## _cr10366

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### Executive summary — program objectives, financing, and risks
- Program objective: restore Ireland’s banking system to health and put public finances on a sound footing to renew confidence and return to strong, sustained, growth.
- Financing package: €85 billion total.
  - IMF contribution: SDR 19.5 billion (about €22.5 billion, equivalent to 2,321.8 percent of quota); SDR 5 billion available on Board approval.
  - Irish authorities: €17.5 billion from cash reserves and liquid assets.
  - European Union and bilateral European lenders: €45 billion on similar terms as under the EFF.
  - ECB liquidity support is an essential component.
- High program risks: uncertain bank losses; difficult debt outlook despite unprecedented fiscal adjustment; unclear growth prospects; continued market focus on peripheral Europe; impending general election.
- Exceptional access rationale: staff assesses Ireland meets all four exceptional access criteria (acute capital account pressures; medium-term sustainable debt under program; impaired private market access; strong policy reform program).

### Banking sector — core problems, vulnerabilities, and restructuring strategy
- Core problems:
  - Over-sized banking sector with sizeable vulnerable assets; domestic banking system scale described as “at 500 percent of GDP”.
  - Substantial use of ECB liquidity support: equivalent to 83 percent of GDP (as presented).
  - Nonperforming loans: 12.9 percent of all loans in September 2010 and expected to rise.
  - Residential mortgage lending accounts for 25 percent of private sector credit; about 40,000 mortgages (close to 5.1 percent) are in arrears; about 45,000 mortgages rescheduled; more than 70,000 mortgages in distress (with overlap).
  - Housing prices have fallen 36 percent since peak.
- Program focus and measures:
  - Downsizing and reorganization: unwind noncore assets (including operations abroad); transfer remaining vulnerable assets to NAMA (about €17 billion additional); permit block transfers and ex-post single valuation where needed.
  - Capitalization strategy:
    - Immediate capital direction: central bank to enforce recapitalization to achieve 12 percent Core Tier 1 by end-February 2011 for AIB, Bank of Ireland, and EBS; Irish Life and Permanent to reach 12 percent Core Tier 1 by May 2011.
    - Notional buffer of about €35 billion to support banking system; up to €10 billion to ensure immediate recapitalization to 12 percent Core Tier 1 and remaining €25 billion available on contingency to maintain 10.5 percent Core Tier 1 under stress.
    - Estimated fresh equity injection of €7bn into four banks to reach 12 percent Core Tier 1; combined actions could result in €10bn fresh capital into the system above prior commitments.
    - Post-assessment regulatory minimum Core Tier 1 to be 10.5 percent.
  - Stress-testing and diagnostics:
    - PCAR 2011: two phases (6 largest domestic banks by end-March 2011; credit unions and subsidiaries by end-June 2011).
    - Central bank to define detailed criteria by end-December 2010.
    - Minimum Core Tier 1: 10.5 percent baseline; 6 percent stress scenario; time horizon 2011–13.
    - Asset quality diagnostic: independent firms to validate asset recoverable value in NPV terms; reports to be made public.
  - Resolution and burden sharing:
    - Special resolution regime draft legislation to permit appointment of special managers, transfers of assets/liabilities, bridge banks; link to liquidation framework.
    - Consideration of burden sharing for subordinated debt (Anglo Irish debt exchange at discount of about 80 percent cited).
  - Supervisory strengthening: increase staffing and budget; enhanced risk assessment framework; independent assessor for Basel Core Principles.

### Fiscal position, consolidation plan, and debt dynamics
- Recent fiscal deterioration and program consolidation:
  - Structural deficit reached 12 percent of GDP in 2008 (adjusted for asset prices).
  - Public debt projected close to 100 percent of GDP by end-2010; general government gross debt series: 2007: 25.0; 2008: 44.4; 2009: 65.6; 2010: 98.8; 2011: 112.8; 2012: 120.0; 2013: 124.5; 2014: 124.1; 2015: 123.0.
  - Authorities’ National Recovery Plan: €15 billion consolidation over 2011–14 (9 percent of GDP), front-loaded with €6 billion in 2011.
  - Budget 2011: adjustment measures of €6 billion; about €0.7 billion one-off; €1.8 billion from capital spending; current spending reductions of €1.2 billion in payroll/discretionary; social welfare measures yield €0.9 billion.
- Fiscal composition and medium-term reforms:
  - Two-thirds of adjustment from spending, remainder from revenues.
  - Revenue measures include lowering income tax bands and credits by 10 percent in 2011 and other base-broadening measures; revenue package sized at €1.4 billion in 2011.
  - Indirect taxes: carbon tax increases to €25 in 2012 and €30 in 2014; VAT increases to 22 percent in 2013 and 23 percent in 2014.
  - Institutional reforms: Fiscal Responsibility Law with multi-year expenditure ceilings; Budget Advisory Council.
  - Pension reforms: raise state pension age to 66 by 2014, 67 by 2021, 68 by 2028; new entrants’ entitlements linked to career-average earnings; indexation to consumer prices for new entrants.
- Debt dynamics scenarios (public sector):
  - Notional program bank-support amount: €35 billion (anticipated not to be fully used).
  - Baseline assumes €17.5 billion drawn from EU-IMF program and €17.5 billion from authorities’ resources.
  - Debt peak scenarios:
    - If €35 billion needed, debt peaks at 125 percent of GDP in 2013.
    - If €25 billion used, debt peaks at 119 percent of GDP in 2013.
    - If only initial €10 billion required, debt peaks at 109 percent of GDP in 2013.
  - Debt-stabilizing primary balance: 0.4 percent of GDP.
  - Sensitivity tests:
    - Growth shock (–2½ percentage points calibrated): debt ratio reaches 155 percent of GDP by 2015 and does not stabilize.
    - No fiscal consolidation: debt ratio reaches 159 percent of GDP by 2015.
    - Interest rate rise of 1½ percentage points: debt ratio stabilizes at 132 percent.

### Macroeconomic outlook and key projections
- Near-term outlook:
  - Staff projects growth: –¼ percent in 2010 to 1 percent in 2011; authorities project private consumption flat and growth of 1¾ percent in 2011.
  - Private consumption projected to fall by 1½ percent of GDP in 2011 (staff projection).
  - Unemployment expected about 13½ percent in 2011.
  - Consumer prices: fall by a further 1½ percent in 2010 cumulative price decline 6 percent; staff projects a fall of ½ percent in 2011.
  - Output declines: economy contracted by 11 percent in real terms and 16 percent in nominal terms during 2008–09.
- Medium-term baseline (selected averages and levels):
  - Growth average 2¾ percent over 2012–15 (compared to 6 percent over 2000–07).
  - Private investment could bottom at 7 percent of GDP in 2010 and rebound to 10 percent of GDP by 2015.
  - Unemployment likely above 10 percent to 2015 (sizeable structural component).
  - Detailed annual indicators (2005–11, projections marked): Real GDP annual changes: 6.0; 5.3; 5.6; -3.5; -7.6; -0.2; 0.9. Unemployment rate (percent): 4.4; 4.4; 4.6; 6.3; 11.8; 13.5; 13.5.
  - Medium-term (2007–15) selected projections: Real GDP annual change: 5.6; -3.5; -7.6; -0.2; 0.9; 1.9; 2.4; 3.0; 3.4. Consumer prices (annual): 2.9; 3.1; -1.7; -1.6; -0.5; 0.2; 1.3; 1.3; 1.7.

### External sector, balance of payments need, and vulnerabilities
- Components of balance of payments need:
  - Financial account deficit from rollovers of external government debt and outflows from Irish banks.
  - Smaller current account deficit reflecting legacy loss of competitiveness.
  - Need to strengthen reserve holdings to meet government external debt obligations and support banks’ external rollover needs.
- External debt and financing metrics:
  - Gross external debt projections (percent of GDP): 2008: 940.4; 2009: 1,036.9; 2010: 1,084.9; 2011: 1,096.5; 2015: 971.7.
  - External debt peak in baseline: 1,096.5 percent of GDP in 2011, declining to 971.7 percent by 2015.
  - External financing gap (billions of euros): financing gap of 37.1 in 2010 (table series shows gaps for 2008–15).
  - Gross financing requirements (billions of euros): 682.0; 805.5; 731.4; 743.9; 753.5; 761.5; 764.7; 745.5 (2008–15).
- Spillover and contagion risks:
  - Conditional probability of distress in at least another European bank given Irish distress estimated over two-thirds, particularly affecting Greek and Portuguese banks.
  - Foreign-bank exposures to Ireland (reported): Germany €113 billion; U.K. €107 billion; U.S. €47 billion; France €36 billion; Belgium €24 billion.
  - Portfolio investment exposures (reported): U.K. €134 billion; Germany €112 billion; France €95 billion; U.S. €83 billion.
  - Relative exposure to home country GDP: Portugal 18.8 percent; U.K. 8.9 percent; Belgium 8.1 percent; Netherlands 6.2 percent; Switzerland 5.9 percent; France 5.2 percent; Germany 4.8 percent.

### Program conditionality, monitoring, and review schedule
- Program modality: three-year Extended Fund Facility (EFF) with SDR 19.4658 billion (about €22.5 billion) drawable over 36 months.
- Quantitative conditionality:
  - Performance criterion on central government cash primary balance (cumulative floors reported: End-December 2010: -15.3; End-March 2011: -7.8; End-June 2011: -11.0; End-September 2011: -14.3; End-December 2011: -14.6, all in billions of euros measured cumulatively).
  - Indicative targets on central government net debt (end-October 2010 provisional: 78.6 billion; End-December 2010 indicative: 83.1; End-March 2011 indicative: 91.6; End-June 2011: 96.5; End-September 2011: 100.0; End-December 2011: 102.2).
  - Continuous performance criterion: non-accumulation of external payments arrears (ceiling 0).
- Structural benchmarks and prior actions:
  - Prior action: submit the 2011 Budget to Dáil Éireann by 7 December 2010.
  - Key structural benchmarks: define PCAR criteria and terms of reference for due diligence by end-December 2010; Central Bank to direct recapitalisation to 12 percent Core Tier 1 for key banks by end-February 2011; submit draft special resolution regime to Dáil Éireann by end-February 2011; complete diagnostic evaluation and PCAR by end-March 2011; complete credit unions’ loan portfolio assessment by end-April 2011; establish Budget Advisory Council by end-June 2011; introduce medium-term expenditure framework with binding ceilings by end-July 2011.
- Review and purchase schedule (IMF disbursements, SDR amounts and percent of quota):
  - Board approval (December 10, 2010): Purchase SDR 5,012,425,200; Percent of Quota 597.9.
  - First Review (March 15, 2011): Purchase SDR 1,839,127,000; Percent of Quota 219.4.
  - Subsequent reviews and purchases through November 2013 total SDR 19,465,800,000; Percent of Quota 2321.8.

### Capacity to repay the Fund, Fund risk assessment, and safeguards
- Prospective Fund credit and repayment profile:
  - Prospective Fund credit disbursements (millions of SDR): 2010: 5,012; 2011: 7,356; 2012: 5,669; 2013: 1,428.
  - Stock of prospective Fund credit (end-period, millions of SDR): 2010: 5,012; 2011: 12,369; 2012: 18,038; 2013: 19,466; 2014: 19,466; 2015: 18,324; 2016: 16,026; 2017: 12,960; 2018: 9,716; 2019: 6,472; 2020: 3,227; 2021: 1,125; 2022: 179.
  - Stock of prospective Fund credit as percent of quota: 598; 1,475; 2,151; 2,322; 2,322; 2,186; 1,912; 1,546; 1,159; 772; 385; 134; 21.
  - Peak GRA exposure projected to be SDR 19.5 billion by 2013.
  - Peak debt service to the Fund as percent of exports of goods and services: 2.0 percent in 2017 (staff table notes 2.0 percent).
- Fund liquidity and concentration impacts:
  - One-year Forward Commitment Capacity (FCC) would be reduced by 19,983 (millions of SDR) on approval; reduction over 13 percent of current FCC.
  - After first purchase, Fund credit to Ireland would be over 68 percent of Fund’s current precautionary balances.
  - GRA credit outstanding to Ireland would peak at about 2,320 percent of quota and translate to over 13 percent of GDP by 2013.
- Institutional safeguards:
  - Safeguards assessment of the Central Bank of Ireland initiated and expected to be completed by first review.
  - IMF funds to be deposited in government account at CBI; CBI publishes annual financial statements with independent audit (2009 audit opinion was unqualified).
- Staff appraisal: program design addresses banking, fiscal, and structural problems; success depends critically on outcomes of bank-support drawdowns, authorities’ use of liquid assets, and the success of fiscal consolidation and growth recovery.

### Key operational program milestones and conditionality (first two reviews highlights)
- Prior action met: Budget 2011 submitted to Dáil Éireann on 7 December 2010.
- Actions for first review (by end Q1-2011) include:
  - Implementation of Budget 2011 with €6 billion consolidation measures (including at least €1,400m revenue in 2011 and €2,090m current expenditure reduction; €1,800m cut in public capital expenditure).
  - NAMA extension to include approximately €16bn of sub-€20m land and development loans from AIB and Bank of Ireland, with transfers completed by end-March 2011.
  - PCAR minimum capital requirement set at 10.5 percent Core Tier 1; AIB, BOI and EBS to be recapitalised to 12 percent Core Tier 1 by end-February 2011; ILP to achieve 12 percent Core Tier 1 by end-May 2011.
  - Central Bank to complete PLAR and establish deleveraging targets and to direct recapitalisation and deleveraging plans.
- Actions for second review (by end Q2-2011) include:
  - Publication and assessment of PCAR 2011 results and recapitalisation actions to ensure 10.5 percent Core Tier 1 is maintained.
  - Introduction of legislation to expand supervisory and enforcement powers of the Central Bank.
  - ILP recapitalisation to 12 percent Core Tier 1 to be ensured.

### Policy priorities and structural reforms to support growth and competitiveness
- Structural reforms to raise efficiency and growth potential:
  - Remove restrictions to trade and competition, especially in sheltered professions; broaden competition law coverage.
  - Improve banking supervision and implement a new bank resolution framework.
  - Personal insolvency reforms and reductions in legal barriers to faster debt resolution.
  - Labor market reforms: adjust minimum wage (reduce by €1 to €7.65) and review sector-specific minimum wage agreements; reforms to unemployment benefits and activation policies.
  - Public sector and service reforms: meter and charge domestic water by 2014; improve targeting of infrastructure investment; extend 15-day payment rule to wider public sector to aid small businesses.
  - Review of state-owned assets (electricity and gas) with view to efficiency and possible privatization options.

*Source: IMF staff mission to Ireland, Letter of Intent, Memorandum of Economic and Financial Policies, Technical Memorandum of Understanding, and staff documents (November–December 2010 excerpts provided in content unit).*

### Executive Summary

### Executive Summary

### Background and context
- Despite bold economic policies, Ireland faced intense economic and financial pressures in recent months, rooted in a critically-weakened banking sector that has not been restored to health and that dampens economic recovery while creating pressures on public finances.
- Fall in domestic consumer and international investor confidence has negative implications for growth and the cost of funding.
- Program objective: restore Ireland’s banking system to health and put public finances on a sound footing to renew confidence and return to strong, sustained, growth.
- IMF mission discussions were held in Dublin during November 18–30, 2010.

### Main elements of the program
- Achieve a smaller, more robust banking sector to serve Irish economic needs; the process will start immediately and will move with deliberate speed.
- Banks will maintain higher capital adequacy standards to minimize market perceptions of weakness and thereby achieve improved access to funding.
- The authorities’ National Recovery Plan will form the basis of 2011 and subsequent budgets. The Plan makes pragmatic choices to achieve consolidation in a fair manner.
- Program addresses remaining impediments to competitiveness to support growth.
- A financing package of €85 billion will support these changes.
- IMF contribution: the Fund will contribute SDR 19.5 billion (€22.5 billion, equivalent to 2,321.8 percent of quota) and make available SDR 5 billion on Board approval.
- Irish authorities will contribute €17.5 billion from cash reserves and liquid assets.
- The European Union and bilateral European lenders will provide €45 billion on similar terms as those under the EFF, with cooperation to continue.
- ECB liquidity support is an essential component of the program.
- High program risks: uncertain bank losses, difficult debt outlook despite unprecedented fiscal adjustment, unclear growth prospects, continued market focus on peripheral Europe countries, and an impending general election.

### Banking sector: core problems and program focus
- At the heart of Ireland’s problems is an over-sized banking sector with sizeable vulnerable assets despite major support measures.
- Key vulnerabilities and actions:
  - National Asset Management Agency (NAMA) is taking over banks’ land and property development assets.
  - Substantial capital injections and sovereign guarantees have been provided, yet market pressures and large rollover needs threaten banking system solvency.
  - Program requires a fundamentally restructured banking system that downsizes the banking sector while addressing market perceptions of weak bank capital positions.
  - Measures include raising capital adequacy standards, downsizing and reorganization, reducing risk, and increasing shock absorption capacity.

### Fiscal situation and consolidation
- Public finances have been weighed down by a deep structural deficit, bank support, and weak growth.
- Public debt is projected to end up close to 100 percent of GDP by end-2010.
- Authorities’ consolidation plan includes another €15 billion in consolidation measures over 2011–14, equivalent to 9 percent of GDP.
- The program aims to safeguard fiscal consolidation to lower the deficit and debt over the medium term, with the burden distributed fairly.
- Government support for the financial sector has been a major fiscal burden.

