## _cr11109 ## Source details **Canonical URL:** [_cr11109](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11109.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11109.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11109.pdf.json) --- ### Executive Summary — background, mission, and program performance - A three-year EFF arrangement with access of SDR 19.5 billion was approved on December 16, 2010. - New coalition government took office on March 9 following elections on February 25. - Authorities requested to combine the first and second program reviews and requested a rephasing of the arrangement. - IMF team during April 5–15, 2011: A. Chopra (head), C. Beaumont, J. Mathisen, B. Barkbu, S. Abbas, D. Hawley, O. Stankova, B. Kelmanson, M. Luedersen, L. Cortavarria, P. Bologna. EC and ECB teams participated; P. McGoldrick (OED) attended. - Policy implementation summary: - All relevant performance criteria for the first and second reviews observed. - All seven structural benchmarks implemented except the advance recapitalization of the banks scheduled for end-February. - End-December and end-March quantitative performance criteria for the primary cash balance met; continuous performance criterion on external debt arrears met; indicative targets for net central government debt met. - End-March banking reform and recapitalization announcements were well received by markets. ### Recent macro-financial developments (selected) - Real GDP: fell by 1 percent in 2010; Q4 2010 fell by 1.6 percent. - Unemployment: revised end-2010 14.8 percent; 14.7 percent in March. - HICP inflation: annual rose to 1.2 percent in March, up from -1.6 percent on average in 2010. - Eurosystem liquidity support: reliance rose to about €145 billion at end-March 2011, including ELA provided by the CBI. - Domestic market access: government has not been able to reenter short-term bill markets; domestic banks unable to source term funding even with a government guarantee. - Foreign exposure to domestic banks declined greatly; nonresidents’ claims on six government guaranteed banks about €75 billion; foreign holdings of domestic bank debt securities fell to €23 billion at end-February from €42 billion in mid-2010. ### Banking reform, recapitalization and deleveraging - Recapitalization: - PCAR 2011 identified capitalization needs of €24 billion for the four domestic banks. - Liability management exercises on subordinated debt assumed to be about €5 billion to mitigate net fiscal cost. - Together with €46.3 billion previously injected, use of public resources for recapitalization about 42 percent of GDP. - Capital assessment (2013 stress scenario) key figures: - Buffers as of December 2010: 23.2 (CT1 13.3; Stock of loan loss provisions 9.9). - Estimated net bank losses through 2013: (37.0) (Operating profit before loan losses and deleverage cost 3.9; 3 year stress loss projections 27.7; Loss on deleveraging under stress scenario 13.2). - Capital shortfall to meet 6 percent under stress scenario: 18.7 (CT1 required 8.4; Estimated equity position before capital injection (10.3)). - Buffers after estimated bank losses through 2013 (A-B): (13.8). - Capital increases within Q1 2011: 3.5. - CBI capital requirements: 24.0 (Additional capital buffer for potential losses after 2013 5.3; Cash capital 2.3; Contingent capital 3.0). - Capitalization will allow banks to meet 10.5 percent and 6 percent CT1 ratios in base and stress scenarios; once recapitalisation completed, four domestic banks’ CT1 ratios will be above 15 percent. - Deleveraging: - Target loan-to-deposit ratio (LDR) of 122.5 percent by end-December 2013 through disposal and run-off of non-core assets. - Specific non-core assets identified totaling €73 billion. - Virtual split of banks’ balance sheets into core and non-core divisions; non-core assets to be managed under a Deleveraging Committee. - System-wide implications if LDR target met and deposits unchanged: - Total bank assets to GDP decline to 221 percent. - Loans to GDP decline to 122 percent. - PCAR allowed for up to €13 billion in losses from deleveraging under stress conditions. - Restructuring and resolution: - Anglo and INBS to be merged into a single Government-owned bank focused on legacy commercial property and other loans; Anglo/INBS assets expected to decline by €17 billion with loans falling by €7 billion during 2011–2013. - Authorities reorganizing domestic banks around two pillar banks centered on AIB and BoI; EBS to be merged into AIB; ILP plans to be finalized by end-July, 2011. - Time-bound plans and strict performance targets for managers of non-viable banks. - Liability management and sequencing: - Expected contribution via LMEs on subordinated bank debt assumed about €5 billion. - Court order issued April 14 to facilitate an LME for AIB; similar orders to be sought for other banks. - Recapitalization process for four banks expected to conclude by end-July (subject to legal challenges and adjustments for asset sales in ILP). ### Capital needs, fiscal reporting and contingent liabilities - PCAR analysis identified €24 billion additional bank capital needs; program had set aside €35 billion. - Direct bank recapitalization costs amounted to €46.3 billion (30 percent of GDP) over 2009–10: - NPRF investments: €10.7 billion. - Cash provided: €4.7 billion. - Promissory notes issued: €30.9 billion. - Fiscal accounting treatment: - NPRF-financed injections: investments (financing operations). - Cash and promissory-note financed injections: unrequited interventions recorded as expenditure, increasing gross and net debt. - Outstanding government guarantee: €113 billion (73½ percent of GDP) at end-December 2010. - NAMA bonds issued: €30.2 billion as of end-December 2010; €28.7 billion government guaranteed (18.6 percent GDP). - Independent validation: advisor validating methodologies for Anglo and doing loan-loss forecasting for INBS; authorities will consult EC, ECB, IMF if additional capital required. ### Market reaction and sovereign ratings - After end-March banking announcement, 10-year bond spreads declined by up to 120 basis points in following weeks but later rose to new highs as broader euro-area developments unfolded. - Rating chronology highlights: - AAA lost in 2009; Moody’s cut rating to Baa1 on December 17; S&P cut to A- in February 2011. - Post end-March announcements S&P downgraded to BBB+; Fitch affirmed BBB+ (negative outlook); mid-April Moody’s cut to Baa3. - Market concerns manifested in hump-shaped spread curves with peaks at 2- and 3-year maturities. ### Macroeconomic framework and projections (selected) - Short-term: - Real GDP fell by 1 percent in 2010; domestic demand fell by 5½ percent; exports rose by more than 9 percent. - Domestic demand expected to decline by 3½ percent in 2011. - Export growth projected about 6 percent in 2011. - GDP growth projected at 0.6 percent in 2011 (down from 0.9 percent at program approval). - HICP inflation projected at 1 percent in 2011 and ½ percent in 2012. - Medium-term: - Growth projected to average 2¼ percent over 2012–13, subject to downside risks. - High unemployment expected to remain elevated; share of long-term unemployed just over half, especially younger men formerly in construction. - External sector: - Current account deficit narrowed by 5 percentage points of GDP during 2008–10 to a deficit of 0.7 percent of GDP. - Small surplus of ½ percent of GDP expected in 2011. - Unit labor costs: fallen by 8 percent since peak in 2007, and by 11 percent relative to the euro area average over that time. ### Debt outlook and debt sustainability (selected) - Public debt projections: - Debt projected to peak at 120 percent of GDP in 2013, then decline gradually. - Debt path below initial program by about 5 percentage points of GDP, primarily because recapitalization cost (net of LMEs) now assumed about €19 billion vs. contingency €35 billion. - Debt would reach about 117 percent of GDP by 2016 under planned fiscal consolidation. - Debt sensitivity scenarios (verbatim outcomes): - Permanent one-third standard deviation negative growth shock: debt increases to 136 percent of GDP by 2016 (average growth reduced from 2¾ to 1½ percent over 2011–16). - Interest-rate scenario (assuming ½ percentage point higher average interest rate): debt peaks at 121 percent of GDP in 2013, then declines slowly to 120 percent by 2016. - No fiscal consolidation (constant primary balance): debt would reach 151 percent of GDP by 2016 and be on an upward path. - External debt: - Ireland’s gross non-resident liabilities: 1,040 percent of GDP (end-2010). - Excluding IFSC, external liabilities about 340 percent of GDP (end-2010). - IIP: net liability of some 97 percent of GDP (end-2010). - Public gross external debt of the CBI (liabilities to the ESCB): €145 billion as of end-December 2010. - Gross external debt baseline: peaked at end-2010 some 1,040 percent of GDP, projected to decline to 807 percent of GDP by end-2016. - External debt sensitivity: - Permanent growth shock: external debt ratio reaches 915 percent of GDP by 2016. - Real exchange rate depreciation of 30 percent in 2010: external debt reaches 1,050 percent of GDP by 2012 and declines to 895 percent by 2016. ### Program monitoring, conditionality, and financing - Monitoring framework: - Quarterly and continuous performance criteria, an indicative target, structural benchmarks and quarterly reviews. - Proposed review dates: third review on/after August 15, 2011; fourth review on/after December 14, 2011. - New structural benchmarks include financial sector benchmarks on recapitalization schedule, strengthening legal framework for banking supervision, and restructuring the domestic banking system. - Key quantitative targets and observed outcomes (selected exact figures): - Cumulative exchequer primary balance observed sequence: -15.8; -14.7; -7.9; -6.3; -10.9; -14.2; -15.0; -6.0. - Ceiling on accumulation of new external payments arrears: 0, 0, 0, 0, 0, 0, 0, 0. - Ceiling on stock of central government net debt observed/targets sequence (in billions of Euros): 83.6; 81.7; 92.1; 88.5; 94.6; 98.2; 101.1; 107.9. - Central government net debt provisional stock: End-March 2011: 88.5. - Financing and disbursements: - Fund and EU disbursed €17.8 billion (11.4 percent of GDP) since arrangement approval. - Fund disbursement: SDR 5 billion (€5.8 billion) on January 18. - EFSM disbursements: €5 billion (January) at 5-year maturity cost 5.5 percent; €3.4 billion (March) at 7-year maturity cost 6.2 percent. - EFSF disbursement: €3.6 billion at 5.9 percent following a €5 billion benchmark. - Bilateral financing: agreement with the United Kingdom; finalising discussions with Denmark and Sweden. - Proposed phasing reduces total EU/IMF disbursements through end-2011 by some €4.5 billion, offset by higher access later; total access unchanged. - IMF schedule and credit indicators (selected): - Board approval December 16, 2010 — SDRs 5,012,425,200. - First and Second Reviews (May 16, 2011) — SDRs 1,410,000,000. - Third Review (August 15, 2011) — SDRs 1,319,000,000. - Total arrangement: SDRs 19,465,800,000. ### Program risks, staff appraisal and policy recommendations - Key risks increasing program vulnerability: - Slower growth and higher unemployment. - Further ratings downgrades. - Developments in other Euro Area crisis countries raising bond spreads and hindering market access. - Some risks diminished: - Immediate liquidity pressures on domestic banks eased; political ownership strengthened by new government. - Staff appraisal highlights: - Program implementation off to a strong start; banking reform and recapitalization announced on March 31 are major steps. - Integrated approach to restructure, deleverage and strengthen capital base is crucial. - Need for rigorous implementation management, balancing deleveraging, loss containment and restoring market-based funding access. - Fiscal consolidation remains on track; institutional reforms (Fiscal Advisory Council, expenditure review, Fiscal Responsibility Bill) strengthen credibility. - Policy recommendations (verbatim emphasis): - Timely implementation of the banking strategy is critical: recapitalization; reorganizing and deleveraging the viable banks; resolving the non-viable banks. - Restore the banking sector to healthy functionality so it can contribute to renewed growth. - Banking effort must be underpinned by fiscal consolidation and structural reforms to overcome doubts about feasibility of fiscal adjustment and medium-term growth prospects. - Program risks must be actively managed with support from a more comprehensive European plan. - Steadfast implementation of policies agreed under the program, coupled with support from a comprehensive European plan, is critical to regaining market access at affordable interest rates. ### Selected program actions and timelines (prior actions and structural benchmarks) - Financial sector: - Finalize plans for recapitalization of ILP — End-May 2011 (structural benchmark). - Complete recapitalization of AIB, BoI, ILP and EBS — End-July 2011 (structural benchmark). - Submit Supervision and Enforcement Bill to Oireachtas — End-July 2011 (structural benchmark). - Complete legal merger procedures of EBS and AIB — End-September 2011 (structural benchmark). - Merge INBS and Anglo-Irish Bank — End-December 2011 (structural benchmark). - Fiscal: - Ensure strict budget neutrality of the Jobs Initiative in 2011 and over the period to 2014 by specifying fully costed offsetting measures — Prior action. - Establish Fiscal Advisory Council — End-June 2011 (structural benchmark). - Introduce medium-term expenditure framework with binding multi-annual ceilings — End-December 2011 (structural benchmark). - Deleveraging monitoring: - Semi-annual interim targets for liquidity indicators; six-month deleveraging plans and quarterly progress updates. - AIB and BoI to provide contingency plans to meet deleverage targets by end-May 2011. - Crisis preparedness: - Special resolution regime legislation progressed (Central Bank and Credit Institutions (Resolution) Bill) with amendments planned to enhance toolset; prepare resolution fund funded by banks and backed by public resources. ### Jobs Initiative and fiscal offsets (selected budgetary figures) - Jobs Initiative budgetary cost (Table summary, in millions of Euro and percent of GDP): - Total budgetary cost by year: - 2011: 270 (0.2 percent of GDP) - 2012: 678 (0.4 percent of GDP) - 2013: 686 (0.4 percent of GDP) - 2014: 228 (0.1 percent of GDP) - Total: 1,861 (1.1 percent of GDP) - Pension levy (0.6 percent on €78 billion) yields: - 2011: 468 (0.3 percent of GDP) - 2012: 468 (0.3 percent of GDP) - 2013: 468 (0.3 percent of GDP) - 2014: 468 (0.3 percent of GDP) - Total: 1,872 (1.1 percent of GDP) - Staff view: Jobs Initiative meets prior action on budget neutrality for first and second reviews; pension levy expected to cover initiative cost through 2014. ### Monitoring, data provision and reporting requirements (selected) - Department of Finance to report Exchequer balance to IMF staff with lag no more than seven days after test date. - NTMA to provide provisional net government debt stock within seven days after test date and revised figures within three months. - Central Bank reporting: weekly Central Bank balance sheet next working day; monthly consolidated balance sheet and other financial stability indicators within specified lags. - Detailed list of regular data (F.1–F.11, N.1–N.5, C.1–C.9) with specified frequencies and lags provided in Annex 1. *Source: IMF staff executive summary and staff report (cr11109).