## _cr1147 - Section 1

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---

### Summary and program context
- Extended Arrangement approved December 6, 2010: access of SDR 19.5 billion (€22.5 billion, US$30 billion, 2,321.8 percent of Ireland’s quota) as part of an overall financing package of €85 billion, with €45 billion from the European Union and bilateral European financing and the rest from self-financing by the Irish.
- SDR 5 billion became available on approval and was purchased by Ireland on January 18, 2011 in parallel with the first EU disbursement.
- Emergency Financing Mechanism (EFM) requires a review of initial policy response and market reaction within one to two months; IMF staff mission visited Dublin during January 19–21, 2011 for an interim review.

### Recent developments and macroeconomic indicators
- Program implementation: on-track.
  - End-December 2010 structural benchmarks (terms of reference for the diagnostic study; definition of scenarios for the stress tests) implemented.
  - End-December quantitative performance criterion for the exchequer primary balance, continuous performance criterion on external payment arrears, and end-December indicative target on central government net debt were met.
- Political developments:
  - Prime Minister declared formal end to his government after losing parliamentary majority; Parliament dissolved on February 1 and early elections set for February 25.
  - Public response to the program generally favorable but domestic perception of inequitable burden sharing persists.
- Growth and labor market:
  - Real GDP grew q-o-q by ½ percent in 2010:Q3; this was broadly in line with expectations of a ¼ percent contraction for the full year.
  - Unemployment remains around 13½ percent.
  - Emigration continued, with primary destinations Canada, Australia, the U.K., and the U.S.
- Revenues and spending 2010:
  - Revenue in 2010 was higher than anticipated by 0.7 percent of GDP, mainly due to stronger corporation and excise taxes.
  - Collections in November and December were higher than expected by 0.4 percent of GDP (these months represent about ¼ of annual receipts).
  - The end-December performance criterion on the exchequer primary balance was met with a margin of ¾ percent of GDP.
  - The performance criterion was adjusted for bank support, reflecting the €525 million (0.3 percent of GDP) injection into EBS on December 14.

### Banking sector — strategy, actions, and risks
- Overall assessment:
  - Sector remains under stress with deteriorating asset quality and falling real estate prices.
  - Provisioning requirements keep bank profits negative.
  - Reliance on Eurosystem liquidity and Emergency Liquidity Assistance (ELA) remains heavy.
  - Corporate deposit outflows have moderated and retail deposits remain relatively stable.
- Market reaction:
  - Sovereign spreads have fallen on days when the ECB reportedly bought sovereign paper but have tended to rebound and remain elevated and volatile.
  - Short-end curve volatility related to political uncertainty.
  - Sovereign downgrades by Fitch and Moody’s caused some collateral to become ineligible under ECB criteria and be reclassified as ELA.
- Program financial-sector strategy (implementation timetable and targets):
  - Immediate recapitalization: process to inject fresh equity into core banks to achieve a 12 percent core tier 1 capital ratio initiated; due to be completed by end-February 2011 (structural benchmark).
  - Steady-state capital ratios and stress testing:
    - Top-down stress tests (PCAR 2011) and bottom-up diagnostic asset valuations on a bank-by-bank basis to be completed by end-March.
    - Independent bottom-up diagnostic asset valuation retained; validation of bank data and bank collateral evaluation to estimate additional capital needed to reach a core tier 1 capital ratio of 10.5 percent on a steady-state basis (program requirement).
    - Adverse scenario under stress tests will require a minimum capital ratio of 6 percent, in line with pan-European stress tests under the European Banking Authority.
    - Authorities coordinating with European partners and IMF staff to ensure capital sufficiency for both steady-state and adverse-case simultaneously.
  - Deleveraging: banks required to submit deleveraging plans by end-February 2011; Irish authorities working with an investment bank to assess plans against criteria agreed with IMF, ECB and EC. Pace must be consistent with program objectives and fiscal sustainability.
  - Bank resolution framework: draft legislation for a special bank resolution regime developed (end-February structural benchmark) covering (i) appointment of a special manager; (ii) Central Bank powers to transfer assets and liabilities; and (iii) establishment of bridge banks. Fund staff providing feedback; approval by the next government would enable submission to parliament.
  - Credit unions: thorough financial examination of about half of the 400 credit unions completed; full assessments will underpin a strategy to enhance sector viability.
- Implementation challenges and tradeoffs:
  - Objectives (leaner, more robust banking system with stable non-government funding) require complex, bank-by-bank restructuring calibrated to avoid asset fire sales and credit crunch risks.
  - Deleveraging depends critically on accurate asset valuation, complicated by market uncertainty.
  - Simultaneous recapitalization, deleveraging, and resolution of nonviable parts are interdependent and operationally demanding.

