## _cr11356 ## Source details **Canonical URL:** [_cr11356](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11356.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11356.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11356.pdf.json) --- ### Background and program status - All quantitative macroeconomic targets were achieved and the structural benchmark for this review was observed. - Authorities advanced financial sector reform while keeping the budget on track for the major fiscal consolidation targeted in 2011. - Irish bond spreads declined notably in recent months, aided by EU rate cuts at the July 21 Euro Summit, private investor participation in bank recapitalization, and strong export-led growth in H1 2011. - Authorities adopt additional consolidation measures in light of weaker nominal growth projections to meet original program deficit targets. - Staff supports completion of the fourth review and rephasing of purchases within 2012; the purchase subject to completion of this review equals SDR 3.309 billion (about €3.8 billion). - Authorities consented to publication of the Staff Report. ### Recent economic developments - Growth and demand - GDP rose by 1.9 percent and 1.6 percent in Q1 and Q2 2011, bringing the annual growth rate to 2¼ percent. - Final domestic demand weighed negatively on annual growth by some 3¾ percentage points. - Inventory rebuilding contributed almost 2 percentage points to annual growth; net exports contributed almost 4¾ percentage points. - Exports and competitiveness - Goods and services exports grew at annual rates of 4¼ and 5½ percent respectively in Q2. - Nominal unit labor cost declined by almost 20 percent since the 2008 peak relative to the euro area average; export-oriented manufacturing saw a 30 percent decline. - Labor market and prices - Employment declined by 0.2 percent annually in Q2. - Unemployment rate: 14.4 percent in October. - Net outward migration: 34,100 persons in the year to April 2011; emigration of Irish nationals rose from 27,000 to 40,200 persons. - HICP inflation: 1.5 percent y/y in October. - Eurostat estimates Irish–euro area consumer price gap fell from 25 to 13 percent over 2008–10. - Financial markets and credit - Credit to households and nonfinancial corporations falling at an adjusted annual rate of about 3 percent. - Lending for house purchases falling at an annual pace of about 2½ percent. - Two domestic banks secured market funding of about €6.7 billion in total. - Anglo sale of $3.5 billion from its $9.5 billion commercial property loan portfolio partly eased reliance on Eurosystem liquidity. - Deposit outflows from domestically owned banks stopped and reversed modestly after end-March banking strategy announcements; deposit rates increased significantly during 2011. ### Housing market and mortgage distress - House prices and arrears - House prices declined by 15.1 percent y/y in October and are down 45.4 percent from their 2007 peak. - Mortgage arrears by value rose to 10.8 percent in September 2011 (8.1 percent in terms of number of mortgages), up from 6.6 percent in September 2010. - Share of longer-term arrears (greater than 180 days) continues to rise. - Granular arrears (CBI loan-by-loan data, end-2010; four banks: AIB, BoI, EBS, ILP) - Data cover 600,000 loans and encompass 56 percent of mortgages in arrears over 90 days. - Loans analyzed: €67 billion to owner-occupiers and €20 billion in buy-to-let loans. - Of households in arrears over 90 days, almost 40 percent have been in this position for a year or more. - Average arrears on loans in arrears over 90 days: €27,000; average outstanding balance: just over €200,000. - About 20 percent of borrowers affected at end-2010 when including restructured loans and delinquent payments <90 days. - Estimated 36 percent of owner-occupier households with mortgages in these institutions are in negative equity (at September 2011 house prices). - For owner-occupier loans taken 2005–2008, 48 percent of properties are in negative equity. - 52 percent of buy-to-let loans are in negative equity; over 90 percent of negative equity borrowers were not in arrears at end-2010. - Average negative equity: owner-occupiers without arrears €68,000; owner-occupiers in arrears €84,000. - Buy-to-let average outstanding balance for properties in negative equity: about €320,000; average negative equity just over €100,000. - Within the four institutions, 33 percent of buy-to-let borrowers also have an owner-occupier mortgage with the same lender. - Drivers of arrears - Key determinants: unemployment, debt service, loan-to-value ratios; geography, loan vintage, and rental/payment rates for buy-to-let properties also important. - Data limitations on current income noted; a transition matrix approach was developed for predicting mortgage arrears. ### Financial sector reform priorities and progress - Objectives: strengthen bank balance sheets, revise business models for viability, improve governance and risk management, strengthen supervision, develop a credit register, and reform the personal insolvency regime. - Progress to date noted; further efforts required to underpin sound lending and viability. - Recapitalization and capital metrics - €24 billion recapitalization of domestic banks completed at end-July 2011 (with €0.5 billion operations expected by end-2011); total budgetary cost limited to €16.5 billion through private participation and liability management. - As of end-September 2011, average reported core tier 1 capital ratio increased to about 18 percent (up from 6 percent at end-2010). - Equity to total assets (leverage ratio) increased to 10 percent from 4 percent as of December 2010. - RWA account for almost 53 percent of nominal total assets (sample average ~40 percent). - Expectation: bank capitalization levels will decline over coming months as conservative provisioning is booked, but remain at a high level. - Capital targets and stress-testing - Program target: maintain Core Tier 1 capital ratios of Irish banks of no less than 10½ percent. - PCAR 2011 completed in March was robust and conservative; EBA capital exercise did not identify additional capital needs for Irish banks. - 2012 PCAR should preserve key credibility features of PCAR 2011, including independent asset quality review. - Supervision, credit register, and legal powers - Strengthening supervision: recruitment, training, new operational structure, risk assessment framework; Supervision and Enforcement Bill signed or expected enacted in early 2012. - Credit register: strategy for a privately-run register completed in September 2011; legislation to be submitted by end-September 2012 pending data protection clarifications; unique personal identifiers needed. - Credit union reforms - Interim report completed; sector: 407 registered credit unions with 2.9 million members; deposits €12.2 billion at end-2010 (~8 percent of private sector deposits). - Analyses point to significant but manageable restructuring; Minister indicated resource needs €0.5 to €1 billion (less than 1 percent of GDP). - Commitment to initial resolution funding of €250 million from the Exchequer in Q4 2011; further funding up to an amount to be agreed with external partners may be available in 2012. - Staff supports broadening program adjustor to cover credit union resolution costs. ### Fiscal consolidation, program financing, and IMF involvement - 2011–12 fiscal stance and measures - 2011 consolidation package: €5.3 billion (3.4 percent of GDP) expected to reduce primary deficit to 6.7 percent of GDP (a €3.1 billion, 2 percent of GDP year-on-year reduction), though realized increase in primary balance likely about three-fifths of the consolidation effort. - 2012 budget targets €3.8 billion consolidation; authorities preserve original program ceiling: general government deficit of 8.6 percent of GDP for 2012. - 2012 budget measures include: raise standard VAT rate from 21 percent to 23 percent; interim uniform charge on principal residences; harmonize capital income tax rates at 30 percent; public service numbers reduction of 7,000; capital spending reduction of €0.75 billion; current spending savings €1.45 billion; revenue measures €1.6 billion. - Medium-Term Fiscal Statement (MTFS) sets cumulative adjustment of €12.4 billion over 2012–15 (about €0.6 billion higher than original December 2010 program). - Composition of MTFS adjustment: current spending ~50 percent, capital spending a little over 10 percent, revenues just under 40 percent. - Program financing and disbursements - The Fund and European partners disbursed some €29.7 billion since arrangement approval: SDR 6.4 billion (€7.2 billion) by the Fund, €11.4 billion by the European Financial Mechanism, €3.6 billion by the EFSF; first U.K. bilateral loan disbursement €0.5 billion in early October following Third Review. - Financing need and sources (in billions of euro, as presented): - Financing need: 2011 50.1; 2012 23.4; 2013 22.3. - Exchequer cash deficit: 2011 1.0; 2012 17.7; 2013 13.8. - Amortization: 2011 12.7; 2012 5.7; 2013 8.5. - Bank recapitalization: 2011 16.5; 2012 0.0; 2013 0.0. - Financing sources 2011–13: EU 21.5 / 16.9 / 6.6; IMF 12.5 / 6.3 / 3.7; Market financing incl. retail 1.1 / 3.7 / 13.3; Cash drawdowns 15.1 / -3.5 / -1.4. - Schedule of IMF purchases (selected): - Fourth Review: December 14, 2011 — SDRs 3,309,000,000. - Fifth Review: February 15, 2012 — SDRs 2,786,000,000 (proposal to rephase within 2012). - Total scheduled purchases: SDRs 19,465,800,000. - IMF Press Release: IMF completed fourth review and approved €3.9 Billion disbursement; immediate disbursement equals SDR 3.31 billion (about €3.91 billion). - Program monitoring and performance criteria - Key quantitative targets (selected): - Cumulative Exchequer primary balance performance criterion (End-December 2011): -15.0 (In billions of Euros from January 1, 2011). - Ceiling on stock of central government net debt — End-September 2011 provisional: 111.7 (In billions of Euros); End-December 2011 indicative target: 116.9. - Proposed performance criteria for end-March 2012: cumulative Exchequer primary balance -7.5; indicative net debt end-March 2012: 126.2 (In billions of Euros). - TMU adjustments: Exchequer primary balance and central government net debt ceilings adjusted for bank restructuring payments and Exchequer outlays for credit union resolution, among other items. - Reporting requirements: Department of Finance, NTMA, and Central Bank to provide timely data (specific lags and series defined). ### Key macroeconomic projections and scenarios - Short-run and medium-term projections (selected) - Real GDP (percentage change): 2010 -0.4; 2011 1.1; 2012 1.0; 2013 2.3; 2014 2.7; 2015 3.0; 2016 3.3. - Real domestic demand: 2010 -4.9; 2011 -2.7; 2012 -1.3; 2013 0.6; 2014 1.2; 2015 2.4; 2016 2.7. - Exports: 2010 6.3; 2011 4.5; 2012 3.8; 2013 4.5; 2014 5.0. - Consumer Prices (HICP): 2010 -1.6; 2011 1.2; 2012 1.1; 2013 1.2. - Unemployment rate: 2010 13.6; 2011 14.3; 2012 14.2; 2013 13.5; 2014 12.6. - Current account (percent of GDP): 2010 0.5; 2011 1.5; 2012 1.5; 2013 1.2. - Alternative scenarios and risks - Export-weighted growth of key trading partners revised down from 2 percent to 1½ percent; Irish export growth in 2012 revised down from 5¼ percent to 3¾ percent. - Debt sensitivity: if growth averaged 1 percent over 2012–16 (a cumulative shortfall of 7 percentage points), public debt would reach 127 percent of GDP by 2016. - Program success conditional on sustaining recovery, continued fiscal consolidation, effective financial sector reforms, and strengthened European support. ### Fiscal consolidation strategy and debt outlook - MTFS and consolidation - MTFS: cumulative adjustment €12.4 billion over 2012–15. - 2012 budget consolidation target: €3.8 billion. - Composition: about half current spending, a little over 10 percent capital spending, just under 40 percent revenues. - Debt projections and stress tests - General government debt projected to peak at 118 percent of GDP in 2013 and decline to 111 percent of GDP by 2016. - Baseline: planned consolidation puts debt on a downward path; primary surplus projected to exceed 3 percent of GDP by 2015. - No-consolidation scenario: debt would reach 147 percent of GDP in 2016. - Sensitivity tests: - Growth shock (permanent one-third standard deviation negative): average growth falls from 2¼ to 1 percent over 2012–16; public debt reaches 127 percent of GDP by 2016. - Interest rate shock (¼–½ percentage point higher): debt reaches 112 percent of GDP by 2016. - External debt: total external debt 1,030 percent of GDP at end-2010; excluding IFSC, external debt end-2010 324.4 percent of GDP and projected to decline to 257.9 percent of GDP by 2016 in baseline. ### Policy discussions, recommendations, and institutional reforms - Fiscal policy - Maintain planned fiscal adjustment and carefully phase and compose consolidation 2012–15 to consider growth. - 2012 measures emphasize VAT increase, public service numbers reduction, welfare reforms, and capital spending reprioritization. - Fiscal Responsibility Bill to establish fiscal rules and the Irish Fiscal Advisory Council (IFAC); submission deferred to allow design time (structural benchmark deferred to end-March 2012). - Financial sector - Continue to strengthen provisioning and disclosure (CBI guidance), challenge banks’ business models and governance, and ensure adequate capital via PCAR exercises. - Implement credit union reforms carefully to limit fiscal costs and extend adjustor to cover resolution costs. - Modernize personal insolvency regime and establish a comprehensive credit register. - Structural reforms and growth - Advance measures to boost hiring and competition in sheltered sectors, strengthen activation and training programs, and prepare an ambitious but orderly program of public asset disposals. - Protect the vulnerable while pursuing efficient public service delivery and social cohesion. - European support - Staff noted strengthened euro area support (public investment, guarantees, conversion of Eurosystem liquidity to medium-term funding, capital support, or temporary equity participation) would reinforce Ireland’s prospects to regain market access early and aid program success. *IMF staff report (Irish program review), publication consented by the Irish authorities.