## _cr12147 - Selected Economic Indicators, 2008–13

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### Background and market context
- Ireland’s policy implementation has been consistently strong during the first half of the EU-IMF supported program; all end March fiscal targets were met (MEFP Table 2).
- Public concerns about austerity may shape a May 31 referendum on the European Fiscal Stability Treaty; resumption of Treasury bill issuance in H2 2012 was expected feasible if the referendum supports Treaty ratification.
- Entering bond markets at reasonable cost and scale in 2013 and thereafter will require substantial improvement in market conditions and deeper financial sector reforms to address:
  - annual promissory note payments, and
  - legacy assets of banks.
- Since late March (2012), spreads relative to German bunds increased by about 280 and 120 basis points on two- and nine-year bonds respectively; two- and nine-year spreads are about 723 and 631 basis points respectively.
- Irish 9-year government bond yield remains at 7.4 percent (yield on nine-year bonds).

### Real sector, inflation, and labor market outcomes
- 2011 and early-2012 key datapoints:
  - Real GDP growth in 2011: 0.7 percent.
  - Real GNP in 2011: −2½ percent; net income outflows to non-residents rose by 16 percent.
  - Nominal GDP in 2011: about ½ percent higher than earlier projected.
  - Industrial production: declined ½ percent y/y in Q1 2012.
  - Exports rose 4 percent in 2011; services exports particularly strong.
  - Current account 2011: 0.1 percent of GDP.
  - HICP inflation first four months of 2012: averaged 1¾ percent y/y; energy accounted for three quarters of the increase.
- Labor market:
  - Employment rose by ½ percent in 2011Q4 (first quarterly increase since 2007).
  - Standardized unemployment rate averaged 14.4 percent in the first four months of 2012.
  - Long-term unemployment: share rising to 60 percent.
  - Youth unemployment: about 30 percent; number of persons under 25 on the Live Register declined by around 10 percent in the last year.
  - Rising share of involuntary part-time employment; vacancy rates among the lowest in Europe.

### Housing, household debt, and arrears
- House prices and household balance sheet:
  - House prices declined 16.4 percent y/y in April (2012); prices at half of their peak in September 2007.
  - Dublin prices rose in the last two months prior to the report.
  - Households’ net wealth peaked in mid-2007 and since declined by 37 percent largely due to collapse in housing prices.
  - By 2011 household deleveraging reduced debt by 13 percent from its end-2008 peak.
  - Household debt burden in 2011: 208 percent of disposable income (total household liabilities in percent of four-quarter gross disposable income).
- Mortgage arrears and restructurings (end March 2012):
  - Mortgages in arrears: 10.2 percent of mortgage accounts (principal private residences); 13.7 percent of mortgage balances.
  - Restructured mortgages by value: 12.6 percent.
  - Restructuring type shares (March 2012):
    - Interest Only: 35%
    - Reduced Payment (greater than interest only): 18%
    - Reduced Payment (less than interest only): 14%
    - Term Extension: 12%
    - Arrears Capitalisation: 12%
    - Hybrid: 5%
    - Payment Moratorium: 4%
  - More than half of restructured loans are in arrears.

### Banking sector: funding, capital, asset quality, profitability
- Funding and deposits:
  - Overall level of deposits in the banking system has stabilized.
  - Deleveraging and modest inflows into the three PCAR banks in 2011 helped reduce reliance on Eurosystem liquidity support.
  - AIB secured €395 million on a 3-year term with a 250 basis point spread over three-month Libor; BoI and PTSB completed similar transactions totaling €6.9 billion in late 2011.
- PCAR banks—end-2011 metrics:
  - Core Tier I capital averaged 16 percent (end-2011), up from about 6 percent at end-2010; regulatory minimum 10.5 percent.
  - Nonperforming loans (NPLs): 19.5 percent of total loans in 2011 (12.1 percent at end-2010).
  - Provisioning coverage: increased to 50 percent of NPLs from 42.7 percent in 2010.
  - Profits before provisioning and extraordinary income: 0.2 percent of average assets (down from 0.4 percent in 2010).
- Box 1 aggregated figures (Covered Banks, change 2011):
  - Total assets: €326.3b (2011) from €368.1b (2010); change (−41.8) (−11.4).
  - Gross loans: €240.9b (2011) from €276.8b (2010); change (−35.9) (−13.0).
  - Loan provisions (LLP): €23.5b (2011) from €14.3b (2010); change €9.2b (63.9).
  - NPLs: €47.0b (2011) from €33.5b (2010); change €13.5b (40.2).
  - % of NPLs to loans: 19.5 (2011), 12.1 (2010).
  - % LLP to NPLs: 49.9 (2011), 42.7 (2010).
  - Capital Tier 1 (CT1) to RWA: 27.2 (2011), 16.1 (2010).
  - CT1 to total assets: 8.3 (2011), 3.7 (2010).
  - Net income (attributable): (4.2) (€b) or (1.2)%TAA (2011) vs (11.7) (€b) or (2.9)%TAA (2010).
  - PPP net of non-recurrent: 0.8 (€b) or 0.2%TAA (2011) vs 1.7 (€b) or 0.4%TAA (2010).