### Recent economic developments and outlook
- Output and prices:
  - The economy contracted by 11 percent in real terms and 16 percent in nominal terms during 2008–09.
  - Growth in the first half of 2010 was modestly positive; staff project 2010 GDP to be ¼ percent lower than in 2009.
  - Consumer prices are expected to fall by a further 1½ percent in 2010, bringing the cumulative price decline to 6 percent.
  - Housing prices have fallen 36 percent since their peak, with the pace of decline slowing.
- Credit and liquidity:
  - The domestic banking system is almost fully dependent on continued ECB liquidity support.
  - The banking system is “at 500 percent of GDP” in scale relative to the economy.
  - At end-September 2010, the domestic banking system accounted for 490 percent of GDP and the domestically-owned banking system for 325 percent of GDP.
  - Irish banks' use of ECB liquidity support is equivalent to 83 percent of GDP (as presented in accompanying charts and text).
- Deposits and funding:
  - Banks have been unable to rollover large maturing obligations; deposit outflows—mainly commercial deposits—have continued.
  - Continued market pressures pose challenges to large rollover needs and sovereign finances.

### Contagion and spillover risks
- Restoring financial stability to Ireland is important to contain contagion to other countries.
- Contagion risk stems mainly from market perceptions that Ireland’s vulnerabilities are similar to other euro-area peripheral economies.
- Direct international bank exposure to the Irish domestic banking sector is smaller than some aggregates imply due to the large IFSC; however, systemic tail risks from the large Irish banks are elevated.
- Estimated conditional probability of distress in at least another European bank given distress in Irish banks is over two-thirds, particularly affecting Greek and Portuguese banks.
- Foreign-bank exposures (reported magnitudes):
  - German banks: €113 billion exposure to Ireland.
  - U.K. banks: €107 billion exposure to Ireland.
  - U.S. banks: €47 billion exposure to Ireland.
  - French banks: €36 billion exposure to Ireland.
  - Belgian banks: €24 billion exposure to Ireland.
- Portfolio investment exposures (reported magnitudes):
  - U.K.: €134 billion.
  - Germany: €112 billion.
  - France: €95 billion.
  - U.S.: €83 billion.
- Relative to home country GDP, the most exposed countries include Portugal (18.8 percent), the U.K. (8.9 percent), Belgium (8.1 percent), the Netherlands (6.2 percent), Switzerland (5.9 percent), France (5.2 percent), and Germany (4.8 percent).

### Program strategy and institutional reforms
- Multi-pronged strategy to break negative feedback loops between banking, fiscal, and growth dynamics:
  - Restructure and downsize the banking sector and improve market perceptions of bank capital.
  - Protect and implement a sustained fiscal consolidation plan.
  - Institutional reforms: special resolution regime for banks, stronger supervision, and greater budgetary oversight.
  - Structural reforms to improve efficiency and raise growth potential.
  - Large external financial assistance to manage the transition and reestablish policy credibility.
- The stability generated is expected to improve competitiveness, increase credit flows, and underpin a return of confidence, employment, and growth prospects.

*Source: Executive Summary (IMF staff mission to Ireland, November 18–30, 2010).*

### 8.      Tackling the crisis has taken a political toll. Until recently, deep consolidation has

### 8.      Tackling the crisis has taken a political toll. Until recently, deep consolidation has

### Political context and social cohesion
- Deep consolidation was implemented in a remarkably socially-cohesive manner, reflecting a tradition of social partnership.
- With continued upward revisions of the consolidation needed and of the costs of supporting the financial sector, frustration has mounted.
- The government has announced it will call early elections. The ruling party, Fianna Fáil, is trailing in the opinion polls.
- Opposition parties indicated broad support for the program objectives of achieving financial sector and fiscal stability, but signaled interest in revisiting some policy approaches.

### Government support of the financial sector (September 2008–October 2010)
- Measures were guided by the European Union framework for state aid; access to ECB liquidity support was an important stabilizing factor.
- Government guarantees of domestic banks’ liabilities:
  - A guarantee on liabilities of seven banks was put in place in September 2008 under the Credit Institutions Financial Support Scheme (CIFS), which expired in September 2010.
  - The CIFS covered all existing and new bank liabilities, excluding retail deposits covered by the statutory deposit guarantee scheme.
  - A new scheme, the Credit Institutions Eligible Liability Guarantee (ELG) Scheme, was put in place in December 2009, replacing the CIFS for newly issued bank liabilities.
  - The ELG scheme covers senior debt and deposits with maturities of less than five years.
  - The scheme has been extended through end-December 2011, and the EC has approved the extension through end-June 2011.
- National Asset Management Agency (NAMA):
  - Established in late 2009 to take over banks’ distressed land and property development assets.
  - Participating banks receive government-guaranteed securities in return for the assets.
  - By August 2010, NAMA had acquired assets with a nominal value of some €27 billion, at an average discount of over 50 percent.
  - NAMA is expected to complete its acquisitions by January 2011, in a total amount of €73 billion.
  - The transfer of assets by the banks at a price below their book value implies that these banks will need additional capital.
- Financing to boost banks’ capital ratios:
  - In March 2010, the Financial Regulator determined a target capital ratio for banks of 8 percent for Core Tier 1 capital, of which 7 percent is to be equity capital, taking into account losses from NAMA transfers as well as expected losses on non-NAMA assets until 2012.
  - Required capital injections also were set to ensure that banks Core Tier 1 capital remains above 4 percent in a stress scenario.
  - During 2009–10, the government has provided capital injections of €45 billion.

### Overall strategy (program objectives)
- Restoring the banking system to health:
  - Reduce the size of the sector to a manageable level, separate good assets from bad, and reduce dependence on wholesale funding.
  - Bolster banks’ capital positions to restore confidence and allow renewed access to market funding over time.
- Underpinning fiscal sustainability:
  - Program builds on the authorities’ National Recovery Plan calling for large further frontloaded fiscal adjustment, with two-thirds of the adjustment coming from spending, and the remainder from revenues.
  - Important structural fiscal reforms include a new budget formation process (Responsibility Law/medium-term spending framework) and a new Budget Advisory Council (independent budget assessment).
- Securing sustainable economic growth:
  - Address mutually-reinforcing problems of government (high deficit and debt), private sector (weak balance sheets), and financial sector.
  - Implement structural reforms (including reducing trade restrictions) alongside banking restructuring and fiscal measures.

### External financing and institutional collaboration
- Substantial external financial assistance is expected to support strategies, given a large balance of payments need over 2011–13 to finance reserve buildup and meet large external debt rollover needs.
- Program aims to gradually restore market access and ensure any financial account shortfall is temporary.
- The ECB is expected to continue providing liquidity support to the domestic banking sector as needed.
- The Fund-supported program was formulated in close collaboration with the EC and the ECB; the EC and ECB were involved in all aspects of the discussions.

### Macroeconomic framework — projections and near-term outlook
- Near-term stabilization and recovery:
  - Staff projects growth to recover from –¼ percent in 2010 to 1 percent in 2011.
  - Staff projects private consumption to fall by 1½ percent of GDP in 2011; authorities expect smaller headwinds and project private consumption to remain flat through 2011, on which basis they project growth to reach 1¾ percent in 2011.
  - Investment spending is projected to continue contracting at a moderating rate.
  - Unemployment likely to persist at about 13½ percent in 2011.
  - The savings ratio reached record-high levels in 2010 and could decrease as precautionary savings limits are reached.
- Medium-term outlook:
  - Baseline program scenario: growth would average 2¾ percent over 2012–15, compared to 6 percent over 2000–07.
  - Private investment could bottom out at 7 percent of GDP in 2010 (historical average 20 percent) and is expected to rebound to 10 percent of GDP by 2015.
  - A sizeable structural component will likely keep the unemployment rate above 10 percent to 2015.
- Inflation and prices:
  - Subdued inflation, below the euro-area average, expected due to spare capacity and modest external price pressures.
  - Staff projects a further fall in consumer prices of ½ percent in 2011.
  - Wage incomes fell on an annual basis by 2½ percent in the first half of 2010; wages expected to increase more slowly than prices in the medium term, generating a real wage adjustment.
- External sector:
  - Current account deficit fell from 5½ percent of GDP in 2008 to 2 percent in 2010.
  - Positive impact of higher net exports will be partly offset by profits repatriation by multinational companies and substantial debt interest payments to foreign holders.

### Returning the banking system to healthy functionality — vulnerabilities
- Key vulnerabilities concentrated in three areas:
  - Low asset quality:
    - Oversized domestic banks heavily exposed to the Irish property market.
    - In September 2010, nonperforming loans were 12.9 percent of all loans and this ratio is expected to rise.
    - Residential mortgage lending accounts for 25 percent of private sector credit.
    - Official estimates suggest only 10 percent of residential mortgages are either in arrears or have been rescheduled, but loan portfolios might be impacted by a high level of forbearance.
    - Provisioning levels have declined sharply in recent years (offset in part by bolstered capital).
    - Current low policy rates will, when raised, exert considerable pressure on variable rate mortgage holders.
  - Constant funding concerns:
    - The cliff effect of maturing loans in last quarter of 2010 following the expiry of the original CIFS guarantee, uncertainties about guarantee renewals, and concerns about restructuring strategies of unsecured creditors have escalated problems rolling over large wholesale funding needs.
  - Prolonged Anglo-Irish bank resolution:
    - Despite nationalization almost two years earlier, Anglo-Irish Bank continued to absorb increasing public funds and highlighted severe banking supervision deficiencies.
- Additional banking sector indicators noted:
  - Bank regulatory capital to risk-weighted assets declined (chart referenced).
  - Loan-to-deposit ratio increased to a high level (chart referenced).
  - Nonperforming loans increased dramatically in the past year (chart referenced).
  - Bank provisioning to nonperforming loans is declining (chart referenced).
  - Domestic credit institutions' asset to GDP rose (chart referenced).
  - Real estate loans to total private sector loans doubled in four years (chart referenced).

### Bank restructuring strategy — agreed objectives and measures
- Agreed objectives of the comprehensive bank restructuring program:
  - Isolate viable banks and return them to healthy functionality by substantial downsizing and reorganization.
  - Support transition to a downsized banking sector through recapitalization to reduce perceptions of weakness and encourage deposit inflows and market-based funding.
  - Reduce systemic risk and increase shock-absorbing capacity through stronger supervision and a special resolution regime for banks.
- Downsizing and reorganization measures:
  - Banks required to unwind noncore assets (including operations abroad).
  - Quickly transfer remaining vulnerable assets (land, property and development loans) to NAMA (about €17 billion); this may require amendment to existing legislation to permit block transfers rather than individual transfers.
  - Authorities considering speeding up the process to allow immediate asset transfers to NAMA at the current average haircut and then adjusting price through ex-post single valuation.
  - Prompt and full provisioning for all nonperforming assets as needed.
  - Deleverage additional specified portfolios as feasible, supported by credit enhancements; certain portfolios could be packaged for clean sale to third parties (i.e., not a government sponsored entity).
  - Distressed institutions, including Anglo-Irish Bank and Irish Nationwide Building Society, will be resolved without compromising the interests of protected or secured creditors.
  - Banks will be required to submit business plans demonstrating explicit commitment to deleverage and restructure operations through clear periodical targets, to be defined by the central bank in consultation with the EC, ECB and IMF.

*Source: _cr10366 - 8.      Tackling the crisis has taken a political toll. Until recently, deep consolidation has*

### 20.      The transition to a leaner and more robust system is to be navigated by setting

### The transition to a leaner and more robust system is to be navigated by setting higher capital standards and ensuring availability of financing to achieve them.

### Capitalization strategy and immediate measures
- Promptly increase capital buffers:
  - The central bank will enforce recapitalization of viable banks to achieve a capital ratio of 12 percent Core Tier 1 by end-February 2011.
  - Irish Life and Permanent would need to reach the capital ratio by May 2011.
- Forward-looking assessment of capital needs:
  - Stress-tests based on adverse scenarios (PCAR 2011) and a diagnostic of current asset valuations (Boxes 3 and 4) will be initiated to review capital needs over a horizon of three years.
  - Following this assessment, a capital ratio of 10.5 percent Core Tier 1 would become the new regulatory minimum.
- Financing availability:
  - Under the program, the authorities have a notional buffer of about €35 billion to support the banking system.
  - The actual amount used is expected to be less than this buffer.
  - In the first instance, up to €10 billion would ensure the immediate recapitalization of banks up to 12 percent in Core Tier I capital and the remaining €25 billion would be available on a contingency basis to maintain a capital ratio of 10.5 percent of Core Tier I capital under a stress scenario.

### Banks’ funding risk and government guarantee
- Current arrangements and timelines:
  - Banks’ funding risk is currently alleviated by the extension of the government guarantee until December 2011.
  - The extension has been approved by the European Commission through the end of June 2011.
- Institutional positions:
  - The ECB has endorsed the authorities’ view that extending the guarantee is needed for financial stability purposes.
  - The EC has agreed that stability would be given precedence over competition considerations.
- Further assessment:
  - The need for further extension of the guarantee, perhaps on a more limited basis, will need to be assessed in due course.
  - Strengthening of banks’ balance sheets under the program would facilitate Eurosystem liquidity support for banks with improved solvency prospects and collateral.

### Box 3 — Methodology to Conduct a Second Stress Test Exercise (PCAR 2011)
- Phases and timing:
  - Two phases: first stage (6 largest domestic banks) planned to be completed by the end of March 2011; second phase (credit unions and subsidiaries of foreign banks) planned to be completed by the end of June 2011.
- Definition of parameters and scenarios:
  - The central bank will define the detailed criteria to run the revised stress test by end-December 2010, in consultation with EC, ECB, and IMF staff.
  - Interest rate and exchange rate risks will be included as additional criteria.
- Capital targets and horizon:
  - Minimum Core Tier 1 ratio of 10.5 percent under the baseline scenario (compared to the 8 percent under PCAR 2010).
  - Minimum Core Tier 1 ratio of 6 percent under the stress scenario (compared to 4 percent under PCAR 2010).
  - Time horizon of the exercise: 2011–13.
- Approach:
  - Top-down component: macroeconomic scenario by the Irish central bank aimed to be consistent with the EU-wide stress test conducted by CEBS/EBA, with local adaptations.
  - Bottom-up component: targeted loan reviews, benchmarking of collateral valuations, reviewing provisioning methodologies and approaches to workout/liquidation.
  - Final assessment based on the most conservative results from top-down and bottom-up approaches.
- Risk and liquidity analysis:
  - Probability of default and loss given default estimated from both components.
  - Liquidity risk review will include funding mix/costs, impact of higher funding costs, credit rating downgrades, contingent liabilities management, contingency funding plans, impact of divestments and restructuring.
- Transparency:
  - Disclosure of the final results and methodology is emphasized to enhance market confidence; proper communication of any needed related action to be addressed.

### Box 4 — Initial Terms of Reference for Data Quality and Asset Quality Diagnostic Review
- Objective:
  - Support the new PCAR with thorough due diligence of the integrity of banks’ financial reporting and the quality of banks’ assets.
- Principles:
  - The diagnostic study should not be conducted by an audit or consultancy firm that has provided such services to the bank in the last three years.
  - The central bank should contract a specialized firm to help staff oversee consistency and integrity.
  - Examinations should cover all relevant assets, liabilities and off balance sheet items, including foreign subsidiaries when relevant.
  - Strict benchmarks should be used similar to those regularly used to assure due diligence quality.
  - Third party independent reports should be made public on each individual institution’s website as well as on that of the central bank as soon as PCAR 2011 is completed.
- General scope and benchmarks:
  - Data validation: verify integrity of banks’ internal processes for (i) information technology, (ii) accounting of earnings; and (iii) reporting and disclosures.
  - Asset quality validation: assess asset recoverable value through the economic cycle, in net present value terms; cover loans and all other material exposures (on and off-balance sheet) and investment portfolios.
  - Development of terms of reference and asset valuation methodology by consulting firms to be carried out in consultation with EC, ECB and IMF staff.
  - Reporting and disclosure: assessors’ report should provide (i) a factual summary of findings and recommendations; (ii) necessary adjustments based on verification and effect on reported regulatory capital; main findings will be made public.

### Reducing institutional weaknesses and increasing shock absorption capacity
- Strengthening banking supervision:
  - Staffing levels and budget allocations will be substantially increased.
  - Top level management at the supervisory authority has been changed.
  - An enhanced risk assessment framework, strict corporate governance standards, and reorganization of the supervisory board structure have been announced.
  - An independent assessor will take stock of progress and compliance with Basel Core Principles for effective banking supervision.
- Bank resolution framework:
  - Authorities are preparing legislation to establish a comprehensive bank resolution framework, drawing on European proposals and recent legislative reforms such as in the U.K. and Germany.
  - Draft legislation will provide for appointment of special managers to perform senior management and board functions, ability to transfer assets and liabilities, and establishment of bridge banks.
  - The new regime needs to be linked with the liquidation framework.
- Personal insolvency regime reform:
  - Current court-based bankruptcy framework discharge period reduced from 12 to six years (at the court’s discretion), but broader legal reform is needed.
  - Once the Law Reform Commission presents its final report in December 2010, legislative drafting will commence as a matter of priority.
  - Possible establishment of a new debt enforcement office to administer an alternative non-judicial debt settlement and enforcement mechanism, while minimizing moral hazard.
  - Authorities estimate initial uptake of improved in-court and new non-judicial proceedings will be significant given household financial distress.