* ### Executive Summary ### Executive Summary ### Background and Mission - A three-year EFF arrangement with access of SDR 19.5 billion was approved on December 16, 2010. - Following elections on February 25, a new coalition government with a comfortable majority took office on March 9. - Authorities requested to combine the first and second program reviews and requested a rephasing of the arrangement due to smaller immediate external financing needs. - Discussions were held in Dublin during April 5–15, 2011. - The IMF team comprised A. Chopra (head), C. Beaumont, J. Mathisen, and B. Barkbu (all EUR), S. Abbas (FAD), D. Hawley and O. Stankova (EXR), B. Kelmanson (SPR), M. Luedersen (LEG), L. Cortavarria, and P. Bologna (MCM). - Teams from the EC and ECB participated. P. McGoldrick (OED) attended the meetings. ### Performance under the program - Policy implementation is off to a strong start. - All relevant performance criteria for the first and second reviews, and all but one of the structural benchmarks were observed. - At end March the authorities announced comprehensive banking reform and recapitalization plans which were well received by financial markets and analysts. - The end December and March quantitative performance criteria for the primary cash balance as well as the continuous performance criterion on external debt arrears were met, as were the indicative targets for net central government debt. - All seven structural benchmarks were implemented, except the advance recapitalization of the banks scheduled for end-February. ### Recent macro-financial developments - Real GDP fell by 1 percent in 2010; Q4 2010 fell by 1.6 percent. - Revised data show unemployment at end-2010 of 14.8 percent, which remained at 14.7 percent in March. - Annual HICP inflation rose to 1.2 percent in March, up from -1.6 percent on average in 2010. - Deposit outflows from domestic covered banks slowed markedly from late 2010, with a modest increase briefly in the run-up to the elections. - Reliance on Eurosystem liquidity support rose to about €145 billion at end-March 2011, including Emergency Liquidity Assistance (ELA) provided by the CBI. - The government has not been able to reenter the short-term bill markets at this stage; domestic banks have been unable to source term funding even with a government guarantee. - New data indicate foreign exposure to the domestic banks has declined greatly. ### Banking reform and recapitalization announcements (end-March) - The authorities announced on March 31 a comprehensive reform and recapitalization of the domestic banks with three main elements: - Recapitalization: - The 2011 Prudential Capital Assessment Review (PCAR) identified capitalization needs of €24 billion for the four domestic banks. - The net fiscal cost is to be mitigated by liability management exercises on subordinated debt assumed to be about €5 billion. - Together with the €46.3 billion previously injected, this brings the use of public resources for recapitalization to about 42 percent of GDP. - Deleveraging: - The Prudential Liquidity Assessment Review (PLAR) established targets including a loan-to-deposit ratio of 122.5 percent by end 2013. - The CBI completed assessment of banks’ restructuring plans to meet those targets. - Plans include run-off and disposal of non-core assets; potential losses from this process are integrated into the PCAR assessment. - Restructuring: - Reorganization of the domestic banks around two “pillar” banks with sound business models focused on serving the Irish economy’s needs. - Box 1 findings on foreign exposure: - Nonresidents’ claims on the six government guaranteed banks are now about €75 billion. - Foreign holdings of debt securities issued by the domestic banking system fell to €23 billion at end-February from €42 billion in mid-2010. - Box 2 summary of capital assessment (2013 stress scenario calculation): - Buffers as of December 2010: 23.2 (Core Tier 1 (CT1) capital 13.3; Stock of loan loss provisions 9.9). - Estimated net bank losses through 2013: (37.0) (Operating profit before loan losses and deleverage cost 3.9; 3 year stress loss projections from BlackRock Systems (27.7); Loss on deleveraging under stress scenario (13.2)). - Capital shortfall to meet 6 percent under stress scenario: 18.7 (CT1 capital required for 6 percent CT1 ratio under stress scenario 8.4; - Estimated equity position before capital injection (10.3)). - Buffers after estimated bank losses through 2013 (A-B): (13.8). - Capital increases within Q1 2011: 3.5. - CBI capital requirements: 24.0 (Capital shortfall to meet 6 percent CT1 ratio under stress (as per C) 18.7; Additional capital buffer for potential losses after 2013 5.3; Cash capital 2.3; Contingent capital 3.0). - Stringent capital assessments show that €24 billion is needed to ensure the four banks have a strong capital base even in adverse circumstances. - The capitalization will allow the banks to meet 10.5 percent and 6 percent Core Tier 1 capital ratios in base and stress scenarios, respectively. - Once recapitalization is completed, the four domestic banks’ Core Tier 1 capital ratios will be above 15 percent. - The analysis includes a significant capital buffer (€5.3 billion) for potential loan losses after 2013. - Box 3 context on deleveraging: - Irish domestic banks’ total assets and loans to GDP peaked at end-2009 at 348 percent and 194 percent, respectively; loan-to-deposit ratio (LDR) reached 138 percent. - By end-2010 assets and loans declined to 297 percent and 183 percent of GDP, respectively; LDR had increased to 168 percent by end-December 2010 due to deposit outflows. - The four fully operating institutions (AIB, BOI, EBS and ILP) have been directed to reduce their current LDRs by one third and have presented plans to meet LDR targets. ### Program discussions - Discussions focused on: - The schedule and sources of funding for recapitalizing the four guaranteed banks. - Timetables and steps for reorganizing domestic banks and the framework for deleveraging during 2011–13. - Ensuring any adjustments in fiscal plans include compensating measures so program targets for 2011 and beyond remain achievable while allowing automatic stabilizers to operate. ### Program risks - Risks to the program, already high at program approval, have increased in some respects and declined in others. - Contributing adverse factors: - Slower growth and higher unemployment. - Further ratings downgrades. - Developments in other Euro Area crisis countries. - These factors have contributed to a rise in bond spreads that hinders Ireland’s prospects to regain market access on affordable terms in the near future. - Bond spreads declined after the end-March banking announcements but subsequently rose to new highs; Ireland’s sovereign and bank ratings have been further downgraded. - Recent growth and unemployment developments have been worse than anticipated. ### Policy recommendations - Program risks must be actively managed with support from a more comprehensive European plan. - Timely implementation of the banking strategy is critical, including: - Recapitalization. - Reorganizing and deleveraging the viable banks. - Resolving the non-viable banks. - Restoring the banking sector to healthy functionality is necessary so it can begin to contribute to renewed growth. - This intensive banking effort must be underpinned by fiscal consolidation and structural reforms to overcome doubts regarding: - The feasibility of the necessary fiscal adjustment. - Growth prospects in the medium term. - Steadfast implementation of policies agreed under the program, coupled with support from a comprehensive European plan, is critical to regaining market access at affordable interest rates. *Source: IMF staff executive summary (cr11109).* ### 122.5 percent by 2013 through the disposal and run-off of non-core assets; specific assets are identified ### _cr11109 - 122.5 percent by 2013 through the disposal and run-off of non-core assets; specific assets are identified ### Asset deleveraging and virtual split - Target loan-to-deposit ratio (LDR) of 122.5 percent by end-December 2013 through disposal and run-off of non-core assets. - Specific non-core assets identified totaling €73 billion, mainly comprised by loans held by subsidiaries in UK and the rest of the world. - Four banks to virtually split their balance sheet into core and non-core divisions to facilitate implementation and monitoring: - Virtual split chosen to manage legal risk, capital implications and funding challenges. - Non-core assets segregated by the banks on the basis of CBI guidelines and to be managed under a Deleveraging Committee. - Expected system-wide implications if LDR target met and deposits broadly unchanged: - Total bank assets to GDP decline to 221 percent. - Loans to GDP decline to 122 percent. - These represent about 70 percent and 55 percent of these ratios at the outset of the crisis, respectively. - Note: estimates do not include the effect on asset decline arising from likely further increases in loan loss provisioning. ### Resolution of non-viable banks and restructuring plans - Anglo and INBS to be merged into a single Government-owned bank focused on working out legacy commercial property and other loans within ten years. - During 2011 to 2013 Anglo/INBS assets are expected to decline by €17 billion with loans falling by €7 billion. - Authorities decided to restructure domestic banks around two pillar banks centered on Allied Irish Banks (AIB) and Bank of Ireland (BoI). - EBS Building Society to be merged into AIB, initially as a subsidiary. - Plans for the future of the banking operations of Irish Life and Permanent Group (ILP) to be finalized by end-July, 2011. - Time-bound plans developed to resolve Anglo-Irish Bank (Anglo) and the Irish Nationwide Building Society (INBS) with managers subject to strict performance targets. - PCAR/PLAR completion seen as critical milestone providing analytical foundation for decisions on restructuring, deleveraging, recapitalization, and strengthening the banking sector framework. ### Capital needs, fiscal reporting, and contingent liabilities - PCAR analysis identified €24 billion additional bank capital needs; program had set aside €35 billion. - Direct bank recapitalization costs amounted to €46.3 billion (30 percent of GDP) over 2009-10: - €10.7 billion represent investments by the National Pension Reserve Fund (NPRF). - €4.7 billion provided in cash. - €30.9 billion issued in promissory notes. - Fiscal reporting treatment: - NPRF-financed injections considered investments (financing operations). - Cash and promissory-note financed injections treated as unrequited interventions and recorded as expenditure, increasing gross and net debt. - Contingent liabilities and guarantees: - Outstanding amount under the government guarantee was €113 billion (73½ percent of GDP) at end-December 2010. - NAMA bonds issued totaling €30.2 billion as of end-December 2010; 95 percent or €28.7 billion (18.6 percent GDP) are government guaranteed. - Independent validation and loan-loss forecasting: - An independent advisor validating methodologies used in Anglo analysis and conducting loan-loss forecasting for INBS. - Authorities do not expect significant additional needs but will consult with EC, ECB and IMF if additional capital required. ### Market reaction and sovereign ratings - Market sentiment improved after end-March banking announcements but later deteriorated with broader European developments. - After the comprehensive end-March banking announcement: - 10-year bond spreads declined by up to 120 basis points in the following few weeks. - Subsequent retracement of spreads reflected developments in Portugal, concerns about Greece, and further rating downgrades. - Rating actions and chronology: - Ireland lost AAA rating in 2009, followed by further downgrades during 2009–10. - Moody’s cut rating by five notches to Baa1 on December 17. - S&P downgraded by one notch to A- in February 2011. - After end-March banking announcements S&P downgraded Ireland by a further notch to BBB+ and revised outlook to stable; Fitch affirmed BBB+ and removed from ratings watch negative but maintained a negative outlook. - In mid-April Moody’s cut Ireland’s rating by another two notches, to Baa3, one notch above speculative grade, and maintained its negative outlook. - Rating agencies cite European-wide developments and proposed ESM terms (including solvency test and potential private sector burden sharing starting from 2013) as introducing uncertainties contributing to downgrades. - Market concerns about potential debt restructuring manifested in hump-shaped spread curves with peaks at 2- and 3-year maturities for Ireland, similar to patterns in Greece and Portugal. ### Macroeconomic framework and projections - 2010 and 2011 short-term outlook: - Real GDP fell by 1 percent in 2010; domestic demand fell by 5½ percent; exports rose by more than 9 percent. - Domestic demand expected to decline by 3½ percent in 2011. - Export growth projected about 6 percent in 2011. - GDP growth projected at 0.6 percent in 2011, down from 0.9 percent at program approval. - HICP inflation projected at 1 percent in 2011 (up from -½ percent at program approval). - HICP inflation projected at ½ percent in 2012. - Medium-term projections and risks: - Growth projected to average 2¼ percent over 2012–13, in line with the original program, but subject to considerable downside risks. - Downside risks include continued fiscal consolidation, household debt overhangs, and emigration outflows. - High unemployment expected to remain elevated in the medium term; share of long-term unemployed has risen to just over half, especially among younger men formerly in construction. - External sector and competitiveness: - Current account deficit narrowed by 5 percentage points of GDP during 2008-10 to a deficit of 0.7 percent of GDP. - A small surplus of ½ percent of GDP is expected in 2011. - Rise in net exports will be partly offset by factor income outflows due to the large role of multinational companies. - Unit labor costs have fallen by 8 percent since peak in 2007, and by 11 percent relative to the euro area average over that time; compositional shifts to higher value-added sectors explain a large share of the recovery in competitiveness. ### Program priorities and discussions - Program discussions focused on: - Schedule and sources of funding for recapitalizing the four guaranteed banks. - Timetables and steps for reorganizing domestic banks and the framework for deleveraging during 2011-13. - Ensuring fiscal adjustment changes include compensating measures so program targets for 2011 and beyond remain achievable while allowing automatic stabilizers to operate. - Safeguarding sovereign from financial sector spillovers remains a top priority given risks to debt sustainability from high debts incurred for bank recapitalization and sensitivities to growth and interest rate developments. *Excerpted from IMF staff report content provided in the source PDF.