### Fiscal policy and legislative measures
- Finance Bill: approved by Parliament on January 29, 2011; gives effect to 2011 budget taxation measures with minor modifications.
  - Abolition of property-related tax expenditure likely to take effect in 2012 after an economic impact assessment.
  - Universal social charge (replacing health and income levies): reduced from 7 percent announced in the budget to 4 percent for medical card holders; to be offset by increasing rate paid by self-employed taxpayers from 7 to 10 percent on incomes above €100,000.
- Fiscal targets: overall budget targets and objectives of the National Recovery Plan, and thus IMF program targets, are respected.

### Data, monitoring, and safeguards
- Data improvements and technical assistance:
  - STA technical assistance mission overlapped with the interim review in January 2011; staff worked with central bank and central statistical office to develop methods for reporting debt service payments (interest and amortization) by sector and instrument.
  - Work program agreed to distinguish assets and liabilities of the domestic Irish banking sector from those of the International Financial Center in Dublin.
- Program monitoring:
  - Centralized unit established in the Department of Finance to coordinate and assist in program implementation and monitoring; will coordinate with central bank, NTMA, and other agencies and report on program performance. Authorities stressed streamlined monitoring mechanisms, including coordination with European institutions.
- Safeguards:
  - Safeguards assessment of the Central Bank of Ireland is in progress; mission visited during January 10–17, 2011 and found that the CBI had a generally sound framework. The assessment will be completed by the time of the first review under the Extended Arrangement.

### Staff appraisal, risks, and recommendations
- Main appraisal points:
  - Restoring market confidence requires sustained policy implementation and reduced political uncertainty; political transition risks contributing to market uncertainty and spread volatility.
  - Decisive action to restore the health of the banking sector is especially important to support the real economy and job creation.
  - Centralized implementation and monitoring arrangements bode well for program execution.
  - The initial overhaul of the banking system is encouraging but outstanding challenges are significant given inherited stress and interdependence of measures.
- Recommended program design flexibility:
  - Define structural benchmarks related to implementation processes underlying the banking sector strategy (e.g., how to deleverage various asset types), complemented by indicative quantitative goals.
  - Combine the first and second reviews of the program and conduct them once a new government is in place due to imminent elections.

*International Monetary Fund, Ireland: Extended Arrangement—Interim Review Under the Emergency Financing Mechanism (staff report completed February 2, 2011).*

### _cr1147 - Section 2

### National accounts (constant prices)
- GNP: 6.0 6.5 4.5 -3.5 -10.7 -2.4
- GDP: 6.0 5.3 5.6 -3.5 -7.6 -0.2
- Domestic demand: 8.8 6.4 5.4 -5.1 -13.9 -4.4
  - Private consumption: 6.9 6.7 6.4 -1.5 -7.0 -1.3
  - Public consumption: 3.9 5.1 6.9 2.2 -4.4 -3.7
  - Gross fixed investment: 14.9 4.6 2.8 -14.3 -31.0 -20.6
- Net exports 1/: -2.0 -0.8 0.8 1.5 3.8 3.6
  - Exports of goods and services: 4.8 4.8 8.2 -0.8 -4.1 8.8
  - Imports of goods and services: 8.3 6.4 7.8 -2.9 -9.7 5.5

### Gross national saving and gross investment (in percent of GDP)
- Gross national saving: 23.6 24.8 21.7 16.4 11.5 10.4
  - Private: 18.8 18.4 18.7 20.6 25.2 24.5
  - Public: 4.8 5.9 3.0 -4.2 -13.8 -14.1
- Gross investment: 27.2 28.0 27.3 22.3 14.1 11.8
  - Private: 23.7 24.2 22.5 16.8 9.4 7.4
  - Public: 3.5 3.8 4.8 5.5 4.7 4.4