### Box 5 — Ireland: Residential mortgages (key facts and proposed measures)
- Mortgage distress statistics and composition:
  - About 40,000 residential mortgages (close to 5.1 percent) are in arrears.
  - About 45,000 mortgages have been rescheduled under a voluntary scheme so far, bringing total mortgages in distress to more than 70,000, given overlap between the two categories.
  - About half of the banks’ residential mortgage book are “tracker” mortgages.
- Vulnerabilities:
  - Many “tracker” mortgages were originated since 2006 and some investment property mortgages are reaching thresholds requiring repayment of principal following interest-only periods.
  - Significant fall in real estate values has produced negative equity for many households.
  - First time buyers who bought in 2006/2007 are particularly vulnerable.
- Policy frameworks and support:
  - Mortgage restructurings guided by the Central Bank’s Code of Conduct on Mortgage Arrears and the Irish Banking Federation’s voluntary Operational Protocol.
  - The Code of Conduct applies to mortgages on the principal private residence and includes a restructuring framework and a moratorium on repossession for 12 months; the Code is under revision to strengthen procedural protections.
  - Money Advice and Budgeting Service advisors assist in reaching affordable/sustainable repayment plans.
- Financial support programs:
  - Mortgage interest supplement (MIS) recipients increased to 17,800 in November 2010 (more than doubled since 2008).
  - Authorities intend to centralize administration of MIS.
  - Authorities grant mortgage interest tax relief for recent vintage mortgages and affordable housing support by local authorities.
- Proposed measures and constraints:
  - Final report by the Mortgage Arrears and Personal Debt Group recommends the introduction of a Deferred Interest Scheme (DIS) for mortgages deemed sustainable:
    - The DIS would allow the deferral of up to one third of interest payments for up to five years or when 18 months deferred interest has accrued, whichever comes sooner, with no interest accruing on the deferred interest portion.
  - Unsustainable cases would require trading down or voluntary surrender of the residence.
  - If more households seek social housing, demand will likely exceed supply.
  - Development of a comprehensive personal insolvency regime is essential and under consideration.

### Safeguarding public finances — fiscal adjustment and debt dynamics
- Crisis impact and initial adjustment:
  - The structural deficit, adjusted for the impact of asset prices, reached 12 percent of GDP in 2008.
  - Measures implemented during 2009–10 amounted to 6.3 percent of GDP (8 percent of GDP in full year terms).
- Fiscal outlook and consolidation strategy:
  - The planned consolidation over 2011–14 in the authorities’ National Recovery Plan is broadly appropriate.
  - Staff expects GDP growth outcomes to be weaker than those foreseen by the authorities and hence the deficit ratio to fall more slowly.
  - The European Commission recently extended by one year the deadline for meeting the Stability and Growth Pact deficit threshold of 3 percent of GDP to 2015.
  - Under staff’s current projections, achieving the new target is likely to need further measures in the medium term.
- General Government Finances (In percent of GDP) — Selected series (as presented)
  - General government balance: 2007: 0.1; 2008: -7.3; 2009: -14.4; 2010: -32.0; 2011: -10.5; 2012: -8.6; 2013: -7.5; 2014: -5.1; 2015: -4.8
  - Current revenue: 2007: 34.6; 2008: 33.3; 2009: 33.1; 2010: 33.4; 2011: 34.0; 2012: 34.5; 2013: 34.9; 2014: 35.4; 2015: 35.6
  - Current expenditure: 2007: 29.9; 2008: 34.4; 2009: 40.8; 2010: 41.7; 2011: 41.3; 2012: 40.3; 2013: 40.0; 2014: 38.2; 2015: 38.1
  - Capital balance: 2007: -4.7; 2008: -6.2; 2009: -6.8; 2010: -23.8; 2011: -3.2; 2012: -2.8; 2013: -2.5; 2014: -2.3; 2015: -2.3
  - Primary balance: 2007: 0.9; 2008: -6.3; 2009: -12.3; 2010: -29.0; 2011: -6.7; 2012: -4.1; 2013: -1.4; 2014: 1.2; 2015: 1.5
  - Primary balance excl. bank support: 2007: 0.9; 2008: -6.3; 2009: -9.7; 2010: -9.6; 2011: -6.7; 2012: -4.1; 2013: -1.4; 2014: 1.2; 2015: 1.5
  - General government gross debt: 2007: 25.0; 2008: 44.4; 2009: 65.6; 2010: 98.8; 2011: 112.8; 2012: 120.0; 2013: 124.5; 2014: 124.1; 2015: 123.0
  - Sources: Department of Finance and staff estimates. (Note: The general government numbers fully incorporate IMF/EFSF financing, including bank recapitalization under the program.)
- Debt dynamics scenarios and implications for peak debt ratio:
  - Staff estimates suggest it is unlikely that bank capitalization needs will exceed €35 billion.
  - If €35 billion is needed, the authorities would use their own resources of up to €17.5 billion and €17.5 billion would be added to sovereign debt; in this conservative baseline scenario the debt ratio would peak at 125 percent of GDP in 2013.
  - If capitalization needs are €25 billion, debt would peak at 119 percent of GDP in 2013.
  - If only the initial €10 billion is required, debt would peak at 109 percent of GDP in 2013.
  - If needs are lower than anticipated, the government can use its liquid assets to cover budgetary financing needs, reducing the debt.

*Source: IMF staff document excerpt as provided in the content unit.*

### 28.      The sovereign’s obligations will also be lower if the debt owed by banks is

### The sovereign’s obligations and Ireland’s National Recovery Plan (excerpt)

### Sovereign obligations and bank debt restructuring
- Anglo Irish, a nationalized bank, is undergoing a debt exchange at a discount of about 80 percent.
- Rationale: subordinated debt is designed to be loss absorbing; where a bank has lost substantial value—and, indeed, insolvent—the debt holders should share in the losses.
- Further debt-sharing actions are contemplated for banks that have received substantial state assistance to reduce the need for fresh injections of capital by the government.
- Principle for loss sharing: based on the extent of the banks’ overall losses and the need to return the bank to a more stable funding structure, while keeping in view the knock-on effects on others.

### Fiscal package: National Recovery Plan and 2011 program targets
- National Recovery Plan:
  - Provides for €15 billion (9 percent of GDP) in budgetary savings over 2011–14.
  - Adjustment is front-loaded—with €6 billion (3.5 percent of GDP) in savings expected in 2011 alone.
  - Expenditure reductions account for about two-thirds of the effort through 2014.
- Budget 2011 measures:
  - Includes adjustment measures of €6 billion; set for parliamentary approval on December 7.
  - About €0.7 billion of measures are one-off in nature.
  - One-third of the adjustment (€1.8 billion) will come from capital spending.
  - Current spending reductions led by savings of €1.2 billion in payroll and discretionary expenditure, reflecting:
    - voluntary public service numbers reductions of about 8,000 (2¼ percent of the payroll);
    - a 10 percent salary reduction for new entrants;
    - an average 4 percent cut in public service pensions, graduated according to pension level;
    - other efficiency savings.
  - Social welfare measures expected to yield €0.9 billion, about one-sixth of the planned 2011 consolidation.
- Revenue package:
  - Sized at €1.4 billion.
  - Measures include a 10 percent reduction in personal income tax bands and credits, and integration of the health and income levies.
  - Aim to bring a positive contribution from part of the 45 percent of households that were hitherto exempt from income tax.
  - Further measures: withdrawal of various tax reliefs on private pension contributions, lowering the tax-allowable ceiling for such contributions, eliminating other income tax expenditures, and strengthening capital taxation.

### Program modalities and fiscal targets
- Performance criterion: the exchequer balance (excluding net interest payments and costs arising from bank support operations) to serve as the program’s performance criterion.
- Authorities confident about meeting end-2010 target based on revenue and expenditure outturns through November.
- For 2011, targets are derived from budget 2011 measures and staff’s macroeconomic projection.
- If growth is lower than staff projections, the program does not require spending cuts to offset underperformance from prudent revenue projections.
- Any revenue over-performance must be saved to secure debt sustainability.
- Critical implementation need: tax administration must have continued adequate funding and technical capacity to implement planned tax policy changes and counteract lower compliance pressures due to the recession.

### Fiscal consolidation measures (selected figures)
- Consolidation totals (announced net yields in € billions, relative to pre-budget positions):
  - Total €10.4 bn (6.3 percent of GDP) for 2009–10.
  - Total €15.0 bn (9.4 percent of GDP) for 2011–14.
- Revenue contributions:
  - 2009–10: Revenue €3.6 bn (2.1 percent of GDP).
  - 2011–14: Revenue €5.1 bn (3.2 percent of GDP).
  - Direct taxes (2009–10 measures): 3.1 (table entry) — introduction and doubling of income levy (base-broadening); increased capital taxation (progressive); tightening of mortgage interest relief (progressive/efficiency).
  - Direct taxes (2011–14): 4.1 — 16.5 percent lowering of bands and credits, of which 10 percent in 2011 (base-broadening); withdrawal of tax reliefs on private pension contributions (progressive/base-broadening); site value-based property tax in 2014.
  - Indirect taxation (2009–10): 0.5 — Carbon tax of €15/tonne on fossil fuels; increased rates on mineral oil, cigarettes, liquor; new air travel tax; VAT rate raised from 21% to 21.5% but reversed.
  - Indirect taxation (2011–14): 1.0 — Increase in carbon tax to €25 in 2012 and to €30 in 2014; increase of VAT rate to 22 percent in 2013 and 23 percent in 2014; removal of tax subsidies implied by lower VAT rates.
- Expenditure contributions:
  - 2009–10: Expenditure €6.8 bn (4.2 percent of GDP).
  - 2011–14: Expenditure €9.9 bn (6.2 percent of GDP).
  - Current spending breakdown (2009–10 and 2011–14 snapshots in table):
    - Payroll: 2.2 (2009–10) → 1.2 (2011–14) with measures including 14 percent graduated wage cuts for public servants (fairness) and containing public service size.
    - Discretionary: 2.2 (2009–10) → 2.9 (2011–14) with measures such as lower payments to drug suppliers, faster collection of private patient bills, halving advertising/PR/consultancy budgets, reduced ODA, and administrative efficiencies.
    - Social welfare: 0.6 (2009–10) → 2.8 (2011–14) with cuts in child, maternity, adoption benefits and reform of unemployment and disability support; shift to means-tested child support.
    - Net capital spending: 1.8 (2009–10) → 3.0 (2011–14) with reprioritization of capital projects and value-for-money infrastructure procurements including metered water charging by 2014.

### Medium-term revenue and expenditure reforms
- Revenue-side reforms:
  - Introduction, by 2014, of a site-value tax on residential property to provide a stable source of local government revenue.
  - Phased increases in VAT and carbon tax rates starting 2012–13 and tightening of VAT subsidies.
- Expenditure-side reforms:
  - Progress toward full cost-recovery in provision of water services and tertiary education, with means-tested protection for lower-income groups.
  - Indicative ceilings by Vote Group to anchor efficiency savings in payroll, capital, and discretionary current spending.
  - Welfare reforms: reform of child and disability benefits; introduction of a single means-tested social assistance payment for working age people.

### Institutional and pension reforms for fiscal sustainability
- Fiscal Responsibility Law (FRL) planned to include:
  - A medium-term budgetary framework, including binding multi-year expenditure ceilings by department.
  - A fiscal rule to provide a post-consolidation anchor for fiscal policies; rule should have broad coverage and be easy to monitor.
  - Establishment of a budget advisory council to assess fiscal policies and forecasts and highlight long-term risks to public finances.
- Pension reforms (in line with the National Pensions Framework published in March 2010):
  - Legislation in 2011 to increase pension retirement age: from 65 to 66 by 2014, 67 by 2021, and to 68 by 2028.
  - For new entrants into the public service: pension entitlements linked to average career earnings and annual increases indexed to consumer prices.
  - Intention to review the indexation regime for state pensions over the medium-term.

### Structural reforms to raise efficiency and growth potential
- Financial sector measures to be implemented:
  - Improved banking supervision.
  - A new bank resolution framework.
  - A new personal insolvency regime.
- Competition and product/service market reforms (Box 6 highlights):
  - Legislative changes to remove restrictions to trade and competition, especially in sheltered professions.
  - Broaden the scope of competition law to encompass all sectors and enable financial and other sanctions in civil law competition cases.
  - Establish an independent ombudsman to promote and oversee competition in sheltered sectors.
  - Legal profession: measures to reduce legal costs.
  - Medical profession: remove restrictions on number of qualifying GPs and the number of patients newly qualified GPs can treat.
  - Pharmacy profession: enforce elimination of the 50 percent mark-up paid on medicines under the State's Drugs Payments Scheme.
- Labor market reforms:
  - Reforms of unemployment benefits to reduce inactivity and unemployment traps, especially for unskilled workers.
  - Likely adjustments to replacement ratios for the long-term unemployed; improvements in activation procedures and job search conditionality.
  - Measures: better identification of jobseekers’ needs, increased counseling early in unemployment spell, more effective monitoring with evidence-based reports, and credible sanctions for noncompliance.
  - Plan to lower the national minimum wage by €1 (to €7.65) followed by review of sector-specific minimum wage agreements with a view to their elimination.
- Other business and public service reforms:
  - Improve targeting of investment to key strategic road projects and maintenance.
  - Extend a 15-day payment rule for goods and services to the wider public sector to help small businesses.
  - Domestic water to be metered and charged by 2014 and industry overseen by a water regulator.
  - Independent assessment of energy and gas sectors to enhance efficiency, including possible privatization of state-owned assets.

*Source: Staff projections and excerpts of the National Recovery Plan and program documents.*

### 39.      The Irish authorities have requested a sizeable financing package to support

### _cr10366 - 39.      The Irish authorities have requested a sizeable financing package to support

### Financing package and Fund arrangement
- Overall size of the financing package is €85 billion (about US$113 billion).
- European Union and bilateral European lenders have pledged a total of €45 billion (about US$60 billion).
- The Irish authorities have decided to contribute €17.5 billion from the nation’s cash reserves and other liquid assets.
- The Fund’s contribution would be through a three-year SDR 19.5 billion (about €22.5 billion; or US$30 billion) arrangement, representing 2,321.8 percent of quota.
- The European disbursement and repayment terms would be aligned to those under the EFF.
- Staff proposes a three-year Extended Arrangement under the Extended Fund Facility (EFF) to address medium-term balance of payments needs and medium-term structural reforms.

### Balance of payments need (nature and components)
- Ireland’s balance of payments need comprises:
  - (i) a financial account deficit arising, in particular, from rollovers of external government debt and outflows from Irish banks;
  - (ii) a smaller current account deficit reflecting the legacy of lost competitiveness, which will only gradually be regained; and
  - (iii) the need for the authorities to strengthen their reserve holdings to meet the government’s external debt obligations as they come due and, through shoring up confidence, improve banks’ ability to meet their large external debt rollover needs (by attracting deposits and market funding) and prevent substantial capital outflows.

### Conditionality: objectives, quantitative targets, and structural benchmarks
- Program anchor: strong fiscal adjustment process with expected sovereign return to market in due course; program assumptions to be reviewed if market spreads decline faster than envisaged.
- Quantitative conditionality:
  - Includes a performance criterion on the central government cash primary balance.
  - Includes an indicative target on central government net debt.
  - Includes a continuous performance criterion on the non-accumulation of external payments arrears.
  - These performance criteria are described in Table 1 attached to the MEFP.
- Structural benchmarks:
  - Focused on strengthening the fiscal framework, safeguarding financial stability, and ensuring an adequate bank restructuring process and the design of a comprehensive bank resolution framework.
  - Fiscal measures include introduction of a fiscal responsibility law providing for binding multi-annual expenditure ceilings by area, and establishment of an independent budgetary council.
  - These measures are described in Table 2 attached to the MEFP.

### Exceptional access criteria: staff assessment against four criteria
- Staff assesses that Ireland meets all four criteria for granting exceptional access:
  - Criterion 1: Exceptional balance of payments pressures in the capital account
    - Ireland is experiencing substantial capital account pressures arising from acute liquidity pressures.
    - Heightened market concerns have prompted rating downgrades and sharp increase in sovereign spreads, restricting market access.
    - Banking sector rollover requirements and accelerated deposit outflows could result in further pressures on the capital account.
  - Criterion 2: Sustainable debt position
    - A rigorous and systemic analysis indicates a high probability that public debt is sustainable in the medium term, but significant uncertainties remain.
    - Prior to March 2009, Ireland had an AAA rating; the financial crisis led to large bank losses and increased public debt-to-GDP on an unsustainable path.
    - Development of a comprehensive bank restructuring strategy, potential for asset recoveries, and a resolute medium-term adjustment program should help reduce government debt in the medium term.
    - Given uncertainties and the high risk of international systemic spillover effects, Fund support at the proposed level is justified.
  - Criterion 3: Access to private capital markets
    - Impaired access reflects sustainability concerns linked to acute funding pressures in the banking sector.
    - A broad restructuring strategy and exceptional financing from European partners and the Fund are expected to drastically reduce debt default risks and normalize access to capital markets within the maturity of EFF resources.
  - Criterion 4: Strong policy reform program
    - The program concentrates conditionality on the banking sector while launching an ambitious medium-term program of economic and fiscal reforms.
    - Ireland’s sound institutions and consensus-based approach underpin staff’s judgment that the program has reasonably strong prospects of success, despite substantial program risks.