### NAMA progress and strategy
- Asset disposal and liquidity:
  - Total asset sales approved exceed €8 billion; about 90 percent were assets located outside Ireland.
  - NAMA cash balances: €4.6 billion at end March 2012, including a €3 billion short-term loan to IBRC.
  - Interim target to redeem €7.5 billion in senior bonds by end 2013 appears feasible.
- Strategy highlights:
  - Vendor (Staple) Finance offering up to 70 percent financing to buyers.
  - Plan for a Qualified Investment Fund to be launched by late 2012.
  - Residential Deferred Payment pilot: deferred portion 20 percent payable only if property value has not fallen over next five years.
  - Proposed capital investment of €2 billion to enhance and complete projects through 2016.
- NAMA financials (2011 unaudited draft vs 2010):
  - Assets: €30,580m (2011) vs €29,655m (2010).
  - Cash: €3,330m (2011) vs €837m (2010).
  - Operating profit: €1,010m (2011) vs €305m (2010).
  - Profit: €200m (2011) vs (−€1,180m) (2010).
  - Net impairment charge: (−€810m) (2011) vs (−€1,485m) (2010).

### Fiscal outturn, projections, and targets
- 2011 general government deficit:
  - 13.1 percent of GDP including 3.7 percent of GDP in bank recapitalization outlays classified as capital transfers by Eurostat.
  - Excluding bank recapitalization outlays: 9.4 percent of GDP (under program ceiling by 1.2 percent of GDP).
- Cumulative exchequer outturn January–April 2012:
  - Performance criterion on exchequer primary balance met with a margin of ¾ percent of GDP in Q1.
  - Cumulative exchequer primary deficit at end-April was 0.2 percent of GDP below authorities’ profile, and ½ percent of GDP below the same period last year.
- Macroeconomic projections (selected, 2012):
  - Real GDP: 0.5
  - Real domestic demand: −2.1
    - Private consumption: −1.7
    - Public consumption: −2.0
    - Fixed investment: −4.5
  - Net exports (contribution to growth): 2.2
  - Nominal GDP (in billions of euros): 2012 = 159.2
  - GDP deflator: 2012 = 1.2
  - Current account (percent of GDP): 2012 = 0.9
  - Consumer Prices (HICP): 2012 = 1.7
  - Unemployment rate: 2012 = 14.3

### Growth outlook, risks, and debt projections
- Baseline medium-term projection:
  - Revival in domestic demand protracted: stabilization in 2013, gradual pick up to about 2 percent growth by 2015–17.
  - Overall growth projected to average 2½ percent in 2013–17.
- Key risks:
  - External demand and financial market conditions: weak trading partner growth or intensified euro area stress could greatly hinder recovery.
  - Domestic demand: resumption in private consumption and investment depends on bottoming of housing prices, SME lending pick-up, and well-targeted private debt restructuring.
  - Bank lending: legacy assets and weak profitability could hinder renewal of lending.
  - Unemployment: slow reductions could raise structural unemployment and sustain emigration.
- Promissory notes:
  - Some €30.7 billion (20 percent of GDP) in promissory notes injected during 2010; annual payments of €3.1 billion due until 2023 add political difficulty.
  - Authorities placed a long-term government bond with face value €3.5 billion with IBRC to settle the payment due end March 2012.
  - Policy need: more durable extension of the debt service schedule on promissory notes and associated Eurosystem funding stability of IBRC.
- Debt sustainability (baseline):
  - Gross debt path projected to peak at 121 percent of GDP in 2013 and decline to 111 percent of GDP by 2017.
  - Scenario sensitivity: debt would rise to about 133 percent of GDP by 2017 if growth stagnated at ½ percent.