### Prices, wages and employment
- Harmonized Index of Consumer Prices (annual average): 2.2 2.7 2.9 3.1 -1.7 -1.6
- Average wages, all economy: 5.1 5.5 5.2 3.5 -1.0 -1.7
- Output, manufacturing: 4.1 3.1 5.3 -2.1 -7.2 -0.2
- GNP/employment: 1.0 2.1 0.8 -2.4 -2.7 1.9
- Employment: 4.9 4.4 3.6 -1.1 -8.1 -4.3
- Unemployment rate (in percent): 4.4 4.4 4.6 6.3 11.8 13.3

### Money and credit (end-period)
- Irish contribution to euro area money supply: M3: 22.1 28.5 9.6 -1.9 -1.5 ...
- Irish resident private sector credit 2/: 28.8 25.9 17.0 7.3 -7.6 ...

### Financial and asset markets (end-period)
- Three-month interbank rate: 2.5 3.7 4.6 3.0 0.6 0.9
- 10-year government bond: 3.3 4.0 4.5 4.4 4.9 9.2
- ISEQ index: 16.8 27.8 -26.3 -66.2 27.0 -3.0
- House prices (permanent tsb index/ESRI): 9.4 11.8 -6.9 -8.8 -18.5 -10.8

### Public finance (in percent of GDP)
- General government balance: 1.6 2.9 0.1 -7.3 -14.4 -31.7
- Primary balance: 2.7 3.8 0.9 -6.3 -12.3 -28.6
- General government debt: 27.2 24.8 25.0 44.4 65.6 94.5

### External trade and balance of payments
- Balance of goods and services (percent of GDP): 11.7 10.3 9.9 9.0 15.0 19.0
- Current account (percent of GDP): -3.5 -3.6 -5.3 -5.6 -3.0 -1.9

### Effective exchange rates (1999:Q1=100, annual average)
- Nominal: 104.1 104.4 107.4 113.0 112.5 ...
- Real (CPI based): 115.4 116.0 120.1 125.6 121.9 ...

### Memorandum items
- Population (in millions): 4.1 4.2 4.3 4.4 4.5 4.5
- GDP per capita (in euros): 39,265 41,828 43,645 40,702 35,801 35,065

*Sources: Department of Finance; Central Bank of Ireland; IFS; Bloomberg; and Fund staff calculations.*

### Section 1

### _cr1147 - Section 1

### Summary and program context
- Extended Arrangement approved December 6, 2010: access of SDR 19.5 billion (€22.5 billion, US$30 billion, 2,321.8 percent of Ireland’s quota) as part of an overall financing package of €85 billion, with €45 billion from the European Union and bilateral European financing and the rest from self-financing by the Irish.  
- SDR 5 billion became available on approval and was purchased by Ireland on January 18, 2011 in parallel with the first EU disbursement.  
- Emergency Financing Mechanism (EFM) requires a review of initial policy response and market reaction within one to two months; IMF staff mission visited Dublin during January 19–21, 2011 for an interim review.

### Recent developments and macroeconomic indicators
- Program implementation: on-track. End-December 2010 structural benchmarks (terms of reference for the diagnostic study; definition of scenarios for the stress tests) implemented. End-December quantitative performance criterion for the exchequer primary balance, continuous performance criterion on external payment arrears, and end-December indicative target on central government net debt were met.
- Political developments: Prime Minister declared formal end to his government after losing parliamentary majority; Parliament dissolved on February 1 and early elections set for February 25. Public response to the program generally favorable but domestic perception of inequitable burden sharing persists.
- Growth and labor market:
  - Real GDP grew q-o-q by ½ percent in 2010:Q3; this was broadly in line with expectations of a ¼ percent contraction for the full year.  
  - Unemployment remains around 13½ percent.  
  - Emigration continued, with primary destinations Canada, Australia, the U.K., and the U.S.
- Revenues and spending 2010:
  - Revenue in 2010 was higher than anticipated by 0.7 percent of GDP, mainly due to stronger corporation and excise taxes.  
  - Collections in November and December were higher than expected by 0.4 percent of GDP (these months represent about ¼ of annual receipts).  
  - The end-December performance criterion on the exchequer primary balance was met with a margin of ¾ percent of GDP.  
  - The performance criterion was adjusted for bank support, reflecting the €525 million (0.3 percent of GDP) injection into EBS on December 14.