* ### 8.6 percent of GDP. The authorities are making additional adjustment efforts given weaker nominal ### _cr11356 - 8.6 percent of GDP. The authorities are making additional adjustment efforts given weaker nominal ### Background - Policy implementation continues to be strong and all quantitative macroeconomic targets were achieved (MEFP Table 2) and the structural benchmark for this review was also observed (MEFP Table 1). - Irish authorities have pressed forward with their financial sector reform strategy while keeping the budget on track for the major fiscal consolidation targeted in 2011. - These efforts contributed to a notable decline in Ireland’s bond spreads in recent months, helped by EU interest rate cuts agreed at the July 21 Euro Summit, participation by private investors in bank recapitalization, and renewed confidence in Ireland’s medium-term growth potential following strong export-led growth in the first half of 2011. - Sustaining the nascent recovery is key to debt sustainability and program success amid deteriorating trade partner growth prospects due to the euro area crisis. - Authorities are adopting additional consolidation measures to meet the original fiscal targets and implementing structural reforms in the labor market and sheltered sectors to enhance competitiveness. - The report notes that “Strengthened euro area support for Ireland’s growth and debt sustainability would greatly reinforce prospects for Ireland to regain market access at an early stage given these more adverse circumstances.” ### Recent economic developments and outlook - Growth - GDP rose by 1.9 percent and 1.6 percent in the first two quarters of 2011, bringing the annual growth rate to 2¼ percent. - Final domestic demand weighed negatively on annual growth by some 3¾ percentage points. - Re-building of inventories contributed almost 2 percentage points to annual growth. - Net exports contributed almost 4¾ percentage points to annual growth. - Exports and competitiveness - Goods and services exports grew at annual rates of 4¼ and 5½ percent respectively in Q2. - The IT sector led the expansion in services exports; pharmaceuticals account for most of the rise in goods exports; the indigenous food and beverage sector grew by 17 percent y/y in Q2. - Nominal unit labor cost for the economy has declined by almost 20 percent since the peak in 2008 relative to the euro area average; the export-oriented manufacturing sector saw a 30 percent decline. - Labor market and prices - Employment declined by 0.2 percent annually in Q2, the lowest fall since 2008, with the decline concentrated in the public sector. - The unemployment rate remained at 14.4 percent in October. - Net outward migration was 34,100 persons in the year to April 2011 (broadly unchanged from the previous year); emigration of Irish nationals rose from 27,000 to 40,200 persons. - HICP inflation was 1.5 percent y/y in October. - Eurostat estimates the gap between Irish and euro area consumer prices has fallen from 25 to 13 percent over 2008–10. - Financial markets and external - Irish bond spreads fell markedly since the spike in mid-July but remain susceptible to euro area developments; spreads declined to pre-program levels in the autumn but partly retraced recently. - Reports suggest investors differentiate Ireland based on policy implementation and growth prospects. - Credit, deposits, and liquidity - Credit to households and nonfinancial corporations is falling at an adjusted annual rate of about 3 percent. - SME credit was largely stable in the first half of 2011. - Lending for house purchases continues to fall at an annual pace of about 2½ percent. - Two domestic banks secured market-funding of about €6.7 billion in total, primarily based on their U.K. mortgage books. - An Anglo sale of $3.5 billion from its U.S. $9.5 billion commercial property loan portfolio partly eased reliance on Eurosystem liquidity. - The outflow of nonresident deposits from domestically owned banks stopped after banking strategy announcements at end-March and reversed modestly; household and resident corporate deposits stabilized. - Deposit rates have increased significantly during 2011 as banks seek to protect liquidity. ### Housing market and mortgage distress - House prices and arrears - House prices accelerated down in October to 15.1 percent on an annual basis and are down 45.4 percent from their peak in 2007. - The rate of mortgage arrears by value rose to 10.8 percent in September 2011 (8.1 percent in terms of the number of mortgages), up from 6.6 percent in September 2010. - Share of longer-term arrears (greater than 180 days) continues to rise. - Granular mortgage arrears analysis (CBI loan-by-loan data, end-2010; four banks: AIB, BoI, EBS, ILP) - Data cover 600,000 loans and encompass 56 percent of mortgages in arrears over 90 days. - Loans analyzed include €67 billion to owner-occupiers and €20 billion in buy-to-let loans. - Of households in arrears over 90 days, almost 40 percent have been in this position for a year or more. - The average amount of arrears on loans in arrears over 90 days is €27,000; the average outstanding balance is just over €200,000. - On top of arrears of 90 days or more, substantial numbers have restructured loans or delinquent payments of less than 90 days, bringing total affected to about 20 percent of borrowers at end-2010. - Estimated 36 percent of owner-occupier households with mortgages in these institutions are in negative equity (at September 2011 house prices). - For owner-occupier loans taken between 2005 and 2008 (half of outstanding loans), 48 percent of properties are in negative equity. - 52 percent of buy-to-let loans are in negative equity. - Over 90 percent of negative equity borrowers were not in arrears at end-2010. - About half of owner-occupier borrowers in arrears at end-2010 had positive equity; around 38 percent had at least 20 percent equity. - The average negative equity of owner-occupiers without arrears is €68,000; average for owner-occupiers in arrears is €84,000. - Buy-to-let segment: 22 percent of the analyzed loan book (€20 billion out of €87 billion) relates to buy-to-let debt; average outstanding balance for the 52 percent of buy-to-let properties in negative equity is about €320,000; average negative equity is just over €100,000. - Within the four institutions covered by the Financial Measures Program, 33 percent of buy-to-let borrowers also have an owner-occupier mortgage with the same lender. - Drivers of arrears - Studies point to unemployment, debt service, and loan-to-value ratios as key determinants for arrears; geography, loan vintage, and rental/payment rates for buy-to-let properties are also important. - Data limitations on current income are noted; a transition matrix approach was developed for predicting mortgage arrears based on loan vintage, borrower type, interest rate type, and region. ### Financial sector reform priorities - Challenge: build capacity of the financial system to support economic recovery and eventually return to majority private ownership. - Focus areas: - Strengthening bank balance sheets. - Revising business models to ensure medium-term viability and profitability. - Improving internal governance and risk management systems to underpin sound lending. - Strengthening banking supervision. - Developing a new credit register. - Reforming the personal insolvency regime. - Progress noted on financial sector reforms to date; further efforts needed to underpin sound lending and viability. ### Fiscal consolidation, program financing, and IMF involvement - Authorities are making additional adjustment efforts given weaker nominal growth projections to reach original program deficit targets; the package of measures is designed to enhance public service efficiency while protecting the vulnerable. - Staff supports the authorities’ request for completion of the fourth review and the rephasing of purchases within 2012. - Purchase amounts and rephasing requests: - The purchase subject to completion of this review would be in an amount equivalent to SDR 3.309 billion (about €3.8 billion). - The authorities request that the purchase that would become available at the fifth review be in an amount equivalent to SDR 2.786 billion, with the additional amount taken equally from purchases scheduled for the seventh and eighth reviews. - Staff notes that further strengthening European support for Ireland’s recovery would reinforce prospects for program success and have benefits for European stability. - Publication: The Irish authorities consent to publication of the Staff Report. ### Key risks and program considerations - External risks center on the euro area crisis and deterioration in trade partner growth prospects, making Irish bond spreads susceptible to developments in the euro area. - Domestic risks include high unemployment (14.4 percent as of October), elevated mortgage arrears and negative equity, continued contraction in credit, and high household debt burdens. - Program success depends on sustaining economic recovery, continued fiscal consolidation, effective financial sector reforms, and strengthened European support. *IMF staff report (Irish program review), publication consented by the Irish authorities.* ### 10.8 percent of mortgages are in arrears (by mortgage ### _cr11356 - 10.8 percent of mortgages are in arrears (by mortgage ### Mortgage arrears, restructurings, and repossessions - Mortgages in arrears: 10.8 percent of total mortgage value. - Arrears are increasingly long-term: - Arrears over 180 days and arrears 91 to 180 days tracked separately (time series shown). - Restructurings: - Half of restructurings are interest-only or partial interest. - Interest-only/partial interest restructurings reported as percent of residential mortgages (time series shown). - Repossessions: - Repossessions and disposals are rising from a low base (time series from December 2009 indicated). ### Housing market and credit developments - Residential property prices indexed to 2005=100 with year-on-year percent change series (Jan-06 to Jan-11). - Housing activity: - Housing starts and housing completions time series (Jan-05 to Jan-11, 3-month moving average). - Mortgage lending and household balances: - Loans for house purchases reported in Billions of euros (outstanding stock on-balance sheet and new lending). - Household savings rate and household debt measured as percent of disposable income; household savings rate estimated for 2010. - Household savings rate estimated at about 10 percent of disposable income (compared with 4 percent on average before the crisis). - Credit to private sector: - Credit to private sector continues to contract, but more slowly. - Credit to corporates has fallen most sharply (including a transfer of €70 billion in loans to NAMA). - SME credit stabilized in 2011:Q1 after contracting through 2010. - Services sector particularly hard hit. - Credit standards and demand: - Credit standards have stabilized after a prolonged period of tightening. - Credit demand generally stabilized at low levels although corporate demand weakened recently. ### Fiscal execution and near-term fiscal outcomes - Exchequer primary deficit and execution January–October: - Excluding net banking sector support costs, the January–October Exchequer primary deficit was €12.1 billion, 0.8 percentage points of GDP narrower than the authorities’ profile after allowing for the impact of the Jobs Initiative introduced in May 2011. - Net current spending undershot budgetary allocation by 1.6 percent (0.4 percent of GDP). - Capital spending was below profile by 17.2 percent (0.8 percent of GDP). - Shortfalls in VAT due to weak domestic demand were offset by higher than budgeted nontax revenues such as bank guarantee fees. - Performance criteria through end-September 2011: - Cumulative Exchequer primary balance through end-September 2011 was -€18.3 billion, above the adjusted target of -€20.2 billion. - Central government net debt was €111.7 billion, below the adjusted indicative target of €115.9 billion. - Insurance Compensation Fund transfers: - Temporary Exchequer transfers to the Insurance Compensation Fund (ICF) to cover losses incurred by Quinn Insurance Limited: transfer in 2011:Q4 will amount to €0.3 billion, with an additional €0.4 billion expected to be transferred in 2012. Transfers are repayable loans to the ICF and treated as financial transactions with no impact on the general government balance. ### Program compliance and fiscal outlook for end-2011 and 2012 - Program ceilings: - Program ceilings for fiscal indicators at end-2011 are expected to be observed. - A funding need of 0.2 percent of GDP is expected in relation to the failure of a private insurance company, but the end-December performance criterion is projected to be achieved. - General government deficit: - General government deficit projected at 10.3 percent of GDP for 2011, within the European Council’s ceiling of 10.6 percent of GDP. - Consolidation package and primary balance: - The 2011 consolidation package of €5.3 billion (3.4 percent of GDP) is expected to reduce the primary deficit to 6.7 percent of GDP, representing a €3.1 billion (2 percent of GDP) year-on-year reduction. - The realized increase in the primary balance will likely amount to only about three-fifths of the consolidation effort, reflecting weak domestic demand and rising unemployment. ### Macroeconomic projections and scenarios - Short-run 2011 outlook: - Real GDP growth revised to 1.1 percent in 2011 (up from 0.4 percent in the most recent WEO projection). - Final domestic demand expected to contract by 3.7 percent in 2011. - Nominal GDP expected to be essentially flat in 2011 given a projected 1 percent decline in the GDP deflator. - Export growth expected to be curbed to about 3½ percent in the second half of 2011. - 2012 and medium-term projections: - Export-weighted growth of key trading partners revised down from 2 percent to 1½ percent. - Irish export growth in 2012 revised down from 5¼ percent to 3¾ percent. - Domestic demand will continue to contract; GDP growth projected at 1 percent in 2012 (down from 1.9 percent at previous review). - Inflation projected at about 1 percent in 2012. - Economic recovery projected to strengthen after 2012 if adverse international scenarios are averted; growth expected to average 2¾ percent over 2013–15. - Unemployment may remain in double-digits through 2016. - Selected projection table (percentage change or rates as provided): - Real GDP: 2010 -0.4; 2011 1.1; 2012 1.0; 2013 2.3; 2014 2.7; 2015 3.0; 2016 3.3 - Real domestic demand: 2010 -4.9; 2011 -2.7; 2012 -1.3; 2013 0.6; 2014 1.2; 2015 2.4; 2016 2.7 - Private consumption: 2010 -0.8; 2011 -2.4; 2012 -1.3; 2013 0.7; 2014 1.2; 2015 2.0; 2016 2.1 - Fixed investment: 2010 -24.9; 2011 -10.5; 2012 0.5; 2013 3.5; 2014 5.0; 2015 9.0; 2016 8.5 - Exports: 2010 6.3; 2011 4.5; 2012 3.8; 2013 4.5; 2014 5.0; 2015 4.9; 2016 4.9 - Consumer Prices (HICP): 2010 -1.6; 2011 1.2; 2012 1.1; 2013 1.2; 2014 1.4; 2015 1.8; 2016 1.8 - Unemployment rate: 2010 13.6; 2011 14.3; 2012 14.2; 2013 13.5; 2014 12.6; 2015 11.4; 2016 10.5 - Current account (in percent of GDP): 2010 0.5; 2011 1.5; 2012 1.5; 2013 1.2; 2014 1.3; 2015 1.1; 2016 1.1 ### Fiscal consolidation strategy, debt outlook, and risks - Medium-Term Fiscal Statement (MTFS) and consolidation: - MTFS sets out a cumulative adjustment of €12.4 billion over 2012–15, some €0.6 billion (0.4 percent of GDP) higher than the amount in the original December 2010 program. - The composition of the aggregate adjustment: current spending (about half), capital spending (a little over 10 percent), and revenues (just under 40 percent). - Debt projections: - Debt-to-GDP projected to peak at 118 percent in 2013. - Factors lowering the debt path include a correction to the end-2010 general government debt level and a reduced interest rate on EU loans; offset by lower nominal GDP projections. - Potential privatization receipts could lower debt prospects; outlays to restructure the credit union sector could raise debt prospects but are expected to be manageable. - 2012 budget specifics: - The 2012 budget will target a €3.8 billion consolidation. - Authorities preserve the original program ceiling of a general government deficit of 8.6 percent of GDP. - The 2012 budget includes €0.2 billion in new fiscal measures in addition to the €3.6 billion consolidation envisaged in the original program. - Total additional fiscal consolidation in 2012 is €0.7 billion when carryover effects from measures not included in the original program are included. - Key risks: - External factors, especially euro area developments, pose large downside risks. - Disorderly financial or debt developments in the euro area could spill back into confidence in Ireland, undermining gains in financial stability. - Domestic amplifiers of shock include household deleveraging, fiscal consolidation drag, and potential higher emigration. - External developments affecting growth and prospective interest rates on market financing are key sources of risk to debt sustainability. ### Policy discussions and priorities - Main policy objectives: - Improve prospects for a sustained recovery and insulate Ireland from increased tensions in the euro area. - Phase and compose fiscal adjustment for 2012–15 with regard for growth. - Deepen reforms to protect financial stability and develop a financial system that supports sustained growth. - Advance structural reforms to enhance employment and competitiveness. - Household debt distress: - Address through enhanced engagement of banks with households and personal insolvency reforms (section IV.B). - Fiscal institutions: - Ongoing fiscal institutional reforms and the Comprehensive Review of Expenditure aim to provide the foundation for delivering substantial consolidation. *Source: _cr11356 - 10.8 percent of mortgages are in arrears (by mortgage* ### 22. The consolidation in 2012 will be underpinned by a robust package of high- ### 22. The consolidation in 2012 will be underpinned by a robust package of high- ### Fiscal consolidation: 2012 measures - Revenue measures: - Raise the standard VAT rate from 21 percent to 23 percent (bringing forward an increase originally programmed for 2013–14). - Further strengthen and reform direct taxes, including: - Introduce an interim uniform charge on principal residences (to help finance local governments). - Harmonize capital income tax rates at 30 percent. - Objective: lend greater stability to Ireland’s tax revenues over time. - Expenditure measures: - Larger reduction in capital spending in 2012 relative to the original program, focused on large capital-intensive projects rather than maintenance spending. - Lasting current spending adjustments through: - Ambitious reductions in public service numbers. - Carefully targeted welfare entitlement reforms. - Rationalization of low-priority programs in key departments. - Objective: contribute to more sustainable public service delivery while protecting the most vulnerable and preserving social cohesion. ### Medium-term consolidation: measures