### Financial sector reforms and restructuring priorities
- Integrated approach to restore bank viability and restart lending requires:
  - (i) maintain banks’ solvency and ensure improvements in liquidity and profitability;
  - (ii) proactively address remaining vulnerabilities;
  - (iii) provide framework to enhance quality of financial sector assets.
- Immediate priorities:
  - Data Integrity and Verification (DIV); Asset Quality Review (AQR); Income recognition and re-aging; Distressed Credit Operations Review (DCOR); platform for loan loss forecasting.
  - DCOR results: banks delay effective loan restructuring through forbearance; lack experienced staff; inadequate quality control.
  - Banks to prepare revised operational plans for distressed mortgages by end June (2012).
  - CBI designing monitoring system with key performance indicators to assess arrears resolution progress.
- PTSB restructuring:
  - Current PTSB considered nonviable; authorities to split PTSB into three business units and prepare detailed restructuring plan by end June (2012).
  - Units: Retail Bank (about half of assets), Asset Management Unit (about one-third of assets), Capital Home Loans (UK).
  - Retail Bank aims to break even in 2015 and deliver ROE consistent with market benchmarks by 2016.
  - Completion of PTSB restructuring will require financial support from European partners; options include transferring existing Eurosystem funding with AMU assets to IBRC or injecting high quality assets.
- Credit union sector:
  - Arrears almost 20 percent of the €5.5 billion loans at end 2011; provisioning about 80 percent of loans in arrears.
  - Process to address 25 severely undercapitalized credit unions began in January with appointment of a special manager.
  - Minister for Finance indicated overall resource needs on the order of €0.5 billion to €1 billion.
  - Restructuring envisaged as voluntary, incentivized, time-bound, funded by participating credit unions, the sector, and exchequer funding on a recoverable basis.

### Personal insolvency framework and household debt workout
- Majority of debt workouts intended bilaterally outside insolvency; CBI exercising supervisory powers to accelerate bilateral resolution.
- Draft general scheme of the personal insolvency bill published in January proposes:
  - Modernization of the Bankruptcy Act.
  - Establishing a non-judicial debt settlement mechanism, including for mortgages.
- Preparatory items to advance in parallel:
  - Guidance on income/expenditure thresholds.
  - Clarification of payment orders in bankruptcy.
  - Infrastructure: New Insolvency Service; enhanced Courts Service resources; licensing and monitoring for personal insolvency trustees.
- SME measures:
  - At end-December 2011, about 20 percent of corporate and SME loans were impaired.
  - Government measures under development: microfinance fund; temporary partial guarantee scheme for small or specialized SMEs.
  - Staff recommendation: channel initiatives to performing or restructured borrowers showing good performance.

### Program financing, targets, and monitoring
- Program financing and disbursements:
  - Bilateral agreements with Sweden and Denmark concluded; Denmark disbursed a first tranche of €0.1 billion.
  - Program total external financing envelope: €67.5 billion; disbursed to date 71 percent or €48 billion (European partners some €32 billion; Fund equivalent €16 billion).
  - At completion of the sixth review, some €4.1 billion disbursed—including equivalent of €1.4 billion by the Fund—so total official financing of €15 billion will remain once that disbursement is made.
- Market funding needs and cash buffers:
  - Gross market funding needs just under €4 billion in 2012.
  - Projected 2012 year-end cash balance: €13.5 billion.
  - Market funding needs excluding rollovers increase to some €6 billion in H1 2013.
- Program conditionality and monitoring:
  - Quantitative performance criteria and indicative targets specified (e.g., Exchequer primary balance floors: End-June 2012 = −9.0 (€b), End-September 2012 = −10.6 (€b), End-December 2012 = −10.9 (€b), End-March 2013 = −6.5 (€b)).
  - Ceiling on central government net debt (indicative target): End-March 2012 provisional = 123.0 (€b); End-June 2012 = 128.8 (€b); End-September 2012 = 130.9 (€b); End-December 2012 = 133.3 (€b); End-March 2013 = 141.7 (€b).
  - Ceiling on accumulation of new external payments arrears: 0.
  - Programme exchange rates (30 December 2011): €1 = 1.2939 U.S. dollar; €1 = 0.842786 SDR.
  - Central Bank to provide quarterly bank-by-bank data on government guaranteed banks 35 working days after quarter end.

### Annex I — Debt Sustainability Analysis (selected scenarios and bounds)
- Baseline general government debt path (percent of GDP):
  - Peak at 121 percent of GDP in 2013; decline to 111 percent of GDP by 2017.
  - Baseline selected series (2007–2017): 24.8 (2007), 44.2 (2008), 65.2 (2009), 92.5 (2010), 108.2 (2011), 117.6 (2012), 121.2 (2013), 119.7 (2014), 116.2 (2015), 113.6 (2016), 110.4 (2017).
- Stress scenarios:
  - Low growth scenario (real GDP stagnating at 0.5 percent): debt-to-GDP 133 percent by 2017 and 151 percent by 2021.
  - One-time contingent liability shock of 10 percent of GDP in 2013: peak general government debt 131 percent of GDP in 2013; 106 percent by 2021.
  - Interest rate shock: permanent 200 basis point shock to short-term debt and new market borrowing increases effective interest rate by 140 basis points by 2021; debt falls to 103 percent of GDP in 2021 under this shock.
- External debt (baseline) selected:
  - External debt (percent of GDP): 257.3 (2007), 303.2 (2008), 327.0 (2009), 334.8 (2010), 309.7 (2011), 299.2 (2012), 284.8 (2013), 267.7 (2014), 250.1 (2015), 233.5 (2016), 218.4 (2017).
  - External stress bounds: historical-averages scenario → external debt 382 percent of GDP in 2017; permanent growth shock → 250 percent in 2017; current account shock → 238 percent in 2017; 30 percent real depreciation in 2013 → peak 318 percent in 2013, decline to 215 percent in 2017.