* ### 19. The authorities are also addressing vulnerabilities in credit unions, although ### 19. The authorities are also addressing vulnerabilities in credit unions, although ### Credit unions - Assets are less than 3 percent of domestic banking system assets (MEFP ¶10). - The authorities are completing an extensive analysis of about 400 credit unions and will prepare a plan to address any undercapitalized institutions. - Policy intent: consolidation to result in a smaller but stronger sector. - Staff note: the process must preserve incentives for credit unions to minimize credit losses while fully meeting the state’s obligations to depositors. ### Deleveraging - Objective: establish a framework to deleverage the banks over time to improve funding structure and regain stable access to market-based funding. - Target: reduce loan-to-deposit ratios to 122.5 percent by end 2013 (MEFP ¶11). - Identified non-core assets: €73 billion in non-core assets to be run-off or disposed of over time. - Implementation framework: incentives for managers focused on non-core assets; oversight by a bank-specific Deleveraging Committee; close official monitoring (MEFP ¶12). - Monitoring: progress toward 6-monthly interim targets for liquidity ratios and banks’ plans to reach future targets will be reviewed in future program reviews. - Loss allowances: up to €13 billion in losses from deleveraging have been allowed for in the PCAR; authorities note these losses are estimated in a stress scenario and typically expected to be smaller in most circumstances. - Preparatory work: objectives for the Deleveraging Committee and performance benchmarks for managers of non-core assets are being prepared, with attention to illiquidity and limited buyer pools. - NAMA role: the government does not currently intend that NAMA will further assist with deleveraging. - Small land and development loans: banks are considered better placed to deal with loans less than €20 million, often cross-guaranteed by SMEs. - Contingency: AIB and BoI will provide contingency plans to meet deleverage targets by alternative means (MEFP ¶14). ### Recapitalization - Scope: recapitalization process for four domestic banks has started and is expected to conclude by end-July (MEFP ¶15–17). - Banks involved: Bank of Ireland, Allied Irish Banks, EBS Building Society, and Irish Life and Permanent (footnote context). - Total recapitalization need: €24 billion. - Expected contribution via liability management exercises (LMEs) on subordinated bank debt: assumed to be about €5 billion. - Legal facilitation: on April 14, a court order was issued to facilitate an LME for AIB’s subordinated debt; similar orders will be sought for the other banks. The LME itself will take some weeks to conclude. - Sequence: once LMEs completed, banks will be instructed to raise remaining capital within a defined timeframe, after which public funds will be injected. - Timing: absent significant delays from legal challenges, the process is expected to be completed by the end of July. - ILP: injection of public funds will take into account expected profits from asset sales. ### Strengthening the banking sector framework - Governance - Authorities are acting to improve governance within banks and strengthen the framework for exercising government ownership rights (MEFP ¶18). - Banks will provide plans for renewal of boards and management to ensure skills adequacy and that senior managers meet the CBI’s new fitness and probity standards, assessing track records where relevant. - Banking supervision - Legislative proposals are being prepared to address weaknesses in supervisory and enforcement powers of the Central Bank identified after the crisis (MEFP ¶19). - Proposals would authorize broad access for the Central Bank to information through “authorized officers,” enhance administrative sanctions, clarify “fit and proper” requirements, and introduce a whistleblower regime. - An action plan to strengthen supervisory practices is being prepared, with progress to be monitored at future reviews and later by an independent assessment against the Basel Core Principles. - Recommendation: a comprehensive review of currently fragmented legislation for bank regulation and supervision is recommended. - Credit practices and information - The CBI will promote improved bank practices in provisioning, recognition of arrears and loan losses, capacity for measuring financial risks, and availability of credit information (MEFP ¶19). - Mortgage restructuring and personal insolvency regime - Authorities are developing reform proposals to address unsustainable debt burdens for financially responsible individuals while targeting those most in need to limit moral hazard (MEFP ¶20). - Staff note: need to assess impact on banks’ balance sheets. - Crisis preparedness - Substantial progress toward establishing a special resolution regime for banks. Draft legislation grants powers to the CBI to seek a court order for (i) imposing official administration on a bank and (ii) initiating transfer of assets and liabilities to another institution, including a bridge bank (MEFP ¶21). - Funding: necessary resources, including capitalization of a bridge bank, would be provided by a new resolution fund to be funded by the banks and backed by public resources. - Staff emphasis: legislation should include provisions to (i) ensure appointment of a special manager is as short as possible; (ii) explicitly limit use of bridge bank tool to circumstances involving systemic risk; (iii) increase transparency in pricing and valuation mechanisms for transfers of assets and liabilities; and (iv) set out roles of the new resolution fund and the limited deposit guarantee scheme. ### Fiscal policies and structural issues - Fiscal program status - The fiscal program is on track. The quarterly performance criterion on the exchequer primary balance was met for end-December 2010 and end-March 2011, as were indicative targets for central government net debt (Table 10). - End-2010 adjustment: the end-December-2010 performance criterion was adjusted for bank support, reflecting the €525 million (0.3 percent of GDP) injection into EBS on December 14, 2010 (Box 6). - Exchequer out-turn through end-March 2011: current voted spending lower than profiled; revenues broadly in line with program but with composition deviations—personal income tax and VAT underperforming, corporation and excise taxes doing better than expected. - Implication: importance of maintaining adequate tax administration resourcing. - 2011 deficit projection - Staff projects the 2011 general government deficit at about 10½ percent of GDP. - Budget 2011 delivered €6 billion in consolidation measures; the Finance Act was approved on January 29. - New government committed to aggregate fiscal adjustment consistent with the EU/IMF-supported program for 2011 and 2012. - Jobs Initiative - The government will announce a fiscally neutral Jobs Initiative in May 2011 (MEFP ¶23). - Expected elements: reductions in the lower tier VAT and employer PRSI rates till end-2013 to support labor-intensive domestic services sectors; new training positions for the unemployed; fiscally neutral reorientation of capital spending toward “shovel-ready” local and regional infrastructure projects. - Prior action: fiscal neutrality of the package, both in 2011 and in the period until 2014, is a prior action for completion of the review. - Staff guidance: monitor efficacy and targeting; ensure training programs provide good value-for-money; ensure investment outlays do not entail permanent spending commitments; ensure tax incentives increase labor demand rather than encourage wage-structure tax avoidance. - Expenditure review and social protection - Authorities undertaking comprehensive review of expenditure to underpin consolidation beyond 2011, while protecting those most in need (MEFP ¶22 and ¶24). - Programme for Government commits to previously-agreed fiscal consolidation of €3.6 billion for 2012 and to meeting the 3 percent of GDP deficit target by 2015. - Comprehensive review of expenditure to be completed by end-September 2011. - Department of Social Protection to produce comprehensive program of reforms to better target social spending and remove inactivity and poverty traps (MEFP ¶24). - Institutional fiscal reforms - Fiscal Advisory Council to be established by June 2011 to provide independent assessment of public finances. - In Budget 2012, authorities will introduce binding medium-term expenditure ceilings, informed by the comprehensive review of expenditure. - Fiscal Responsibility Bill to provide legislative backing by the end of the year. - Important pension reforms being legislated later in the year to strengthen long-term public finances (MEFP ¶26). - Structural reforms to boost medium-term growth - Measures to tighten regulation of sheltered sectors, reduce entry barriers, cap exemptions from Competition Law, and strengthen the Competition Authority. - Follow-up on recommendations of an independent review of sectoral wage agreements to enhance job creation. - Consideration of recommendations from the Review of State Assets and Liabilities to increase efficiency of state enterprises and scope for privatization and associated reforms. - Historical privatization: first wave generated receipts of €8.3 billion (much of it €6.3 billion sale of Eircom over 1996–99). - Net asset value of major remaining state commercial companies estimated at €8.3 billion (book value) at end-2009; Report identifies €5 billion of these for potential privatization (mainly non-transmission assets in electricity and gas sectors, government’s 25 percent share in Aer Lingus, and non-forest land assets of Coillte). ### Program modalities and risks - Monitoring framework - Program monitoring for 2011 updated: monitored by quarterly and continuous performance criteria, an indicative target, structural benchmarks and quarterly reviews. - Proposed review dates: third and fourth reviews to be completed on or after August 15 and December 14, 2011, respectively. - Quantitative performance criteria proposed for end-June 2011 and end-September 2011 (Table 10). - Indicative target for end-2011 on the exchequer primary balance modified in line with revised fiscal deficit projection for 2011; quarterly path adjusted for better-than-programmed end-March outcome. - Several new structural benchmarks proposed, including financial sector benchmarks on recapitalization schedule, strengthening legal framework for banking supervision, and restructuring the domestic banking system. - Deadline for introduction of a medium-term expenditure framework moved to end 2011 to allow ceilings to be informed by comprehensive expenditure review. - Financing and disbursements - The Fund and the EU have disbursed €17.8 billion (11.4 percent of GDP) since the extended arrangement was approved. - Fund disbursement: SDR 5 billion (€5.8 billion) on January 18; one third of total financing disbursed so far. - EFSM disbursements: €5 billion in January at 5-year maturity with cost of 5.5 percent, and €3.4 billion in March at 7-year maturity and 6.2 percent. - EFSF: launched a €5 billion 5-year benchmark issue on January 25, resulting in a €3.6 billion disbursement to Ireland at 5.9 percent. - Bilateral financing: a bilateral agreement concluded with the United Kingdom; finalization of discussions ongoing with Denmark and Sweden. - Schedule adjustment - Schedule of IMF and EU disbursements reviewed given new information on scale and timing of external financing needs. - Immediate financing need lower than previously assumed, primarily reflecting a smaller net recapitalization expense in cash terms than provided for in original schedule. - Proposed phasing reduces total EU/IMF disbursements through end-2011 by some €4.5 billion, offset by higher access later in the program. - The Fund’s disbursement schedule would continue to be half that of the EU (Table 8). - With total access unchanged and a similar medium-term outlook, Ireland’s capacity to repay the Fund is little changed from time of program approval. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 35. The debt outlook, however, remains fragile. Debt is projected to peak at ### 35. The debt outlook, however, remains fragile. Debt is projected to peak at ### Debt outlook and projections - Debt is projected to peak at 120 percent of GDP in 2013, and to then decline gradually. - The debt path is below the one projected in the initial program by about 5 percentage points of GDP, primarily because the recapitalization cost (net of LMEs) is now assumed to be about €19 billion, less than the program’s contingency funding for banks of €35 billion. - Debt would reach about 117 percent of GDP by 2016 under the planned fiscal consolidation path. - Higher market interest rates and downsides to medium-term growth prospects represent key risks to putting the debt ratio on a downward path. - Responding to downside shocks by accelerating the already substantial fiscal adjustment programmed in the medium term would not mitigate these risks as it would further retard growth in an already weak economic environment. ### Program risks (update to key risks identified at approval) - Growth: - Recent GDP and unemployment data were disappointing, pointing to larger downside risks to growth. - Period since program approval has been subject to unusual uncertainties. - Export prospects remain strong but are sensitive to growth in partner countries including the euro area; robust export growth does not necessarily translate into strong domestic demand. - For now, staff have not revised the medium-term outlook, but a weaker recovery would impact financial sector health, revenue, and debt dynamics. - Fiscal: - The program is on track in this respect. - The new government is committed to the consolidation targets for 2011 and 2012. - The comprehensive expenditure review is expected to find scope for savings. - Revenue performance going forward will bear close monitoring. - Financial: - Comprehensive banking announcements have credibly specified fiscal costs from the banking sector in a stress scenario. - Immediate liquidity pressures on domestic banks appear to have eased. - Contingencies could still arise, and implementation of reforms may face legal and other challenges. - Political: - Elections brought in a coalition government with strong ownership of the goals and key elements of the EU/IMF-supported program, much reducing risks compared with the time of program approval. - Capacity to sustain fiscal adjustment and other reforms will depend on signs of concrete results in time. - Access to market funding: - Since program approval, ratings have been downgraded to the bottom tier of investment grade, spreads have widened, and access to markets has not been regained. - Continued inability to regain market access for the sovereign, and hence for the banks, would impede growth and, if prolonged, would result in a rising share of official financing in total public debt that could itself lead to wider spreads and undermine the ability to regain market access. - Deepening financial stress for other euro area periphery countries presents a critical yet largely exogenous risk that needs to be addressed through a more comprehensive European plan. ### Safeguards assessment of the CBI - The safeguards assessment of the CBI has been completed. - Assessment conclusions: - The CBI has a relatively strong safeguards framework in place, underpinned by its participation in the Eurosystem and good governance practices. - Recommendations were made to address heightened risks emanating from the financial crisis, notably in relation to ELA lending, and to strengthen the CBI’s financial autonomy. - Considering the planned €24 billion recapitalization of the domestic banks will shape the risks identified, the Government will discuss these recommendations after that process is completed. - In the interim the authorities are preparing draft amendments to clarify certain aspects of the CBI Act, taking into account best practices in the Eurosystem. ### Staff appraisal — implementation and reforms - Program implementation: - In the face of challenges, program implementation is off to a strong start. - Authorities’ implementation has been resolute despite political change and an uncertain external environment. - The new government has taken full ownership of the goals and key elements of the EU/IMF-supported program. - Banking sector reforms: - The comprehensive reform and recapitalization of domestic banks announced on March 31 is a major step toward restoring the Irish banking system to health. - The integrated approach to restructure and deleverage the domestic banks, and to strengthen their capital base, is crucial for enabling these banks to become a driver of economic recovery. - Credibility of the capital needs assessment was reflected in positive market reaction and favorable commentary by financial analysts. - The intention to seek a contribution from holders of banks’ subordinated debt will help execute bank recapitalization while limiting the burden on the taxpayer. - A far-reaching and intensive implementation agenda to advance toward a healthy and fully privately owned banking system has been designed. - Implementation challenges and priorities: - As reforms move from design to implementation, continued rigorous management of the process will be essential. - Deleveraging must balance improving liquidity and containing losses. - Greater confidence in the availability of ECB financing in the medium term could maximize benefits for banks’ ability to regain market-based funding. - Authorities need to ensure banks focus on strengthening balance sheet quality by working out problem loans on the basis of best international practices. - Fiscal front: - The program is on track; institutional frameworks are being strengthened. - Fiscal targets were met by a comfortable margin in March, and the deficit remains on track for 2011. - The new government affirmed commitment to fiscal consolidation agreed in the EU/IMF-supported program, as well as to a deficit of 3 percent of GDP in 2015. - The authorities’ plan to adopt a Jobs Initiative in the near-term does not undermine these fiscal consolidation goals. - Feasibility of reaching these ambitious goals is reinforced by the commitment to implement a Fiscal Advisory Council, a comprehensive review of expenditure to guide medium-term expenditure ceilings, and fiscal responsibility legislation. - To strengthen credibility of fiscal consolidation goals, it will be important to identify a set of high-quality measures to underpin fiscal consolidation in 2012 and beyond at forthcoming reviews. ### Overall risks summary - Risks to the program, already high at approval, have risen in some respects: - Combination of slower growth and higher unemployment, together with higher bond spreads and rating downgrades, have increased downside risks, especially risks to regaining market access. - Some risks, such as those from the financial sector and political uncertainty, appear to have diminished, but benefits have been limited or temporary. - External developments, such as the introduction of the forthcoming European Stability Mechanism or developments in other eurozone periphery countries, drive financial markets and the perception of the probability of default. *Source: Staff projections and assessment as presented in the document.