for 2013–15 - Revenue expectations: - Authorities expect about half of the adjustment effort to come from: - Further increases in indirect taxes, mainly carbon, excise and vehicle taxes. - Introduction of a full-fledged value-based property tax (to replace the interim uniform charge on principal residences). - The other half of the effort expected from tightening various tax expenditures, including those identified in the 2009 Commission on Taxation Report. - Staff view: further base-broadening will likely need to encompass income tax bands and credits. - Note: These indirect taxes are generally less susceptible to cyclical fluctuations and should reinforce the impact of the 2012 measures; however, concerns about border trade/smuggling in relation to increases in excise rates (especially on alcohol and tobacco, which are already high in Ireland) should be considered. - Spending expectations 2013–15: - Combination of significant carryovers from earlier structural measures and new savings from: - Employment reductions. - Welfare entitlement reforms. - A relatively small extent from the capital budget. - Savings anchored in binding cash expenditure ceilings over 2012–14, with fallback options if necessary in relation to public sector wages and primary social welfare rates. ### Fiscal governance: Fiscal Responsibility Bill and institutions - Fiscal Responsibility Bill will: - Give legal backing to a fiscal rules framework. - Establish the Irish Fiscal Advisory Council (IFAC). - Institute medium-term expenditure ceilings (MEFP ¶9). - Timing and design: - Authorities plan to defer submission of the Bill to Parliament to allow more time to design the fiscal rules framework and consider latest EU developments. - Staff supports deferral of the respective structural benchmark to end-March 2012 from end-December 2011. - Funding and guarantees: - Medium-term budget allocations for the IFAC were deemed not appropriate under the current budget system; nonetheless, the government has clearly expressed its commitment to ensuring adequate funding for the IFAC. - Deferral does not affect establishment of binding multi-annual expenditure ceilings as part of the 2012 Budget. ### Financial sector reforms: implementation progress and priorities - Overall progress: - Financial sector policy implementation has been strong throughout the first year of the program. - Government and Central Bank strategy to restructure domestic banks around two pillars, recapitalize on the basis of stringent stress tests and independent loan loss forecasts, and progressively deleverage banks is progressing well. - Restructuring: - Early progress: mergers of AIB with EBS and Anglo Irish with INBS. - Department of Finance established a banking division to oversee largely state owned banks in the interim before return to private ownership. - Division’s responsibilities for banking oversight in relation to the CBI clarified in a Memorandum of Understanding (structural benchmark for end-October). - Division developing relationship frameworks with banks to ensure core businesses run on a commercial basis. - Central Bank and Credit Institutions (Resolution) Act 2011 signed into law on October 20, 2011. - Recapitalization: - €24 billion recapitalization of the domestic banks completed at the end of July, with exception of operations for €0.5 billion expected to be completed by end-2011. - Total budgetary cost limited to €16.5 billion through participation by private investors and liability management exercises on subordinated debt. - Deleveraging: - Both pillar banks expected to meet their deleveraging targets for the end of 2011 despite difficult market conditions. - Bank of Ireland (BoI) has completed half of the total noncore asset disposals targeted by end-2013 within base case discounts used in the recapitalization exercise. - AIB expects to at least meet planned disposals for 2011. - Going forward, deleveraging targets will become more challenging as market conditions for bank assets have deteriorated; remaining volume of deleveraging is substantial and disposal plans increasingly focused on Irish rather than foreign assets. ### Enhancing bank balance-sheet quality and transparency - CBI guidance and actions (MEFP ¶12, ¶13): - Provide guidance on more conservative and realistic provisioning and enhanced disclosure requirements on asset quality. - Banks asked to submit plans to the CBI to address loans to households and SMEs in, or facing, financial difficulties (MEFP ¶14, ¶15). - Codes of conduct for lending to SMEs and for consumer protection revised. - Box 3 highlights (recapitalization, capital adequacy, provisioning and disclosure): - As of end-September 2011, average reported bank capital ratios (core tier 1 capital to risk weighted assets) increased to about 18 percent, up from 6 percent at end 2010. - Equity to total assets ratio (leverage ratio) increased to 10 percent from 4 percent as of December 2010. - Robust RWA requirements: RWA account for almost 53 percent of the nominal value of total assets (average of a sample of core regional banks is about 40 percent). - CBI actions to enhance data quality and disclosure on three fronts: - Loan provisioning: banks expected to have by end-December 2011 booked more than half of losses forecast in PCAR 2011, with further progress by end-2012, while keeping accounting policies within IFRS. - Enhanced disclosure on loan quality: about a dozen new disclosure requirements identified; further improvements expected including information on forbearance and debt for equity swaps, qualitative disclosure of noncore assets, and enhanced disclosure of provisioning on impaired loans and related suspended interest income. - Standardization of troubled loan definitions (impaired, defaulted, restructured) to enhance comparability and monitoring. - Expectation: bank capitalization levels will decline over coming months (but remain at a high level) as conservative and realistic provisioning is booked. ### Capital targets and stress-testing - Ongoing program target: maintain Core Tier 1 capital ratios of Irish banks of no less than 10½ percent. - Adequate capital also required under the authorities’ own Prudential Capital Review (PCAR) stress scenario. - PCAR 2011 (completed in March) was robust and conservative; its credibility was confirmed by the European Banking Authority (EBA) capital exercise, which did not identify additional capital needs for Irish banks. - Upcoming PCAR in 2012 should preserve key features that made PCAR 2011 widely credible, including the independent asset quality review (MEFP ¶17). ### Business models, governance, and risk management - CBI initiated detailed reviews of banks’ business models and will challenge them to restructure to ensure long-term viability. - Work underway to assess role of Banks’ Board Risk Committees, ensure effectiveness of internal audit functions, and assess compliance with EBA’s guidelines on remuneration for senior management. - Objective: strengthen banks’ medium-term viability and profitability and improve internal governance and risk management. ### Supervision, credit register, and legal powers - Strengthening supervision: - Progress in recruitment, training and development, information management and technology, adoption of new operational structure and risk assessment framework. - Enhanced legal powers in the Supervision and Enforcement Bill expected to be enacted in early 2012. - Credit register: - Strategy for a new privately-run credit register completed in September 2011. - Credit register set to have comprehensive coverage and be regulated by the CBI. - Legislation to be submitted by end-September 2012 pending clarification of data protection issues. - Staff stressed need for unique personal identifiers to ensure accuracy and usefulness of the credit register. ### Addressing remaining financial system weaknesses and credit union reforms - Credit unions: - Interim report by the Commission on Credit Unions completed; strategy to strengthen sector governance and regulation developed (Box 4). - Sector profile and issues: - 407 registered credit unions with 2.9 million members out of a population of 4½ million. - Deposits at credit unions stood at €12.2 billion at end-2010, just under 8 percent of private sector deposits. - Deposit Guarantee Scheme for credit institutions extended to credit unions, covering all deposits up to €100,000. - Analyses (special loan portfolio review by March 2011; Strategic Review by Grant Thornton; CBI stress tests) point to need for significant but manageable restructuring. - Minister for Finance indicated resource needs of €0.5 to €1 billion (less than 1 percent of GDP). - Authorities developed a sequenced reform process guided by final report of the Credit Union Commission. - Program adjustor: - Staff supports authorities’ request to broaden the program’s adjustor for bank restructuring costs to cover resolution costs for credit unions (MEFP ¶19). - ILP: - Further analysis of options to strengthen the draft restructuring plan for ILP was agreed to be needed by end-2011. *IMF staff report content (selected paragraphs 22–31, Boxes 2–4).* ### 1. Address weak and nonviable credit unions. This will be done in a manner that helps to ### _cr11356 - 1. Address weak and nonviable credit unions. This will be done in a manner that helps to ### Credit union strategy and reforms - Objectives: - Protect members’ savings, prevent contagion, safeguard financial stability, and protect the sector more generally. - Ensure long-term sustainability of the credit union sector through restructuring and strengthened governance. - Actions taken and planned: - Design and establishment of a mechanism to resolve non-viable entities. - Ensuring adequate supervisory powers to intervene in the sector. - Establishment of a resolution fund and securing initial funding. - Implementation has begun, with broader reform process to continue and be the focus of the final report of the Commission on Credit Unions expected by end-March 2012. - A key part of the legislative, regulatory, and governance framework under development is expected to be presented to the Oireachtas by mid-2012, following the necessary regulatory impact analysis. - Regulatory framework aims: - Give the regulator tools to supervise the sector adequately, taking account of the risk profile of the sector. - Ensure effective governance standards and strengthen credit unions’ risk management and compliance functions. - Structural benchmark: - Publication of legislation to strengthen the regulatory framework and put in place effective governance standards for credit unions (MEFP ¶19). ### Household debt distress and personal insolvency reform - Mortgage arrears and housing market: - Extent of mortgage arrears and implied risk of distressed house sales hinders stabilization of the housing market and potential recovery in consumption. - Inter-departmental Mortgage Arrears Working Group recommended case-by-case approaches for borrowers in difficulties, such as mortgage-to-rent schemes (Report of the Inter-Departmental Working Group on Mortgage Arrears, 12 October 2011). - Central Bank of Ireland (CBI) supervisory actions: - CBI has used supervisory power to require banks to submit strategies for engaging with borrowers by end-November 2011 (Address by Matthew Elderfield, Deputy Governor of the Central Bank of Ireland, Mortgage Arrears - CBI Supervisory Strategy, 14 October 2011). - Personal insolvency framework: - Ireland had 29 personal bankruptcies in 2010 compared with more than 1,400 in Northern Ireland. - Initial amendments to the Bankruptcy Act (effective October) shortened the period after which debts are discharged to five years with court approval, and introduced an automatic discharge after 12 years. - Authorities advancing a strategy for more comprehensive personal insolvency reforms (end-December 2011 structural benchmark). - Issues under discussion include length of the discharge period and the possibility of allowing secured creditors (e.g., mortgage lenders) to participate in envisaged voluntary nonjudicial procedures. - Staff cautioned to avoid adverse incentives for borrowers and to husband bank capital. ### Reinforcing growth and job creation prospects - Labor market and sectoral reforms: - Steps to boost hiring and enhance competition in sheltered sectors. - New legislation being prepared to provide greater guidance on wage setting after a High Court ruling on EROs; legislation would streamline ERO coverage and increase likelihood REAs will be reviewed over time (MEFP ¶24). - Legislation submitted to enhance regulation and transparency of legal services, increase competition in medical services, and strengthen competition enforcement (MEFP ¶26). - Active labor market programs: - Shortcomings identified in employment activation, training efforts, and support schemes. - National employment action plan revised; authorities will commission and publish an external evaluation of the revised plan and prepare an implementation plan based on recommendations to ensure adequate incentives and skills for the unemployed to return to work (MEFP ¶25). - Public asset disposals: - Authorities preparing a program of public asset disposals and associated regulatory reforms (MEFP ¶27). - Scale of disposals under consideration; given significant past privatizations, could only be on the order of a few percent of GDP. - Importance of orderly process to avoid fire sales and allow time for regulatory reform; discussion ongoing about using part of proceeds for growth-enhancing investments. ### Program modalities, financing, and risks - Program monitoring and targets: - Quantitative performance criteria proposed for end-March 2012 (MEFP Table 2). - Performance criterion for the Exchequer primary balance unchanged for end-December 2011; a performance criterion end-March 2012 is proposed. - End-December 2011 indicative target for net debt lowered to reflect out-performance to date. - Indicative targets for the primary Exchequer balance and for net debt set through September 2012. - Proposal to introduce an adjustor for outlays for credit union resolution costs (MEFP ¶18–19). - Prior action: submission to parliament of a 2012 Budget in line with the agreed program for completion of the review. - Proposed modification: date for submitting to parliament the Fiscal Responsibility Bill, including legal framework for the Irish Fiscal Advisory Council, from end-December 2011 to end-March 2012 (MEFP ¶9). - Financing to date: - The Fund and European partners have disbursed some €29.7 billion since the approval of the arrangement. - To date, SDR 6.4 billion (€7.2 billion) disbursed by the Fund, €11.4 billion by the European Financial Mechanism, and €3.6 billion by the European Financial Stability Facility. - The first disbursement under the U.K. bilateral loan equivalent to €0.5 billion was made in early October following completion of the Third Review. - The November disbursement by the EFSF was deferred by a few days and priced at 177 basis points over German bunds, compared with 51 basis points on the issuance in June. - The quarterly schedule of IMF and EU disbursements was reviewed; authorities requested rephasing of purchases within 2012 to bring forward resources from the third and fourth quarters into the first quarter while leaving total financing in 2012 unchanged. - The purchase available at the time of the fifth review would be in an amount equivalent to SDR 2.79 billion, with the additional amount taken equally from purchases scheduled for the seventh and eighth reviews. - Ireland: Financing Need and Sources, 2011–13 (In billions of euro) — figures as presented: - Financing need 2011 50.1 2012 23.4 2013 22.3 - Exchequer cash deficit 1/2 2011 1.0 2012 17.7 2013 13.8 - Amortization 12.7 5.7 8.5 - Bank recapitalization 16.5 0.0 0.0 - Financing sources 50.1 23.4 22.3 - EU 21.5 16.9 6.6 - IMF 12.5 6.3 3.7 - Market financing, incl. retail 1.1 3.7 13.3 - Cash drawdowns 2/ 15.1 -3.5 -1.4 - 1/ Includes allowance for amortisation of promissory notes and contingency for collateral on hedging transactions. - 2/ Use of Exchequer cash balances and NPRF. - Key risks to debt sustainability: - Growth: - Projected growth of 1 percent in 2012 has been halved compared with the previous quarterly review. - If growth fell to 1 percent on average over 2012–16 (i.e., a cumulative shortfall relative to the baseline of 7 percentage points), debt would reach 127 percent of GDP by 2016. - Cost of regaining market access: - Continued financial stress in the euro area could hold up Irish spreads, preventing early resumption of market financing or significantly increasing its cost. - Rise in share of debt perceived as senior can increase cost of