### Banking sector—strategy, actions, and risks
- Overall assessment: sector remains under stress with deteriorating asset quality and falling real estate prices; provisioning requirements keep bank profits negative; reliance on Eurosystem liquidity and Emergency Liquidity Assistance (ELA) remains heavy; corporate deposit outflows have moderated and retail deposits remain relatively stable.
- Market reaction: sovereign spreads have fallen on days when the ECB reportedly bought sovereign paper but have tended to rebound and remain elevated and volatile; short-end curve volatility related to political uncertainty; sovereign downgrades by Fitch and Moody’s caused some collateral to become ineligible under ECB criteria and be reclassified as ELA.
- Program financial-sector strategy (implementation timetable and targets):
  - Immediate recapitalization: process to inject fresh equity into core banks to achieve a 12 percent core tier 1 capital ratio initiated; due to be completed by end-February 2011 (structural benchmark).
  - Steady-state capital ratios and stress testing:
    - Top-down stress tests (PCAR 2011) and bottom-up diagnostic asset valuations on a bank-by-bank basis to be completed by end-March.  
    - Independent bottom-up diagnostic asset valuation retained; validation of bank data and bank collateral evaluation to estimate additional capital needed to reach a core tier 1 capital ratio of 10.5 percent on a steady-state basis (program requirement).  
    - Adverse scenario under stress tests will require a minimum capital ratio of 6 percent, in line with pan-European stress tests under the European Banking Authority.
    - Authorities coordinating with European partners and IMF staff to ensure capital sufficiency for both steady-state and adverse-case simultaneously.
  - Deleveraging: banks required to submit deleveraging plans by end-February 2011; Irish authorities working with an investment bank to assess plans against criteria agreed with IMF, ECB and EC. Pace must be consistent with program objectives and fiscal sustainability.
  - Bank resolution framework: draft legislation for a special bank resolution regime developed (end-February structural benchmark) covering (i) appointment of a special manager; (ii) Central Bank powers to transfer assets and liabilities; and (iii) establishment of bridge banks. Fund staff providing feedback; approval by the next government would enable submission to parliament.
  - Credit unions: thorough financial examination of about half of the 400 credit unions completed; full assessments will underpin a strategy to enhance sector viability.
- Implementation challenges and tradeoffs:
  - Objectives (leaner, more robust banking system with stable non-government funding) require complex, bank-by-bank restructuring calibrated to avoid asset fire sales and credit crunch risks.
  - Deleveraging depends critically on accurate asset valuation, complicated by market uncertainty.
  - Simultaneous recapitalization, deleveraging, and resolution of nonviable parts are interdependent and operationally demanding.

### Fiscal policy and legislative measures
- Finance Bill: approved by Parliament on January 29, 2011; gives effect to 2011 budget taxation measures with minor modifications.
  - Abolition of property-related tax expenditure likely to take effect in 2012 after an economic impact assessment.
  - Universal social charge (replacing health and income levies): reduced from 7 percent announced in the budget to 4 percent for medical card holders; to be offset by increasing rate paid by self-employed taxpayers from 7 to 10 percent on incomes above €100,000.
- Fiscal targets: overall budget targets and objectives of the National Recovery Plan, and thus IMF program targets, are respected.

### Data, monitoring, and safeguards
- Data improvements and technical assistance:
  - STA technical assistance mission overlapped with the interim review in January 2011; staff worked with central bank and central statistical office to develop methods for reporting debt service payments (interest and amortization) by sector and instrument.  
  - Work program agreed to distinguish assets and liabilities of the domestic Irish banking sector from those of the International Financial Center in Dublin.
- Program monitoring:
  - Centralized unit established in the Department of Finance to coordinate and assist in program implementation and monitoring; will coordinate with central bank, NTMA, and other agencies and report on program performance. Authorities stressed streamlined monitoring mechanisms, including coordination with European institutions.
- Safeguards:
  - Safeguards assessment of the Central Bank of Ireland is in progress; mission visited during January 10–17, 2011 and found that the CBI had a generally sound framework. The assessment will be completed by the time of the first review under the Extended Arrangement.