* ### 43. Staff support the authorities’ requests for completion of the first and second ### Staff support the authorities’ requests for completion of the first and second program reviews and rephasing of the arrangement ### Program assessment and policy stance - Staff support the authorities’ requests for completion of the first and second program reviews and rephasing of the arrangement. - Authorities are determined to bring about a recovery of the Irish economy and recognize risks ahead. - Program implementation priorities cited: - Banking reforms - Fiscal consolidation - Supporting structural reforms - The decisiveness of program implementation is stated to offer the best prospect to: - Overcome market doubts - Regain market access - Reduce the threat of spillovers - Restore growth ### Macroeconomic outlook and projections (selected) - Real GDP (annual change): 2007 5.6; 2008 -3.5; 2009 -7.6; 2010 -0.2; 2011 -1.0; 2012 0.6 - Real domestic demand (annual change): 2007 5.4; 2008 -5.1; 2009 -13.9; 2010 -4.1; 2011 -5.6; 2012 -3.5 - Private consumption: 2007 6.4; 2008 -1.5; 2009 -7.0; 2010 -1.4; 2011 -1.2; 2012 -1.6 - Public consumption: 2007 6.9; 2008 2.2; 2009 -4.4; 2010 -2.0; 2011 -2.2; 2012 -4.4 - Gross fixed investment: 2007 2.8; 2008 -14.3; 2009 -31.0; 2010 -21.1; 2011 -27.8; 2012 -13.5 - Net exports contribution to growth 1/: 2007 0.8; 2008 1.5; 2009 3.8; 2010 3.5; 2011 3.4; 2012 3.5 - Exports of goods and services (annual change): 2007 8.2; 2008 -0.8; 2009 -4.1; 2010 5.8; 2011 9.4; 2012 6.0 - Imports of goods and services (annual change): 2007 7.8; 2008 -2.9; 2009 -9.7; 2010 2.2; 2011 6.6; 2012 3.0 - Harmonized Index of Consumer Prices (annual average): 2007 2.9; 2008 3.1; 2009 -1.7; 2010 -1.6; 2011 -1.6; 2012 1.0 - Unemployment rate (in percent): 2007 4.6; 2008 6.3; 2009 11.8; 2010 13.5; 2011 13.6; 2012 14.5 - Employment (annual change): 2007 3.6; 2008 -1.1; 2009 -8.1; 2010 -4.5; 2011 -4.2; 2012 -1.4 ### Public finance: balances, debt, and fiscal projections - General government balance (in percent of GDP): 2007 0.1; 2008 -7.3; 2009 -14.3; 2010 -32.0; 2011 -32.4; 2012 -10.6 - Primary balance (in percent of GDP): 2007 0.9; 2008 -6.3; 2009 -12.2; 2010 -29.0; 2011 -29.2; 2012 -6.7 - General government debt (in percent of GDP): 2007 25.0; 2008 44.4; 2009 65.5; 2010 98.9; 2011 96.2; 2012 111.1 - Table 3 highlights (in billions of euros, selected): - Current revenue: 2010 62.4; 2011 65.6; 2012 59.9; 2013 52.9; 2014 52.3; 2015 52.3; 2016 52.8; 2017 55.5; 2018 58.2; 2019 61.0; 2020 64.6 - Current expenditure: 2010 50.9; 2011 56.7; 2012 62.0; 2013 64.9; 2014 65.3; 2015 65.0 - Capital expenditure: 2010 8.3; 2011 11.1; 2012 13.0; 2013 11.9; 2014 39.1; 2015 38.0 - General government balance (in billions): 2006 5.2; 2007 0.1; 2008 -13.2; 2009 -22.8; 2010 -50.2; 2011 -49.9; 2012 -16.5; 2013 -14.2; 2014 -12.3; 2015 -8.6; 2016 -8.1 - Memorandum items: - Gross general government debt (percent of GDP): 2006 24.8; 2007 25.0; 2008 44.4; 2009 65.6; 2010 98.9; 2011 96.2; 2012 111.1; 2013 116.7; 2014 120.1; 2015 119.8; 2016 118.7 - Output Gap (percent of potential GDP): 2006 2.8; 2007 6.5; 2008 2.2; 2009 -6.0; 2010 -6.3; 2011 -6.6; 2012 -6.4; 2013 -5.1; 2014 -3.7; 2015 -2.4; 2016 -1.1 - Nominal GDP (in billions of Euros): 2006 177.3; 2007 189.4; 2008 180.0; 2009 159.6; 2010 156.6; 2011 153.9; 2012 155.8; 2013 160.2; 2014 166.5; 2015 174.1; 2016 182.5 ### External sector, balance of payments, and financing needs - Current account (percent of GDP): 2007 -5.3; 2008 -5.6; 2009 -3.0; 2010 -2.4; 2011 -0.7; 2012 0.5 - Balance of goods and services (percent of GDP): 2007 9.9; 2008 9.0; 2009 15.0; 2010 19.0; 2011 18.6; 2012 21.0 - Exports (annual percent change, value in euros): 2004 6.9; 2005 5.9; 2006 6.2; 2007 8.3; 2008 -1.4; 2009 -3.6; 2010 9.4 - Imports (annual percent change, value in euros): 2004 8.6; 2005 10.3; 2006 8.9; 2007 9.5; 2008 -1.1; 2009 -10.1; 2010 7.4 - Gross financing requirement (in billions of euros): 2008 723.7; 2009 845.8; 2010 783.0; 2011 653.8; 2012 592.8; 2013 549.8 - Current account deficit (in billions of euros): 2008 10.2; 2009 4.9; 2010 1.1; 2011 -0.8; 2012 -1.9; 2013 -1.1 - Medium- and long-term debt amortization (in billions of euros): 2008 98.3; 2009 110.0; 2010 114.8; 2011 97.5; 2012 106.5; 2013 106.7 - Short-term debt amortization (in billions of euros): 2008 615.2; 2009 730.9; 2010 667.1; 2011 557.0; 2012 488.1; 2013 444.3 - Sources of financing (in billions of euros) include: - Medium- and long-term borrowing: 2008 96.0; 2009 84.4; 2010 135.6; 2011 75.1; 2012 85.8; 2013 101.4 - Short-term borrowing: 2008 730.9; 2009 667.1; 2010 557.0; 2011 488.1; 2012 444.3; 2013 415.2 - Financing gap and program financing: - Financing gap: 2008 0.00; 2009 0.00; 2010 0.00; 2011 38.5; 2012 19.0; 2013 10.0 - Program financing (in billions of euros): 2008 0.00; 2009 0.00; 2010 0.00; 2011 38.5; 2012 19.0; 2013 10.0 - IMF contribution (in billions of euros): 2011 12.8; 2012 6.3; 2013 3.4 - EU contribution (in billions of euros): 2011 25.7; 2012 12.7; 2013 6.6 ### Financial sector vulnerability indicators (selected) - General government debt (in percent of GDP): Dec-08 25.0; Dec-09 44.4; Dec-10 65.5; Feb-11 98.9; Dec-08 96.2; Dec-09 111.1; Dec-10 116.7 - Government bond yield (10-year, end-period): 2004 3.5; 2005 3.3; 2006 4.0; 2007 4.5; 2008 4.4; 2009 4.9; 2010 9.2 - ISEQ index annual change (percent, end-period): 2004 26.8; 2005 16.8; 2006 27.8; 2007 -26.3; 2008 -66.2; 2009 27.0; 2010 -3.0 - Annual credit growth rates (to Irish resident private sector, in percent): 2004 26.6; 2005 28.8; 2006 25.9; 2007 17.0; 2008 7.3; 2009 -7.6; 2010 -5.3 - Non-performing loans (in percent of total loans): 2004 0.8; 2005 0.7; 2006 0.7; 2007 0.8; 2008 2.6; 2009 9.0; 2010 8.6 - Regulatory capital to risk-weighted assets of domestic banks (in percent): 2004 12.6; 2005 12.0; 2006 10.9; 2007 10.7; 2008 10.6; 2009 10.9; 2010 10.4 - Liquid assets of all banks to total assets (liquid asset ratio, in percent): 2004 33.0; 2005 34.2; 2006 32.7; 2007 28.4 ### IMF financing, schedule of reviews, and Fund credit indicators - Board approval of arrangement: December 16, 2010 — SDRs 5,012,425,200 (Percent of old quota 1/: 598; Percent of new quota 1/: 399) - First and Second Reviews (May 16, 2011) — SDRs 1,410,000,000 (Percent of old quota 1/: 168; Percent of new quota 1/: 112) - Third Review (August 15, 2011) — SDRs 1,319,000,000 (Percent of old quota 1/: 157; Percent of new quota 1/: 105) - Schedule of reviews lists subsequent purchases and dates through Twelfth Review (November 15, 2013) culminating in a Total of SDRs 19,465,800,000 (Percent of old quota 1/: 2,322; Percent of new quota 1/: 1,548) - Indicators of Fund credit (Table 9, selected): - Stock of Fund credit (end of period, in millions of SDR) for 2011 11,050; 2012 16,543; 2013 19,466; 2014 19,466 - Stock of Fund credit expressed: In percent of old quota: 2011 1,318; 2012 1,973; 2013 2,322; 2014 2,322 - In percent of new quota: 2011 879; 2012 1,315; 2013 1,548; 2014 1,548 - In percent of GDP: 2011 7.0; 2012 11.9; 2013 14.6; 2014 14.5 - Table 8: Schedule of Reviews and Purchases summarizes dates, review actions, SDR amounts, and quota percentages for the program reviews through November 15, 2013. *Source: Excerpt from IMF staff report and tables contained in the provided content unit.* ### 1. Cumulative exchequer primary balance 2/ ### 1. Cumulative exchequer primary balance 2/ ### Program monitoring: quantitative and continuous performance criteria - Cumulative exchequer primary balance (measured by the exchequer balance excluding interest payments; cumulative from the start of the relevant calendar year) - Observed values (presented in the source as sequence): - -15.8 - -14.7 - -7.9 - -6.3 - -10.9 - -14.2 - -15.0 - -6.0 - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government (applies on a continuous basis) - Targets / observed: 0, 0, 0, 0, 0, 0, 0, 0 - Ceiling on the stock of central government net debt (observed/targets presented as sequence): - 83.6 - 81.7 - 92.1 - 88.5 - 94.6 - 98.2 - 101.1 - 107.9 ### Table 11 — Program Monitoring: selected dates and status - Quantitative Performance Criteria - Cumulative exchequer primary balance: End-December 2010 — Observed - Cumulative exchequer primary balance: End-March 2011 — Observed - Ceiling on the stock of central government net debt: End-December 2010 — Observed - Ceiling on the stock of central government net debt: End-March 2011 — Observed - Continuous Performance Criterion - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government: Continuous — Observed - Structural Benchmarks (selected) - Define the criteria to run stringent stress tests scenarios. End-December 2010 — Observed - Agree on terms of reference for the due diligence of bank assets by internationally recognised consulting firms. End-December 2010 — Observed - 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 — Not observed 1/ - Submit to Dáil Éireann the draft legislation on a special resolution regime. End-February 2011 — Observed 2/ - The Central Bank to complete the assessment of the banks’ restructuring plans. End-March 2011 — Observed - Complete the diagnostic evaluation of banks’ assets. End-March 2011 — Observed - Complete stress tests (PCAR 2011). End-March 2011 — Observed - Complete a full assessment of credit unions’ loan portfolios. End-April 2011 — Ongoing - The Central Bank will direct the recapitalization of ILP to achieve a capital ratio of 12 percent core tier 1. End-May 2011 — Replaced 3/ - Establish a Budget Advisory Council. End-June 2011 — Ongoing - Introduce a medium-term expenditure framework with binding multi-annual ceilings on expenditure in each area. End-July 2011 — Deferred until end-Dec. 2011 - Footnotes from Table 11 (verbatim content): - 1/ Central Bank directions were issued within the required timeframe; however completion of the capital injections required was postponed by the Minister for Finance until after the General Election. These directions are now superseded by the Central Bank’s PCAR directions of March 31, 2011. - 2/ In practice this was submitted to the Seanad as discussed in paragraph 21of the MEFP, as the Dáil was dissolved owing to the elections. - 3/ See Table 12, which has a new structural benchmark for the recapitalization of banks by end-July. ### Table 12 — Prior Action and Structural Benchmarks Under the Program for 2011 (selected) - Financial sector policies (measures, dates, status) - Finalize plans for the recapitalization of Irish Life and Permanent (MEFP, ¶8). End-May 2011 — Structural benchmark - Complete the recapitalization of Allied Irish Banks, Bank of Ireland, Irish Life and Permanent and EBS Building Society (MEFP, ¶17). End-July 2011 — Structural benchmark - Submit to Oireachtas the Supervision and Enforcement Bill (MEFP, ¶19). End-July 2011 — Structural benchmark - Complete the legal merger procedures of EBS Building Society and Allied Irish Banks (MEFP, ¶8). End-September 2011 — Structural benchmark - The merger of Irish Nationwide Building Society and Anglo-Irish bank (MEFP, ¶9). End-December 2011 — Structural benchmark - Fiscal policies - Ensure strict budget neutrality of the Jobs Initiative in 2011 and over the period to 2014 by specifying fully costed offsetting measures (MEFP ¶23). — Prior action - Establish a Fiscal Advisory Council (MEFP, ¶25). End-June 2011 — Structural benchmark - Introduce a medium-term expenditure framework with binding multi-annual expenditure ceilings with broad coverage and consistent with the fiscal consolidation targets (MEFP, ¶25). End-December 2011 — Structural benchmark ### Debt Sustainability Analysis — Public sector debt: baseline and risks - Baseline projections and key summary points - Baseline scenario: debt expected to peak at 120 percent of GDP in 2013, then decline to 117 percent of GDP by 2016 (baseline somewhat better than at program approval, when peak was 125 percent). - Assumed recapitalization cost: about €19 billion net of liability management exercises (less than program’s baseline contingency funding for banks of €35 billion). - Lower outlays on bank support partly offset by a lower nominal GDP (about 2 percent by 2015) and an upward revision to international and Irish interest rates. - Risks and alternative scenarios (verbatim findings) - A negative shock to the baseline growth rate could put debt on an upward path. With a permanent shock of one-third standard deviation, debt would increase to 136 percent of GDP by 2016. A one-third standard deviation shock reduces the average growth rate from 2¾ to 1½ percent over 2011–16. - The debt outlook is sensitive to interest rate developments. Assuming interest rates on new borrowing remain at current levels is equivalent to assuming a ½ percentage point higher average interest rate on the full debt stock. In this scenario, debt would peak at 121 percent of GDP in 2013, then decline slowly to 120 percent by 2016. - The planned fiscal consolidation, projected to deliver a primary surplus of 2 percent by 2016, is essential to put debt on a declining path. In the absence of fiscal consolidation, debt would reach 151 percent of GDP by 2016 and be on an upward path. ### Debt Sustainability Analysis — External debt: baseline and risks - Key levels and observations - Ireland’s gross non-resident liabilities: 1,040 percent of GDP (end-2010). - Excluding the IFSC, external liabilities: in the order of 340 percent of GDP (at end-2010). - International Investment Position (IIP): Irish external position is a net liability of some 97 percent of GDP (at end-2010). - Public gross external debt of the Central Bank of Ireland (related to liabilities to the ESCB): €145 billion as of end-December 2010. - Public gross external debt about 111 percent of GDP (amounts to around 10 percent of all external debt); IIP data indicate public sector responsible for around 130 percent of total net external liabilities. - Baseline projections - Gross external debt expected to have peaked at end-2010 at some 1,040 percent of GDP, and to decline to 807 percent of GDP by end-2016. - Baseline incorporates assumption that full amount of the EU-IMF financing will be drawn, partly contributing to a buildup in Irish foreign assets (about €19 billion). - Under baseline projections, public sector external liabilities will continue to increase, while deleveraging will lower private sector liabilities. Public sector external debt expected to peak at 120 percent of GDP in 2013, three years later than total external debt. - Sensitivity and alternative scenarios (verbatim findings) - With a permanent shock to growth, the external debt ratio would reach 915 percent of GDP