regaining market access. - Deleveraging: - Intensification of deleveraging by banks in other countries and persistent weakness of funding markets would increase difficulty and cost of deleveraging by Irish banks, undermining bank capital and potential for renewed lending. - Uncertainty about scale and duration of household deleveraging given high debt and rising arrears. - Fiscal and political risks: - Ireland’s net public debt was 11 percent of GDP in 2007 and projected to reach 97 percent of GDP by 2011. - Support for privately-owned banks accounts for 40 percentage points of this increase. - Debt securities on issue by banks now in wind-down (Anglo and INBS) stood at some €21.1 billion in late 2008 (13½ percent of GDP in 2011), excluding covered bonds and subordinated liabilities. - Lack of burden sharing with unguaranteed senior debt holders is perceived as contributing to Ireland’s debt sustainability challenge and fiscal adjustment needs. ### European support, policy recommendations, and staff appraisal - Potential European actions to support recovery and debt sustainability: - Enhanced support for appropriate public investment or for SME lending to underpin growth and job creation. - Guarantees for term funding and conversion of short-term Eurosystem liquidity support into medium-term funding to aid banks regaining market access and returning to private ownership. - Capital support for vehicles designed to reduce deleveraging costs and spillovers. - Temporary equity participation in banks by European partners. - Refinancing prior recapitalization of banks or use of enhanced EFSF flexibility to facilitate regaining market access at reasonable cost. - Staff appraisal — key findings and recommendations: - Irish authorities have maintained strong policy implementation despite external volatility; first phase of financial sector reform strategy completed and budget kept on track. - Sustaining nascent economic recovery is critical to program success; careful design and timely implementation of fiscal consolidation, financial sector reforms, and structural reforms necessary. - Authorities committed to reducing the deficit to 3 percent of GDP by 2015 via Medium-Term Fiscal Statement; additional consolidation planned in 2012 and 2013. - Fiscal measures rely primarily on structural reforms of current spending, cuts in large capital-intensive projects, and revenue measures principally a rise in the standard VAT rate. - Further reforms of current spending are key for 2013–15; staff welcomes plans to broaden the tax base, likely encompassing income tax bands and credits in later years. - Continued intensive efforts needed to protect financial stability and ensure the financial system supports sustained recovery: - Central bank guidance on provisioning and disclosure encouraged. - Challenge banks’ business models, governance, and risk management. - Careful implementation of credit union restructuring. - Modernize personal insolvency regime and develop an effective credit register. - Structural reforms under development will help competitiveness, growth, and hiring; active labor market policy strengthening and enhanced competition in sheltered sectors recommended. - Stronger European support for Ireland’s recovery is warranted to reinforce program success and promote broader European stability. *Italic: IMF staff report content as provided in the source content unit.* ### 50. Staff supports the authorities’ request for completion of the fourth review and ### Staff supports the authorities’ request for completion of the fourth review and the rephasing of purchases within 2012 ### Macroeconomic outlook and key projections (Table 1 / Table 2) - Real GDP (annual change): 2007: 5.2; 2008: -3.0; 2009: -7.0; 2010: -0.4; 2011 (Prel.): 0.6; 2012 (Proj.): 1.1; 2013 (Proj.): 1.0; 2014 (Proj.): 2.3; 2015 (Proj.): 2.7; 2016 (Proj.): 3.0; 2017 (Proj.): 3.3. - Real domestic demand (annual change): 2007: 4.9; 2008: -4.0; 2009: -12.5; 2010: -4.9; 2011: -3.6; 2012: -2.7; 2013: -1.3; 2014: 0.6; 2015: 1.2; 2016: 2.4; 2017: 2.7. - Net exports (contribution to growth): 2007: 1.1; 2008: 1.3; 2009: 3.5; 2010: 3.7; 2011: 3.5; 2012: 3.3; 2013: 2.0; 2014: 1.8; 2015: 1.8; 2016: 1.2; 2017: 1.3. - Exports (annual change): 2007: 8.4; 2008: -1.1; 2009: -4.2; 2010: 6.3; 2011: 6.0; 2012: 4.5; 2013: 3.8; 2014: 4.5; 2015: 5.0; 2016: 4.9; 2017: 4.9. - Imports (annual change): 2007: 7.9; 2008: -3.0; 2009: -9.3; 2010: 2.7; 2011: 3.0; 2012: 1.4; 2013: 2.3; 2014: 3.6; 2015: 4.3; 2016: 4.9; 2017: 4.9. - Current account (percent of GDP): 2007: -5.3; 2008: -5.6; 2009: -2.9; 2010: 0.5; 2011: 1.8; 2012: 1.5; 2013: 1.5; 2014: 1.2; 2015: 1.3; 2016: 1.1; 2017: 1.1. - Gross national saving (percent of GDP): 2007: 21.1; 2008: 15.5; 2009: 10.8; 2010: 11.6; 2011: 12.1; 2012: 12.5; 2013: 11.8. - Gross investment (percent of GDP): 2007: 26.1; 2008: 21.6; 2009: 14.3; 2010: 11.0; 2011: 9.7; 2012: 10.5; 2013: 10.4. - Consumer prices (annual change): 2007: 2.9; 2008: 3.1; 2009: -1.7; 2010: -1.6; 2011: 1.1; 2012: 1.2; 2013: 1.1; 2014: 1.2; 2015: 1.4; 2016: 1.8; 2017: 1.8. - Employment (annual change): 2007: 3.6; 2008: -1.1; 2009: -8.1; 2010: -4.2; 2011: -1.5; 2012: -1.7; 2013: -0.2; 2014: 0.7; 2015: 1.3; 2016: 1.6; 2017: 1.5. - Unemployment rate (average): 2007: 4.6; 2008: 6.3; 2009: 11.8; 2010: 13.6; 2011: 14.3; 2012: 14.3; 2013: 14.2; 2014: 13.5; 2015: 12.6; 2016: 11.4; 2017: 10.5. - Output gap (percent of potential GDP): 2007: 6.5; 2008: 2.2; 2009: -5.5; 2010: -6.0; 2011: -5.9; 2012: -5.5; 2013: -5.0; 2014: -3.6; 2015: -2.2; 2016: -1.1; 2017: 0.0. ### Public finances and fiscal projections (Table 3) - General government balance (percent of GDP): 2007: 0.1; 2008: -7.3; 2009: -14.2; 2010: -31.4; 2011: -10.4; 2012: -10.3; 2013: -8.5; 2014: -7.5; 2015: -4.9; 2016: -2.9; 2017: -2.3. - General government gross debt (percent of GDP): 2007: 24.8; 2008: 44.2; 2009: 65.2; 2010: 92.5; 2011: 109.2; 2012: 105.6; 2013: 113.7; 2014: 118.1; 2015: 117.6; 2016: 114.7; 2017: 110.9. - Primary balance (excl. bank support, percent of GDP): 2007: 1.1; 2008: -6.0; 2009: -9.7; 2010: -8.5; 2011: -6.6; 2012: -6.7; 2013: -4.0; 2014: -1.8; 2015: 1.3; 2016: 3.3; 2017: (not shown). - Revenue (in billions): 2007: 68.9; 2008: 62.9; 2009: 54.2; 2010: 53.5; 2011: 54.4; 2012: 54.3; 2013: 56.2; 2014: 57.4; 2015: 60.4; 2016: 63.0. - Expenditure (ex. bank support, in billions): 2007: 68.7; 2008: 76.1; 2009: 73.0; 2010: 71.6; 2011: 70.9; 2012: 70.4; 2013: 69.7; 2014: 69.7; 2015: 68.8; 2016: 68.2. - Interest payments (in billions): 2007: 2.0; 2008: 2.5; 2009: 3.3; 2010: 4.9; 2011: 6.0; 2012: 5.6; 2013: 7.1; 2014: 9.3; 2015: 10.7; 2016: 10.7. - Structural primary balance (percent of nominal potential GDP): 2007: -9.4; 2008: -12.9; 2009: -9.1; 2010: -4.4; 2011: -2.4; 2012: -0.8; 2013: 0.4; 2014: 2.6; 2015: 3.5. - Nominal GDP (in billions of Euros): 2007: 189.9; 2008: 180.0; 2009: 160.6; 2010: 156.0; 2011: 157.7; 2012: 156.1; 2013: 159.1; 2014: 164.8; 2015: 171.7; 2016: 179.8. ### External sector and financial vulnerability (Table 4 / Table 6) - Current account (in percent of GDP): 2008: -5.6; 2009: -2.9; 2010: 0.5; 2011: 1.5; 2012 (Proj.): 1.5. - Balance of goods and services (percent of GDP): 2008: 9.0; 2009: 15.2; 2010: 18.8; 2011: 20.4; 2012: 22.3; 2013: 23.5. - Income balance (percent of GDP): 2008: -14.0; 2009: -17.4; 2010: -17.6; 2011: -18.3; 2012: -21.3; 2013: -21.5. - Capital and financial account balance (percent of GDP): 2008: 9.0; 2009: -1.3; 2010: 7.5; 2011: -20.6; 2012: -16.1; 2013: -7.5. - Exports (annual percent change, value in euros): 2008: 8.3; 2009: -1.4; 2010: -2.8; 2011: 8.1; 2012: 5.3. - Imports (annual percent change, value in euros): 2008: 9.5; 2009: -1.1; 2010: -9.6; 2011: 5.7; 2012: 4.5. - U.S. dollar per euro (period average): 2008: 1.37; 2009: 1.47; 2010: 1.39; 2011: 1.33; 2012: 1.42. - Government 10-year bond (end-period): 2007: 4.5; 2008: 4.4; 2009: 4.9; 2010: 9.2; 2011: 8.2. - ISEQ index annual change: 2007: -26.3; 2008: -66.2; 2009: 27.0; 2010: -3.0; 2011: -6.5. ### Banking sector and financial soundness (Table 4 / Table 7) - Annual credit growth to Irish resident private sector (adjusted): 2007: 20.1; 2008: 8.8; 2009: -1.7; 2010: -3.7; 2011: -3.1. - Non-performing loans (percent of total loans): Dec-08: 0.8; Dec-09: 2.6; Dec-10: 9.0; Mar-11: 8.6; Jun-11: 10.8. - Total provisions for loan losses (percent of total loans): Dec-08: 0.4; Dec-09: 1.3; Dec-10: 4.0; Mar-11: 4.2; Jun-11: 5.4. - Regulatory capital to risk-weighted assets (percent): Dec-08: 10.7; Dec-09: 10.6; Dec-10: 10.9; Mar-11: 10.4; Jun-11: 10.9. - Bank return on assets (before tax, percent): 2007: 0.7; 2008: -0.3; 2009: -1.6; 2010: -3.1; 2011: -0.3. - Bank return on equity (before tax, percent): 2007: 16.4; 2008: -8.0; 2009: -40.6; 2010: -67.6; 2011: -5.4. - Deposits to M3 ratio: 2007: 1.4; 2008: 1.4; 2009: 1.4; 2010: 1.5; 2011: 1.2. ### General government financing requirements and sources (Table 5) - Gross borrowing need (in billions): 2008: 15.9; 2009: 63.4; 2010: 71.4; 2011: 50.1; 2012: 23.4; 2013: 22.3. - Exchequer cash deficit (in billions): 2008: 12.7; 2009: 24.6; 2010: 18.7; 2011: 21.0; 2012: 17.7; 2013: 13.8. - Amortization (in billions): 2008: 3.1; 2009: 27.7; 2010: 17.3; 2011: 12.7; 2012: 5.7; 2013: 8.5. - Bank recapitalization costs (in billions): 2008: 0.0; 2009: 11.0; 2010: 35.3; 2011: 16.5; 2012: 0.0; 2013: 0.0. - Gross financing sources (in billions): 2008: 15.9; 2009: 63.4; 2010: 71.4; 2011: 16.2; 2012: 0.1; 2013: 11.9. - Market financing (inc. retail, in billions): 2008: 34.9; 2009: 53.3; 2010: 26.1; 2011: 1.1; 2012: 3.7; 2013: 13.3. - Cash drawdowns (use of Exchequer cash balances and National Pension Reserve Fund, in billions): 2008: -19.0; 2009: 10.0; 2010: 14.4; 2011: 15.1; 2012: -3.5; 2013: -1.4. - Financing gap (in billions): 2008: 0.0; 2009: 0.0; 2010: 0.0; 2011: 33.9; 2012: 23.2; 2013: 10.3. ### Balance of payments summary (Table 6) - Current account balance (in billions): 2008: -10.2; 2009: -4.7; 2010: 0.8; 2011: 2.4; 2012 (Proj.): 2.4; 2013 (Proj.): 2.0. - Trade balance (in billions): 2008: 23.8; 2009: 32.5; 2010: 36.5; 2011: 35.8; 2012: 35.7; 2013: 38.5. - Exports of goods (in billions): 2008: 81.0; 2009: 77.6; 2010: 82.9; 2011: 84.2; 2012: 82.9; 2013: 86.9. - Imports of goods (in billions): 2008: -57.2; 2009: -45.2; 2010: -46.4; 2011: -48.5; 2012: -47.2; 2013: -48.4. - Financial account — Direct investment (in billions): 2008: -24.2; 2009: -0.5; 2010: 1.7; 2011: 16.2; 2012: 5.9; 2013: 4.2. - Financial account — Portfolio investment (in billions): 2008: -45.7; 2009: 22.6; 2010: 94.0; 2011: 9.4; 2012: -10.7; 2013: -2.3. - Financing gap and program financing: Financing gap 2011: 33.9; 2012: 23.2; 2013: 10.3. Program financing sources identified include IMF and EU in projections. ### Monetary survey and banking balance sheet aggregates (Table 7) - Aggregate assets of domestic market credit institutions (end-period, in billions): Dec-08: 801; Dec-09: 798; Dec-10: 742; Mar-11: 704; Jun-11: 654; Sep-11: 659. - Irish resident broad money (M3, end-period, in billions): Dec-08: 194; Dec-09: 208; Dec-10: 185; Mar-11: 184; Jun-11: 192; Sep-11: 186. - Net foreign assets (in billions): Dec-08: -100; Dec-09: -75; Dec-10: -67; Mar-11: -60; Jun-11: -50. - Private sector credit (in billions): Dec-08: 394; Dec-09: 375; Dec-10: 335; Mar-11: 331; Jun-11: 332; Sep-11: 326. - Irish resident private sector credit to deposits (percent): Dec-08: 222.8; Dec-09: 200.8; Dec-10: 200.0; Mar-11: 205.5; Jun-11: 207.3; Sep-11: 209.2. - Wholesale funding (in billions): Dec-08: 439.6; Dec-09: 422.8; Dec-10: 315.3; Mar-11: 275.7; Jun-11: 241.2; Sep-11: 245.8. ### Schedule of IMF reviews and purchases (Table 8) - Board approval of arrangement: December 16, 2010 — SDRs 5,012,425,200 — 399 percent of quota. - First and Second Reviews: May 16, 2011 — SDRs 1,410,000,000 — 112 percent of quota. - Third Review: August 15, 2011 — SDRs 1,319,000,000 — 105 percent of quota. - Fourth Review: December 14, 2011 — SDRs 3,309,000,000 — 263 percent of quota. - Fifth Review: February 15, 2012 — SDRs 2,786,000,000 — 222 percent of quota. - Sixth Review: June 15, 2012 — SDRs 1,191,000,000 — 95 percent of quota. - Seventh Review: September 15, 2012 — SDRs 758,000,000 — 60 percent of quota. - Eighth Review: December 15, 2012 — SDRs 758,000,000 — 60 percent of quota. - Ninth Review: March 15, 2013 — SDRs 831,000,000 — 66 percent of quota. - Tenth Review: June 15, 2013 — SDRs 831,000,000 — 66 percent of quota. - Eleventh Review: September 15, 2013 — SDRs 681,000,000 — 54 percent of quota. - Twelfth Review: November 15, 2013 — SDRs 579,374,800 — 46 percent of quota. - Total scheduled purchases: SDRs 19,465,800,000 — 1,548 percent of quota. - Note: Table incorporates proposed rephasing of the fifth, seventh and eight purchase at the Fourth Review. ### Indicators of Fund credit and obligations (Table 9) - Disbursement (SDR millions): 2011 (stock) 11,050; 2012 (stock) 16,543; 2013 (stock) 19,466; 2014 (stock) 19,466; 2015 (stock) 18,931. - Stock of Fund credit (in percent of quota): 2011: 879; 2012: 1,315; 2013: 1,548; 2014: 1,548; 2015: 1,505; 2016: 1,332. - Stock of Fund credit (in percent of GDP): 2011: 8.0; 2012: 11.7; 2013: 13.4; 2014: 12.9; 2015: 12.1; 2016: 10.3. - Obligations to the Fund (in percent of quota): 2011: 10; 2012: 31; 2013: 41; 2014: 55; 2015: 100; 2016: 226; 2017: 275; 2018: 293; 2019: 282; 2020: 271; 2021: 219; 2022: 86; 2023: 28; 2024: 0. - Repurchase schedule and charges are presented in the table for 2011–24 with detailed year-by-year amounts (SDR basis). *Source: IMF staff calculations and projections as presented in the provided tables.* ### Annex I. Debt Sustainability Analysis ### Annex I. Debt Sustainability Analysis ### General Government Debt — baseline and drivers - General government gross debt is expected to peak at 118 percent of GDP in 2013 and decline to 111 percent of GDP by 2016 (improved from 115 percent in the previous review). - Downward revisions and one-off outlays: - Nominal GDP projected to be 2.8 percent lower by 2016 than at the Third Review, reflecting a weaker GDP deflator. - Exchequer outlays for resolution of credit unions, transfers to the Insurance Compensation Fund, and voluntary health insurance amounting to about €1.2 billion in 2011–12 (0.8 percent of GDP) are now incorporated. - General government debt stock at end-2010 revised downward by €3.72 billion (2.4 percent of GDP) due to correction of a statistical accounting error. - Financing and policy developments improving dynamics: - Reduction in interest rates and extension of maturities on EU loans (effective October) reduced projected interest payments on EU loans by about 3 percent of GDP cumulatively over 2011–16. - Fiscal consolidation plan incorporated, bringing the deficit to 3 percent of GDP by 2015 (previously projected 4.9 percent for 2015 at the Third Review). ### General Government Debt — baseline trajectory and counterfactuals - Baseline: - Planned fiscal consolidation places debt-to-GDP ratio on a downward path; primary surplus projected to exceed 3 percent of GDP by 2015, more than 2½ percentage points above the debt-stabilizing primary balance. - Assuming the primary balance remains at this level, debt-to-GDP could be reduced to close to 80 percent of GDP by 2030. - No-consolidation scenario: - In the absence of fiscal consolidation, debt would reach 147 percent of GDP in 2016. ### Sensitivity and stress scenarios (public debt) - Growth shock: - A permanent one-third standard deviation negative growth shock would lower average growth from 2¼ to 1 percent over 2012–16; under this scenario, public debt would reach 127 percent of GDP by 2016. - Interest rate shock: - Assuming interest rates on new borrowings remain at current levels (equivalent to a ¼ percentage point higher average interest rate on the full debt stock over 2012–16 and ½ percentage point higher average interest rate in 2016), debt would reach 112 percent of GDP by 2016 (baseline: 111 percent). - Principal baseline figures from Annex Table 1: - Public sector debt (percent of GDP): 2010: 105.6; 2011: 113.7; 2012: 118.1; 2013: 117.6; 2014: 114.7; 2015: 110.9; 2016: 110.9 (table shows 110.9 for 2015 and 2016 row entries). - Change in public sector debt (percent of GDP): 2011: 13.1; 2012: 8.1; 2013: 4.4; 2014: -0.5; 2015: -3.0; 2016: -3.7. - Identified debt-creating flows (4+7+12) (percent of GDP): 2011: 14.5; 2012: 6.5; 2013: 3.6; 2014: 0.1; 2015: -2.4; 2016: -3.2. - Primary deficit (percent of GDP): 2011: 6.7; 2012: 4.0; 2013: 1.8; 2014: -1.3; 2015: -3.1; 2016: -3.6. - Average nominal interest rate on public debt (in percent): 2011: 3.9; 2012: 4.3; 2013: 5.1; 2014: 5.5; 2015: 5.3; 2016: 5.4. - Real GDP growth (in percent): 2011: 1.1; 2012: 1.0; 2013: 2.3; 2014: 2.7; 2015: 