### Capacity to repay the Fund and program risks
- Capacity to repay:
  - Fund’s cumulative exposure will remain high but manageable by the end of the program.
  - Outstanding credit to the Fund is expected to peak in 2013–14 at about 2,320 percent of quota.
  - Peak debt service to the Fund as a ratio of exports of goods and services will be 2.0 percent in 2017.
  - Government debt could peak at 125 percent of GDP.
  - Combined repayment for Fund/EFSM/EFSF financing will be large.
  - Fiscal adjustment and resumption of growth are expected to place the debt on a declining path from 2013 onwards.
  - Lower bank capitalization needs than projected in staff’s conservative baseline scenario would lower the peak debt ratio.
- Key risks to the program:
  - Growth may be weaker than projected; prolonged deep recession could weaken loan repayment capacity and increase bank losses.
  - Wage and price deflation coupled with contraction in activity could have a powerful negative effect on debt dynamics.
  - The fiscal outlook might deteriorate; side effects of adjustment could lead to sharp reductions in tax revenue.
  - Reversing financial sector deterioration might be difficult due to low growth, deteriorating asset quality, and higher funding costs; risk of disorderly disruption of financial pressures.
  - Political risks are considerable; adherence to fiscal targets and bank restructuring require strong political will and public support, and a likely change in government in early 2011 increases political risks.
  - Access to capital markets might take longer than expected, especially under adverse shocks in the debt sustainability analysis.

### Institutional safeguards
- Staff has initiated a safeguards assessment of the Central Bank of Ireland (CBI), expected to be completed by the first review.
- IMF funds will be deposited in the government account at the CBI.
- The CBI publishes annual financial statements, independently audited in accordance with international standards.
- The most recent audit opinion for 2009 was unqualified.

### Staff appraisal: program design, banking sector, and fiscal strategy
- Program aims to address deep-rooted structural problems and restore confidence while calibrating pace to avoid heavy short-term costs.
- Banking sector objectives and measures:
  - Return the critically-weakened banking sector to health via disposal of noncore assets, further transfer of land and property development loans to NAMA, and sale of asset portfolios (possibly through credit enhancements).
  - Wind down evidently nonviable banks and transfer their deposits to safer, viable banks.
  - Provide additional capital to banks to raise and maintain higher bank capital-asset ratios, guided by peers and with an eye to higher standards under Basel III.
  - Bolster credibility through stringent stress and diagnostic tests, complemented by careful diagnostic of underlying asset values; capitalization based on this analysis to reassure markets.
  - Program does not directly provide liquidity to banks, but confidence generated and ECB liquidity support are expected to enable banks to attract deposits and market funding over time.
- Fiscal strategy:
  - Based on the recently published National Recovery Plan.
  - Emphasizes expenditure reductions and tax increases with focus on broadening the tax base.
  - Reinforces compositional choices with efforts to increase expenditure efficiency and support equity considerations.
- Growth-enhancing structural reforms:
  - Reduction of restrictions on trade and competition.
  - Supportive measures directed at increasing employment.
  - Assessment of scope for increased efficiency of state-owned assets based on the Review Group of State Assets and Liabilities; exploration of asset privatization possibilities, especially in the electricity and gas sectors.
- Risk management:
  - Substantial risks require active management; principal mitigation strategy is to proceed in an adaptive and deliberate manner with appropriate consultation with relevant constituencies.

*Source: IMF mission documents contained in the cited PDF chapter.*

### 54.      In view of Ireland’s balance of payments need and the comprehensive package of

### _cr10366 - 54.      In view of Ireland’s balance of payments need and the comprehensive package of

### Staff recommendation and financing
- The staff supports the authorities request for an Extended Arrangement in an amount equivalent to SDR 19.5 billion.

### Key national accounts indicators (annual changes, 2005–11; projections marked)
- Real GNP: 6.0; 6.5; 4.5; -3.5; -10.7; -3.0; -1.5 (2005–2011)
- Real GDP: 6.0; 5.3; 5.6; -3.5; -7.6; -0.2; 0.9
- Domestic demand: 8.8; 6.4; 5.4; -5.1; -13.9; -4.1; -2.2
  - Private consumption: 6.9; 6.7; 6.4; -1.5; -7.0; -1.4; -1.0
  - Public consumption: 3.9; 5.1; 6.9; 2.2; -4.4; -2.0; -4.0
  - Gross fixed investment: 14.9; 4.6; 2.8; -14.3; -31.0; -21.1; -10.4
- Net exports (contribution to growth): -2.0; -0.8; 0.8; 1.5; 3.8; 3.5; 3.7
- Exports of goods and services: 4.8; 4.8; 8.2; -0.8; -4.1; 5.8; 4.5
- Imports of goods and services: 8.3; 6.4; 7.8; -2.9; -9.7; 2.2; 0.7

### Savings, investment, prices, and labor (levels and rates)
- Gross national saving (percent of GDP): 23.6; 24.8; 21.7; 16.4; 11.5; 10.0; 10.9
  - Private: 18.8; 18.4; 18.7; 20.6; 25.2; 24.7; 23.9
  - Public: 4.8; 5.9; 3.0; -4.2; -13.8; -14.8; -13.0
- Gross investment (percent of GDP): 27.2; 28.0; 27.3; 22.3; 14.1; 11.8; 11.1
  - Private: 23.7; 24.2; 22.5; 16.8; 9.4; 7.0; 7.5
  - Public: 3.5; 3.8; 4.8; 5.5; 4.7; 4.7; 3.6
- Harmonized Index of Consumer Prices (annual average): 2.2; 2.7; 2.9; 3.1; -1.7; -1.6; -0.5
- Average wages, all economy: 5.1; 5.5; 5.2; 3.5; -1.0; -3.7; -1.1
- Employment (annual change): 4.9; 4.4; 3.6; -1.1; -8.1; -4.5; -0.5
- Unemployment rate (percent): 4.4; 4.4; 4.6; 6.3; 11.8; 13.5; 13.5

### Financial and asset market indicators (selected end-period)
- Three-month interbank rate: 2.5; 3.7; 4.6; 3.0; 0.6
- 10-year government bond: 3.3; 4.0; 4.5; 4.4; 4.9
- ISEQ index (annual change): 16.8; 27.8; -26.3; -66.2; 27.0
- House prices (permanent tsb index/ESRI): 9.3; 11.8; -7.3; -9.1; -18.5

### Public finance (percent of GDP)
- General government balance: 1.6; 2.9; 0.1; -7.3; -14.4; -32.0; -10.5
- Primary balance: 2.7; 3.8; 0.9; -6.3; -12.3; -29.0; -6.9
- General government debt: 27.2; 24.8; 25.0; 44.4; 65.6; 98.8; 112.8

### External sector and exchange rates
- Balance of goods and services (percent of GDP): 11.7; 10.3; 9.9; 9.0; 15.0; 19.0; 22.4
- Current account (percent of GDP): -3.5; -3.6; -5.3; -5.6; -3.0; -2.4; -1.2
- Nominal effective exchange rate (1999:Q1=100, annual average): 104.1; 104.4; 107.4; 113.0; 112.5
- Real effective exchange rate (CPI based): 115.4; 116.0; 120.1; 125.6; 121.9

### Medium-term scenario (2007–15) — selected projections
- Real GNP (annual change): 4.5; -3.5; -10.7; -3.0; -1.5; 0.8; 1.4; 2.3; 3.4
- Real GDP (annual change): 5.6; -3.5; -7.6; -0.2; 0.9; 1.9; 2.4; 3.0; 3.4
- Real domestic demand: 5.4; -5.1; -13.9; -4.1; -2.2; 0.5; 1.2; 1.9; 2.9
- Net exports (contribution to growth): 0.8; 1.5; 3.8; 3.5; 3.7; 1.5; 1.5; 1.5; 1.2
- Current account (percent of GDP): -5.3; -5.6; -3.0; -2.4; -1.2; -0.2; -0.4; -0.5; -0.5
- Gross national saving (percent of GDP): 21.7; 16.4; 11.5; 10.0; 10.9; 11.3; 11.3; 11.7; 12.3
- Gross investment (percent of GDP): 27.3; 22.3; 14.1; 11.8; 11.1; 11.2; 11.5; 12.0; 12.6
- Consumer prices (annual): 2.9; 3.1; -1.7; -1.6; -0.5; 0.2; 1.3; 1.3; 1.7
- Average unemployment rate (percent): 4.6; 6.3; 11.8; 13.5; 13.5; 12.8; 12.3; 11.5; 10.7
- General government balance (percent of GDP): 0.1; -7.3; -14.4; -32.0; -10.5; -8.6; -7.5; -5.1; -4.8
- General government gross debt (percent of GDP): 25.0; 44.4; 65.6; 98.8; 112.8; 120.0; 124.5; 124.1; 123.0
- Output gap (percent of potential output): 6.5; 2.2; -6.0; -6.3; -5.9; -4.9; -3.8; -2.1; -0.8
- Growth in nominal GDP: 9.3; 6.8; -5.0; -11.3; -1.9; 1.3; 2.7; 3.8; 4.6; 5.0 (selected years)

### General government finances (2006–15) — detailed items (percent of GDP)
- Current balance (2006–15): 6.5; 4.7; -1.2; -7.6; -8.3; -7.3; -5.8; -5.1; -2.8; -2.5
- Current revenue (percent of GDP): 35.2; 34.6; 33.3; 33.1; 33.4; 34.0; 34.5; 34.9; 35.4; 35.6
  - Tax revenue (including taxes on capital): 27.1; 26.3; 23.9; 22.0; 21.3; 22.1; 22.8; 23.4; 23.9; 24.2
    - Income tax: 7.0; 7.2; 7.3; 7.4; 7.2; 8.4; 8.8; 9.3; 9.5; 9.7
    - Corporate tax: 3.8; 3.4; 2.8; 2.4; 2.5; 2.5; 2.6; 2.6; 2.6; 2.6
    - VAT: 7.6; 7.5; 7.5; 6.7; 6.3; 6.0; 6.0; 6.2; 6.2; 6.3
    - Stamp duty: 2.0; 1.7; 0.9; 0.6; 0.5; 0.5; 0.5; 0.5; 0.6; 0.6
  - Social security receipts: 4.6; 4.8; 5.2; 5.6; 5.8; 5.8; 5.9; 5.9; 5.9; 5.9
  - Miscellaneous: 3.5; 3.6; 4.2; 5.6; 6.3; 6.1; 5.9; 5.5; 5.5; 5.5
- Current expenditure (percent of GDP): 28.7; 29.9; 34.4; 40.8; 41.7; 41.3; 40.3; 40.0; 38.2; 38.1
  - Interest payments: 0.9; 0.8; 1.0; 2.2; 3.0; 3.8; 4.4; 6.1; 6.3; 6.3
  - Compensation of employees: 9.3; 9.5; 11.2; 12.4; 11.7; 10.8; 10.1; 9.5; 9.0; 9.0
  - Current transfers: 12.3; 13.1; 15.3; 18.7; 19.4; 19.3; 18.8; 17.8; 16.7; 16.6
- Primary current expenditure: 27.8; 29.1; 33.4; 38.6; 38.7; 37.5; 35.9; 33.9; 31.9; 31.8
- Capital balance (percent of GDP): -3.6; -4.7; -6.2; -6.8; -23.8; -3.2; -2.8; -2.5; -2.3; -2.3
- Primary balance: 3.8; 0.9; -6.3; -12.3; -29.0; -6.7; -4.1; -1.4; 1.2; 1.5
- Primary balance excl. bank support measures: 3.8; 0.9; -6.3; -9.7; -9.6; -6.7; -4.1; -1.4; 1.2; 1.5
- Structural government balance (memorandum): -4.0; -7.2; -11.2; -9.6; -8.8; -6.1; -4.8; -4.3; -3.5; -3.5

### Indicators of external and financial vulnerability (selected, 2003–10)
- Exports (annual percent change, value in euros): -4.5; 6.9; 5.9; 6.2; 8.3; -1.4; -3.6; 6.4 (2003–2010 series)
- Imports (annual percent change, value in euros): -5.5; 8.6; 10.3; 8.9; 9.5; -1.1; -10.1; 2.7
- Current account balance (percent of GDP): 0.0; -0.6; -3.5; -3.6; -5.3; -5.6; -3.0; -2.4
- Capital and financial account balance (percent of GDP): -0.9; 2.7; -0.1; 2.8; 6.4; 9.0; -2.9; -8.8
  - Inward portfolio investment (selected): 74.8; 100.0; 106.9; 124.9; 86.4; -10.2; 5.7; 19.7
  - Inward foreign direct investment (selected): 14.4; -5.7; -15.7; -2.5; 9.5; -6.2; 11.1; 2.5
- Government bond yield (10-year, end-period): 4.3; 3.5; 3.3; 4.0; 4.5; 4.4; 4.9; 6.6 (selected years)
- Non-performing loans (percent of total loans): 0.9; 0.8; 0.7; 0.7; 0.8; 2.6; 9.0; 12.9
- Regulatory capital to risk-weighted assets of domestic banks (percent): 13.9; 12.6; 12.0; 10.9; 10.7; 10.6; 10.9; 11.1
- Annual credit growth rates (to Irish resident private sector, percent): 17.9; 26.6; 28.8; 25.9; 17.0; 7.3; -7.6; 1.7

### Summary of balance of payments (2008–15 projections, percent of GDP and billions of euros)
- Current account balance (percent of GDP, 2008–15 projections in table): -10.2; -4.9; -3.8; -1.9; -0.2; -0.7; -0.8; -0.9 (alternative series shows -5.7; -3.0; -2.4; -1.2; -0.2; -0.4; -0.5; -0.5)
- Balance of goods and services (percent of GDP, projections): 16.1; 24.0; 29.8; 35.6; 38.8; 41.8; 45.2; 48.1
  - Goods balance: 23.8; 32.4; 35.8; 34.5; 36.7; 38.8; 40.3; 41.5
  - Services balance: 7.7; 8.4; 5.9; -1.0; -2.1; -2.9; -4.9; -6.6
- Income balance (percent of GDP, projections): -25.2; -27.9; -31.8; -36.2; -37.7; -41.0; -44.6; -47.5
- Capital and financial account balance (percent of GDP, projections): 16.2; -4.6; -2.2; -35.2; -19.4; -4.3; 0.8; 0.9
- Financing gap (billions of euros): 0.0; 0.0; 5.8; 37.1; 19.7; 5.0; 0.0; 0.0
- Memorandum — potential sources to fill the gap (billions of euro): EU/Bilateral loans: 0.0; 0.0; 28.6; 13.1; 3.3; 0.0; 0.0; 0.0; IMF: 0.0; 5.8; 8.5; 6.6; 1.7; 0.0; 0.0; 0.0
- External debt (percent of GDP, projections): 940.4; 1,036.9; 1,084.9; 1,096.5; 1,086.6; 1,059.1; 1,016.3; 971.7
  - Public sector share of external debt (percent of GDP): 56.8; 80.6; 125.5; 139.1; 149.1; 154.0; 152.7; 150.9
  - Private sector share of external debt (percent of GDP): 883.6; 956.3; 959.5; 957.4; 937.4; 905.0; 863.7; 820.8

### External financing requirements and sources (2008–15, in billions of euros)
- Gross Financing Requirements: 682.0; 805.5; 731.4; 743.9; 753.5; 761.5; 764.7; 745.5 (2008–15)
- Current account deficit (billions of euros): 10.2; 4.9; 3.8; 1.8; 0.3; 0.7; 0.8; 0.9
- Medium- and long-term debt amortization (billions of euros): 56.6; 60.2; 79.0; 71.0; 66.0; 59.8; 56.3; 37.9
  - Banks' amortization (selected): 40.9; 30.1; 55.2; 34.8; 35.6; 28.5; 27.1; 23.4
- Short-term debt amortization (billions of euros): 615.2; 740.4; 648.5; 671.0; 687.2; 701.0; 707.5; 706.6
  - Central Bank of Ireland component (selected): 0.6; 44.4; 53.5; 102.0; 102.0; 102.0; 102.0; 102.0
  - Banks component (selected): 500.0; 566.3; 493.2; 468.5; 494.1; 506.6; 510.2; 498.4
- Sources of financing — New borrowing and debt rollover (billions of euros): 808.9; 711.9; 749.1; 730.9; 745.0; 761.9; 763.8; 744.5
  - Medium- and long-term borrowing (billions of euros): 67.6; 63.4; 72.6; 40.6; 41.1; 54.4; 57.2; 38.2
  - Short-term borrowing (billions of euros): 741.3; 648.5; 676.6; 690.3; 704.0; 707.5; 706.6; 706.3
- Financing Gap: 0.0; 0.0; 0.5; 5.8; 37.1; 19.7; 5.0; 0.0
- Potential IMF contribution (memorandum, billions of euros): IMF: ...; 5.8; 8.5; 6.6; 1.7; ...; ...; ...