by 2016 (despite a -2½ percentage points lower growth than in the baseline scenario). - Sensitivity to exchange rate: if the real exchange rate depreciates by 30 percent in 2010, debt would reach 1,050 percent of GDP by 2012, and decline to 895 percent by 2016. - Under a permanent growth shock, the external debt-to-GDP ratio still stabilizes despite the severity of the shock. ### Annex Table 1 — Ireland: Public Sector Debt Sustainability Framework, 2006–2016 (selected series; in percent of GDP unless otherwise indicated) - Baseline: Public sector debt (percent of GDP), by year: - 2006: 24.8 - 2007: 25.0 - 2008: 44.4 - 2009: 65.6 - 2010: 96.2 - 2011: 111.1 - 2012: 116.7 - 2013: 120.1 - 2014: 119.8 - 2015: 118.7 - 2016: 117.4 - Change in public sector debt (percent of GDP): - 2006: -2.4 - 2007: 0.2 - 2008: 19.3 - 2009: 21.3 - 2010: 30.6 - 2011: 14.9 - 2012: 5.7 - 2013: 3.4 - 2014: -0.3 - 2015: -1.1 - 2016: -1.3 - Identified debt-creating flows (4+7+12) (percent of GDP): - 2006: -5.2 - 2007: -1.6 - 2008: 8.6 - 2009: 19.9 - 2010: 35.3 - 2011: 15.2 - 2012: 5.9 - 2013: 3.0 - 2014: -0.3 - 2015: -1.1 - 2016: -1.3 - Primary deficit (percent of GDP): - 2006: -3.8 - 2007: -0.9 - 2008: 6.3 - 2009: 12.2 - 2010: 29.2 - 2011: 6.7 - 2012: 4.2 - 2013: 1.4 - 2014: -1.3 - 2015: -1.8 - 2016: -2.1 - Revenue and grants (percent of GDP): - 2006: 36.3 - 2007: 35.8 - 2008: 34.3 - 2009: 33.8 - 2010: 34.5 - 2011: 34.9 - 2012: 35.2 - 2013: 35.5 - 2014: 35.6 - 2015: 35.9 - 2016: 35.6 - Primary (noninterest) expenditure (percent of GDP): - 2006: 32.5 - 2007: 34.9 - 2008: 40.6 - 2009: 46.0 - 2010: 63.7 - 2011: 41.6 - 2012: 39.4 - 2013: 36.9 - 2014: 34.3 - 2015: 34.1 - 2016: 33.6 - Automatic debt dynamics (percent of GDP): - 2006: -1.4 - 2007: -0.7 - 2008: 2.3 - 2009: 7.7 - 2010: 5.7 - 2011: 2.7 - 2012: 1.6 - 2013: 1.6 - 2014: 1.0 - 2015: 0.8 - 2016: 0.7 - Contribution from interest rate/growth differential (percent of GDP): - 2006: -1.4 - 2007: -0.7 - 2008: 2.3 - 2009: 7.7 - 2010: 5.7 - 2011: 2.7 - 2012: 1.6 - 2013: 1.6 - 2014: 1.0 - 2015: 0.8 - 2016: 0.7 - Of which contribution from real interest rate (percent of GDP): - 2006: -0.1 - 2007: 0.6 - 2008: 1.4 - 2009: 3.9 - 2010: 5.0 - 2011: 3.3 - 2012: 3.7 - 2013: 4.3 - 2014: 4.3 - 2015: 4.5 - 2016: 4.5 - Of which contribution from real GDP growth (percent of GDP): - 2006: -1.3 - 2007: -1.3 - 2008: 0.9 - 2009: 3.8 - 2010: 0.7 - 2011: -0.5 - 2012: -2.1 - 2013: -2.7 - 2014: -3.4 - 2015: -3.7 - 2016: -3.8 - Other identified debt-creating flows (percent of GDP): - 2010: 0.4 - 2011: 5.8 - other years: 0.0 - (Other specified as "Other (specify, e.g. bank recapitalization)" shows 0.4 in 2010 and 5.8 in 2011) - Residual, including asset changes (percent of GDP): - 2006: 2.8 - 2007: 1.8 - 2008: 10.7 - 2009: 1.3 - 2010: -4.7 - 2011: -0.3 - 2012: -0.2 - 2013: 0.4 - 2014: 0.0 - 2015: 0.0 - 2016: 0.0 - Public sector debt-to-revenue ratio (percent): - 2006: 68.5 - 2007: 69.9 - 2008: 129.2 - 2009: 194.1 - 2010: 278.8 - 2011: 318.6 - 2012: 331.6 - 2013: 338.3 - 2014: 336.3 - 2015: 330.5 - 2016: 329.4 - Gross financing need (percent of GDP): - 2006: -2.9 - 2007: 3.1 - 2008: 7.4 - 2009: 21.9 - 2010: 46.1 - 2011: 31.7 - 2012: 14.3 - 2013: 14.1 - 2014: 17.0 - 2015: 9.4 - 2016: 19.1 - Gross financing need (in billions of U.S. dollars): - 2006: -6.4 - 2007: 8.1 - 2008: 19.6 - 2009: 47.8 - 2010: 97.9 - 2011: 68.4 - 2012: 31.9 - 2013: 32.8 - 2014: 41.6 - 2015: 24.2 - 2016: 51.4 - Scenario with no policy change (constant primary balance) in 2011–2016 (public sector debt percent of GDP by year): - 2011: 111.1 - 2012: 119.2 - 2013: 127.9 - 2014: 135.6 - 2015: 143.2 - 2016: 150.7 ### Key macroeconomic and fiscal assumptions underlying baseline (selected) - Real GDP growth (in percent): - 2006: 5.3 - 2007: 5.6 - 2008: -3.5 - 2009: -7.6 - 2010: -1.0 - 2011: 0.6 - 2012: 1.9 - 2013: 2.4 - 2014: 2.9 - 2015: 3.3 - 2016: 3.3 - Average nominal interest rate on public debt (in percent) 8/: - 2006: 3.6 - 2007: 3.6 - 2008: 4.0 - 2009: 4.1 - 2010: 4.8 - 2011: 4.1 - 2012: 4.3 - 2013: 5.3 - 2014: 5.4 - 2015: 5.5 - 2016: 5.5 - Average real interest rate (nominal rate minus change in GDP deflator, in percent): - 2006: -0.2 - 2007: 2.5 - 2008: 5.4 - 2009: 8.2 - 2010: 7.4 - 2011: 3.4 - 2012: 3.4 - 2013: 3.9 - 2014: 3.8 - 2015: 4.0 - 2016: 4.0 - Inflation rate (GDP deflator, in percent): - 2006: 3.7 - 2007: 1.1 - 2008: -1.5 - 2009: -4.0 - 2010: -2.6 - 2011: 0.6 - 2012: 0.9 - 2013: 1.4 - 2014: 1.6 - 2015: 1.5 - 2016: 1.5 - Growth of real primary spending (deflated by GDP deflator, in percent) 9/: - 2006: 7.2 - 2007: 13.7 - 2008: 12.1 - 2009: -1.0 - 2010: -1.6 - 2011: -3.4 - 2012: -3.3 - 2013: -4.1 - 2014: -4.3 - 2015: 2.6 - 2016: 1.7 ### Annex Table 2 — Ireland: External Debt Sustainability Framework, 2006–2016 (selected series; in percent of GDP unless otherwise indicated) - Baseline: External debt (percent of GDP): - 2006: 754.9 - 2007: 813.3 - 2008: 942.1 - 2009: 1,036.9 - 2010: 1,040.9 - 2011: 994.4 - 2012: 938.8 - 2013: 888.8 - 2014: 858.8 - 2015: 830.1 - 2016: 807.2 - External debt excluding IFSC (percent of GDP): - 2006: 207.6 - 2007: 258.0 - 2008: 341.8 - 2009: 341.1 - 2010: 337.1 - Change in external debt (percent of GDP): - 2006: 57.1 - 2007: 58.4 - 2008: 128.8 - 2009: 94.8 - 2010: 4.0 - 2011: -46.5 - 2012: -55.6 - 2013: -50.1 - 2014: -30.0 - 2015: -28.7 - 2016: -22.9 - Identified external debt-creating flows (4+8+9) (percent of GDP): - 2006: -84.9 - 2007: -85.9 - 2008: 53.1 - 2009: 117.3 - 2010: 26.2 - 2011: -10.3 - 2012: -16.4 - 2013: -25.1 - 2014: -25.2 - 2015: -26.8 - 2016: -26.3 - Current account deficit, excluding interest payments (percent of GDP): - 2006: -6.8 - 2007: -7.3 - 2008: -9.0 - 2009: -9.0 - 2010: -11.3 - 2011: -15.9 - 2012: -15.7 - 2013: -14.2 - 2014: -13.3 - 2015: -12.3 - 2016: -11.8 - Deficit in balance of goods and services (percent of GDP): - 2006: -147.9 - 2007: -150.7 - 2008: -156.6 - 2009: -165.0 - 2010: -185.6 - 2011: -193.8 - 2012: -199.8 - 2013: -202.7 - 2014: -204.7 - 2015: -207.4 - 2016: -210.0 - Net non-debt creating capital inflows (negative, percent of GDP): - 2006: -29.3 - 2007: -43.3 - 2008: 5.0 - 2009: -5.7 - 2010: -12.9 - 2011: -3.9 - 2012: 3.4 - 2013: -2.3 - 2014: 0.1 - 2015: 0.0 - 2016: 0.0 - Automatic debt dynamics (percent of GDP): - 2006: -48.8 - 2007: -35.4 - 2008: 57.1 - 2009: 132.1 - 2010: 50.5 - 2011: 9.5 - 2012: -4.1 - 2013: -8.5 - 2014: -12.1 - 2015: -14.6 - 2016: -14.6 - Contribution from nominal interest rate (percent of GDP): - 2006: 10.3 - 2007: 12.6 - 2008: 14.6 - 2009: 12.1 - 2010: 12.0 - 2011: 15.4 - 2012: 14.5 - 2013: 13.6 - 2014: 12.7 - 2015: 12.3 - 2016: 11.9 - Contribution from real GDP growth (percent of GDP): - 2006: -34.0 - 2007: -39.8 - 2008: 30.4 - 2009: 80.5 - 2010: 11.2 - 2011: -5.9 - 2012: -18.6 - 2013: -22.1 - 2014: -24.8 - 2015: -26.9 - 2016: -26.4 - Residual, including change in gross foreign assets (percent of GDP): - 2006: 141.9 - 2007: 144.3 - 2008: 75.7 - 2009: -22.6 - 2010: -22.2 - 2011: -36.2 - 2012: -39.1 - 2013: -25.0 - 2014: -4.7 - 2015: -1.9 - 2016: 3.4 - External debt-to-exports ratio (percent): - 2006: 954.2 - 2007: 1013.1 - 2008: 1138.2 - 2009: 1152.3 - 2010: 1019.4 - 2011: 925.8 - 2012: 843.7 - 2013: 784.2 - 2014: 747.0 - 2015: 713.1 - 2016: 684.9 - Gross external financing need (in billions of US dollars): - 2006: 514.2 - 2007: 567.5 - 2008: 723.7 - 2009: 845.8 - 2010: 783.0 - 2011: 653.8 - 2012: 592.8 - 2013: 549.8 - 2014: 519.0 - 2015: 535.5 - 2016: 561.7 - Gross external financing need (in percent of GDP): - 2006: 290.0 - 2007: 299.7 - 2008: 402.1 - 2009: 529.8 - 2010: 508.6 - 2011: 419.5 - 2012: 370.0 - 2013: 330.3 - 2014: 298.1 - 2015: 293.4 - 2016: 293.4 ### Scenario and stress test outcomes (summary) - Public debt sensitivity: - Growth shock (permanent one-third standard deviation): debt increases to 136 percent of GDP by 2016. - Interest rate shock (assumed ½ percentage point higher average): debt peaks at 121 percent of GDP in 2013 and declines to 120 percent by 2016. - No fiscal consolidation (constant primary balance): debt reaches 151 percent of GDP by 2016. - External debt sensitivity: - Permanent growth shock: external debt ratio reaches 915 percent of GDP by 2016. - Real exchange rate depreciation of 30 percent in 2010: external debt reaches 1,050 percent of GDP by 2012 and declines to 895 percent by 2016. *Source: _cr11109 - 1. Cumulative exchequer primary balance 2/ (extracted content).* ### Annex Figure 1. Ireland: Public Debt Sustainability: Bound Tests 1/ ### Annex Figure 1. Ireland: Public Debt Sustainability: Bound Tests 1/ ### Chart description and shock assumptions - Public debt is expressed in percent of GDP. - Sources: International Monetary Fund, country desk data, and staff estimates. - Shaded areas represent actual data. - Individual shocks are permanent one-half standard deviation shocks, except for the growth and interest rate shocks, which are one-third and one-sixth standard deviation, respectively. - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. - Notes on alternative shocks: - 2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance. - 3/ One-time 10 percent of GDP shock to contingent liabilities occur in 2011. ### Historical and baseline debt paths (selected annotations) - Historical: 116 - Baseline: 117 ### Baseline and historical scenarios (public debt percent of GDP) - Combined shock: 137 - Baseline: 117 ### Combined shock (alternative specification) and baseline - Combined shock 2/: (chart shows) Baseline: 117 ### Contingent liabilities shock and baseline - Contingent liabilities shock 3/: 128 - Baseline: 117 ### Gross financing need and primary balance metrics (annotated box values) - Gross financing need under baseline (right scale) — annotated box values: - Baseline: -0.1 - Scenario: -2.7 - Historical: -1.0 - Primary balance shock and no policy change scenario (constant primary balance) — annotated box values: - Baseline: 2.8 - Scenario: 1.2 - Historical: 2.6 - No policy change — annotated box values: - Baseline: 3.8 - Scenario: 4.3 - Historical: 2.6 ### Interest-rate shock (in percent) — i-rate shock panel - Interest-rate shock panel annotations: - i-rate shock: 813 - Baseline: 807 - (Chart axis range displayed from 0 to 1400 for years 2006–2016) --- ### Annex Figure 2. Ireland: External Debt Sustainability: Bound Tests 1/ 2/ ### Chart description and shock assumptions - External debt is expressed in percent of GDP. - Sources: International Monetary Fund, Country desk data, and staff estimates. - Shaded areas represent actual data. - Individual shocks are permanent one-half standard deviation shocks. - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. - Additional notes: - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. - 3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - 4/ One-time real depreciation of 30 percent occurs in 2011. ### Historical and baseline external debt paths (selected annotations) - Historical: 730 - Baseline: 807 ### Baseline and historical scenarios (external debt percent of GDP) - Baseline and historical scenarios panel shows Baseline: 807 and Historical: 730 (chart axis ranges shown) ### Non-interest current account (CA) shock and baseline - CA shock: 814 - Baseline: 807 ### Combined shock and baseline - Combined shock 3/: 866 - Baseline: 807 ### Real depreciation shock (one-time 30 percent) and baseline - 30% depreciation shock 4/: 895 - Baseline: 807 ### Gross financing need and scenario box annotations (selected boxed averages) - Gross financing need under baseline (right scale) — chart annotations: Baseline: 807 (panel context) - Non-interest current account shock (in percent of GDP) — boxed averages (Baseline; Scenario; Historical): - Baseline: 1.5 - Scenario: 1.6 - Historical: 1.4 - Growth shock (in percent per year) — boxed averages (Baseline; Scenario; Historical): - Baseline: 2.8 - Scenario: 0.3 - Historical: 2.6 - Growth shock / alternative boxed averages (third boxed triplet shown): - Baseline: 13.5 - Scenario: 12.0 - Historical: 6.2 - Growth shock panel annotation: - Growth shock: 915 - Baseline: 807 *Source: International Monetary Fund, country desk data, and staff estimates (Annex Figures 1 and 2 panels and notes as provided).* ### 11. We are targeting a significantly smaller and more robust banking system while ### 11. We are targeting a significantly smaller and more robust banking system while avoiding fire sales ### Deleveraging targets and framework - Target: by the end of 2013 the domestic banks will achieve a loan to deposit ratio of 122.5 percent. - Identified non-core assets for deleveraging: €73 billion (by end-2013), through run-offs and a carefully phased programme of disposals. - Recapitalisation allows for a total potential loss on disposals of up to €13bn, estimated under stress conditions by the Central Bank. - Governance and execution arrangements: - Banks will reorganise balance sheets and operations into core and non-core assets. - Non-core assets will be managed by an individual and/or team with necessary skills, on time-limited contracts, reporting to the Deleveraging Committee. - Each bank’s Deleveraging Committee to be chaired by a non-executive Director and include observers representing the Minister for Finance and the Central Bank. - Monitoring and reporting: - Semi-annual interim targets adopted for key liquidity indicators; progress reported every six months. - Banks to submit detailed six-month deleveraging plans to the authorities and update progress toward interim targets on a quarterly basis. - If actual or forecast performance is inconsistent with interim targets, authorities will require remedial plans and may use powers to ensure achievement of the goal. - Transparency: - By end-June 2011: specification of management and internal incentive structures to ensure (i) prompt deleveraging and (ii) best prices consistent with market conditions, and a consistent set of objectives for the Deleveraging Committee. - Every six months: publication of information on aggregate progress with deleveraging together with liquidity indicators for banks undergoing deleveraging. ### Contingency and scope adjustments - Assets within deleveraging scope (land and development loans below €20 million) were previously intended for resolution by NAMA; government no longer intends to transfer these assets to NAMA. - Requirement: AIB and BoI to provide contingency plans by end-May 2011 to meet deleverage targets. - If plans are not feasible, authorities will find and implement alternative ways to meet deleveraging goals and may reconsider transferring remaining loans to NAMA. ### Recapitalisation - PCAR finding: a further €24 billion is required to ensure a sound capital basis of the banks; this covers losses up to and beyond end-2013, over and above current and projected loan loss provisioning. - Included within the €24 billion is a buffer of €5.3 billion to cover additional but unlikely losses post 2013, including contingent capital of €3 billion. - Arrangement: claw back of any State capital injection — subject to CBI approval — requiring banks to repay any such capital in excess of regulatory obligations once they regain stable access to wholesale funding or otherwise stabilise funding. - From 2012 onward: timetable for annual PCAR to be aligned with the European Banking Authority's EU-wide bank stress tests. - Timetable: complete recapitalisation of AIB, BoI, ILP and EBS by end-July, 2011, including placement of contingent capital, subject to appropriate adjustment for expected asset sales in the case of ILP (proposed structural benchmark). - Steps to mitigate taxpayer cost: - Seek direct contributions (e.g., from subordinated debt holders). - Sale of assets to generate capital. - Seek private sector investors where possible. - Liability management: initiating liability management exercises (LME) on subordinated debt, aiming to reduce principal by the maximum extent possible. ### Institutional and governance actions for state involvement - Reorganise government responsibility for the banking sector to create a more integrated decision making and supervision structure among relevant Departments and Agencies; strengthen the Department of Finance capacity in banking policy and ensure appropriate