3.0; 2016: 3.3. - Scenario with no policy change (constant primary balance) in 2011–2016: public sector debt reaches 147.1 percent of GDP by 2016. ### External Debt — levels and composition - Total external debt reached 1,030 percent of GDP at end-2010. - IFSC (International Financial Services Center) accounts for more than two thirds of total external debt and holds substantial external assets. - Overall international investment position was a net liability of about 90 percent of GDP at end-2010. - Excluding IFSC: - External debt at end-2010 represented 330 percent of GDP. - Projected to decline gradually to 260 percent of GDP by 2016 in the baseline. ### External Debt — risks and sensitivity scenarios - Growth shock: - With a permanent growth shock, the external debt ratio declines more slowly to 304 percent of GDP by 2016 (from baseline path to 260 percent). - Exchange rate shock: - High estimated degree of euro-denominated external debt mitigates sensitivity to exchange rate changes. - Should the real exchange rate depreciate by 30 percent in 2011, external debt would reach 350 percent of GDP by 2012 and decline to 263 percent by 2016. - Key projection figures from Annex Table 2 (excl. IFSC): - External debt (excl. IFSC) (percent of GDP): 2010: 324.4; 2011: 315.5; 2012: 302.0; 2013: 288.4; 2014: 273.6; 2016: 257.9. - Change in external debt (percent of GDP): 2011: -10.4; 2012: -8.9; 2013: -13.5; 2014: -13.6; 2015: -14.8; 2016: -15.7. - Current account deficit, excluding interest payments (percent of GDP): 2011: -21.0; 2012: -15.5; 2013: -14.2; 2014: -16.5; 2015: -17.8; 2016: -18.8. - External debt-to-exports ratio (percent): 2010: 349.6; 2011: 335.3; 2012: 315.4; 2013: 296.7; 2014: 278.7; 2016: 260.6. - Gross external financing need (in billions of US dollars): 2010: 333.8; 2011: 334.2; 2012: 331.6; 2013: 329.6; 2014: 328.3; 2016: 325.4. ### Illustrative bound tests and stress outcomes - Public debt bound tests (Annex Figure 1) — selected outcomes: - Baseline public debt: 111 (percent of GDP average shown in figures). - Growth shock average projection: 127. - Interest rate shock average projection: 112. - Primary balance shock / no-policy-change scenario: 147 (public debt by 2016). - Combined shock average projection: 129. - Contingent liabilities one-time 10 percent of GDP shock in 2011 yields average projection: 121. - External debt bound tests (Annex Figure 2) — selected outcomes: - Baseline external debt (excl. IFSC): 258 (percent of GDP average shown in figures). - Growth shock average projection: 302. - Interest rate shock average projection: 266. - Current account shock average projection: 275. - Real depreciation (30 percent) average projection: 264. - Combined shock average projection: 292. *Source: Annex I. Debt Sustainability Analysis, IMF staff calculations and tables in the provided content.* ### 1. The Government’s commitment to the Programme is illustrated by our continued ### The Government’s commitment to the Programme is illustrated by our continued strong performance in its implementation ### Programme implementation and financing requests - Met commitments under the EU/IMF supported programme in terms of policy reforms and quantitative targets (MEFP Tables 1 and 2). - Published a memorandum of understanding governing the relationship of the Department of Finance and the Central Bank in relation to banking sector oversight (structural benchmark for this review). - Performance criterion for end-September 2011 on the cumulative Exchequer primary balance was met with a margin. - Indicative target on stock of Central Government net debt was met. - Continuous performance criterion on non-accumulation of external payment arrears is met. - Request completion of the fourth review under the Extended Arrangement and availability of the fourth purchase in an amount equivalent to SDR 3.309 billion at the time of completion of the review. - Request rephasing of purchases within 2012: - Purchase to become available at the time of the fifth review: SDR 2.79 billion. - Additional amount to be taken equally from the purchases currently scheduled for the seventh and eighth reviews. - Propose quantitative performance criteria under the arrangement for 31 March 2012 (set out in the attached MEFP). - Propose two new structural benchmarks—on credit union reforms and policies to address unemployment—against which to measure progress under the programme (MEFP Table 3). - Request that the adjustor on bank restructuring costs be extended to include any resolution costs which may arise for credit unions. ### Recent economic developments and outlook - GDP grew at 2¼ percent on an annual basis in the second quarter (first half of 2011 recovery gathered pace; growth mainly export led and supported by stock rebuilding). - Growth likely to be modest in 2011 and 2012 due to weakening external demand, though Ireland’s competitiveness provides a cushion; domestic demand expected to continue declining at a moderating rate. - Current account surplus is expected to expand. - Annual HICP inflation was 1½ percent in October; inflation expected to remain low. - Market sentiment toward Ireland has improved; Euro Area agreements (noted July 21 and October 26 decisions) have lowered Ireland’s debt burden and rollover needs and been reflected in a notable decline in Irish sovereign spreads, though spreads remain high. ### Fiscal policies and consolidation strategy - 2011 consolidation targeted for 2011 will be achieved; end-year general government deficit is within the 10.6 percent of GDP EU/IMF-supported programme ceiling. - Medium-Term Fiscal Statement: additional consolidation of some €12.4 billion to be implemented over the next four years to bring the general government deficit to below 3 percent of GDP by 2015. - Budgetary Consolidation 2012–15, in €billion (figures consistent with the Medium-Term Fiscal Statement published on 4 November): - 2012: Expenditure 2.2; Current 1.45; Capital 0.75; Revenue 1.6; Consolidation 3.8. - 2013: Expenditure 2.25; Current 1.70; Capital 0.55; Revenue 1.25; Consolidation 3.5. - 2014: Expenditure 2.0; Current 1.9; Capital 0.1; Revenue 1.1; Consolidation 3.1. - 2015: Expenditure 1.3; Current 1.3; Capital 0.0; Revenue 0.7; Consolidation 2.0. - Note: The annual consolidation amounts exclude one-off items but include an element of carryover from measures implemented in previous years. In 2012, the expected €0.4 billion in carryover from the Universal Social Charge is not included in the €3.8 billion in consolidation. - Budget 2012: - Committed to meeting the deficit target of 8.6 % of GDP. - Will be submitted to the Oireachtas on December 6 (prior action). - Consolidation measures amounting to €3.8 billion comprised of expenditure savings of €2.2 billion and revenue measures contributing €1.6 billion. - Composition and design of measures for 2012: - Spending measures (total current expenditure adjustments €1.45 billion; capital reductions €0.75 billion): - Public service numbers reductions of 7,000 (wage bill savings). - Reforms to social welfare entitlements, reducing unemployment traps and improving targeting. - Departments’ non-pay budgets focused on high-priority programs, reducing input costs, eliminating subsidies. - Capital budget reductions achieved by deferring a number of large and expensive capital intensive projects while protecting essential outlays for schools and hospitals. - Supported by the Public Service Reform programme (rationalising state bodies, reducing decentralisation-related project commitments, procurement reform, shared services, greater use of IT services). - Revenue measures (total €1.6 billion): - VAT rate raised by 2 percentage points to 23 percent. - Increases in carbon and motor taxes. - Introduction of an interim uniform household charge on primary residences as first steps toward a value-based property tax. - Medium-term measures for 2013–15: - Over one-quarter of the almost €5½ billion in planned expenditure effort for this period will arise from carryover of savings from public service numbers reductions and entitlement reforms implemented in 2012. - Additional public service numbers reduction of 11,500 planned. - Budget 2012 will set binding nominal expenditure ceilings for all Departments for 2012–14 (end-December 2011 structural benchmark). - Revenue-side target: a further €3 billion effort through strengthening carbon, excise and vehicle taxation; replacing the interim uniform household charge with a value-based property tax; tightening various capital gains, VAT, PRSI and income tax expenditures. - Institutional reforms: - Fiscal Responsibility Bill to be submitted to the Oireachtas by end-March 2012. - Will establish a fiscal rules framework in line with the Stability and Growth Pact. - Will provide for establishment of the Irish Fiscal Advisory Council on a statutory basis. - Council independence assured through clear arrangements for membership, including consultation with a relevant Committee of the Oireachtas for nomination, appointment, extension and termination (end-March 2012 structural benchmark). - Government will ensure the Council is adequately funded over time. ### Financial sector policies and progress - Recapitalisation of the banking sector substantively completed at lower fiscal cost than expected due to private participation and burden-sharing. - Banks are securing term funding; deleveraging advancing; likely that domestic banks will meet their disposal objectives for end-2011 though transaction risks remain. - Priorities: strengthen bank balance sheets, expand access to market funding, develop banks’ capacity to lend soundly to support the recovery. Enhancing quality and transparency of banks’ balance sheets - Strengthen banks’ disclosure and provisioning practices to bring private funding and ownership back to the financial system. - Specific actions and structural benchmarks: - By end-December 2011, issue disclosure guidance to banks covering items such as standardised definitions related to troubled loans including arrears, default, and restructuring; principles to be made transparent and requirements reflected in the 2011 published financial statements, with continued monitoring of adherence. - Issue guidance to banks for the recognition of accounting losses in their loan books (end-December 2011 structural benchmark). - Banks expected to bring forward a substantial proportion of loan losses originally envisaged to be booked in the period through 2013 in the 2011 PCAR, while remaining in compliance with IFRS. - Principles governing loan provisioning guidance will be made transparent to ensure bank reporting is fully understood. SME lending and arrears strategies - Finalised revisions to the Code of Conduct for Business Lending to Small and Medium Enterprises: - New SME Code published on 4th of November 2011 and effective 1st of January 2012. - Requires lenders to have procedures for dealing with SMEs in financial difficulties, including minimum communication and information standards, and facilitating balanced negotiations where borrowers show willingness to cooperate. - Lenders retain rights with respect to liquidation or other insolvency procedures. - Banks required to submit their strategies for addressing arrears in their SME portfolios to the CBI by end-June 2012. ### Programmatic confidence and contingencies - Policies in Letters of Intent of 3 December 2010, 28 April 2011, 28 July 2011, and in this letter are considered adequate to achieve programme objectives. - Acknowledgement of high uncertainty and margins of error surrounding macroeconomic and fiscal projections, due mainly to international events; readiness to take corrective actions as appropriate and to consult with the Fund, the European Commission and the ECB in advance of necessary revisions. - Letter copied to Messrs. Draghi, Juncker, Rehn, and Rostowski. *Source: Ireland — Letter from the Minister for Finance and the Governor of the Central Bank of Ireland and attached Memorandum of Economic and Financial Policies (excerpt).* ### 15. The framework to enable households and creditors to deal with unsustainable ### _cr11356 - 15. The framework to enable households and creditors to deal with unsustainable ### Framework to resolve household debt burdens - Orderly negotiations between lenders and distressed borrowers are emphasized to address unsustainable household debts while preserving Ireland’s strong payment culture. - Monitoring and implementation actions: - Continue to monitor implementation of the Code of Conduct on Mortgage Arrears. - An Inter-departmental Mortgage Arrears Working Group recommended a range of options for households in different financial situations; Government is considering recommendations. - Government committed to begin placing independent mortgage advisors in the field by end-March 2012. - The CBI is exercising supervisory powers to encourage banks to address mortgage arrears proactively. ### Personal insolvency regime reform - The Government is preparing a strategy to reform the personal insolvency regime to underpin the household debt resolution process. - Key milestones and commitments: - Finalise a strategy by end-2011 to amend the Bankruptcy Act and create a new structured non-judicial debt settlement and enforcement mechanism (structural benchmark end-December). - Intend to publish draft legislation by end-March 2012. - Prepare plans to implement institutional infrastructure needed to support out-of-court settlements by end-March 2012. ### Strengthening the resilience of the financial sector - Bank capital adequacy: - In the 2012 Prudential Capital Assessment Review (PCAR) the conservative and prudent approach underpinning the 2011 exercise will be maintained, including independent loan loss forecasts, in the context of the EBA stress tests. - Credit union sector support and containment of fiscal costs: - Immediate actions to deal with weaknesses in the most troubled credit unions while protecting depositors and financial stability. - Commitment to initial resolution funding of €250 million from the Exchequer in Q4 2011; funding will be based on a principle of recoupment over the medium term via a levy under the Central Bank and Credit Institutions (Resolution) (No.2) Act 2011. - Further funding, up to an amount to be agreed with external partners, will be made available in 2012, if required, for resolution or stabilisation once the 2012 Credit Union amendment legislation is in place. - Legal provision requiring credit unions to maintain an amount in the Deposit Protection account at the Central Bank (under the Deposit Guarantee Scheme) will be commenced in 2012. - Restructuring and regulatory strengthening: - Restructuring will take account of the interim report of the Commission on Credit Unions and further recommendations on the revised structure for the sector. - Publish legislation to strengthen the regulatory framework, including legislative provision for effective governance standards and prudential standards by end-June 2012 (proposed structural benchmark). - Request that the adjustor in respect of payments for bank restructuring be extended to include resolution costs for credit unions for both the performance criterion on the Exchequer primary balance and the indicative target on net central government debt. - Irish Life and Permanent (ILP): - While evaluating bids for ILP’s insurance arm, an action plan is being developed to address the banking group’s challenges. - Reviewed ILP restructuring plan submitted to the European Commission in July; working with institution and advisors to assess options to strengthen the restructuring plan. - Complete an assessment of these options by end-December 2011. - Central Bank supervisory enhancements: - Continue to implement and report on the Central Bank’s action plan to strengthen supervision of credit institutions. - Roll out a new risk assessment framework (PRISM); assess banks’ risk weighted asset calculations and accuracy of internal models. - Continue training and development for Central Bank staff, embed new operational structures for cultural and engagement model changes, and monitor bank deleveraging targets. - The Supervision and Enforcement Bill will commence second stage in the Dáil shortly and is expected to continue through the Oireachtas in early 2012. ### Upgrading the financial information and crisis framework - Central Credit Register: - Legislation will be published by end-September 2012 for a new Central Credit Register to support more informed lending decisions, improved insolvency procedures, and banking supervision. - The data set will be comprehensive in scope, include information on restructured as well as new loans, and be covered by robust personal information