### Monetary survey (selected aggregates, 2005–2010)
- Assets (billions): 2005: 941.9; 2006: 1,178.1; 2007: 1,337.4; 2008: 1,412.2; 2009: 1,323.6; 2010 (Oct.): 1,246.6
  - Domestic credit: 349.6; 450.8; 481.8; 532.6; 505.3; 472.6
    - Credit to private sector: 250.5; 306.6; 363.7; 358.1; 328.6; 279.9
  - Credit to nonresidents: 241.2; 298.2; 334.9; 362.5; 339.0; 395.5
    - Euro area: 91.8; 102.6; 109.0; 111.0; 84.7; 159.9
    - Rest of world: 149.4; 195.7; 225.9; 251.5; 254.2; 235.6
- Liabilities (billions): Domestic deposits: 246.0; 314.8; 302.7; 351.1; 358.3; 340.8
- Capital to assets (percent): 5.7; 5.3; 5.6; 5.2; 6.8; 6.9

### Schedule of reviews and purchases (IMF arrangement summary)
- Board approval of arrangement (December 10, 2010): Purchase SDR 5,012,425,200; Percent of Quota 597.9
- First Review (March 15, 2011): Purchase SDR 1,839,127,000; Percent of Quota 219.4
- Second Review (June 15, 2011): Purchase SDR 1,839,127,000; Percent of Quota 219.4
- Third Review (September 15, 2011): Purchase SDR 1,839,127,000; Percent of Quota 219.4
- Fourth Review (December 15, 2011): Purchase SDR 1,839,127,000; Percent of Quota 219.4
- Fifth Review (March 15, 2012): Purchase SDR 1,417,209,700; Percent of Quota 169.0
- Sixth Review (June 15, 2012): Purchase SDR 1,417,209,700; Percent of Quota 169.0
- Seventh Review (September 15, 2012): Purchase SDR 1,417,209,700; Percent of Quota 169.0
- Eighth Review (December 15, 2012): Purchase SDR 1,417,209,700; Percent of Quota 169.0
- Ninth Review (March 15, 2013): Purchase SDR 357,007,000; Percent of Quota 42.6
- Tenth Review (June 15, 2013): Purchase SDR 357,007,000; Percent of Quota 42.6
- Eleventh Review (September 15, 2013): Purchase SDR 357,007,000; Percent of Quota 42.6
- Twelfth Review (November 15, 2013): Purchase SDR 357,007,000; Percent of Quota 42.6
- Total purchases listed: SDR 19,465,800,000; Percent of Quota 2321.8

### Indicators of Fund credit and prospective Fund credit (2010–24, selected)
- Prospective Fund credit disbursements (millions of SDR): 2010 disbursement 5,012; 2011 disbursement 7,356; 2012 disbursement 5,669; 2013 disbursement 1,428
- Stock of prospective Fund credit (end of period, millions of SDR): 2010: 5,012; 2011: 12,369; 2012: 18,038; 2013: 19,466; 2014: 19,466; 2015: 18,324; 2016: 16,026; 2017: 12,960; 2018: 9,716; 2019: 6,472; 2020: 3,227; 2021: 1,125; 2022: 179
- Stock of prospective Fund credit (in percent of quota): 598; 1,475; 2,151; 2,322; 2,322; 2,186; 1,912; 1,546; 1,159; 772; 385; 134; 21
- Stock of prospective Fund credit (in percent of GDP): 3.7; 9.0; 12.8; 13.3; 12.7; 11.4; 9.5; 7.3; 5.2; 3.3; 1.6; 0.5; 0.1

*Source: Department of Finance; Central Bank of Ireland; IFS; Bloomberg; CSO; national authorities; and IMF staff calculations and estimates (tables and figures as provided in the content).*

### Appendix I. Debt Sustainability Analysis

### Appendix I. Debt Sustainability Analysis

### Public sector debt: recent evolution and baseline
- At the onset of the crisis, in 2007, general government debt was 25 percent of GDP.
- Following the crisis, the debt ratio is expected to reach 99 percent by end-2010.
- In the baseline scenario, public sector debt is expected to peak at 125 percent of GDP in 2013.
- Growth and fiscal assumptions in the baseline:
  - Growth is expected to average 2¼ percent over 2011–14.
  - Inflation is expected to remain below other euro area countries.
  - Primary balance: improve from a deficit of 9½ percent in 2010 (excluding bank support) to a 1½ percent of GDP surplus in 2015 under the authorities’ National Recovery Plan for 2011–14.
- Bank recapitalization financing and baseline conservatism:
  - Notional program amount designated for bank support: €35 billion (anticipated not to be fully used).
  - Baseline assumes €17.5 billion drawn from the overall EU-IMF program (the other half from authorities’ own resources).
  - Alternative recapitalization-draw scenarios (each assumes one half financed by authorities’ liquid assets and remainder from EU-IMF resources):
    - If €25 billion used, debt would peak at 119 percent of GDP in 2013.
    - If €10 billion used, debt would peak at 109 percent of GDP.
  - Implication: smaller recapitalization needs allow authorities to use liquid assets to cover budgetary financing needs or repay debt.

### Public debt risk scenarios and sensitivities
- Growth shock (standardized permanent shock): debt ratio would reach 155 percent of GDP by 2015 and not stabilize. (Calibration: ½ historical standard deviation — 2½ percentage points lower growth than baseline.)
- No fiscal consolidation (primary balance at 2010 level excluding bank support): debt ratio would reach 159 percent of GDP by 2015.
- Interest rate sensitivity: if interest rates were 1½ percentage points higher, the debt ratio would stabilize at 132 percent.

### External debt: structure and baseline projections
- Gross non-resident liabilities: 1,057 percent of GDP (as of end-March 2010).
- International Investment Position (IIP): Irish external position is a net liability of circa 90 percent of GDP when foreign assets are taken into account.
- Public sector external liabilities:
  - Central Bank of Ireland gross external debt related to ESCB liabilities: €38.1 billion as of end-March 2010.
  - Public gross external debt at about 120 percent of GDP (just over 10 percent of all external debt).
  - IIP data indicate the public sector is now responsible for 55 percent of total net external liabilities.
- Baseline external debt path:
  - Gross external debt expected to peak at 1,096 percent of GDP in 2011.
  - Gross external debt expected to decline to 972 percent of GDP by end-2015.
  - Baseline incorporates assumption that the full amount of the EU-IMF financing will be drawn, contributing to a buildup in Irish foreign assets (about €19 billion).
  - Public sector external debt expected to peak at 154 percent of GDP in 2013 (two years later than total external debt).

### External debt risks and sensitivity tests
- Growth shock: external debt ratio would reach 1,116 percent of GDP by 2015 and peak two years later than under baseline (calibration: -2½ percentage points lower growth than baseline).
- Exchange rate risk: a real exchange rate depreciation of 30 percent in 2010 would raise external debt to 1,546 percent of GDP by 2011, declining to 1,370 percent by 2015.

### Key projections and macro-fiscal assumptions (selected series)
- Public sector gross debt (percent of GDP), selected years:
  - 2007: 25.0
  - 2009: 65.6
  - 2010: 98.9
  - 2011: 112.8
  - 2012: 120.0
  - 2013: 124.5
  - 2014: 124.1
  - 2015: 123.0
- Debt-stabilizing primary balance (percent of GDP): 0.4
- Change in public sector debt (percent of GDP), 2010–2015 (annual): 33.3 (2010), 13.9 (2011), 7.1 (2012), 4.6 (2013), -0.4 (2014), -1.1 (2015).
- Key macro assumptions (real GDP growth, percent):
  - 2005: 6.0
  - 2006: 5.3
  - 2007: 5.6
  - 2008: -3.5
  - 2009: -7.6
  - 2010: -0.2
  - 2011: 0.9
  - 2012: 1.9
  - 2013: 2.4
  - 2014: 3.0
  - 2015: 3.4
- Average nominal interest rate on public debt (percent):
  - 2005: 3.9
  - 2009: 4.3
  - 2010: 4.5
  - 2011: 3.9
  - 2013: 5.3
  - 2015: 5.4
- Inflation rate (GDP deflator, percent): 2010: -1.7; 2011: 0.4; 2012: 0.8; 2013: 1.4; 2014: 1.6; 2015: 1.6.

### Quantitative indicators of external debt dynamics (selected)
- Baseline gross external debt (percent of GDP), selected years:
  - 2005: 697.8
  - 2008: 940.4
  - 2009: 1,036.9
  - 2010: 1,084.9
  - 2011: 1,096.5
  - 2015: 971.7
- Change in external debt (percent of GDP), 2010–2015: 48.0 (2010), 11.6 (2011), -9.9 (2012), -27.5 (2013), -42.7 (2014), -44.6 (2015).
- Gross external financing need (in percent of GDP), 2010–2015:
  - 2010: 506.6
  - 2011: 492.1
  - 2012: 481.2
  - 2013: 470.1
  - 2014: 450.9
  - 2015: 418.2

### Policy implications and priorities (from the text)
- The document underscores the need for a strong, wide-ranging reform programme, backed by a substantial international financing package, to restore confidence and return the economy to sustained growth and job creation.
- Decisive actions are needed to:
  - Restore the strength of the financial sector through recapitalization and resolution measures.
  - Re-establish fiscal credibility through fiscal consolidation as laid out in the National Recovery Plan for 2011–14.
- The analysis highlights that outcomes depend critically on:
  - The size of bank-support drawdowns and the authorities’ use of liquid assets.
  - The success of fiscal consolidation and the path of growth, inflation, interest rates, and exchange rates.

*Appendix I. Debt Sustainability Analysis*

### 3.      The Irish authorities have already undertaken major steps to address these challenges.

### 3.      The Irish authorities have already undertaken major steps to address these challenges.

### Financial sector measures and objectives
- Measures taken to facilitate funding of banks, separate good assets from bad, asset disposals, and bank recapitalisation.
- Goal: a robust, smaller, and better capitalised banking system that effectively serves the needs of the economy and insulates public finances from further pressures.
- Actions: raise capital standards, ensure prompt recognition of bank losses, create a mechanism to inject needed capital, and strengthen the banking resolution framework to promote financial stability.

### Immediate program request and financing envelope
- Estimated financing need: up to €85 billion until the end of 2013.
- Request for Fund support: an arrangement under the Extended Fund Facility, drawable over a period of 36 months in the amount of SDR 19.4658 billion (€22.5 billion).
- Complementary financing: €45 billion from the European Financial Stability Mechanism/European Financial Stability Facility including bilateral loans from the United Kingdom, Sweden and Denmark.
- Own resources to be used: €17.5 billion.

### Program composition (four key elements)
- A fundamental downsizing and reorganisation of the banking sector, complemented by availability of capital to underpin solvency.
- An ambitious fiscal consolidation building on progress already made.
- Renewing growth through a multi-pronged effort.
- A substantial external financial assistance to support policy objectives.

### Economic outlook and risks
- After two years of sharp declines in output, the economy is expected to broadly stabilise this year before expanding during 2011–14.
- Recovery is expected to be primarily export-driven initially.
- Short-term risks: tilted to the downside, notably headwinds from fiscal consolidation on domestic demand.
- Longer-term risks: continued private and public sector balance sheet adjustments and a weak banking sector could delay the recovery.
- Inflation: expected to remain low given a large output gap and modest external price pressures; likely to remain lower than in trading partner countries.
- Current account: projected to continue to improve gradually, though profit repatriation by multinationals and large interest payments to foreign holders of Irish debt will limit improvement over the programme period.

### Restoring financial sector viability — strategy and key actions
- Overview: overhaul the financial sector to achieve substantial downsizing, isolate non-viable parts, and return the sector to healthy functionality; support with capital injections to viable institutions; introduce a special resolution scheme and strengthen supervision.
- Specific elements of the banking overhaul:
  - Banks required to run down non-core assets.
  - Transfer to NAMA of land and development property loans not yet transferred.
  - Banks required to promptly and fully provide for all non-performing assets as needed.
  - Banks required to securitise and/or sell asset portfolios or divisions with credit enhancement if needed once markets normalise.
  - Swift and decisive action to resolve the position of Anglo Irish Bank (Anglo) and Irish Nationwide Building Society (INBS) in a way that protects depositors and strengthens the banking system; revised proposal to be submitted to the European Commission by end-January 2011 (developed in collaboration with IMF).

### Deleveraging, assessments, and timelines (benchmarks)
- Banks will be required to submit deleveraging plans to national authorities by end-February 2011; plans prepared on basis of clear periodic targets defined by the Central Bank, taking into consideration the Prudential Liquidity Assessment Review (PLAR).
- By end-March 2011, the Central Bank, with assistance from an internationally recognised consulting firm, will complete the assessment of the banks’ restructuring plans (structural benchmark).
- Deleveraging plans will be a component of restructuring plans to be submitted to the European Commission for approval under EU competition rules.

### Capital standards, stress tests, and recapitalisation measures
- Immediate directed capital ratios:
  - Allied Irish Bank (AIB), Bank of Ireland (BoI), and EBS to achieve a capital ratio of 12 percent core tier 1 by end-February 2011 (structural benchmark).
  - Irish Life & Permanent to achieve a capital ratio of 12 percent core tier 1 by end-May 2011 (structural benchmark).
- Estimated equity injections:
  - Injection of fresh equity capital of €7bn into these four banks to achieve the 12 percent core tier 1 target.
  - This action, along with early deleveraging measures and accounting for haircuts on additional loans to be transferred to NAMA, would result in an injection of €10bn of fresh capital into the banking system, above and beyond the already committed capital injection of €6.6bn for AIB previously announced by the Irish authorities.
- Diagnostic and stress testing timetable:
  - By end-December 2010, in consultation with EC, ECB, and IMF staff, define criteria to run stringent stress test scenarios (structural benchmark).
  - By end-December 2010, agree draft terms of reference for due diligence of bank assets by internationally recognised consulting firms (structural benchmark).
  - Complete diagnostic evaluation of banks’ assets by end-March 2011 and the stress tests (PCAR 2011) by end-March 2011 (both structural benchmarks), and transparently communicate findings.
- Post-assessment capital requirement:
  - Based on assessments, starting end-April 2011, banks will be required to maintain a core tier 1 capital ratio of 10.5 percent.
  - Banks will report capital adequacy ratios to the Central Bank on a quarterly basis.
  - The Central Bank’s assessment of banks’ capital adequacy ratio will be made public at least semi-annually.

### Burden sharing, legal framework, and resolution regime
- Burden on bank subordinated debt:
  - Consideration of imposing burden on bank sub debt influenced by the quantum of State support and perceived bank viability without such capital.
  - Legislation to enable forced burden sharing is currently being prepared.
  - An alternative option in certain cases: a very deeply discounted liquidity management exercise.
- Special resolution regime draft legislation will:
  - Provide for appointment of a special manager where, in the opinion of the Central Bank, an institution's financial condition has severely deteriorated.
  - Grant powers to the Central Bank for transfer of assets and liabilities to other institutions.
  - Create a framework for establishment of bridge banks.
- Submission target: draft legislation including these elements to be submitted to Dáil Éireann by end-February 2011 (structural benchmark).

### Strengthening supervision, personal insolvency, and sector-specific measures
- Banking supervision:
  - Strengthen by ensuring higher staffing levels and budget allocations in line with OECD best practices.
  - Enhance risk assessment framework and raise corporate governance standards.
  - By end-September 2011, publish a report by an independent assessor on compliance with Basel core principles for effective banking supervision.
- Personal insolvency reform:
  - Reform the personal insolvency regime for financially responsible individuals (including sole traders) to lower cost and increase speed and efficiency of proceedings, mitigate moral hazard, and maintain credit discipline.
  - New legal framework to include a non-judicial debt settlement and enforcement mechanism as an alternative to court-supervised proceedings.
- Credit unions:
  - Complete full assessment of loan portfolios by end-April 2011 (structural benchmark).
  - By end-April 2011, have ready a comprehensive strategy to enhance sector viability.
  - By end-December 2011, submit legislation to Dáil Éireann to assist credit unions with a strengthened regulatory framework including effective governance and stabilisation requirements.

### Ensuring flow of credit and NAMA governance
- Support for credit to viable businesses:
  - Allied Irish Banks and Bank of Ireland agreed, in connection with recapitalisation last March, to make available not less than €3 billion each for targeted lending in both 2010 and 2011 for SMEs, plus funds for seed and venture capital and Environmental lending.
  - Lending policies and decisions subject to review by the Credit Review Office, enabling independent review for businesses refused or withdrawn credit.
- NAMA governance and oversight:
  - NAMA subject to an extensive range of statutory Governance and Accountability arrangements and statutory codes of practice.
  - NAMA required to prepare various reports, including quarterly reports, subject to Oireachtas committee scrutiny.
  - Comptroller and Auditor General audits annual accounts and prepares reports on NAMA for review by the Public Accounts committee.