policy responsibilities and financial market and banking expertise. - Adopt strict governance standards for majority state-owned banks: - Appoint a professional and qualified management team. - Operate banks at arm’s length from the state. - Goal: maximise value for the Irish taxpayer and prepare banks for return to private ownership as soon as conditions permit. ### Strengthening the banking framework (supervision, risk, disclosure, credit information) - Enhance banking supervision: - CBI has restructured the supervisory function by more than doubling staffing and training, substantially increasing budget resources, and making a high proportion of external hires. - CBI commencing design and implementation of a regulatory risk model. - By end-June, 2011: Central Bank will prepare an action plan to address gaps (data collection, financial reporting, credit risk assessments) and update on measures initiated in 2010; includes benchmarking recommendations and review of training for regulatory staff. - By end-July 2011: submit a “Supervision and enforcement bill” to the Oireachtas to expand and clarify supervisory powers and sanctions (proposed structural benchmark). - Provisioning and arrears recognition: - CBI to issue guidelines by end-June 2011 to encourage timely and adequate allocation of provisions. - CBI to commence ongoing monitoring of guideline implementation in July 2011, including addressing delays in recognition of loan arrears. - By end-September 2011: CBI to publish a report on treatment of loans in arrears under the Code of Conduct for Business Lending to Small and Medium Enterprises. - Lending, risk management, governance, and transparency: - Banks instructed to enhance capacity to measure financial risks by hiring highly-skilled senior personnel and retraining existing staff. - Drafted new corporate governance standards; new “fit-and-proper” standards for bank managers effective September 2011. - CBI to enhance frequency and quality of banks’ information disclosure and transparency by end-September, 2011. - Credit information framework: - Develop a legal framework to facilitate collection and centralisation of financial information on borrowers. - Proposals to be submitted for the Minister’s consideration by the Department of Finance by end-September, 2011. ### Asset recovery and NAMA - Personal insolvency regime reforms: - Preparing draft legislation to reform personal insolvency law and procedures, seeking balance between efficient insolvency proceedings and moral hazard risks. - Proposals likely to focus on significant amendment of the Bankruptcy Act and introduction of a new structured non-judicial debt settlement and enforcement system. - Further analysis of economic and financial effects and ongoing intensive discussions with stakeholders to be completed shortly. - NAMA strengthening: - NAMA required to maintain highest standards of governance, accountability and transparency. - Ensure reduced costs of NAMA operations and constructive contribution to restoration of the Irish property market. - NAMA Board to establish and monitor asset disposal targets, including disposal of 25 percent of assets by end 2013. ### Crisis preparedness and resolution regime - Work on establishing a special resolution regime for banks is well advanced. - Central Bank and Credit Institutions (Resolution) Bill: - Submitted to Seanad Éireann at the end of February (Dáil dissolved for general election on 25th of February 2011). - Plan to reintroduce the Bill in Dáil Éireann to progress legislation quickly. - Preparing amendments to enhance the resolution toolset in line with evolving EU principles and discussions with external partners. - Note: Elections to the Seanad Éireann underway; new Seanad not expected to convene before early to mid-May 2011. ### Fiscal policies: consolidation, targets, and jobs initiative - Commitment: deliver a 3 percent of GDP fiscal deficit in 2015 (as reaffirmed in Programme for Government, in line with EU/IMF-supported programme). - Comprehensive review of expenditure launched to ensure effective use of resources; scale of consolidation in Budgets 2013-2015 to be reviewed nearer the time in context of likely growth prospects. - Jobs Initiative: - Immediate priority: support job creation through a fiscally neutral Jobs Initiative. - Measures to include job training programmes for the unemployed, temporary tax incentives for labour-intensive sectors till end-2013, and reorientation of public investment toward local and regional infrastructure. - Submit Jobs Initiative to Dáil Éireann in May 2011. - Ensure strict budget neutrality in 2011 and over the period to 2014 of adopted fiscal measures; specify fully costed measures to deliver offsetting savings in the Jobs Initiative (prior action). - Social protection and targeting: - Reverse recent reduction in the national minimum wage as a first step; mitigate employment effects through targeted reduction in PRSI in the Jobs Initiative. - Department of Social Protection to build on recent studies and submit to Government by end-March 2012 a comprehensive programme of reforms to better target social support to lower incomes; submit a progress report by end-December 2011. ### Institutional fiscal reforms - Establish a Fiscal Advisory Council to provide an independent assessment of public finances by end-June (structural benchmark). - Council to report publicly to Government and the Oireachtas; by end-June 2011 specify role, appoint members, and allocate resources. - Mandate and independence to be given statutory basis as part of the Fiscal Responsibility Bill later in the year. - Fiscal Responsibility Bill: - To be submitted to Dáil Éireann in the fourth quarter of 2011; will reform the budgetary framework and give legal backing to a set of fiscal rules to safeguard fiscal discipline over the cycle. - Multi-annual expenditure ceilings: - Following the comprehensive review of expenditure, introduce by end-December 2011 binding multi-annual expenditure ceilings with broad coverage and consistent with government fiscal consolidation targets under the EU/IMF-supported programme and the Stability and Growth Pact provisions (proposed to be re-set as structural benchmark for end-December 2011). - Department actions: organise a seminar in May 2011 to discuss policy options with regard to Programme for Government and relevant reports. ### Pension policy measures - Major changes to pensions terms to be put into law over the next few months. - Key change: a three-step increase in the retirement age for social welfare pensions from 65 to 68, over 2014-28. - Introduce a new single pension scheme for all new entrants to the public service: - Link pension age to social welfare pension age. - Entitlements based on average career earnings and annual increases in consumer prices. - Expected effect: considerably and credibly strengthen public finances over the long term. ### Product and labour market reforms - Policies to lower costs in sheltered sectors to boost purchasing power and competitiveness. - Reforms to regulation of the legal profession. - Reduce barriers to entry to the medical profession to bring down costs. - Reinforce competition enforcement by strengthening the powers of the Competition Authority. - No further exemptions to competition law framework unless entirely consistent with goals of the EU/IMF-supported programme and needs of the economy. *Source: _cr11109 - 11. We are targeting a significantly smaller and more robust banking system while avoiding fire sales.* ### 28. It is important that we make effective use of our state assets and, where appropriate, ### _cr11109 - 28. It is important that we make effective use of our state assets and, where appropriate, ### Asset management, governance, and privatisation - Commitment to study recommendations of the Review of State Assets and Liabilities to raise efficiency of commercial semi-state bodies via governance reforms and cost-control. - Commitment to phased privatisation of selected enterprises supported by associated development of the regulatory system as appropriate. ### Employment policy and wage agreements - Commitment to create conditions conducive to job creation. - Awaiting results of an independent review of sectoral wage agreements (Employment Regulation Orders – EROs - and Registered Employment Agreements - REAs). - Will present a time bound action plan to follow-up on the review's recommendations by end September 2011. ### Programme financing adjustments - Request to adjust timing of EU and IMF drawings to bring forward disbursement scheduled for June 15, 2011 to May 15, 2011. - Request to reduce the total of the second and third purchases from the IMF by 2.3 billion SDRs due to a lower immediate balance of payments need, and to rephase remaining purchases accordingly while keeping the total amount under the EU-IMF financing package unchanged. - Bilateral funding arrangements being completed, including a recently signed bilateral agreement with the United Kingdom and finalising similar arrangements with Sweden and Denmark expected to total about €5 billion to ensure full financing of the programme. ### Programme monitoring framework - Progress monitored through quarterly and continuous performance criteria, indicative targets, structural benchmarks, and quarterly programme reviews. - Third and fourth reviews expected to be completed on or after August 15 and December 14, 2011, respectively. - Continuous performance criterion on the non-accumulation of external payment arrears. - Government’s targets for the exchequer primary balance monitored through quarterly performance criteria; net central government debt is an indicative target. - The attached Technical Memorandum of Understanding (TMU) defines quantitative performance criteria and indicative targets. ### Status of specific programme measures and structural benchmarks (selected) - Cumulative exchequer primary balance: End-March 2011 — Observed. - Ceiling on the stock of central government net debt: End-March 2011 — Observed. - Ceiling on the accumulation of new external payments arrears: Continuous — Observed. - Define criteria to run stringent stress tests scenarios: End-December 2010 — Observed. - Agree terms of reference for due diligence of bank assets by internationally recognised consulting firms: End-December 2010 — Observed. - Central Bank direction for recapitalisation of the principal banks (AIB, BoI and EBS) to achieve 12 percent core tier 1: End-February 2011 — Not observed. - Note: Central Bank directions were issued within the required timeframe, however completion of capital injections was postponed by the Minister for Finance until after the General Election; directions now superseded by Central Bank’s PCAR directions of 31 March 2011. - Submit draft legislation on a special resolution regime to Dáil Éireann: End-February 2011 — Observed (submitted to the Seanad in practice due to Dáil dissolution). - Central Bank to complete assessment of banks’ restructuring plans: End-March 2011 — Observed. - Complete diagnostic evaluation of banks’ assets: End-March 2011 — Observed. - Complete stress tests (PCAR 2011): End-March 2011 — Observed. - Complete full assessment of credit unions’ loan portfolios: End-April 2011 — Ongoing. - Central Bank direction to recapitalise ILP to achieve 12 percent core tier 1: End-May 2011 — Modified or replaced. - Establish a Budget Advisory Council: End-June 2011 — Ongoing. - Introduce a medium-term expenditure framework with binding multi-annual ceilings: End-July 2011 — Modified or replaced. ### Quantitative performance criteria and indicative targets (selected exact figures) - Cumulative exchequer primary balance (in billions of Euros; targets/outcomes shown in Table 2): - December 31, 2010 Target/Outcome: -15.8 / -14.7 - March 31, 2011 Target/Outcome: -7.9 / -6.3 - June 30, 2011 Target: -10.9 - September 30, 2011 Target: -14.2 - December 31, 2011 Target: -15.0 - March 31, 2012 Target: -6.0 - Ceiling on the stock of central government net debt (in billions of Euros): - December 31, 2010: 83.6 - March 31, 2011: 81.7 - June 30, 2011: 92.1 - September 30, 2011: 88.5 - December 31, 2011: 94.6 - March 31, 2012: 98.2 - (Further entries in Table 2 show targets of 101.1 and 107.9 for later dates.) - TMU programme exchange rates (as of November 24, 2010): - €1 = 1.3339 U.S. dollar - €1 = 0.86547 SDR ### TMU definitions and measurement rules (selected) - Exchequer balance: difference between total receipts into, and total expenditure out of, the Exchequer Account; includes current and capital balances; measured using Finance Accounts (annual audited) and Exchequer Statement (unaudited monthly). - Exchequer primary balance: exchequer balance excluding net debt interest payments; performance criteria set on this metric. - Adjustment rules: - Floor on exchequer primary balance will be adjusted downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy (including loans to banks, requited and unrequited recapitalisation, purchases of troubled assets). - Floor on exchequer primary balance measured cumulatively from start of calendar year. - Floor adjusted upward/downward for full amount of any over-/under-performance in Exchequer tax revenues, PRSI, and national training fund contributions against the projections listed. - Cumulative exchequer primary balance (from January 1, 2011): - End-June 2011 (performance criterion): -10.9 - End-September 2011 (performance criterion): -14.2 - End-December 2011 (indicative target): -15.0 - End-March 2012 (indicative target): -6.0 - Cumulative Exchequer tax revenue & other receipts projections (in billions of Euros, from January 1, 2011): - End-June 2011 (projection): 18.5 - End-September 2011 (projection): 28.6 - End-December 2011 (projection): 41.3 - End-March 2012 (projection): 9.9 - Central government net debt definition: National Debt less liquid assets of the National Pensions Reserve Fund (NPRF); NPRF liquid assets include Exchequer cash balances, Exchequer deposits with commercial banks, investments in investment grade sovereign bills, and marketable securities such as equities and government bonds; NPRF shares in domestic Irish banks are excluded from liquid assets. - Adjustments to ceiling on central government net debt: - Adjusted upward by debt arising from payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy. - Programme exchange rates apply to all non-euro denominated debt. - Adjusted upward (downward) by final upward (downward) revision to stock of end-March 2011 central government net debt. ### Central government net debt outstanding stock (In billions of Euros) - End-March 2011 (provisional): 88.5 - End-June 2011 (indicative target): 94.6 - End-September 2011 (indicative target): 98.2 - End-December 2011 (indicative target): 101.1 - End-March 2012 (indicative target): 107.9 ### Non-accumulation of external payments arrears - Central government will accumulate no external payments arrears during the programme period. - Definition: an external payment arrear is a payment by central government on contracted or guaranteed external debt not made within five business days after falling due, excluding any contractual grace period. - Performance criterion applies on a continuous basis. - Stock of external payments arrears calculated based on schedule of external payment obligations reported by the National Treasury Management Agency. *Source: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding (TMU) attached to the programme documents (April 28, 2011).