protections. - Plan to submit legislation to the Oireachtas to implement this approach by end-September 2012. - Crisis management and resolution fund: - Central Bank and Credit Institutions (Resolution) (No. 2) Act was passed in October 2011 establishing a resolution fund and providing resolution tools including asset and liability transfer and bridge banks (where in the public interest). - Parameters of the levy noted for credit union resolution funding (paragraph 18) will be determined by end-December 2011. ### Structural reforms to boost competitiveness and employment - Sectoral wage agreement reforms: - Reforms prepared consistent with time-bound action plan completed at end-September. - Government outlined proposed changes on July 28 to Employment Regulation Orders (EROs) and Registered Employment Agreements (REAs) to increase hiring willingness and facilitate cross-sector adjustment, accounting for the 7 July 2011 High Court ruling. - Reforms will: allow targeted abolition of some EROs; greatly streamline number of minimum wages set; require consideration of economic conditions (unemployment, wage trends, international competitiveness) in setting wage rates; allow greater flexibility to deviate from EROs for companies facing financial difficulties; exclude conditions covered in existing legislation from EROs; establish time-bound process for varying REA terms without consent of all parties; clarify representativeness for REA registration and when REAs may be cancelled. - Legislation will be submitted to the Oireachtas by end-December 2011. - Activation and training for jobseekers: - Commission and publish an external evaluation of the revised national employment action plan to ensure: - that the large numbers of unemployed across all regions, including the long-term unemployed, have adequate incentives and skills needed to return to work; and - the data and reporting systems required to ensure more effective interventions are put in place, including: - group intervention statistics (3 to 6 months); and - ongoing intervention statistics (post 6 months) including numbers and level of penalty sanctions. - Based on recommendations, prepare an implementation plan by end-March 2012. - Competition, legal services, and healthcare contracting reforms: - Legal Services Regulation Bill submitted in October to increase transparency on legal costs, better protect consumers, and create independent oversight bodies covering solicitors and barristers. - Legislation submitted in September to make it easier for general practitioner doctors to obtain contracts under the General Medical Services Scheme. - Competition (Amendment) Bill submitted to increase penalties for competition law violations, allow recovery of investigation and court proceeding costs, and make it easier for private individuals to prove actions after successful public enforcement proceedings. - Continue engagement with European Commission staff on effectiveness of competition enforcement and seek timely enactment and implementation. - State asset disposals: - Preparing an ambitious programme of state asset disposals and associated regulatory reforms based on the Programme for Government and the Review Group on State Assets and Liabilities. - Draft programme of asset disposals to be discussed with the European Commission, the IMF and the ECB by end-December 2011. - Draft will identify potential assets for disposal and necessary regulatory changes consistent with relevant EU legislation; timetable will avoid fire sales and allow time to implement regulatory reforms. ### Programme financing and improvements in financing outlook - Improvements in financing and debt outlook: - Combined effect of reductions in interest rates and longer maturities on EFSM, EFSF and bilateral loans, along with quota related reductions in IMF lending rates, could reduce interest bill by around €10 billion over the full period to maturity. - Bilateral loan disbursements and negotiations: - First disbursement under the U.K. bilateral loan of €0.5 billion was made in early October in the context of the completion of the third review of the IMF-supported program. - Bilateral discussions with Sweden and Denmark are ongoing, with completion of loan documentation pending final agreement on the new EFSF terms. ### Programme monitoring and performance criteria - Monitoring mechanisms: - Policies under the programme will be monitored through quarterly and continuous performance criteria, indicative targets, structural benchmarks, and quarterly programme reviews as envisaged in Letters of Intent of 3 December 2010, 28 April 2011, 28 July 2011 and this letter. - Programme remains in compliance with the Memorandum of Understanding on Specific Policy Conditionality. - The attached Technical Memorandum of Understanding (TMU) defines quantitative performance criteria and indicative targets. - Government targets for the exchequer primary balance are monitored through quarterly performance criteria and net central government debt is an indicative target. - Continuous performance criterion on the non-accumulation of external payment arrears applies. - Progress on structural reforms is monitored through structural benchmarks. - Authorization: - Government authorises the IMF and the European Commission to publish the Letter of Intent and its attachments, and the related staff report. ### Key quantitative figures and targets (as presented in the source) - Credit union support and timing: - Commitment to initial resolution funding of €250 million from the Exchequer in Q4 2011. - Further funding, up to an amount to be agreed with external partners, may be made available in 2012. - Bank capital target: - The Central Bank directed recapitalisation of the principal banks (AIB, BoI and EBS) to achieve a capital ratio of 12 percent core tier 1 (structural benchmark noted in Table 1; status: Not observed 1/). - Programme financing impact estimate: - Could reduce interest bill by around €10 billion over the full period to maturity. - Specific disbursement: - First disbursement under the U.K. bilateral loan in the amount of €0.5 billion was made in early October. - Exchequer primary balance figures (Table 2 — 1. Cumulative exchequer primary balance 2/): - -10.1 - -8.4 - -20.2 - -18.3 - -15.0 - -7.5 - -9.0 - -11.0 - Ceiling on the stock of central government net debt (Table 2 — 3. Ceiling on the stock of central government net debt): - 94.6 - 91.7 - 115.9 - 111.7 - 116.9 - 126.2 - 129.9 - 132.4 - Structural benchmark and prior action timetable highlights (Table 3): - Central Bank to issue guidance to banks for recognition of accounting losses in loan book: End-December 2011 (Structural benchmark). - Finalise strategy for broader legal reforms around personal insolvency and creation of non-judicial debt settlement system: End-December 2011 (Structural benchmark). - Publish legislation to strengthen regulatory framework for credit unions (governance and prudential requirements): End-June 2012 (Proposed structural benchmark). - Submit the 2012 Budget to the Oireachtas: 6 December 2011 (Prior action). - Introduce medium-term expenditure framework with binding multi-annual expenditure ceilings (consistent with fiscal consolidation targets): 2012 Budget day in early December 2011 (Structural benchmark). - Submit legal framework for the Fiscal Advisory Council ensuring its independence as part of the Fiscal Responsibility Bill: End-March 2012 (Structural benchmark). *Source: Attachment III. Ireland: Technical Memorandum of Understanding (TMU); Letter of Intent and MEFP text as provided in the supplied content.* ### 1. This Technical Memorandum of Understanding (TMU) sets out the understandings ### This Technical Memorandum of Understanding (TMU) sets out the understandings regarding the definitions of the indicators subject to performance criteria and indicative targets under the arrangement supported by the Extended Fund Facility (EFF) ### Overview and purpose - Sets out definitions of indicators subject to performance criteria and indicative targets reported in Table 2 attached to the Memorandum of Economic and Financial Policies (MEFP). - Describes methods for assessing programme performance and information requirements to ensure adequate monitoring of targets. - For programme purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “programme exchange rates”, except items affecting government fiscal balances, which will be measured at current exchange rates. - The programme exchange rates are those that prevailed on November 24, 2010 as shown on the European Central bank web-page, in particular, €1 = 1.3339 U.S. dollar and €1 = 0.86547 SDR. ### Quantitative performance criteria and indicative targets — Floor on the Exchequer Primary Balance - The Exchequer balance: net surplus/deficit of the Exchequer Account (single bank account of the Central Fund held at the Central Bank of Ireland). - Exchequer balance = current balance + capital balance. - Current balance = current receipts (tax and non-tax revenue) minus current expenditure (voted expenditure and non-voted expenditure charged directly on the Central Fund, including the Sinking Fund). - Capital balance = capital receipts (Sinking Fund and other capital receipts) minus capital expenditure (voted and non-voted expenditure). - The Sinking Fund provision is a transfer from the current account to the capital account and has no effect on the overall Exchequer balance. - Performance criteria are set on the Exchequer primary balance (the Exchequer balance excluding net debt interest payments in the service of the National Debt). - Adjustments to the floor on the Exchequer primary balance: - Adjusted downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy (including loans to banks, investments in equity (requited recapitalisation), unrequited recapitalisation, and purchases of troubled assets) when carried out in line with programme objectives. - Adjusted upward by proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts. - Adjusted downward for Exchequer outlays for the resolution of credit unions, and upward for any return of such outlays to the Exchequer and for recoupment by the Exchequer from the Resolution Fund. - Any other financial operation by Government to support banks, including issuance of guarantees or provision of liquidity, will be reported to EC, IMF, and ECB staffs. - Measurement: the floor on the Exchequer primary balance (quantitative performance criterion) in each year will be measured cumulatively from the start of that calendar year. Key cumulative Exchequer primary balance figures (In billions of Euros) - From January 1, 2011: - End-December 2011 (performance criterion) -15.0 - From January 1, 2012: - End-March 2012 (performance criterion) -7.5 - End-June 2012 (indicative target) -9.0 - End-September 2012 (indicative target) -11.0 - The performance criterion on the Exchequer primary balance (floor) will be adjusted upward (downward) for the full amount of any over-performance (under-performance) in Exchequer tax revenues, pay-related social insurance contributions (PRSI) and national training fund contributions against the current projection listed below. Cumulative Exchequer tax revenue & other receipts (as outlined in 7. above) (In billions of Euros) - From January 1, 2011: - End-December 2011 (projection) 42.4 - From January 1, 2012: - End-March 2012 (projection) 9.7 - End-June 2012 (projection) 19.7 - End-September 2012 (projection) 30.7 - Any policy changes, including in administration and enforcement of taxes, which impact the revenue projection set out in paragraph 7 will lead to a reassessment of the adjustor in the context of program reviews. ### Ceiling on the Stock of Central Government Net Debt (indicative target) - Central government net debt = National Debt less liquid assets of the National Pensions Reserve Fund (NPRF). - National Debt = total outstanding principal borrowed by central government and not repaid as of the test date, less liquid assets available for redemption of those liabilities at the same date. - Liquid assets comprise Exchequer cash balances (including cash in the Capital Services Redemption Account), Exchequer deposits with commercial banks and other institutions, and investments in investment grade sovereign bills. - For programme purposes, NPRF liquid assets include the asset classes listed above and also all marketable securities such as equities, government bonds and other listed investments. NPRF shares in domestic Irish banks are excluded from the definition of liquid assets. - Adjustments to the 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 (including loans to banks, investments in equity (requited recapitalisation), unrequited recapitalisation, and purchases of troubled assets). - Adjusted downward by proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer or NPRF receipts. - Adjusted upward for Exchequer outlays for the resolution of credit unions, and downward for any return of such outlays to the Exchequer and for recoupment by the Exchequer from the Resolution Fund. - Programme exchange rates will apply to all non-euro denominated debt. - The ceiling will be adjusted upward (downward) by the amount of any final upward (downward) revision to the stock of end-September 2011 central government net debt. Central government net debt (In billions of Euros) - Outstanding stock: - End-September 2011 (provisional) 111.7 - End-December 2011 (indicative target) 116.9 - End-March 2012 (indicative target) 126.2 - End-June 2012 (indicative target) 129.9 - End-September 2012 (indicative target) 132.4 ### Non-accumulation of External Payments Arrears by Central Government (performance criterion) - Central government will accumulate no external payments arrears during the programme period. - Definition: an external payment arrear is a payment by the central government on its contracted or guaranteed external debt that has not been made within five business days after falling due, excluding any contractual grace period. - The performance criterion applies on a continuous basis. - The stock of external payments arrears will be calculated based on the schedule of external payments obligations reported by the National Treasury Management Agency. ### Reporting requirements - Performance criteria will be monitored using data supplied to the EC, IMF, and ECB staffs. Irish authorities will transmit promptly any data revisions in a timely manner. - Reporting lags and responsibilities: - The Department of Finance will report the Exchequer primary balance to the EC, IMF and ECB staff, with a lag of no more than seven days after the test date. - The National Treasury Management Agency 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 National Treasury Management Agency will provide the final stock of the central government system external payments arrears to the EC, IMF and ECB staff, with a lag of not more than seven days after the arrears arise in accordance with the definition in paragraph 12. - The Central Bank of Ireland will provide on a quarterly basis, bank by bank data on the assets of government guaranteed banks, including loans and provisioning by period overdue (90+days and less than 90 days) and category of borrower, 35 working days after the end of each quarter. ### Letter of Intent highlights (Dublin, 28 November 2011) - Government asserts it has met all programme targets for the fourth quarterly review (policy reforms and quantitative targets). - Fiscal policy: outturns up to end-October are in line with programme profile; general government deficit for 2011 expected to be within the 10.6% of GDP programme ceiling. - Actions taken: comprehensive review of expenditure; established an independent fiscal advisory council; reformed pension entitlements for new entrants to the public service (including linking them to career average earnings). - Banking sector: recapitalisation substantively completed at a cost significantly lower than initially anticipated due to private sector participation and burden sharing; domestic banks have sold a significant amount of non-core assets; restructuring plans submitted to the European Commission for State Aid clearance; published a memorandum of understanding governing Department of Finance and Central Bank relationship on banking sector oversight. - Structural reforms: progress on opening sheltered sectors (pharmacies, general practitioners, legal services); action plan to reform sectoral labour arrangements to facilitate labour market adjustment. - External environment: uncertainty in relation to Euro Area debt has increased financial market pressures and contributed to a deteriorating outlook for the world economy; positives include resumed growth (mainly export led), private investment returning to the banking sector, improved funding in private markets, and Euro Area decisions to reduce cost of EFSF loans and related commitments. - Budget 2012: committed to meeting the deficit target of 8.6% of GDP. - Financing/disbursement request: requests completion of the fourth review and release of the fourth EU disbursement of EUR 4.2 billion; requests a re-phasing of disbursements in 2012 so that the disbursement following the fifth review should be €5.8 billion with the additional amount taken equally from the sixth, seventh and eighth reviews (redistribution within 2012 of already agreed disbursements). - Authorities stand ready to take corrective actions as appropriate and will consult EC, ECB, and IMF in advance of necessary revisions. ### Memorandum of Understanding on Specific Economic Policy Conditionality (Third Update) — commitments - Quarterly disbursement of EFSM assistance subject to quarterly reviews of conditionality; release based on observance of quantitative performance criteria, respect for EU Council Decisions and Recommendations in the excessive deficit procedure, and positive evaluation of progress on policy criteria in the MEFP and updated MoU. - Authorities commit to: - Rigorously implement fiscal policy consistent with the requirements of the excessive deficit procedure; Department of Finance and Department of Public Expenditure and Reform to ensure tight supervision of expenditure commitments and effective tax collection to achieve cash primary deficit target (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 will be granted unless entirely consistent with EU/IMF Programme goals and the needs of the economy. - Consult ex-ante with the European Commission, the ECB and the IMF on adoption of policies not included in the Memorandum that could have a material impact on programme objectives. - Programme monitoring information commitments: - Provide all information required to monitor progress and track the economic and financial situation. - Provide a compliance report on the fulfilment of conditionality prior to release of instalments. - Provide reliable and regular availability of budgetary and other data as detailed in Annex 1. *Source: Technical Memorandum of Understanding; Letter of Intent (28 November 2011); Memorandum of Understanding on Specific Economic Policy Conditionality (Third Update, 28 November 2011).