### Fiscal consolidation and National Recovery Plan
- National Recovery Plan 2011–14:
  - Approved by Government and published on 24 November 2010.
  - Forms basis for 2011 budget and fiscal consolidation measures amounting to €15 billion, a 9 percent of GDP budgetary correction over the period 2011–14.
  - Budget 2011 will include adjustment measures of €6 billion and will be submitted to Dáil Éireann for passage on 7 December (prior action).
- Fiscal adjustment composition:
  - Most adjustment to come from the expenditure side, including reduced capital budget and greater value for money in infrastructure procurements.
  - Current expenditure savings via public service numbers reductions through natural attrition and voluntary schemes, adjustments in public service pensions, and further savings on social transfers (from reductions in working age payments, reductions in universal child benefit payments and other reforms).
  - Protecting the socially vulnerable remains a central policy goal; means-tested financial assistance continued, and the mortgage interest supplement scheme administration will be centralised with further modification introduced in the 2011 Social Welfare Act.
  - Option reserved to take further measures should expected savings or numbers reductions not materialise.
- Debt and deficit projections:
  - Steps announced aim to place the budget deficit-to-GDP ratio on a firm downward path.
  - Debt-to-GDP ratio: will remain at high levels for the next few years but is projected to decline thereafter, underpinning debt sustainability.
  - Progress towards meeting Stability and Growth Pact targets will be kept under review.

*Source: Letter and attached Memorandum of Economic and Financial Policies from the Irish authorities (text provided)._

### 23.      An  income  tax-led  revenue  package—sized  at  over  €2  billion  in  a  full  year—will

### An income tax-led revenue package—sized at over €2 billion in a full year—will

### Revenue measures and tax-base broadening
- An income tax-led revenue package—sized at over €2 billion in a full year—will supplement expenditure measures in 2011.
- Over the past decade, the proportion of citizens exempt from income tax has risen to 45 percent and tax credits have doubled.
- Measures to widen the tax base:
  - Lowering income tax bands and credits by 10 percent.
  - Reducing various pension-related tax reliefs.
  - Acting on other tax expenditures and distortions arising from multiple levies.

### Fiscal measures for 2012–14 and expenditure strategy
- Fiscal measures identified for 2012–14 build on:
  - Expenditure savings of €6.1 billion, led by current spending savings of €4.9 billion (as outlined in the National Recovery Plan).
- Targets and policy actions:
  - Further reductions in public sector numbers, social benefits and programme spending.
  - Publication of multi-year expenditure ceilings by Vote Group through 2014 to anchor prospective savings.
  - Move towards full cost-recovery in the provision of water services.
  - Ensure a greater student contribution towards tertiary education while supporting lower-income groups.
  - Accelerate the process of placing pension systems on a path consistent with long-term sustainability of public finances.
  - Build on tax base-broadening and establish a residential-property based site value tax for sub-national finances.
  - Finance Bill 2012 to contain provisions to bring into effect already signalled VAT increases in 2013 and 2014.

### Institutional reforms and fiscal framework
- Reforms being prepared:
  - Reform Budget Formation Process taking into account anticipated EU-level economic governance reforms.
  - Introduce a Fiscal Responsibility Law including a medium-term expenditure framework with binding multi-annual ceilings on expenditure in each area by end-July 2011 (structural benchmark).
  - Introduce a Budget Advisory Council to provide an independent assessment of the Government’s budgetary position and forecasts by end-June 2011 (structural benchmark).
- Purpose: enhance fiscal credibility and anchor long-term debt sustainability.

### Raising the growth potential and structural reforms
- Objective: restore strong sustainable growth through structural changes to financial and fiscal sectors and removal of impediments to competitiveness and employment creation.
- Specific structural reform commitments (per Memorandum of Understanding on specific economic policy conditionality):
  - Promote service sector growth by removing remaining restrictions on trade and competition and propose legislative amendments to enable imposition of financial and other sanctions in civil law competition cases.
  - Undertake an independent assessment of the electricity and gas sectors (building on the Review Group on State Assets & Liabilities) to enhance efficiency and consult Commission Services on results with a view to setting targets for possible privatisation of state-owned assets.
  - Reform the benefits system and legislate to reform the national minimum wage to create greater incentives to take up employment and reduce long-term unemployment.

### Programme financing (key amounts and composition)
- Estimated financing need: up to €85 billion until the end of 2013 (includes a contingency element for bank recapitalisation).
- Irish contribution: €17.5 billion to be covered through the Treasury cash buffer and investments of the National Pension Reserve Fund.
- Expected commitments:
  - IMF under the Extended Arrangement: €22.5 billion.
  - EU financial support from the European Financial Stability Mechanism/European Financial Facility and bilateral arrangements: €45 billion.
- Drawdown and repayment approach:
  - Ireland will draw on these resources in parallel throughout the programme period and plans to draw pari passu on IMF and EU financial support as needed.
  - If market access is restored sustainably, anticipate paying down drawings on an advanced schedule.
- Policy view: an arrangement under the Extended Fund Facility (EFF) is viewed as appropriate given medium-term structural adjustment needs and offers a more realistic repayment schedule.

### Programme monitoring and performance criteria
- Monitoring mechanisms:
  - Quarterly and continuous performance criteria, indicative targets, structural benchmarks, quarterly programme reviews, and compliance with Excessive Deficit Procedure (EDP) requirements.
  - Technical Memorandum of Understanding (TMU) defines quantitative performance criteria and indicative targets.
  - Government’s targets for the exchequer balance (central government cash balance) excluding interest payments will be monitored through quarterly performance criteria; net central government debt is an indicative target.
  - Continuous performance criterion on non-accumulation of external payment arrears.
  - Structural benchmarks to monitor progress on implementing structural reforms; a joint EC-ECB Memorandum of Understanding specifies recommended structural policies and precise time frames for implementation.
- Safeguards:
  - Safeguards assessment of the Central Bank of Ireland to be completed by the first review of the arrangement; the Central Bank will receive a safeguards mission and provide required information.
  - A framework agreement between the government and the Central Bank on respective responsibilities for servicing IMF financial obligations; Fund disbursements will be deposited into the government’s account at the Central Bank.

### Quantitative targets and projections (as reported)
- Cumulative exchequer primary balance (floor; measured cumulatively from start of calendar year; in billions of Euros):
  - End-December 2010 (performance criterion): -15.3
  - End-March 2011 (performance criterion): -7.8
  - End-June 2011 (indicative target): -11.0
  - End-September 2011 (indicative target): -14.3
  - End-December 2011 (indicative target): -14.6
- Cumulative Exchequer tax revenue & other receipts (projection; in billions of Euros):
  - End-March 2011 (projection): 9.7
  - End-June 2011 (projection): 19.4
  - End-September 2011 (projection): 29.7
  - End-December 2011 (projection): 41.9
- Central government net debt (outstanding stock; in billions of Euros):
  - End-October 2010 (provisional): 78.6
  - End-December 2010 (indicative target): 83.1
  - End-March 2011 (indicative target): 91.6
  - End-June 2011 (indicative target): 96.5
  - End-September 2011 (indicative target): 100.0
  - End-December 2011 (indicative target): 102.2
- Ceiling on accumulation of new external payments arrears on external debt contracted or guaranteed by central government (applies on a continuous basis): 0 at each reporting date shown.

### Structural benchmarks and prior actions (selected timeline)
- Prior Action:
  - Submit the 2011 Budget to Dáil Éireann: 7 December 2010.
- Structural Benchmarks and target dates:
  - Define criteria to run stringent stress test scenarios: End-December 2010.
  - Agree terms of reference for due diligence of bank assets by internationally recognised consulting firms: End-December 2010.
  - The Central Bank will direct the recapitalisation of the principal banks (AIB, BoI and EBS) to achieve a capital ratio of 12 percent core tier 1: End-February 2011.
  - Submit draft legislation on a special resolution regime to Dáil Éireann: End-February 2011.
  - Central Bank to complete assessment of banks’ restructuring plans: End-March 2011.
  - Complete diagnostic evaluation of banks’ assets: End-March 2011.
  - Complete stress tests (PCAR 2011): End-March 2011.
  - Complete a full assessment of credit unions’ loan portfolios: End-April 2011.
  - The Central Bank will direct the recapitalisation of ILP to achieve a capital ratio of 12 percent core tier 1: End-May 2011.
  - Establish a Budget Advisory Council: End-June 2011.
  - Introduce a medium-term expenditure framework with binding multi-annual ceilings on expenditure in each area: End-July 2011.

### Technical Memorandum of Understanding (TMU) highlights
- Programme exchange rates (prevailed on November 24; used to evaluate foreign currency-related assets, liabilities, and flows):
  - €1 = 1.3339 U.S. dollar
  - €1 = 0.86547 SDR
- Definition and measurement notes:
  - Exchequer balance = total receipts into minus total expenditure out of the Exchequer Account; includes current and capital balances.
  - Performance criteria are set on the exchequer primary balance (the exchequer balance excluding net debt interest payments).
  - Floor on the exchequer primary balance will be adjusted downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy; other government support operations for banks will be reported to IMF staff.
  - Ceiling on central government net debt defined as National Debt less liquid assets of the National Pensions Reserve Fund (NPRF); NPRF shares in domestic Irish banks are excluded from liquid assets.
  - Ceilings on net debt will be adjusted upward by debt arising from payments for bank restructuring and by any final revision to the stock of end-October 2010 central government net debt.

*Source: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding (TMU), December 1, 2010.*

### 12.      The central government will accumulate no external payments arrears during the

### _cr10366 - 12.      The central government will accumulate no external payments arrears during the

### Performance criterion: external payments arrears
- The central government will accumulate no external payments arrears during the programme period.
- Definition: an external payment arrear is a payment by the central government on its contracted or guaranteed external debt that has not been made within five business days after falling due.
- The performance criterion will apply on a continuous basis.
- The performance criterion does not cover arrears with regard to trade credits.
- The stock of external payments arrears of the central government will be calculated based on the schedule of external payments obligations reported by the National Treasury Management Agency.

### Reporting requirements and data transmission
- Performance criteria under the programme will be monitored using data supplied to the IMF. The Irish authorities will transmit promptly any data revisions in a timely manner.
- Department of Finance reporting:
  - The Department of Finance will report the Exchequer balance to the IMF staff, with a lag of no more than seven days after the test date.
- National Treasury Management Agency (NTMA) reporting:
  - The NTMA will provide provisional figures on the outstanding stock of net government debt with a lag of no more than seven days after the test date.
  - The revised figures will be provided within three months of the test date.
  - The NTMA will provide the final stock of the central government system external payments arrears to the IMF staff, with a lag of not more than seven days after the arrears arise in accordance with the definition in paragraph 12.

### Letter: Irish authorities’ request for support and program overview (Dublin, 3 December, 2010)
- Macroeconomic context and diagnosis:
  - Ireland faces an economic crisis characterized by low growth, doubts about fiscal sustainability, and a fragile banking sector that are feeding on each other and undermining confidence.
  - The domestic banking system at its peak was five times the size of the economy; Irish-owned banks were much larger than the size of the economy.
- Immediate objectives:
  - Break the vicious circle by implementing a strong, wide-ranging reform programme backed by a substantial international financing package to restore confidence and return the economy to sustained growth and job creation.
  - Undertake a fundamental downsizing and reorganisation of the banking system to create a robust, smaller, and better capitalised banking system.
  - Restore fiscal sustainability through a large consolidation programme and a National Recovery Plan.
- Financial assistance requests and resources:
  - Request to the European Financial Stability Mechanism/European Financial Stability Facility (EFSF/EFSM) and bilateral loans (United Kingdom, Sweden, Denmark): overall total of €45 billion; EFSF can be drawn down over a period of 36 months.
  - Parallel request to the IMF for a total amount of €22.5 billion.
  - Use of existing Irish financial resources: €17.5 billion.
- Implementation and monitoring:
  - The attached Memorandum of Economic and Financial Policies (MEFP) and an annexed Memorandum of Understanding (MoU) specify policies, benchmarks, and detailed economic policy measures to be assessed in quarterly reviews under the financial assistance programme.
  - Implementation will be monitored through quantitative performance criteria and structural benchmarks; quarterly reviews will be conducted in coordination with the IMF.
  - Authorities commit to consult with the European Commission, the ECB and the IMF on adoption of measures and to provide all available information requested to assess implementation.
- Legal and collateral considerations:
  - Authorities explored options for provision of collateral for EFSF support and identified legal and economic constraints that would risk undermining programme goals; therefore collateral provisions were not pursued.
  - Financial assistance will be subject to loan terms and conditions that protect EU, euro-area and EU Member States' financial and legal interests in a non discriminatory way compared to assistance under EU Balance of Payments facilities and adapted for the EFSF structure and credit enhancement mechanism.
- Commitment to take additional measures:
  - Authorities believe the policies are adequate but stand ready to take any corrective actions that may become appropriate as circumstances change.

### Memorandum of Understanding (MoU) — specific economic policy conditionality (Attachment II, November 28, 2010)
- Disbursement conditionality:
  - Quarterly disbursement of financial assistance from the EFSM, the EFSF and bilateral loans by UK, Sweden and Denmark will be subject to quarterly reviews of conditionality for the duration of the programme.
  - Release of instalments will be based on observance of quantitative performance criteria, respect for EU Council Decisions and Recommendations in the context of the excessive deficit procedure, and a positive evaluation of progress with respect to policy criteria in the MEFP and the MoU.
  - The MoU specifies detailed criteria to be assessed for successive reviews up to the end of 2013.
  - If targets are (expected to be) missed, additional action will be taken.
- Consultation and information provision:
  - Authorities commit to consult with the European Commission, the ECB and the IMF on policies not consistent with the MoU.
  - Authorities will provide the European Commission, the ECB and the IMF with all information requested that is available to monitor progress during programme implementation.
  - Prior to release of instalments, authorities shall provide a compliance report on the fulfilment of the conditionality.
- Initial disbursement condition:
  - The release of the first instalments will be conditional on the successful adoption of Budget 2011 as described in the MEFP and this MoU.

*Source: _cr10366 - 12.      The central government will accumulate no external payments arrears during the (PDF content provided).*

### 1. Actions for the first review (actions to be completed by end Q1-2011)

### 1. Actions for the first review (actions to be completed by end Q1-2011)

### i. Fiscal consolidation
- Government submits the draft budget for 2011 for Dáil approval; budget provides information and prudent projections on the entire general government sector and targets a further reduction of the general government deficit in line with the MEFP. It includes a detailed presentation of fiscal consolidation adjustments for 2011 of €6 billion.
- The budget includes the following measures (in exceptional circumstances, measures yielding comparable savings could be considered in close consultation with European Commission, IMF and ECB staffs):
  - Revenue measures to raise at least €1,400m in 2011 and an extra €620m in a full year will be introduced to the Houses of the Oireachtas, including:
    - A lowering of personal income tax bands and credits or equivalent measures to yield €945m in 2011 and an extra €300m in a full year.
    - A reduction in pension tax relief and pension related deductions to yield €155m in 2011, and an extra €105m in a full year.
    - A reduction in general tax expenditures to yield €220m in 2011, and an extra €185m in a full year.
    - Excise and miscellaneous tax measures to raise €80m in 2011 and a further €30m in a full year will be introduced.
    - The government will outline methods to raise at least €700m in one-off and other measures in 2011.
  - A reduction of current expenditure in 2011 of at least €2,090m will be implemented including:
    - Social Protection expenditure reductions.
    - Reduction of public service employment numbers in 2011.
    - A reduction of existing public service pensions on a progressive basis averaging over 4% will be introduced.
    - Other expenditure savings of €1,030m including savings on goods and services.
  - A reduction of at least €1,800m in public capital expenditure against existing plans for 2011 will be introduced.
- Implementation and monitoring:
  - Government will rigorously implement the budget for 2011 and the fiscal consolidation measures announced afterwards, consistent with the requirements of the excessive deficit procedure.
  - Progress is assessed against the (cumulative) quarterly primary deficit ceilings in the Memorandum of Economic and Financial Polices (MEFP) including the Technical Memorandum of Understanding (TMU).
  - The Department of Finance will continue to ensure tight supervision of expenditure commitments by the line departments, and effective tax collection, to make certain that the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis as set out in the EU Council Recommendation on excessive deficit procedures are achieved.