### Staff appraisal, risks, and recommendations
- Main appraisal points:
  - Restoring market confidence requires sustained policy implementation and reduced political uncertainty; political transition risks contributing to market uncertainty and spread volatility.
  - Decisive action to restore the health of the banking sector is especially important to support the real economy and job creation.
  - Centralized implementation and monitoring arrangements bode well for program execution.
  - The initial overhaul of the banking system is encouraging but outstanding challenges are significant given inherited stress and interdependence of measures.
- Recommended program design flexibility:
  - Define structural benchmarks related to implementation processes underlying the banking sector strategy (e.g., how to deleverage various asset types), complemented by indicative quantitative goals.  
  - Combine the first and second reviews of the program and conduct them once a new government is in place due to imminent elections.

*International Monetary Fund, Ireland: Extended Arrangement—Interim Review Under the Emergency Financing Mechanism (staff report completed February 2, 2011).*

### Section 2

### _cr1147 - Section 2

### National accounts (constant prices)
- GNP: 6.0 6.5 4.5 -3.5 -10.7 -2.4
- GDP: 6.0 5.3 5.6 -3.5 -7.6 -0.2
- Domestic demand: 8.8 6.4 5.4 -5.1 -13.9 -4.4
  - Private consumption: 6.9 6.7 6.4 -1.5 -7.0 -1.3
  - Public consumption: 3.9 5.1 6.9 2.2 -4.4 -3.7
  - Gross fixed investment: 14.9 4.6 2.8 -14.3 -31.0 -20.6
- Net exports 1/: -2.0 -0.8 0.8 1.5 3.8 3.6
  - Exports of goods and services: 4.8 4.8 8.2 -0.8 -4.1 8.8
  - Imports of goods and services: 8.3 6.4 7.8 -2.9 -9.7 5.5

### Gross national saving and gross investment (in percent of GDP)
- Gross national saving: 23.6 24.8 21.7 16.4 11.5 10.4
  - Private: 18.8 18.4 18.7 20.6 25.2 24.5
  - Public: 4.8 5.9 3.0 -4.2 -13.8 -14.1
- Gross investment: 27.2 28.0 27.3 22.3 14.1 11.8
  - Private: 23.7 24.2 22.5 16.8 9.4 7.4
  - Public: 3.5 3.8 4.8 5.5 4.7 4.4

### Prices, wages and employment
- Harmonized Index of Consumer Prices (annual average): 2.2 2.7 2.9 3.1 -1.7 -1.6
- Average wages, all economy: 5.1 5.5 5.2 3.5 -1.0 -1.7
- Output, manufacturing: 4.1 3.1 5.3 -2.1 -7.2 -0.2
- GNP/employment: 1.0 2.1 0.8 -2.4 -2.7 1.9
- Employment: 4.9 4.4 3.6 -1.1 -8.1 -4.3
- Unemployment rate (in percent): 4.4 4.4 4.6 6.3 11.8 13.3

### Money and credit (end-period)
- Irish contribution to euro area money supply: M3: 22.1 28.5 9.6 -1.9 -1.5 ...
- Irish resident private sector credit 2/: 28.8 25.9 17.0 7.3 -7.6 ...

### Financial and asset markets (end-period)
- Three-month interbank rate: 2.5 3.7 4.6 3.0 0.6 0.9
- 10-year government bond: 3.3 4.0 4.5 4.4 4.9 9.2
- ISEQ index: 16.8 27.8 -26.3 -66.2 27.0 -3.0
- House prices (permanent tsb index/ESRI): 9.4 11.8 -6.9 -8.8 -18.5 -10.8

### Public finance (in percent of GDP)
- General government balance: 1.6 2.9 0.1 -7.3 -14.4 -31.7
- Primary balance: 2.7 3.8 0.9 -6.3 -12.3 -28.6
- General government debt: 27.2 24.8 25.0 44.4 65.6 94.5

### External trade and balance of payments
- Balance of goods and services (percent of GDP): 11.7 10.3 9.9 9.0 15.0 19.0
- Current account (percent of GDP): -3.5 -3.6 -5.3 -5.6 -3.0 -1.9

### Effective exchange rates (1999:Q1=100, annual average)
- Nominal: 104.1 104.4 107.4 113.0 112.5 ...
- Real (CPI based): 115.4 116.0 120.1 125.6 121.9 ...

### Memorandum items
- Population (in millions): 4.1 4.2 4.3 4.4 4.5 4.5
- GDP per capita (in euros): 39,265 41,828 43,645 40,702 35,801 35,065

*Sources: Department of Finance; Central Bank of Ireland; IFS; Bloomberg; and Fund staff calculations.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1147.pdf_