place. We see that NTMA is already progressing on that issue, but it's something that we thought needed to be flagged given the significant public resources at stake.
QUESTIONNER: And on the mortgage policy?
MR. BEAUMONT: The mortgage policy, we understand, is a proposal that is being further considered. Specifically it's under review by the Department of Finance for the Minister for Finance who will, take into account the pros and cons, advantages and disadvantages of the proposal. We've already indicated that we would suggest significant caution in adopting a guarantee framework, especially one that would involve guarantees of a very large share of the mortgage principal.
QUESTIONNER: The IMF is perceived as being supportive in the past of Ireland's case for retrospective or retroactive recapitalization of the Irish banks. Do you still support that case, and how best do you think that could be achieved? 2015, of course, is seen as the year where that might be possible following the completion of banking union.
MR. BEAUMONT: Thanks very much. Yes, we continue to support measures that would improve Ireland's debt sustainability. Especially taking into account the fact that the costs of bank recapitalization to the Irish government were increased as a result of European limits on the bail-in of bank creditors. When taking that into account I think there's a reasonable case that could be made. We understand the Irish government continues to make this case with its European counterparts. I have no advantage in advising how to go about achieving that goal, but we continue to support it.
QUESTIONNER: Okay. Just as a follow on. Without such a deal being done, if you like, you know, what does that say about the sustainability of our debt? How much less sustainable or how more difficult is the challenge to deal with our debt?
MR. BEAUMONT: We provided an analysis on Ireland's debt sustainability in the report. It's similar to previous reports in noting that the main issues are growth prospects and possible contingent liability remaining from the financial sector. The benefit of retroactive bank recapitalization would be to help offset those risks and reinforce the progress that Ireland's made recently in terms of its excellent market access and very low yields for its bond issues. So I think it's something that Ireland should keep seeking.
QUESTIONNER: Okay. Thank you very much.
QUESTIONNER: Hi, Craig. Just coming back to the 2 billion quantitative measurers. In light of the elections is that tough love message not going to inevitably leading to some sort of conflict with the Irish government?
MR. BEAUMONT: It's the job of the Fund to give advice on what we think are the appropriate policies. Much the same as the Irish Fiscal Advisory Council came out recently with its recommendations on fiscal policy, we've come out with ours. We also make recommendations on banking policies and structural reforms. We really can't avoid conflicts, but if we have a difference in views it's important to inform our Board about the authorities' views, compare them with our views, and give the full picture. But some conflict is inherently part of this job.
QUESTIONNER: Thanks very much. I'd like to ask questions if I could. Could you, first of all, just tell me a little bit more about this language used in Paragraph 16 where you talk about anchoring the quantum of adjustment rather than the headline deficit? I just want to be absolutely clear and understand what you mean by that and whether it applies to the 2016 to 2018 period as well.
Secondly, I wanted to ask you, if you could, to comment a bit more about, what I presume you're saying in the report is the increased political risk after the elections?
MR. BEAUMONT: Thanks very much. On the anchoring, for this coming budget, we're suggesting to continue with previous plans which were a total consolidation of about €2 billion, or about 1 1/4 percent of GDP, and to do that, really regardless, of what the growth prospects appear to be.
If growth turns out to be in very strong the deficit will come in under ceiling, so there is a healthy buffer helping to get closer to the medium term goal of budget balance. If growth turns out to be very weak it may be the case that the deficit ceiling is not quite met. From our perspective, that wouldn't be a significant issue. The main issue is to continue with a steady adjustment that helps protect Ireland's growth.
We would apply the same principle going forward that the government should set out a path towards its budget balance goal, and identify, roughly, the amount of measures it expects going forward, and spread those relatively evenly over time. Then stick to that fiscal adjustment path. If growth turns about to be lower than that built into the medium term framework it may just take a little bit longer to get to the budget balance goal.
On the politics I think we've said what we've had to say. We observe that the elections did have an impact on the governing coalition parties, and that there was a leadership process underway. That's as far as we would comment.
QUESTIONNER: Hi, Craig. Can you please clarify the quantum of adjustment needed to reach that balanced budget target by 2018?
MR. BEAUMONT: In the report we put the whole adjustment figure at 4 1/2 of GDP compared to where we are now. If the measurers of 1 1/4 percent were taken for Budget 2015 that would leave a further 2 3/4 percent of GDP improvement needed. Now, that improvement can come partly from a strengthening in the economy and partly from actual discretionary measurers. A further part is if you don't index spending on public sector wages and benefits that can also contribute to the adjustment. The exact breakdown hasn't been calculated, but we see some need for discretionary measurers to contribute as well.
QUESTIONNER: You couldn't put a figure on that yet?
MR. BEAUMONT: Not yet.
OPERATOR: Thank you. There are no further questions at this time.
MS. STANKOVA: Thank you. I will remind you that the call is under embargo until 11:00 a.m. Eastern Standard Time. That's 15:00 GMP. Thank you and good-bye.