### ii. Financial sector reforms — Recapitalisation and deleveraging
- Recapitalisation measures:
  - The measures proposed for the recapitalisation of Irish banks in the government statement of 30 September 2010 will be implemented, taking into account any changes in strategy for the future of the banking sector agreed under the programme.
  - Further deleveraging will be achieved by extension of the NAMA programme to include approximately €16bn of land and development loans in AIB and Bank of Ireland previously excluded as below €20m threshold. NAMA will categorise sub-€20m AIB and BOI land and development and associated loans (roughly estimated to number 10,000) by reference to asset type and region and apply different discounts to each category. All loans are expected to be transferred by end-March 2011. NAMA will issue bonds in return for the assets transferred. NAMA legislation will be amended to underpin valuation and acquisition of these assets on a portfolio basis. The additional capital requirement will be met by the programme and is included in the figure below. These measures will be notified to the European Commission in accordance with EU competition rules.
  - Prudential Capital Assessment Review (PCAR) minimum capital requirement for the Irish banks (AIB, BOI, EBS and ILP) will be set at 10.5% core tier 1.
  - The Irish authorities will ensure that AIB, BOI and EBS are initially recapitalised to a level of 12% core tier 1 capital, which will take account of haircuts on the additional loans to be transferred to NAMA and will fund early deleveraging by making available EUR 10 billion in the system; the recapitalisation will take the form of equity shares (or equivalent instruments for EBS).
  - The PCAR exercise will be enhanced to provide a comprehensive evaluation of the underlying assets of the banks, taking into account future expected losses.
  - The PCAR for 2011 will be completed based on comprehensive Terms of Reference previously agreed between the Central Bank, the European Commission, IMF and ECB staff. The methodology used will be published in detail. The Commission, IMF and ECB shall be involved in validation of the PCAR process and key data and information related to PCAR will be available to them upon request.
- Deleveraging measures:
  - The Central Bank will complete a Prudential Liquidity Assessment Plan (PLAR) for 2011, outlining measures to steadily deleverage the banking system and reduce reliance on short term funding by the end of the programme period.
  - Ambitious target loan to deposit ratios, to be achieved by end 2013, will be established for each bank by the Irish authorities in consultation with the ECB, EC and the IMF by end Dec 2010. Targets will be designed to ensure convergence to Basel III standards can be readily met by the relevant dates.
  - The PLAR will establish target funding ratios for 2013 for each bank, identify non core assets and set an adjustment path to these targets based on specified non public annual benchmarks. Banks will be informed of necessary actions to comply with funding targets and adjustment paths.
  - The design and implementation of the PLAR will be agreed with the European Commission, the ECB and the IMF. Compliance with PLAR benchmarks will be monitored and enforced by the Central Bank taking account of prevailing market conditions. The PLAR will be updated on an annual basis.

### ii. Financial sector reforms — Reorganisation, legislation, staffing and burden sharing
- Reorganisation of banking sector:
  - Strategy for future structure, functioning and viability of Irish credit institutions will be developed in detail and agreed with the European Commission, the ECB and the IMF.
  - Within a comprehensive reorganisation and downsizing the strategy will identify the path to ensure the banking system operates without need of further State support. Irish authorities committed to divest participations in banks acquired during the crisis within the shortest timeframe consistent with financial stability and public finance considerations.
  - Further restructuring and viability plans for the institutions concerned will be submitted in accordance with EU competition rules and made available to the IMF and ECB. Commitments in the context of EU competition decisions will be maintained.
  - A specific plan for the resolution of Anglo Irish Bank and Irish Nationwide Building Society will be established and submitted to the European Commission in accordance with EU competition rules; related legal procedures will be set in motion under a precise timetable. The plan will seek to minimise capital losses and ensure these institutions adhere to requisite capital ratios.
  - Legislation on improved procedures for early intervention in distressed banks and a special bank resolution regime (SRR) will be introduced. The SRR should include a robust set of powers and tools consistent with the EU Treaty rules and similar initiatives ongoing at EU level.
  - Central Bank staffing in relation to the PCAR and PLAR exercises will be reviewed and augmented as necessary to guarantee timely and efficient conduct of both exercises.
- Burden sharing by holders of subordinated debt:
  - Consistent with EU State aid rules, burden sharing will be achieved with holders of subordinated debt in relevant credit institutions over the programme period based on the quantum of capital and other financial assistance the State commits and the financial viability of institutions absent such support.
  - Resolution and restructuring legislation which will address burden sharing by subordinated bondholders will be submitted to the Oireachtas by end-2010.
  - Where appropriate, liability management exercises similar to those undertaken in relation to holders of subordinated debt in Anglo Irish Bank will be commenced by end-Q1 2011.

### iii. Structural reforms — Labour market, unemployment, personal debt
- To facilitate adjustment in the labour market:
  - Government will introduce legislation to reform the minimum wage to foster job creation for higher-risk categories and prevent sectoral distortions. Measures:
    - Reduce by €1.00 per hour the nominal level of the current national minimum wage.
    - Enlarge the scope of the "inability to pay clause" permitting firms to invoke this clause more than once.
  - These measures should come into effect by May 2011.
  - An independent review of the Framework REA and ERO arrangements will be initiated by the end of Q1 2011. Terms of Reference and follow up actions will be agreed with European Commission Services.
- To reduce the risk of long-term unemployment:
  - Government will reform the unemployment benefit system to provide incentives for an early exit from unemployment. This reform will be part of overall welfare reforms designed to reach budgetary savings of €750m in 2011.
  - Legislative measures will be enacted to:
    - Tackle unemployment and poverty traps including through reducing replacement rates for individuals receiving more than one type of benefit (including housing allowance).
    - Reform activation policies to adapt to benefit reforms and make them more effective.
  - Measures to improve activation and administration:
    - Improve efficiency of administration of unemployment benefits, social assistance and active labour market policies by exploiting synergies and reducing overlapping competencies across departments.
    - Enhance conditionality on work and training availability.
    - Strengthen activation measures via:
      i. Instruments to better identify job seekers' needs ("profiling") and increased engagement;
      ii. More effective monitoring of jobseekers' activities with regular evidence-based reports;
      iii. Application of sanction mechanisms for beneficiaries not complying with job-search conditionality and recommendations for participation in labour market programmes set to imply an effective loss of income without being perceived as excessively penalising.
  - At each subsequent review, government will submit reports containing an assessment (including quantitative indicators) of management of activation policies and outcomes of job seekers' search activities and participation in labour market programmes.
  - Legislative measures should come into effect by May 2011.
- Personal debt regime:
  - An in-depth review of the personal debt regime will be published shortly. Work will commence on reform of legislation to balance interests of creditors and debtors.

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### 2. Actions for the second review (actions to be completed by end Q2-2011)

### i. Fiscal consolidation
- Government will rigorously implement the budget for 2011 and the fiscal consolidation measures announced afterwards, consistent with the requirements of the excessive deficit procedure. Progress will be assessed against the (cumulative) quarterly primary deficit ceilings in the MEFP including the TMU.
- The Department of Finance will continue to ensure tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis as set out in the EU Council Recommendation on excessive deficit procedures.
- The government will submit a timetable for implementing the recommendations of the Memorandum. Upon consideration by the European Commission, IMF and ECB staffs the measures in this timetable shall become the performance benchmarks for future reviews.

### ii. Financial sector reforms
- The results of the PCAR for 2011 will be assessed by the authorities, together with the European Commission, the ECB and the IMF. The results will be published in detail and on a bank-by-bank basis.
- Depending on the results of the PCAR 2011, the Government will ensure that the banks are recapitalised in the form of equity, if needed, so as to ensure that the minimum capital requirement of 10.5% will be maintained.
- Introduce legislation for the enhancement of financial regulation, expanding the supervisory and enforcement powers of the Central Bank.
- The Irish authorities will ensure that ILP is recapitalised to a level of 12% core tier 1 capital.
- Progress in implementation of the strategy for the reorganisation of Irish credit institutions will be assessed by the authorities, together with the European Commission, the ECB and the IMF.

### iii. Structural reforms — pensions and fiscal governance
- To enhance long-term fiscal sustainability:
  - Authorities undertake to introduce legislation to increase the state pension age. Under the Government’s National Pension Framework the age at which people will qualify for the State Pension will be increased to 66 years in 2014, 67 in 2021 and 68 in 2028.
- Structural fiscal reforms to reinforce a credible budgetary strategy:
  - Ensure reliability and regular availability of budgetary data for the whole general government sector and its breakdown into government layers; reporting will comply with provisions included in annex 1 of the MoU.
  - Under this financial assistance programme, any additional unplanned revenues must be allocated to debt reduction.
  - In accordance with the National Recovery Plan 2011-2014 proposal, the government will establish a budgetary advisory council to provide an independent assessment of the Government’s budgetary position and forecasts.
  - Government extends the voluntary 15 day rule relating to prompt payments to the health service executive, local authorities and state agencies.

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### 3. Actions for the third review (actions to be completed by end Q3-2011)

### i. Fiscal consolidation
- Government will rigorously implement the budget for 2011 and the fiscal consolidation measures announced afterwards, consistent with the requirements of the excessive deficit procedure. Progress is assessed against the (cumulative) quarterly primary deficit ceilings in the MEFP including the TMU.
- Government will consider an appropriate adjustment, including to the overall public service wage bill, to compensate for potential shortfalls in the projected savings arising from administrative efficiencies and public service numbers reductions.
- The Department of Finance will continue tight supervision of expenditure commitments and effective tax collection to ensure the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis are achieved.

### ii. Financial sector reforms
- Interim review of progress under PLAR 2011 and any related actions will be assessed, together with the European Commission, the ECB and the IMF.
- Progress in implementing the strategy for the reorganisation of Irish credit institutions will be assessed by the authorities, together with the European Commission, the ECB and the IMF.
- Review progress against PCAR requirements.

### iii. Structural reforms — services, competition, retail
- To increase growth in the domestic services sector, government will introduce legislative changes to remove restrictions to trade and competition in sheltered sectors including:
  - The legal profession: establish an independent regulator for the profession and implement the recommendations of the Legal Costs Working Group and outstanding Competition Authority recommendations to reduce legal costs.
  - Medical services: eliminate restrictions on the number of GPs qualifying and remove restrictions on GPs wishing to treat public patients as well as restrictions on advertising.
  - The pharmacy profession: ensure that the recent elimination of the 50% mark-up paid for medicines under the State's Drugs Payments Scheme is enforced.
- To enhance competition in open markets:
  - Introduce reforms to legislation to (1) empower judges to impose fines and other sanctions in competition cases to generate more credible deterrence and (2) require the competition authorities to list restrictions in competition law which exclude certain sectors from its scope and to identify processes to address those exclusions.
- To encourage growth in the retail sector:
  - Government will conduct a study on the economic impact of eliminating the cap on the size of retail premises with a view to enhancing competition and lowering prices for consumers and discuss implementation of its policy implications with the Commission services.

### v. Structural fiscal reforms — public service pensions, fiscal governance, local government
- To put the public service pension system on a more sustainable basis:
  - Pension entitlements for new entrants to the public service will be reformed with effect from 2011. This will include a review of accelerated retirement for certain categories of public servants and an indexation of pensions to consumer prices. Pensions will be based on career average earnings. New public service entrants will also see a 10% pay reduction. New entrants' retirement age will also be linked to the state pension retirement age.
- To ensure a more credible fiscal framework:
  - Assessment of work in progress related to the fiscal governance requirements considered in previous quarters.
- To facilitate better government at a local level:
  - Government will ensure effective measures are in place to cap the contribution of the local government sector to general government borrowing at an acceptable level. Mechanisms will be kept under close review in consultation with the Commission services.
  - The review will consider how to provide data on the financial position including assets and liabilities of the sector on a timelier basis.

*Source: _cr10366 - 1. Actions for the first review (actions to be completed by end Q1-2011)*

### 4. Actions  for  the  fourth  review  (actions  to  be  completed  by  end  Q4-

### 4. Actions for the fourth review (actions to be completed by end Q4-2011)

### Fiscal consolidation
- Government will rigorously implement the budget for 2011 and the fiscal consolidation measures announced afterwards, consistent with the requirements of the excessive deficit procedure.
- Progress is assessed against the (cumulative) quarterly primary deficit ceilings in the Memorandum of Economic and Financial Polices (MEFP) including the Technical Memorandum of Understanding (TMU).
- Government will provide a draft budget for 2012 aiming to further reduce the general government deficit in line with the National Recovery Plan and the programme and including the detailed presentation of consolidation measures amounting to at least €3.6bn.
- Revenue measures to yield €1,500m in a full year will be adopted, including:
  - A lowering of personal income tax bands and credits.
  - A reduction in private pension tax reliefs.
  - A reduction in general tax expenditures.
  - A property tax.
  - A reform of capital gains tax and acquisitions tax.
  - An increase in the carbon tax.
- The budget will provide for a reduction of expenditure in 2012 of €2,100m including:
  - Social expenditure reductions.
  - Reduction of public service numbers and public service pension adjustments.
  - Other programme expenditure, and reductions in capital expenditure.
- Department of Finance will ensure tight supervision of expenditure commitments by line departments and effective tax collection to achieve the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis as set out in the EU Council Recommendation on excessive deficit procedures.

### Financial sector reforms
- Progress in implementing the strategy for the reorganisation of Irish credit institutions will be assessed by the authorities, together with the European Commission, the ECB and the IMF.

### Structural reforms
- Building on the forthcoming report of the Review Group on State Assets & Liabilities, the government will undertake an independent assessment of the electricity and gas sectors. State authorities will consult with the Commission Services on the results of this assessment with a view to setting appropriate targets.
- In advance of the introduction of water charges, the government will have undertaken an independent assessment of transfer of responsibility for water services provision from local authorities to a water utility, and prepare proposals for implementation, as appropriate with a view to start charging in 2012/2013.

### Structural fiscal reforms
- Assessment of work in progress related to the fiscal governance requirements considered in the previous quarters.
- Government will introduce a Fiscal Responsibility Law which will include provision for a medium-term expenditure framework with binding multi-annual ceilings on expenditure in each area by Q4 2011. This will take into account any revised economic governance reforms at EU level and will build on reforms already in place.

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### 5. Actions for the fifth review (actions to be completed by end Q1-2012)

### Fiscal consolidation
- Government will rigorously implement the budget for 2012 and the fiscal consolidation measures announced afterwards, consistent with the requirements of the excessive deficit procedure.
- Progress is assessed against the (cumulative) quarterly primary deficit ceilings in the MEFP including the TMU.
- Finance Bill 2012 will contain necessary provisions to bring into effect the already signalled VAT increases in 2013 and 2014.
- Department of Finance to continue tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis.

### Financial sector reforms
- PCAR for 2012 will be completed. The methodology used will be published in detail. The Government will ensure that the banks adhere to the requisite capital ratios.
- PLAR 2012 will be completed and any related actions will be assessed, together with the European Commission, the ECB and the IMF.
- Progress in implementing the strategy for the reorganisation of Irish credit institutions will be assessed jointly with the European Commission, the ECB and the IMF.
- Legislation to reform the bankruptcy regime to be presented to the Houses of the Oireachtas.

### Structural reforms
- Assessment of work in progress related to the fiscal governance requirements considered in the previous quarters.
- Legislation to reform personal debt regime submitted to the Houses of the Oireachtas.

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### 6. Actions for the sixth review (actions to be completed by end Q2-2012)

### Fiscal consolidation
- Department of Finance to continue tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis.

### Financial sector reforms
- Results of the PCAR for 2012 will be assessed, together with European Commission, the ECB and the IMF. The results will then be published in detail and on a bank-by-bank basis.
- Depending on the results of the PCAR 2012, the Government will ensure that the minimum capital requirement of 10.5% will be maintained.
- Progress in implementation of the strategy for the restructuring of the Irish credit institutions banking system will be assessed by the authorities, together with the European Commission, the ECB and the IMF.

### Structural fiscal reforms
- Assessment of work in progress related to the fiscal governance requirements considered in the previous quarters.

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### 7. Actions for the seventh review (actions to be completed by end Q3-2012)

### Fiscal consolidation
- Department of Finance to continue tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis.

### Financial sector reforms
- Interim review of progress under PLAR 2011 and any related actions will be assessed, together with the European Commission, the ECB and the IMF.
- Progress in implementing the strategy for restructuring of the Irish credit institutions will be assessed jointly with the European Commission, the ECB and the IMF.
- Review progress against PCAR requirements.

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### 8. Actions for the eighth review (actions to be completed by end Q4-2012)

### Fiscal consolidation
- Government will provide a draft budget for 2013 aiming at a further reduction of the general government deficit in line with the 4-year plan and the programme and including the detailed presentation of consolidation measures amounting to at least €3,100m.
- Revenue measures to raise at least €1,100m in the full year will be introduced, including:
  - A lowering of personal income tax bands and credits.
  - A reduction in private pension tax relief.
  - A reduction in general tax expenditures.
  - An increase in property tax.
- The budget will provide for a reduction in expenditure in 2013 of no less than €2,000m, including:
  - Social expenditure reductions.
  - Reduction of public service numbers and public service pension adjustments.
  - Other programme expenditure, and reductions in capital expenditure.
- Department of Finance to continue supervision to ensure primary deficit and ESA95 nominal budget deficit objectives are met.

### Financial sector reforms
- Progress in implementation of the strategy for the reorganisation of Irish credit institutions will be assessed jointly with the European Commission, the ECB and the IMF.
- Implementing of the plan for restructuring and strengthening the balance sheets of the credit union sector will be completed.
- Legislation to reform the bankruptcy regime to be presented to the Houses of the Oireachtas.

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### 9. Actions for the ninth review (actions to be completed by end Q1-2013)

### Fiscal consolidation
- Government will rigorously implement the budget for 2013 and the fiscal consolidation measures announced afterwards, consistent with the requirements of the excessive deficit procedure.
- Progress is assessed against the (cumulative) quarterly primary deficit ceilings in the MEFP including the TMU.
- Department of Finance to continue tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis.

### Financial sector reforms
- PCAR for 2013 will be completed. The methodology used will be published in detail.
- PLAR 2012 will be completed and any related actions will be assessed, together with the European Commission, the ECB and the IMF.
- Progress in implementing the strategy for the reorganisation of Irish credit institutions will be assessed jointly with the European Commission, the ECB and the IMF.

### Structural fiscal reforms
- Assessment of work in progress related to the fiscal reforms considered in the previous quarters.
- The nominal value of the State pension should not rise over the period of the programme.