* ### 1. Actions for the fifth review (actions to be completed by end Q4-2011) ### _cr11356 - 1. Actions for the fifth review (actions to be completed by end Q4-2011) ### Fiscal consolidation (actions by end Q4-2011) - Government published the Medium-Term Fiscal Statement on 4 November 2011 setting out a medium-term fiscal consolidation plan for 2012 – 2015 consistent with the targets set out in the Council Recommendation in the context of the excessive deficit procedure. - By 2012 Budget day in early December 2011, Government will anchor the consolidation plan in binding medium-term expenditure cash ceilings and will set out revenue and expenditure measures to deliver the needed adjustment. - Government will propose a budget for 2012 aiming to further reduce the general Government deficit in line with the fiscal targets and including the detailed presentation of consolidation measures amounting to €3.8billion. The Government will introduce: - Revenue measures to yield €1.6 billion including: - An increase in the standard VAT rate - Increases in other indirect taxes - A Property tax - A reform of capital gains tax and capital acquisitions tax. - Expenditure reduction of EUR €2.2 billion including: - Social expenditure reductions. - Reduction of public service numbers and public service pension adjustments. - Other programme expenditure, and reductions in capital expenditure. - Without prejudice to the minimum consolidation amount and in consultation with the staff of the European Commission, the IMF and the ECB, Government may substitute one or more measures with others of equally good quality following further analysis of the CRE. ### Financial sector reforms (actions by end Q4-2011) - Recapitalization: - Government will ensure that the recapitalization of banks, as identified in the 2011 Prudential Capital Assessment Review, will be completed subject to appropriate adjustments for asset sales of IL&P. - Deleveraging: - 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 staff of the European Commission, the ECB and the IMF. - Irish authorities, in consultation with European Commission, IMF, and ECB staff, will monitor closely the evolution of the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR) to ensure convergence to Basel 3 standards by the relevant dates. - Reorganisation: - Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it with staff of the European Commission, the ECB and the IMF. - Authorities will continue to work to obtain European Commission approval of restructuring plans for the banks in the context of State Aid cases. - Authorities, in consultation with staff of the European Commission, the IMF and the ECB, will complete the assessment of options to strengthen the restructuring plan for IL&P. - Credit unions: - Authorities will act to underpin solvency and viability of the credit union sector while minimising fiscal cost. - A commitment to initial resolution funding of €250 million will be made from the Exchequer in Q4 2011 based on a principle of recoupment over the medium term via a levy under the Central Bank and Credit Institutions (Resolution)(No.2) Act 2011. - Financial supervision: - Irish authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss it with European Commission, ECB and IMF staff. - The Central Bank of Ireland will issue guidance to banks for recognition of accounting losses in their loan book requiring: - On core assets: increased consistency and conservatism in impairment triggers and provisioning model inputs including inter alia: period of arrears, emergence periods, cure rates and collateral value, and treatment of restructured loans and forbearance. - On non-core assets: provisioning to reflect losses arising from planned disposal, taking account as appropriate of the PLAR/PCAR analysis. - Ensure transparency of principles governing these disclosure requirements to ensure bank reporting is fully understood. - The Central Bank of Ireland will publish new guidelines for the valuation of collateral for bank loans by end December 2011. ### Structural reforms (actions by end Q4-2011) - To prepare for introduction of water charges: - Government will prepare proposals for implementation of recommendations of the independent assessment of transfer of responsibility for water service provision from local authorities to a water utility in consultation with European Commission Services with a view to starting charging during the EU/IMF Programme period. - To better target social support expenditure: - Department of Social Protection will build on recent studies on working age payments, child income support and disability allowance to produce, after consultation with stakeholders, a comprehensive programme of reforms to better target social support to those on lower incomes and ensure work pays for welfare recipients. - Department will submit a progress report by end-December 2011. - To increase competition: - Building on the Competition (Amendment) Bill, authorities will engage with European Commission services to discuss measures to enhance the competition enforcement framework and present amendments to the Bill where appropriate. - To reform labour market: - Building on the time-bound action plan presented in September 2011, authorities will present legislation to the Dáil to modernise Registered Employment Agreements (REAs) and Employment Regulations Orders (EROs) to reduce negative impacts on job creation and competitiveness. - Irish authorities will engage with staff of the European Commission, the IMF and the ECB on the basis of draft legislation in advance of publication. - Structural fiscal reforms to further reform key sectors: - Government will consider options for an ambitious programme of asset disposals based on the Programme for Government and the report of the Review Group on State Assets and Liabilities. - Government will prepare a draft programme of asset disposals and discuss it with staff of the European Commission, the IMF and the ECB by end-December 2011. The draft programme will include identification of potential assets to be disposed, necessary regulatory changes, a timetable for implementation, and an assessment of their classification as financial or non-financial transactions. - Draft programme will include identification of regulatory steps and changes required, including those consistent with relevant EU legislation, before sale of a minority stake in the Electricity Supply Board (ESB) can be finalised. --- ### Actions for the sixth review (actions to be completed by end Q1-2012) - Structural fiscal reforms: - Government will introduce a Fiscal Responsibility Bill consistent with the EU economic governance framework, including provisions for a medium-term budgetary framework, fiscal rules and the Fiscal Advisory Council. - Bill will assure the Council’s independence through clear arrangements for Council memberships, including consultation with a relevant committee of the Oireachtas for nomination, appointment, extension and termination. - Government will ensure the Council is adequately funded over time. - Financial sector reforms — PCAR 2012: - Irish authorities will report on evolution of capital up to end December 2011 within banks covered by the PCAR and will present and discuss findings with European Commission, ECB and IMF staff by end February 2012. - The 2012 PCAR exercise will be carried out in the context of the 2012 European Banking Authority (EBA) stress tests. Irish authorities will agree with European Commission, IMF and ECB staff on methodology features building on strengths of PCAR 2011. - Deleveraging: - Authorities, in consultation with European Commission, IMF and ECB staff, will assess banks' performance vis-à-vis agreed asset disposal targets. - Banks will report actual and forecast LDRs, NSFRs and asset disposals to the Central Bank of Ireland every six months (first report was issued on 31 July 2011). Reports will include: - progress achieved towards interim target; - forecast of LDR and NSFR for the end of the next period; - a detailed plan of action to meet the next interim target; and - actual and planned asset disposals. - If actual or forecast asset disposals fail to meet interim targets, Irish authorities will inform staff of European Commission, IMF, and ECB within 14 days of becoming aware. The Central Bank will oversee remedial actions and prompt timetables. - In addition to six-monthly reports, Irish authorities will update European Commission, IMF and ECB staff on progress in intervening quarters. - Authorities will monitor NSFR and LCR evolution to ensure convergence to Basel 3 standards by the relevant dates. - Reorganisation and supervision: - Irish authorities will report on progress implementing the strategy for reorganisation of Irish credit institutions and discuss it with European Commission, ECB and IMF staff. - Irish authorities will present a comprehensive report on progress in implementing the Central Bank action plan for strengthening supervision and discuss it with European Commission, ECB and IMF staff. - Structural reforms: - To reform the personal debt regime: Government will introduce legislation to the Houses of the Oireachtas aiming to lower cost and increase speed and efficiency of proceedings while mitigating moral hazard and maintaining credit discipline. - To further reform key sectors: Authorities will publish a public consultation draft of updated retail planning guidelines including agreed changes to retail size caps, and issue finalised guidelines after representations received by end-2011. - To improve activation of the unemployed: - Strengthen activation and training policies and commission and publish an external evaluation of the revised national employment action plan to ensure: - large numbers of unemployed across all regions, including long-term unemployed, have adequate incentives and skills to return to work; and - data and reporting systems required for more effective interventions are put in place, including: - group intervention statistics (3 to 6 months); - ongoing intervention statistics (post 6 months) including numbers and level of penalty sanctions. - Based on recommendations, Department of Social Protection will prepare an implementation plan by end-March 2012. - To better target social support expenditure: Department of Social Protection will submit to Government the comprehensive programme of reforms to better target social support to those on lower incomes and ensure work pays for welfare recipients. - To increase competition: Authorities will undertake a review of resourcing of the Competition Authority and report on sufficiency to allow adequate enforcement capacity of the new legislative framework. ### Actions for the seventh review (actions to be completed by end Q2-2012) - Financial sector reforms — PCAR 2012: - The PCAR for 2012 will be completed. - Before publication, PCAR 2012 results will be assessed with European Commission, ECB and IMF staff. - Results and methodology will be published in detail and on a bank-by-bank basis by 30 June 2012. - Based on results, authorities will ensure that banks are adequately capitalised. - Deleveraging: - Update on progress of banks' implementation of deleveraging plans under PLAR 2011 and related actions will be discussed with European Commission, ECB and IMF staff. - Authorities will monitor NSFR and LCR evolution to ensure convergence to Basel 3 standards by the relevant dates. - Credit unions: - Legal provision requiring credit unions to maintain an amount in the Deposit Protection account at the Central Bank under the Deposit Guarantee Scheme will become effective in 2012. - Restructuring will take account of the interim report of the Commission on Credit Unions and further recommendations; authorities will publish legislation to strengthen the regulatory framework including governance standards and prudential requirements. - Reorganisation and supervision: - Authorities will report on progress implementing the strategy for reorganisation of Irish credit institutions and discuss with European Commission, ECB and IMF staff. - Authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision and discuss with European Commission, ECB and IMF staff. - Structural reforms: - To assist financing needs and increase competition: Based on assessment of efficiency of electricity and gas sectors, authorities will strengthen regulatory and market reform programme in consultation with European Commission Services to increase efficiency, improve governance, strengthen competition and improve sectors' ability to contribute towards covering Ireland's financing needs and improving growth potential and economic recovery. - To increase competition: Authorities will ensure resourcing of the Competition Authority is sufficient to ensure adequate enforcement capacity of the new legislative framework on the basis of the Q1 2012 review. ### Actions for the eighth review (actions to be completed by end Q3-2012) - Financial sector reforms — Deleveraging: - Asset disposal monitoring as per requirement under Financial Sector Reforms in 6th Review (Q1 – 2012). - Authorities, in consultation with European Commission, IMF, and ECB staff, will monitor evolution of NSFR and LCR to ensure convergence to Basel 3 standards by the relevant dates. - Reorganisation: - Authorities will report on progress implementing the strategy for reorganisation of Irish credit institutions and discuss it with European Commission, ECB and IMF staff. - Financial supervision: - Authorities will present a comprehensive report on progress implementing the Central Bank of Ireland's action plan for strengthening supervision of credit institutions and discuss it with European Commission, ECB and IMF staff. - Government will present to Dáil Éireann legislation to establish a statutory credit risk register. ### Actions for the ninth review (actions to be completed by end Q4-2012) - Fiscal consolidation: - Government will propose a budget for 2013 aiming at a further reduction of the general Government deficit in line with Council Recommendation fiscal targets and including the detailed presentation of consolidation measures amounting to €3.5 billion. Proposed measures for 2013: - Revenue measures to raise at least €1.25 billion will be introduced, including: - A broadening of personal income tax base - A restructuring of motor taxation - A reduction in general tax expenditures - An increase in excise duty and other indirect taxes. - Expenditure reductions of no less than €2.25 billion, including: - Social expenditure reductions. - Reduction of public service numbers and public service pension adjustments. - Other programme expenditure, and reductions in capital expenditure. - Without prejudice to the minimum consolidation amount and in consultation with European Commission, IMF and ECB staff, Government may substitute measures with others of equally good quality following further analysis of the CRE. - Financial sector reforms: - Deleveraging: - Update on progress of banks' implementation of deleveraging plans under PLAR 2011 and related actions will be discussed with European Commission, ECB and IMF staff. - Authorities will monitor NSFR and LCR evolution to ensure convergence to Basel 3 standards by the relevant dates. - Reorganisation: - Authorities will report on progress implementing the strategy for reorganisation of Irish credit institutions and discuss it with European Commission, ECB and IMF staff. - Financial supervision: - Authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision and discuss it with European Commission, ECB and IMF staff. - Structural reforms — To increase competition: - Based on a report to be provided by end Q4 2012, authorities in consultation with European Commission, IMF and ECB staff will review whether sufficient progress has been made toward strengthening competition law enforcement by ensuring 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 and the functioning of the Competition Authority, and whether additional measures will be required. *Source: _cr11356 - 1. Actions for the fifth review (actions to be completed by end Q4-2011).