* ### 14. Performance criteria under the programme will be monitored using data supplied to ### _cr11109 - 14. Performance criteria under the programme will be monitored using data supplied to ### Monitoring and data provision - Performance criteria under the programme will be monitored using data supplied to the EU, IMF, and ECB staffs. - The Irish authorities will transmit promptly any data revisions in a timely manner. - Department of Finance reporting requirements: - 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 requirements: - 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 EU, IMF and ECB staff, with a lag of not more than seven days after the arrears arise in accordance with the definition of external payments arrears as set forth in paragraph 12 of this memorandum. ### Letter of Intent — key points and programme status - Political mandate and objectives: - Government elected February 25; policies aimed to facilitate economic growth, restore confidence, fix the banking system, bring order to public finances, and support job creation. - Programme implementation status (as of the Letter): - Fiscal programme is on track; deficit projected to stay within the path set by the EU Council Decision on granting financial assistance to Ireland. - Quantitative performance criteria for the exchequer primary balance were met for end-December 2010 and end-March 2011. - End-December 2010 and end-March 2011 indicative targets on net central government debt were met. - Banking sector benchmarks and reforms: - Two end-December 2010 structural benchmarks implemented: preparation of terms of reference for the diagnostic study and definition of scenarios for the stress tests. - Central Bank and Credit Institutions (Resolution) Bill 2011 laid before the Seanad on 28 February 2011. - Recapitalisation to a 12-percent core tier-1 capital ratio by end-February was not implemented due to the Dáil dissolution for elections; new government formed on March 9 awaited completion of Financial Measures Programme at end-March. - All critical end-March benchmarks were observed, including assessment of banks restructuring plans, completion of diagnostic evaluation of banks’ assets and the stress tests; CBI released detailed results of the Financial Measures Programme. - Structural reform progress: - Launched independent review of sectoral wage setting arrangements. - Reformed unemployment benefit system to reduce replacement rates and increase effectiveness of activation measures. - Requests and commitments: - Request completion of the first review under Council Implementing Decision 2011/77/EU of 7 December 2010. - Request rephasing of loan disbursements and second EU disbursement in an amount of EUR 2.9 billion. - Programme to be monitored through quarterly reviews coordinated with the IMF. - Authorities stand ready to take corrective actions and will consult EC, ECB, IMF in advance of revisions. ### Memorandum of Understanding (First update) — monitoring, conditionality, and commitments - Disbursement and review framework: - Quarterly disbursement of financial assistance from the European Financial Stabilisation Mechanism (EFSM) subject to quarterly reviews of conditionality. - Release of instalments based on observance of quantitative performance criteria, respect for EU Council Decisions and Recommendations in the excessive deficit procedure, and positive evaluation of progress with respect to policy criteria in the MEFP and this MoU. - If targets are (expected to be) missed, additional action will be taken. - Authorities commit to: - Rigorously implement fiscal policy consistent with the requirements of the excessive deficit procedure. - 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 TMU) and the general government nominal budget deficit on ESA95 basis as set out in the EU Council Recommendation on excessive deficit procedures. - Allocate any additional unplanned revenues to debt reduction. - Ensure the nominal value of Social Welfare pensions will not be increased. - Continuously monitor financial markets to exploit opportunities to return to commercial funding as soon as possible. - Ensure no further exemptions to the competition law framework unless consistent with the goals of the EU/IMF Programme. - Consult with the European Commission, the ECB and the IMF on policies not included in the MoU that could have a material impact on programme objectives. - Information provision to the European Commission, ECB and IMF: - All information required to monitor progress during programme implementation and to track the economic and financial situation. - A compliance report on the fulfilment of the conditionality prior to the release of the instalments. - Reliable and regular availability of budgetary and other data as detailed in annex 1. ### Actions for the third review (actions to be completed by end Q2-2011) - i. Fiscal consolidation - Government will introduce necessary measures to offset in full the estimated fiscal costs of new measures in the '2011 Jobs Initiative' in 2011 and over the period to 2014 while avoiding measures that would endanger the successful implementation of the programme. - Government commits to consult with the European Commission, the ECB and the IMF on these measures. - ii. Financial sector reforms - Recapitalisation - Recapitalisation process to be immediately set in motion responding to PCAR 2011 outcome. - PCAR 2011 identified a total capital need of EUR 24 billion for BOI, AIB, EBS and IL&P. - Of this EUR 24 billion, EUR 21 billion should be met in the form of Core Tier 1 (CT1) capital and EUR 3 billion in the form of contingent capital. - Liability management exercises (LMEs) will be initiated to reduce subordinated debt principal by the maximum extent possible; possibilities for private placements will be explored. - Irish authorities will submit a comprehensive term sheet for a contingent capital instrument in the amount of EUR 3 billion. - This term sheet will be agreed with the European Commission, IMF, and ECB by 15 May 2011 at the latest. - Authorities will make arrangements for a claw back of any injection of capital by the State requiring banks to repay any such capital in excess of regulatory obligations when institutions have stable access to wholesale funding or have otherwise stabilised funding. - Independent advisor validating methodology for Anglo and performing a three year lifetime loan loss forecast for INBS; Central Bank will release conclusions in May and will undertake remedial action if necessary. - To minimise costs, INBS will be merged into Anglo by end-2011. - Joint restructuring plan of Anglo and INBS submitted for EC approval at end January; authorities intend to implement plan on an accelerated basis while minimising further capital losses. - Managers of these institutions will be subject to strict performance targets. - Deleveraging - PLAR 2011 established a target loan-to-deposit ratio (LDR) of 122.5% to be achieved by end 2013 for BoI, AIB, EBS and IL&P. - Interim targets will be established by the CBI for the intervening period. - Irish authorities will present a plan by 30 June 2011 which will provide: - an appropriate governance structure including incentives for deleveraging in each bank based on objective benchmarks; - an in-depth monitoring system to examine compliance with targets; - a set of sanctions for non-compliance with these targets. - By 31 May 2011, AIB and BoI will provide alternative deleveraging options to account for the fact that transfer of sub-EUR 20 million land and development loans to NAMA will no longer take place. - If these plans are not feasible, authorities will ensure banks find alternative ways to meet deleveraging goals including reconsidering transfer of remaining loans to NAMA. - Authorities, in consultation with EC, IMF, ECB, will monitor evolution of Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) to ensure convergence to Basel 3 standards by the relevant dates. - Financial supervision - Central Bank and Credit Institutions (Resolution) Bill was submitted to the Seanad at end of February; authorities will reintroduce the Bill in the Dáil Éireann. - Authorities will prepare amendments to the Bill to enhance resolution toolset in line with evolving EU principles and discussions with external partners. - CBI will strengthen capacity to supervise credit institutions by reinforcing staffing and expertise, enhancing risk assessment and monitoring framework, and improving data collection. - CBI will produce a detailed action plan by 30 June 2011, prioritising most urgent actions. - Credit institutions - Progress in implementing strategy for reorganisation of Irish credit institutions announced in the 31 March 2011 statement will be assessed with EC, ECB and IMF. - Banks covered by PCAR/PLAR will begin separating core and non-core assets and implement governance structures to deleverage non-core assets. - Credit unions - Extensive diagnostic and stress test of credit union sector underway. - Plan to underpin solvency and viability of undercapitalised institutions to be prepared by 31 May 2011. - Plan will include obtaining powers to promote consolidation through mergers, with government financial support if warranted. - Government will establish a Commission on Credit Unions by 31 May 2011 to design a strategy for the sector. - By end-2011, authorities will submit legislation to Dáil Éireann to strengthen regulatory framework for credit unions. - Any government financial support will be notified to the European Commission in line with EU State aid rules. - iii. Structural reforms - To enhance long-term fiscal sustainability: - Government will introduce legislation to increase the age at which one qualifies for a Social Welfare pension. - Under the National Pension Framework the age will be increased to 66 years in 2014, 67 in 2021 and 68 in 2028. - To support businesses: - Government will extend the voluntary 15-day rule relating to prompt payments to the health service executive, local authorities and state agencies. - To support employment growth: - Government will reverse the recent reduction in the national minimum wage, mitigating effects on employment through targeted reduction in PRSI in the Jobs Initiative. - iv. Structural fiscal reforms - To reinforce a credible budgetary strategy: - Government will establish a Fiscal Advisory Council in the context of the Programme for Government and pre-existing commitments under the Programme of Financial Support. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11109.pdf* ### 2. Actions for the fourth review (actions to be completed by end Q3- ### 2. Actions for the fourth review (actions to be completed by end Q3-2011) ### i. Fiscal consolidation - Government will review the achieved and projected savings arising from administrative measures to increase efficiency and from public service numbers reductions and present appropriate adjustment measures, including to the overall public service wage bill, to ensure consistency with the fiscal adjustment targets over the programme horizon. ### ii. Financial sector reforms - The Irish authorities will ensure that the capital needs of BoI, AIB, EBS and IL&P, as identified in the PCAR 2011 have been fully met by 31 July 2011, subject to an appropriate adjustment for asset sales in the case of IL&P. - The Irish authorities will ensure that the banks covered by the PLAR will have identified the separation of their core and non-core assets and have implemented the appropriate governance structure for the deleveraging of non-core assets. - In line with the monitoring system set up, actual and forecast target LDRs shall be reported by the banks to the CBI every six months (first report 31 July 2011). Such reports will include: - (i) progress achieved towards interim target; - (ii) forecast of LDR for the end of the next period; - (iii) a detailed plan of action to meet the next interim target. - If actual or forecast LDRs fail to meet the interim targets, the Irish authorities will within 14 days of becoming aware of such failure inform the European Commission, IMF, and ECB. The CBI will then oversee the remedial actions to be taken by any bank in question including a prompt timetable for their implementation. - The Irish authorities will update the European Commission, the IMF and the ECB on progress in the quarters not covered by the six-monthly report. - The Irish authorities, in consultation with the European Commission, IMF, and ECB, will monitor closely the evolution of the NSFR and the LCR in order to ensure convergence to Basel 3 standards by the relevant dates. - The Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it with the European Commission, the ECB and the IMF. - The Irish authorities will present a comprehensive report on progress in implementing the CBI action plan for strengthening supervision of credit institutions and discuss it with the European Commission, the ECB and the IMF. - Building on the restructuring undertaken to date, the Irish authorities will submit by 31 July 2011, restructuring plans to the European Commission in accordance with EU competition rules taking into account the outcomes of the PCAR and PLAR and covering a period of 5 years. These plans will also be made available to the IMF and the ECB. Commitments already undertaken by the Irish authorities in the context of EU competition decisions will be maintained. - The Department of Finance will, by 31 July 2011, introduce legislation (titled “The Central Bank (Supervision and Enforcement) Bill 2011) enhancing the powers of the CBI to intervene in the financial system when fulfilling its role as supervisor. Following the enactment of this legislation, the CBI will have the power to enforce the implementation of a LDR of 122.5%, including the power to direct the banks subject to the PLAR to sell assets. - The Department of Finance will finalise a detailed plan for enhancing the quality and availability of credit information available to credit providers by 30 September 2011. ### iii. Structural reforms - Labour market reforms: - Government will report on reforms to strengthen the labour market activation system and its link to unemployment supports in the fight against long-term unemployment. - Government will discuss with European Commission Services the main findings of the independent reviews of Registered Employment Agreements (REAs) and Employment Regulations Orders (EROs) arrangements, and present a time-bound comprehensive action plan to follow up on its recommendations. - To increase competition, Government will introduce legislative changes to remove restrictions to trade and competition in sheltered sectors including: - the legal profession, establishing an independent regulator for the profession and implementing the recommendations of the Legal Costs Working Group and outstanding Competition Authority recommendations to reduce legal costs. - medical services, eliminating restrictions on the number of GPs qualifying and removing restrictions on GPs wishing to treat public patients as well as restrictions on advertising. - the pharmacy profession, ensuring that the recent elimination of the 50% mark-up paid for medicines under the State's Drugs Payments Scheme is enforced. - Government shall bring forward legislation to strengthen competition law enforcement in Ireland by ensuring the availability of effective sanctions for infringements of Irish competition law and Articles 101 and 102 of the Treaty on the Functioning of the European Union as well as ensuring the effective functioning of the Competition Authority. - The authorities will agree with European Commission Services a time-bound action plan to implement the recommendations of the 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. - An independent assessment of the electricity and gas sectors will commence taking due account of the EU regulatory context for these sectors. ### iv. Structural fiscal reforms - To underpin medium-term ceilings and identify savings and efficiencies: - The Authorities will complete a comprehensive review of expenditure which will form the basis for the allocation of binding multi-year expenditure ceilings by expenditure vote group consistent with the aggregate expenditure envelope underpinning the government's fiscal targets under the EU/IMF financial assistance programme and the Stability and Growth Pact provisions. - 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 Social Welfare pension retirement age. - To facilitate better government at a local level: - Government will ensure that effective measures are in place to cap the contribution of the local government sector to general government borrowing at an acceptable level. - The mechanisms in place to underpin this position will be kept under close review, in consultation with the Commission