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### 10. Actions for the tenth review (actions to be completed by end Q2-2013)

### Fiscal consolidation
- Department of Finance to continue tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis.

### Financial sector reforms
- Results of the PCAR for 2013 will be assessed, together the European Commission, the ECB and the IMF. The results will then be published in detail and on a bank-by-bank basis.
- Depending on the results of the PCAR 2013, the Government will ensure that the minimum capital requirement of 10.5% will be maintained.
- The PLAR for 2013 will be completed.
- Progress in implementation of the strategy for the restructuring the banking system will be assessed jointly with the European Commission, the ECB and the IMF.

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### 11. Actions for the eleventh review (actions to be completed by end Q3-2013)

### Fiscal consolidation
- Department of Finance to continue tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis.

### Financial sector reforms
- Interim review of progress under PLAR 2011 and any related actions will be assessed, together with the European Commission, the ECB and the IMF.
- Progress in implementing the strategy for the reorganisation of Irish credit institutions will be assessed jointly with the European Commission, the ECB and the IMF.
- Review progress against PCAR requirements.

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### 12. Actions for the twelfth review (actions to be completed by end Q4-2013)

### Fiscal consolidation
- Department of Finance to continue tight supervision of expenditure commitments and effective tax collection to meet the primary deficit target in cash (see Table 1 of MEFP) and the general government nominal budget deficit on ESA95 basis.

### Financial sector reforms
- Progress in implementing the strategy for the reorganisation of Irish credit institutions will be assessed jointly with the European Commission, the ECB and the IMF.

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### Annex 1. Provision of data (reporting schedules and deliverables)

- To be provided by the Department of Finance:
  - Monthly data on adherence to budget targets (Exchequer statement, details on Exchequer revenues and expenditure with information on Social Insurance Fund to follow as soon as practicable). Frequency: Monthly, 10 days after the end of each month.
  - Updated monthly report on the central government's budget execution and prospects for the remainder of the year. Frequency: Monthly, 30 days after the end of each month.
  - Quarterly data on main revenue and expenditure items of local government. Frequency: Quarterly, 90 days after the end of each quarter.
  - Updated annual plans for the general government balance showing transition from the Exchequer balance to the general government balance (using presentation in Table 1 and Table 2A of the EDP notification). Frequency: Monthly, 30 days after the end of each month.
  - Quarterly data on the public service wage bill, number of employees and average wage (using presentation of the Pay and Pension Bill with further details on pay and pension costs of local authorities). Frequency: Quarterly, 30 days after the end of each quarter.
  - Information on the main Government spending and receipt items. Frequency: Weekly on Friday, reporting on the previous Thursday.
  - Quarterly data on general government accounts, and general government debt as per the relevant EU regulations on statistics. Frequency: Quarterly accrual data, 90 days after the end of each quarter.
  - Updated annual plans of the general government balance and its breakdown into revenue and expenditure components for the current year and the following four years, using presentation in the stability programme's standard table on general government budgetary prospects. Timing: Together with EDP notification.

- To be provided by the NTMA:
  - Weekly information on the Government's cash position with indication of sources as well of number of days covered. Frequency: Weekly on Friday, reporting on the previous Thursday.
  - Data on below-the-line financing for the general government. Frequency: Monthly, no later than 15 days after the end of each month.
  - Data on public debt, new guarantees and other instruments issued by the general government to public enterprises, banks and the private sector. Frequency: Monthly, 30 days after the end of each month.
  - Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months for the general government (interest and amortisation) and for central government and local authorities. Frequency: Monthly, 30 days after the end of each month.
  - Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months for State-guaranteed enterprises (interest and amortisation) (or Dept of Finance). Frequency: Quarterly, 30 days after the end of each quarter.
  - Updated estimates of financial sources (bonds issuance, other financing sources) for the banking and government sectors in the next 12 months. Frequency: Monthly, 30 days after the end of each month.

- To be provided by the Central Bank:
  - Assets and liabilities of the Central Bank. Frequency: Weekly, next working day.
  - Assets and liabilities of the Irish banking system - aggregate monetary balance sheet of credit institutions. Frequency: Monthly, 30 days after the end of each month.
  - Short-, medium- and long-term debt falling due (by type of instrument) over the next 36 months for domestic banks of systemic importance (interest and amortisation). Frequency: Monthly, 30 days after the end of each month.
  - Weekly individual operational balance sheets of commercial banks (of systemic importance), including detailed information on deposits (by maturity and type of depositor) and loans provided to the public and the private sector (households and corporates). Frequency: Weekly, next working day.
  - Public debt and new guarantees issued by the general government to banks. Frequency: Monthly, 30 days after the end of each month.
  - Financial stability indicators (IMF core set: deposits, non-performing loans, capital adequacy ratios) for systemic domestic banks. Frequency: Monthly, 30 days after the end of each month.
  - Estimates of domestic banks' capital needs in the next 12 months. Frequency: Monthly, 30 days after the end of each month.
  - Estimates of funding sources for the banking sector for the next 12 months. Frequency: Monthly, 30 days after the end of each month.

*INTERNATIONAL MONETARY FUND — Ireland—Assessment of the Risks to the Fund and the Fund’s Liquidity Position; Prepared by the Finance and Strategy, Policy, and Review Departments (In consultation with other Departments); Approved by Andrew Tweedie and Martin Mühleisen; December 8, 2010*

### 1.      This note assesses the risks to the Fund arising from the proposed arrangement

### This note assesses the risks to the Fund arising from the proposed arrangement

### Background
- Authorities request a three-year extended arrangement with access of SDR 19.5 billion (2,322 percent of quota or 564 percent of proposed 14th General Review quota).
- Arrangement design and phasing:
  - Frontloaded purchase schedule with a first purchase of SDR 5 billion (598 percent of quota) upon approval, followed by twelve purchases as shown in the source table.
  - Access during the first year would reach almost 1,500 percent of quota.
  - Last purchase under the arrangement would be available in November 2013.
- Ireland macro-debt context:
  - Total external debt projected at over 1000 percent of GDP at end-2010 (staff projection).
  - Excluding an estimate of the bank component of IFSC debt leaves total external debt at almost 800 percent of GDP, with banks’ external liabilities accounting for about half.
  - Private short-term external debt at end-2010 projected at approximately 370 percent of GDP, of which about a fifth consists of banks’ repos with the ECB.
  - Total general government debt projected at around 100 percent of GDP at end-2010 (up from 25 percent in 2007).
  - External public sector debt projected at 125 percent of GDP in 2010 (up from about 16 percent in 2007).

### The Extended Arrangement — Risks and Impact on Fund’s Finances
- Scale and duration of access:
  - If all purchases made as scheduled, Ireland’s outstanding use of GRA resources would rise from almost 600 percent of quota (145 percent of proposed 14th General Review quota) upon approval to about 1,500 percent of quota (about 360 percent of proposed 14th General Review quota) during the first year, peaking at just over 2,300 percent of quota (just over 560 percent of proposed 14th General Review quota) in November 2013.
  - In SDR terms, projected peak GRA exposure of SDR 19.5 billion would be second highest among recent exceptional access cases.
  - GRA credit outstanding to Ireland would peak at over 13 percent of GDP and over 10 percent of total external public debt by 2013.
- Debt service impact to the Fund:
  - Ireland’s projected debt service to the Fund would peak at over SDR 3.7 billion in 2018 (Table 3).
  - Peak debt service equivalent to about 2.1 percent of GDP and about 5.6 percent of general government revenues.
  - Debt service to the Fund would peak at a modest 1.9 percent of exports of goods and services, but in the context of a total external debt service burden approaching 80 percent of exports at its peak.
- Comparative standing:
  - In terms of quota, the projected peak exposure would be among the highest in Fund history and exposure could remain at a high level notably longer than in other exceptional access cases given the EFF repurchase schedule.

### Capacity-to-Repay and Key Financial Indicators (selected figures from staff projections and tables)
- Access and phasing (summary):
  - Total from arrangement table: SDR 19,465.8 (cumulative 2,321.8 percent of quota).
  - First purchase at approval: SDR 5,012.4 (597.9 percent of quota) [source table figures].
- GRA credit to Ireland (selected years, in SDR millions and percent of quota):
  - 2010: 5,012 (598 percent of quota)
  - 2011: 12,369 (1,475 percent of quota)
  - 2012: 18,038 (2,151 percent of quota)
  - 2013: 19,466 (2,322 percent of quota)
  - 2018: 3,227 (385 percent of quota)
- Debt service and charges (selected figures, SDR millions and ratios):
  - Charges due on GRA credit (includes basic rate, surcharges, service fees): 2010: 25; 2011: 21; 2012: 44; 2018: 76; 2021: 4; 2022: 12 (per Table 3).
  - Debt service due on GRA credit (includes charges and principal payments): 2010: 25; 2011: 21; 2012: 44; 2016: 3,005; 2017: 3,662; 2018: 3,704; 2019: 3,562.
  - Debt service due on GRA credit as percent of GDP: peaks around 2.1 percent (2018).
  - Debt service due on GRA credit as percent of general government revenues: peaks at about 5.6 percent (2018).
- Broader debt indicators (selected projected values):
  - Total external debt (in percent of GDP): 2010: 1,085; 2011: 1,096; 2012: 1,087; 2013: 1,059; declines thereafter in projections.
  - External debt, public (percent of GDP): 2010: 125; 2011: 139; 2012: 149; 2013: 154; 2014: 153; 2018: 121; 2022: 79.
  - Total external debt service (percent of exports of goods and services): 2010: 80; 2011: 78; 2012: 77; 2013: 67; declines to 22 by 2022 (Table 3 series).

### Impact on the Fund’s Liquidity Position and Risk Exposure
- Liquidity (one-year Forward Commitment Capacity, FCC):
  - Current FCC: 151,334 (millions of SDR).
  - Impact on FCC on approval: 19,983 (reduction).
  - Commitments under the proposed arrangement would reduce FCC by over 13 percent.
  - This level of liquidity remains comfortable by historical standards but could change quickly given potential other large requests.
- Prudential and concentration measures:
  - Fund GRA commitment to Ireland in percent of current precautionary balances: 266.
  - Fund GRA credit outstanding to Ireland in percent of total GRA credit outstanding (as of first purchase): 37 (after first purchase Ireland would represent almost 9 percent of total GRA Fund credit).
  - Fund GRA credit outstanding to top five borrowers in percent of total GRA credit outstanding: 72 (before Ireland’s purchase); including first Irish purchase: 65.
- Precautionary balances and burden-sharing implications:
  - Fund's precautionary balances (FY 2010): 7,320 (millions of SDR).
  - Fund's Residual Burden Sharing Capacity: 34.7 (millions of SDR).
  - After the first purchase, Fund credit to Ireland would be over 68 percent of the Fund’s current precautionary balances, and the total access would be over 2½ times the current level of precautionary balances.
  - Ireland annual GRA charges in percent of the Fund's residual burden sharing capacity for 2011: 367.8 (i.e., charges accruing to Ireland’s GRA obligations would far exceed the Fund’s burden sharing capacity were they to fall into arrears).

### Key risk observations from staff analysis
- The proposed arrangement would produce one of the highest and more prolonged levels of Fund exposure in quota terms among recent exceptional access cases.
- Debt service to the Fund would be moderate in standard indicators but occurs in the context of a very heavy overall external debt service burden for Ireland.
- The arrangement would substantially reduce Fund liquidity measures (FCC) and concentrate credit risk, increasing Ireland’s share among top users of Fund resources.
- Potential GRA exposure to Ireland would be a multiple of current precautionary balances and would exceed the Fund’s residual burden-sharing capacity by a large margin in early years if fully drawn.

*Source: _cr10366 - 1.      This note assesses the risks to the Fund arising from the proposed arrangement*

### 8.      The proposed extended arrangement for Ireland intends to support the

### _cr10366 - 8.      The proposed extended arrangement for Ireland intends to support the

### Program objectives and intent
- Support the authorities’ economic program during a period of substantial adjustment and reduce the risk of international systemic spillovers.
- Address deep-rooted structural problems with a view to restoring confidence in the Irish economy’s future.
- Pursue a fundamental restructuring of the banking sector while preserving the fiscal consolidation objective to lower the deficit and debt over the medium term.
- Restore market confidence and stem potentially pernicious systemic spillovers.

### Key risks to the program and Fund exposure
- Achieving a gradual recovery of the economy is central; negative shocks to households’ and businesses’ repayment capacity—e.g., from lower-than-expected growth—could:
  - Further deteriorate banks’ balance sheets despite restructuring efforts.
  - Put additional pressure on public sector debt and add fiscal costs while tax revenue performance weakens.
- Political commitment and public support are required to adhere to fiscal targets and complete financial-sector restructuring.
- Ultimate need for bank recapitalization will not be known until early next year.
- Market confidence may return more gradually than envisaged if concerns about debt dynamics in Ireland and other Eurozone members intensify.
- The proposed access entails substantial risks to the Fund:
  - The Fund would be highly exposed to Ireland in terms of both the stock of outstanding credit and the projected debt service, for an extended period and in a context of high overall debt and debt service burdens.
  - Associated risks increase if any downside scenarios materialize.
- Mitigating factors cited:
  - Exceptional circumstances warrant strong international support given the high risk of international systemic spillovers.
  - Financial terms of Fund assistance, the authorities’ commitment to their comprehensive adjustment program, strong European partner support, and the Fund’s preferred creditor status serve to mitigate financial risks.

### Recent fiscal and budget developments (as of December 2010)
- The 2011 Budget was presented to Parliament on December 7 and budget-related financial resolutions were passed the same day, meeting the prior action.
- The 2011 Budget is broadly in line with the authorities’ four-year National Recovery Plan (NRP) and consistent with the Fund-supported program.
- Expenditure measures:
  - The expenditure package specifies welfare cuts underpinning the €0.9 billion savings for 2011 indicated in the NRP.
  - Reductions principally apply to universal and hence non-progressive benefit schemes, and benefits to working-age individuals and families.
- Revenue measures and tax changes:
  - A 10 percent reduction in personal income tax bands and credits.
  - Abolition of the income ceiling up to which the Pay Related Social Insurance (PRSI) is payable.
  - An increase in the PRSI contribution rate for the self-employed.
  - A merger of the income and health levies into a graduated universal social charge.
- Property market measure:
  - Sharp reduction in the stamp duty rate to 1 percent, while removing various exemptions, intended to resuscitate the property market.

### Financing package and IMF arrangement
- IMF Executive Board approved a three-year Extended Fund Facility (EFF) arrangement for Ireland.
- The Fund arrangement amounts to SDR 19.5 billion (about €22.5 billion; or US$30.1 billion), or the equivalent of about 2,322 percent of Ireland’s IMF quota.
- The EFF approval was under the Fund's exceptional access policy and fast-track Emergency Financing Mechanism procedures.
- Immediately available disbursement:
  - SDR 5 billion (about €5.8 billion) is immediately available to Ireland from the IMF.
- Total financing package:
  - €85 billion (about US$113 billion) from European partners through the EFSM and EFSF, bilateral loans from the UK, Sweden and Denmark, and Ireland’s own contributions.
  - EFSM, EFSF and bilateral European lenders will provide €45 billion on similar maturities as the IMF’s EFF.
  - Irish authorities’ contribution: €17.5 billion from the nation’s cash reserves and liquid assets.
  - European Central Bank liquidity support is an essential component.

### Banking sector strategy and structural measures
- Strategy rests on twin pillars: deleveraging and reorganization; and ample capitalization.
- Specific banking measures and institutional reforms:
  - Fundamental restructuring of the banking sector entailing extensive deleveraging and reorganization.
  - Banks to maintain higher capital adequacy standards to minimize market perceptions of weakness and improve access to funding.
  - National Asset Management Agency taking over banks’ land and property development assets.
  - Substantial capital injections and sovereign guarantees aimed to reassure banks’ creditors.
  - Introduction of a special resolution scheme for deposit-taking institutions.
  - Further strengthening of the supervisory system.
- A substantially restructured, smaller, more robust, and better-capitalized banking system is expected to emerge over time.

### Program summary and policy pillars
- Priority areas:
  - Fundamental restructuring of the banking sector.
  - National Recovery Plan as the basis for 2011 and subsequent budgets to balance consolidation, growth protection, and social safety nets.
  - Address structural impediments to the business environment to underpin competitiveness and growth.
- Multifaceted approach to achieve objectives:
  - Downsize banking sector while addressing market perceptions of weak bank capital positions.
  - Safeguard fiscal consolidation plan to lower deficit and debt over the medium term.
  - Institutional reform: special resolution regime for banks, stronger supervision, and greater budgetary oversight.
  - Further reforms to improve economy’s efficiency and growth potential.
  - Large external financial assistance to manage the transition and reestablish policy credibility.
- Expected outcome:
  - Stability, improved competitiveness, and increased credit flows would underpin a return of confidence, leading to brighter employment and growth prospects.

### Background and contextual statistics
- Public debt projected to end up close to 100 percent of GDP by end-2010.
- Fiscal consolidation plan includes another €15 billion in consolidation measures over 2011–14, equivalent to 9 percent of GDP.
- Ireland became a member of the IMF on August 8, 1957, and has an IMF quota of SDR 838.40 million.

*IMF Executive Board Meeting, December 10, 2010; Press Release No. 10/496, December 16, 2010*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10366.pdf_