* ### 6. Actions for the tenth review (actions to be completed by end Q1-2013) ### _cr11356 - 6. Actions for the tenth review (actions to be completed by end Q1-2013) ### Financial sector reforms — PCAR 2013 (tenth review) - The Irish authorities will report on the evolution of the capital up to the end of December 2012, within the banks covered by the PCAR and will present and discuss its findings with the staff of the European Commission, the ECB and the IMF by end February 2013. - The 2013 PCAR exercise will be carried out in the context of the 2013 European Banking Authority (EBA) stress tests. The Irish authorities will agree with the staff of the European Commission, IMF and ECB on the specific features of the methodology building on the strengths of the PCAR 2011. ### Deleveraging (tenth review) - Asset disposal monitoring – as per requirement under Financial Sector Reforms in 6th Review (Q1 – 2012). - The Irish authorities, in consultation with the staff of 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. ### Reorganisation (tenth review) - The Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it together with the staff of the European Commission, the ECB and the IMF. ### Financial supervision (tenth review) - The Irish authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss it together with the staff of the European Commission, the ECB and the IMF. ### 7. Actions for the eleventh review (actions to be completed by end Q2-2013) ### Financial sector reforms — PCAR 2013 (eleventh review) - The PCAR for 2013 will be completed. Before publication, the results of the PCAR for 2013 will be assessed, together with the staff of the 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 Irish authorities will ensure that banks are adequately capitalised. ### Deleveraging (eleventh review) - 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 staff of the European Commission, the ECB and the IMF. - In addition, the Irish authorities, in consultation with the staff of 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. ### Reorganisation (eleventh review) - The Irish authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss it together with the staff of the European Commission, the ECB and the IMF. ### Financial supervision (eleventh review) - The Irish authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss it together with the staff of the European Commission, the ECB and the IMF. ### 8. Actions for the twelfth review (actions to be completed by end Q3-2013) ### Deleveraging (twelfth review) - Asset disposal monitoring – as per requirement under Financial Sector Reforms in 6th Review (Q1 – 2012). - The Irish authorities, in consultation with the staff of 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. ### Reorganisation (twelfth review) - 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. ### Financial supervision (twelfth review) - The Irish authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss it together with the staff of the European Commission, the ECB and the IMF. ### 9. Actions for the thirteenth review (actions to be completed by end Q4-2013) ### Financial sector reforms — PCAR 2013 (thirteenth review) - The Irish authorities will report on the evolution of the capital up to the end September 2013, within the banks covered by the PCAR and will present and discuss its findings with the European Commission, the ECB and the IMF by end 2013. ### Deleveraging (thirteenth review) - 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. - In addition, 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. ### Reorganisation (thirteenth review) - 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. ### Financial supervision (thirteenth review) - The Irish authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s 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 — overview of regular data and reporting requirements - During the programme, the following indicators and reports shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis. 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 Exchequer Balance and General Government Balance outlook for the remainder of the year which shows 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.3 Quarterly data on main revenue and expenditure items of local Government. — Quarterly, 90 days after the end of each quarter - F.4 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.5 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.6 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.7 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 quarter - F.8 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 quarter - F.9 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.10 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. - F11 Report on progress achieved towards interim PLAR targets and actual and planned asset disposals. — Quarterly, 10 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, three working days after the end of each month - 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 of Ireland - C.1 The Central Bank of Ireland’s balance sheet. — Weekly, next working day - C.2 Individual maturity profiles (amortisation only) for each of the domestic banks will be provided as of the last Friday of each month. — Monthly, 30 working days after each month end. - C.3 Detailed financial and regulatory information (consolidated data) on domestic individual Irish banks and the banking sector in total especially regarding profitability (P&L), balance sheet, asset quality, regulatory capital; PLAR funding plan forecasts — Quarterly, 35 working days after the end of each quarter - C.4 Detailed information on deposits for the last Friday of each month. — Monthly, 30 working days after each month end. - C.5 Data on liabilities covered under the ELG Scheme for each of the Covered Institutions. — Monthly, 30 working days after each month end. - C.6 Deleveraging committee minutes and deleveraging sales progress sheets, detailing pricing, quantum, and other relevant result metrics. — Monthly, reflecting committee meetings held each month ### Supplementary information (selected findings and budgetary measures) - Budget 2012 was submitted to parliament on December 5–6 and is consistent with the programmed €3.8 billion consolidation for 2012, meeting the prior action for this review. The budgetary package also includes binding current expenditure ceilings over 2012–14 and capital expenditure envelopes set out in the Infrastructure and Capital Investment Plan 2012–16. - The authorities revised their 2012 macroeconomic projections: projected growth in real GDP was revised to 1.3 percent in 2012 (down from 1.6 percent in the MTFS), and closer to the staff projection of 1 percent growth in 2012. The authorities expect a 1.9 percent increase in HICP next year (compared to 1.2 percent projected earlier). - The revenue package totals €1.07 billion (net of the €0.6 billion carryover from 2011, and the cost of new targeted tax reliefs), while net expenditure savings amount to €2.15 billion, combining €0.75 billion in capital reductions and €1.4 billion in current spending cuts. - Revenue measures (and associated yields) include: - a 2 percentage point increase in the standard VAT rate, to 23 percent (€0.56 billion); - a tightening of excise duties – mainly carbon and motor tax (€0.18 billion); - harmonization of tax rates for capital gains, capital acquisitions and retained deposit interest, at 30 percent (€0.17 billion); - introduction of a flat annual household charge of €100 (€0.16 billion); - tightening of various income tax and pay-related social insurance reliefs (€0.08 billion); - tax administration measures (€0.09 million). - The €1.24 billion revenue effort is offset slightly by €0.17 billion in targeted tax reliefs. - Current expenditure savings are anchored in a targeted reduction of 6,000 in public service numbers in 2012 (relative to end-2011 forecast of 300,000). Health, social protection, and education and skills account for 80 percent of gross current spending savings. - Distribution of Current Expenditure Measures (Euro billions) — Department: Savings in 2012 / Full year equivalent: - Health: 0.54 / 0.80 - Social Protection: 0.48 / 0.81 - Education and Skills: 0.13 / 0.32 - Agriculture, Food & the Marine: 0.11 / 0.11 - Justice and Equality: 0.10 / 0.10 - Other: 0.19 / 0.16 - Less: Offsetting costs: -0.15 - Total: 1.40 / 2.29 - A majority of the targeted consolidation effort of €8.6 billion over 2013–15 has been specified, with tax effort of €2.8 billion (excluding €0.23 billion carryover) to be achieved by measures including a value-based property tax, vehicle registration and motor tax reform, extending PRSI to non-payroll income, tightening income tax expenditures, and reducing tax-related costs of private pension provision. The Infrastructure and Capital Investment Plan 2012–16 provides a basis for €0.65 billion in additional capital savings through 2015. - The authorities announced a target for the reduction in public service numbers of 12,500 over 2013–15. *Prepared by the European Department (in consultation with other departments); Approved by Ajai Chopra and Lorenzo Giorgianni; December 9, 2011.* ### 6. Increased financial stress in the euro area is starting to hamper the deleveraging ### 6. Increased financial stress in the euro area is starting to hamper the deleveraging ### Disposal of Irish Life and recapitalization implications - The disposal of Irish Life, which was part of the plan to recapitalize Irish Life & Permanent, has been suspended. - Authorities reported the bidding process attracted significant interest from a broad range of potential acquirers, but "none of the bids received for Irish Life were acceptable at the present time, as the current very challenging European market environment is not supportive of achieving a valuation that recognizes the strength of the Irish Life business." - Authorities confirmed they will complete the envisaged recapitalization. - Resulting capital requirement: €1.3 billion. - Fiscal significance: €1.3 billion is less than 1 percent of GDP. - Timing and modalities: expected to be discussed as part of the fifth review of the program. - Fiscal neutrality: the transaction is expected to be neutral with respect to the program’s fiscal deficit target. - Net government debt impact: manageable and expected to be temporary. ### Recapitalization of Bank of Ireland (BoI) - Recapitalization completed. - On December 2, 2011 BoI announced it had generated approximately €350 million of core tier 1 capital from the repurchase of residential mortgage backed securities and subordinated debt. - Policy consequence: Minister Noonan announced he was no longer considering the use of a Subordinated Liability Order to raise the remaining capital requirement for Bank of Ireland. ### IMF fourth review, disbursement, and program context - Press Release No. 11/471 — FOR IMMEDIATE RELEASE — December 15, 2011: IMF completes fourth review under the Extended Arrangement with Ireland and approves €3.9 Billion disbursement. - Arrangement details: - Three-year, SDR 19.47 billion (about €23.02 billion; or US$29.91 billion) arrangement under the Extended Fund Facility (EFF). - Equivalent of about 1,548 percent of Ireland’s IMF quota. - Disbursement enabled by the review: - Immediate disbursement amount equivalent to SDR 3.31 billion (about €3.91 billion; or US$5.08 billion). - Brings total disbursements under the EFF to SDR 11.05 billion (about €13.07 billion; or US$16.98 billion). - Broader financing package: part of a financing package amounting to €85 billion (about US$110.44 billion) also supported by Ireland’s European partners through the European Financial Stabilization Mechanism and European Financial Stability Facility, and bilateral loans from the United Kingdom, Sweden and Denmark, and Ireland’s own contributions. ### Financial sector reform and program implementation - Authorities undertook an in-depth analysis, including stringent stress tests, of domestic banks following credit and housing booms and the ensuing crisis. - Irish authorities adopted a comprehensive financial sector reform strategy in March 2011. - Implementation status: - First phase of the strategy (reorganize domestic banks, strengthen capital base, initiate downsizing of balance sheets) is now complete. - Further reforms are underway. - Key reform actions underway (as identified by the IMF statement): - Improving provisioning and disclosure. - Strengthening banks’ business models and internal controls. - Enhancing financial sector supervision. - Restructuring the credit union sector. - Developing relationship frameworks so that state owned banks operate on a commercial basis. - Modernizing the personal insolvency framework to facilitate resolution of household debt distress. ### Fiscal stance, targets, and growth outlook - 2012 budget measures: €3.8 billion (2.7 percent of GDP) in spending and revenue measures to reach a deficit target of 8.6 percent of GDP. - Medium-Term Fiscal Framework: sets out path to bring deficit below 3 percent of GDP in 2015. - Growth developments and projections: - Led by strong export performance, Ireland’s real GDP growth turned positive in the first half of 2011, reaching an annual rate of 2¼ percent in the second quarter. - Annual growth projected in 2011: 1.1 percent. - Outlook for 2012: weakening activity in Ireland’s trading partners is projected to slow Irish exports such that real GDP growth remains around 1 percent in 2012. - Program implementation assessment: authorities have maintained strong program implementation despite the strained external environment; growth turned positive in the first half of the year and Irish bond spreads have declined significantly since the summer, but Ireland faces risks from the turmoil in the euro area and the weakened growth prospects of trading partners. ### Policy guidance and IMF messages - Fiscal policy: - Authorities are keeping the budget on track for a substantial consolidation in the current year. - Through the 2012 budget and Medium-Term Fiscal Statement they committed to putting the public debt ratio on a clear downward path through a balanced mix of expenditure and revenue measures. - The planned amount of fiscal adjustment should be maintained in the event of adverse developments to avoid amplifying policy procyclicality. - Financial sector: - Continued efforts to deepen financial sector reforms are essential to build capacity to support the recovery. - Overall guidance: "Continued timely implementation of fiscal, financial, and structural reforms as well as European support, are essential for the success of the Irish program." — Mr. David Lipton, First Deputy Managing Director and Acting Chair. *IMF Press Release No. 11/471 (December 15, 2011) and related IMF staff commentary included in the source content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11356.pdf_