Services. - The review will also consider how to provide data on the financial position including assets and liabilities of the sector on a timely basis. *Source: IMF staff compilation from the document titled “2. Actions for the fourth review (actions to be completed by end Q3-2011)”* ### 8. Actions for the tenth review (actions to be completed by end Q1-2013) ### _cr11109 - 8. Actions for the tenth review (actions to be completed by end Q1-2013) ### Financial sector reforms (Reviews 10–13: actions and monitoring) - For the tenth review (actions to be completed by end Q1-2013): - The authorities will agree the terms of reference for the PCAR 2013. - In line with the monitoring system set up, actual and forecast target LDRs shall be reported by the banks to the CBI every six months. Such reports will include: - (i) progress achieved towards the final target; - (ii) forecast of LDR for the end of the next period; - (iii) a detailed plan of action to meet the final target. - If actual or forecast LDRs fail to meet the interim targets, or it does not appear to be feasible that the bank will meet the end of year target, the Irish authorities will within 14 days of becoming aware of such failure inform the European Commission, IMF, and ECB. The CBI will then oversee the remedial actions to be taken by any bank in question including a prompt timetable for their implementation. - The Irish authorities, in consultation with the European Commission, IMF, and ECB, will monitor closely the evolution of the NSFR and the LCR in order to ensure convergence to Basel 3 standards by the relevant dates. - The Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it together with the European Commission, the ECB and the IMF. - The Irish authorities will present a comprehensive report on progress in implementing the CBI action plan for strengthening supervision of credit institutions and discuss it together with the European Commission, the ECB and the IMF. - For the eleventh review (actions to be completed by end Q2-2013): - The PCAR for 2013 will be completed. - Before publication, the results of the PCAR for 2013 will be assessed, together with European Commission, the ECB and the IMF. The results and methodology used will then be published in detail and on a bank-by-bank basis by 30 June 2013. - Based on these results, the authorities will ensure that banks are adequately capitalised. - An update on progress of the banks' implementation of their deleveraging plans under the PLAR 2011 and any related actions will be discussed with the European Commission, the ECB and the IMF. - The Irish authorities, in consultation with the European Commission, IMF, and ECB, will monitor closely the evolution of the NSFR and the LCR in order to ensure convergence to Basel 3 standards by the relevant dates. - The Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it together with the European Commission, the ECB and the IMF. - The Irish authorities will present a comprehensive report on progress in implementing the CBI action plan for strengthening supervision of credit institutions and discuss it together with the European Commission, the ECB and the IMF. - For the twelfth review (actions to be completed by end Q3-2013): - In line with the monitoring system set up, actual and forecast target LDRs shall be reported by the banks. Such reports will include: - (i) progress achieved towards the final target; - (ii) forecast of LDR for the end of the next period; - (iii) a detailed plan of action to meet the final target. - If actual or forecast LDRs fail to meet the interim targets, or it does not appear to be feasible that the bank will meet the end of year target, the Irish authorities will within 14 days of becoming aware of such failure inform the European Commission, IMF, and ECB. The CBI will then oversee the remedial actions to be taken by any bank in question including a prompt timetable for their implementation. - The Irish authorities, in consultation with the European Commission, IMF, and ECB, will monitor closely the evolution of the NSFR and the LCR in order to ensure convergence to Basel 3 standards by the relevant dates. - The Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it together with the European Commission, the ECB and the IMF. - The Irish authorities will present a comprehensive report on progress in implementing the CBI action plan for strengthening supervision of credit institutions and discuss it together with the European Commission, the ECB and the IMF. - For the thirteenth review (actions to be completed by end Q4-2013): - The authorities will report on the evolution of the capital within the banks covered by the PCAR. - A final report of the banks' implementation of their deleveraging plans under the PLAR 2011 and their compliance with the LDR target will be discussed with the European Commission, the ECB and the IMF. - The Irish authorities, in consultation with the European Commission, IMF, and ECB, will monitor closely the evolution of the NSFR and the LCR in order to ensure convergence to Basel 3 standards by the relevant dates. - The Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it together with the European Commission, the ECB and the IMF. - The Irish authorities will present a comprehensive report on progress in implementing the CBI action plan for strengthening supervision of credit institutions and discuss it together with the European Commission, the ECB and the IMF. ### Annex 1 — Provision of data (regular reporting requirements) - Coordination: - The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to all external programme partners. - To be provided by the Department of Finance in consultation with the Department of Public Expenditure and Reform as appropriate: - F.1 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). — Monthly, 10 days after the end of each month - F.2 Updated monthly report on the central government's budget execution and prospects for the remainder of the year. — Monthly, 20 days after the end of each month - F.3 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). — Monthly, 20 days after the end of each month - F.4 Quarterly data on main revenue and expenditure items of local government. — Quarterly, 90 days after the end of each quarter - F.5 Quarterly data on the public service wage bill, number of employees and average wage (using the presentation of the Pay and Pension Bill with further details on pay and pension costs of local authorities). — Quarterly, 30 days after the end of each quarter - F.6 Quarterly data on general government accounts, and general government debt as per the relevant EU regulations on statistics. — Quarterly accrual data, 90 days after the end of each quarter - F.7 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. — 30 days after EDP notifications - F.8 Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for Non-Commercial State Agencies — Quarterly , 30 working days after the end of each month - F.9 Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for local authorities — Quarterly , 30 working days after the end of each month - F.10 Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months for State- owned commercial enterprises (interest and amortisation) — Quarterly, 30 working days after the end of each quarter - F.11 Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes. — Quarterly, 30 working days after the end of each quarter. - To be provided by the NTMA: - N.1 Monthly information on the Government's cash position with indication of sources as well of number of days covered — Monthly, next working day - N.2 Data on below-the-line financing for central government. — Monthly, no later than 15 days after the end of each month - N.3 Data on public debt and new guarantees issued by central government to public enterprises and the private sector. — Monthly, 30 working days after the end of each month - N.4 Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for central government. — Monthly , 30 working days after the end of each month - N.5 Updated estimates of financial sources (bonds issuance, other financing sources) for the banking and government sectors in the next 12 months — Monthly, 30 working days after the end of each month - To be provided by the Central Bank: - C.1 The Central Bank’s balance sheet. — Weekly, next working day - C.2 The Central Bank will provide details on the aggregate monetary balance sheet of all Irish authorised credit institutions, EEA and non-EEA branches on a monthly basis. — Monthly, on the last working day of the following month - C.3 Individual maturity profiles (amortisation only) for each of the domestic banks will be provided for the last Friday of each month. — Monthly, 30 working days after each month end. - C.4 The Central Bank will provide monthly consolidated balance sheet information for the domestic banks (collected through the FINREP reporting system) — Monthly, 30 working days after each month end. - C.5 On a quarterly basis the Central Bank will provide balance sheet information, based on products rather than categories (as in FINREP). — Quarterly, 30 working days after the end of each quarter - C.6 The Central Bank will provide detailed information on deposits for the last Friday of each month. — Monthly, 30 working days after each month end. - C.7 For each of the Covered Institutions the Central Bank will provide monthly data on liabilities covered under the ELG Scheme. — Monthly, 30 working days after each month end. - C.8 The Central Bank will provide certain financial stability indicators on a monthly basis, including capital adequacy ratios, liquidity ratios, loan to deposit ratios and sectoral distribution of loans — Monthly, 30 working days after each month end. - C.9 On a quarterly basis the Central Bank will provide additional financial stability indicators including details on non performing loans, provisions, return on assets, return on equity, interest margin and income. — Quarterly, 30 working days after the end of each quarter. ### Jobs Initiative — fiscal impact and offsets (supplementary information) - Overview of announced measures: - Tax measures include: - (i) a 4½ percentage point VAT rate reduction on a subset of items subject to the lower VAT rate of 13½ percent; - (ii) a halving of the lower-tier employer pay-related social insurance (PRSI) rate of 8½ percent on jobs paying up to €356 per week (the minimum-wage level). - Suspension of the €3 air travel tax, contingent on an increase in the number of inland passengers on the two major airlines. - Measures to expire by end-2013 and to be reviewed before end-2012. - Expenditure measures include: - Reallocation of capital budget and expansion of labor activation programs. - Most of the €135 million (about 0.1 percent of GDP) increase in capital spending is for “shovel ready” projects, one-off maintenance works on schools, and retrofitting to boost home energy efficiency. - The initiative offers 20,900 new places for training, education and enhancing skills with an annual cost of €30 million from 2012. - A temporary, partial credit guarantee scheme for new or expanding commercially viable SMEs was announced; anticipated little or no costs in 2011, with funding for 2012 and beyond to be found through savings in future budgets. - Budgetary cost and offsets (Table 1 — The Jobs Initiative - Budgetary Cost and Offsets, In millions of Euro): - Tax measures totals by year: - 2011: 230 - 2012: 648 - 2013: 656 - 2014: 198 - Total: 1,731 - Breakdown of selected tax measures: - 4.5 percentage point cut in 13.5 percent VAT rate on selected items: 2011: 120; 2012: 350; 2013: 350; 2014: 60; Total: 880 - Halving of employer PRSI of 8.5 percent on minimum wage earners: 2011: 85; 2012: 190; 2013: 183; 2014: 154; Total: 73 (note: table lists "73" as total) - Suspension of air travel tax: 2011: 15; 2012: 90; 2013: 105; 2014: 105; Total: 315 - Abolition of employer PRSI on unapproved share options: 2011: 10; 2012: 18; 2013: 18; 2014: 18; Total: 63 - Expenditure measures totals by year: - 2011: 40 - 2012: 30 - 2013: 30 - 2014: 30 - Total: 130 - Capital projects (cost net of reallocation of €106 million): 2011: 29; 2012: 29 - Labor market activation programs: 2011: 11; 2012: 30; 2013: 30; 2014: 30; Total: 101 - Total budgetary cost: - 2011: 270 - 2012: 678 - 2013: 686 - 2014: 228 - Total: 1,861 - In percent of GDP: 2011: 0.2; 2012: 0.4; 2013: 0.4; 2014: 0.1; Total: 1.1 - Levy on capital value of pension funds (0.6 percent on €78 billion) yields: - 2011: 468 - 2012: 468 - 2013: 468 - 2014: 468 - Total: 1,872 - In percent of GDP: 2011: 0.3; 2012: 0.3; 2013: 0.3; 2014: 0.3; Total: 1.1 - Staff assessment: - Staff considers the Jobs Initiative meets the prior action on budget neutrality for the completion of the first and second reviews. - The pension levy is expected to be sufficient to cover the cost of the initiative, both in 2011 and cumulatively through 2014. - Staff encourages active review of the efficacy of all measures, their budgetary impact in practice and any potential distortions, and to adapt policies appropriately. ### Other recent developments (May 2011 supplement) - High-frequency indicators and labor market: - Live Register: unemployment rate fell slightly from 14.7 percent in March to 14.6 percent in April. (Latest unemployment rate from the Quarterly National Household Survey was 14.7 percent in the fourth quarter of 2010.) - PMI manufacturing in April was up slightly from March; PMI for services showed business activity rose in April marginally. - Industrial production was down by 1¼ percent on a monthly basis in March. - April 2011 budgetary out-turn (Exchequer basis): - Income tax and PRSI exceeded their respective monthly profiles and, adjusted for one-off timing issues, were only marginally behind the corresponding cumulative targets through April. - Excises and corporate taxes continued to exceed their expected profile; VAT underperformed by 3 percent. - Expenditure remained within budget, capital spending especially; social spending slightly below profile despite higher unemployment than projected. - Data on public service numbers for Q1 2011 suggest a decline consistent with annual reductions budgeted for 2011. - On current trends, the exchequer primary balance remains on track for the 2011 program targets. - Financial markets: - Spreads on government bonds remain elevated; deterioration in market confidence in Greek debt has spilled over to higher spreads for Ireland. - For 2- and 3-year maturities, spreads have risen above 1,000 basis points. - Pressure from corporate deposit outflows abated after the March 31 banking announcement; retail deposits remain relatively stable. ### IMF press release (May 16, 2011) - The Executive Board completed the first and second reviews of Ireland’s performance under a three-year, SDR 19.5 billion arrangement under the Extended Fund Facility (EFF). - Completion enables immediate disbursement of an amount equivalent to SDR 1.41 billion (about €1.58 billion; or US$2.24 billion), bringing total disbursements under the EFF to SDR 6.42 billion (about €7.20 billion; or US$10.19 billion). - Arrangement approved on December 16, 2010; part of a financing package amounting to €85 billion from European partners and bilateral loans and Ireland's own contributions. - Executive Board commentary (Naoyuki Shinohara, Deputy Managing Director and Acting Chair) highlighted: - Program is off to a strong start; comprehensive reforms and recapitalization of domestic banks announced. - Banks should be recapitalised in a timely manner while containing fiscal costs. - Deleveraging of domestic banks is needed to help them regain market-based funding; medium-term availability of Eurosystem financing would support this process. - The budget is on track for the ambitious 2011 fiscal adjustment targets; Jobs Initiative is fiscally neutral while supporting job creation. - A more comprehensive European plan would help overcome market doubts, regain market access, reduce spillovers, and bring about recovery. *Source: _cr11109 - 8. Actions for the tenth review (actions to be completed by end Q1-2013)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11109.pdf_