### Annex II — Structural fiscal balance methodology (key points)
- Structural balance adjusts for four gaps: real output gap, equity price gap, house price gap, unemployment gap.
- Output gap method: Hodrick-Prescott filter on log real GDP with smoothing parameter 25.
- House and equity price fundamentals: set at average of 2014–17 projected levels.
- Expenditure elasticities: zero for all expenditures except unemployment benefits (assumed cost 0.2 percent of GDP per 0.1 percentage point of cyclical unemployment).
- Key results:
  - Structural primary deficit peaked at −10.4 percent of potential GDP in 2008.
  - Structural primary balance projected to improve from −4.8 percent of potential GDP at end-2011 to +3.3 percent of potential GDP in 2015.

### Publication, PCAR follow-up, and structural benchmarks
- Publication of PCAR results to be aligned with next EBA exercise; rigorous stress test leveraging phase one outputs planned.
- Deleveraging framework: six-monthly nominal targets for non-core asset disposals/run-offs; emphasis to shift toward NSFR goals for end-2013.
- Structural benchmarks (selected):
  - Submit updated restructuring plan for PTSB by end-June 2012 (proposed structural benchmark).
  - Publish legislation to strengthen regulatory framework for credit unions by end-September 2012 (modified structural benchmark).
  - Approve regulations for levy to recoup resolution costs from credit institutions by end-September 2012 (structural benchmark).
  - Submit legal framework for Fiscal Advisory Council as part of Fiscal Responsibility Bill by end-September 2012 (modified structural benchmark).

### Supplement and Executive Board decision
- Referendum (May 31, 2012): 60.3 percent of votes in favor; turnout 51 percent.
- Market reaction: decline in 2-year bond spreads of 85 basis points in the following days; nine-year bond yield close to 7.4 percent.
- May exchequer returns:
  - Cumulative exchequer primary deficit at end-May (including promissory note payment via bond issuance to IBRC): €6.4 billion (4 percent of GDP).
  - That deficit was 0.1 percent of GDP under authorities’ profile and 1.3 percentage points of GDP narrower than same period in 2011.
  - Forty percent of full-year tax revenue target collected.
- IMF Executive Board completed Sixth Review enabling immediate disbursement equivalent to SDR 1.191 billion (about €1.4 billion).
- IMF-stated priorities (selected recommendations):
  - Accommodate potential revenue shortfalls if real GDP weakens to protect fragile recovery.
  - Specify by Budget 2013 measures to underpin 2013–15 consolidation.
  - Advance fiscal institutional reforms to regain market access.
  - Bolster growth and job creation, enhance labor activation resources, and avoid unemployment traps.
  - Reinvest portion of state asset disposals to support jobs and strengthen competition enforcement.
  - Prepare personal insolvency framework early; carefully implement PTSB restructuring including timely separation of legacy assets.
  - Stronger European support would be most effective as part of a broader plan to stabilize financial markets and strengthen euro-area growth.

*Italic: IMF staff report content provided in the unit _cr12147 - 1. Selected Economic Indicators, 2008–13 (and associated sections and annexes) as supplied in the source content.*

### 1. Selected Economic Indicators, 2008–13 ..............................................................................3

### _cr12147 - 1. Selected Economic Indicators, 2008–13

### Background
- Ireland’s policy implementation has been consistently strong during the first half of the EU-IMF supported program; all end March fiscal targets were met (MEFP Table 2).
- Public concerns about austerity will shape the outcome of the May 31 referendum on the European Fiscal Stability Treaty.
- Resuming Treasury bill issuance in the second half of 2012 was expected to be feasible if the referendum supports Treaty ratification, but risks have grown with escalation of euro area financial market tensions.
- Entering bond markets at reasonable cost and scale in 2013 and thereafter will require substantial improvement in market conditions and deeper financial sector reforms to address:
  - annual promissory note payments, and
  - legacy assets of banks.
- Stronger European support would be most effective as part of a broader plan to stabilize financial markets and strengthen growth in the euro area.

### Recent developments in sovereign spreads and markets
- Since late March (2012), spreads relative to German bunds increased by about 280 and 120 basis points on two- and nine-year bonds respectively.
- Two- and nine-year spreads are about 723 and 631 basis points respectively, exceeding levels at the time of the program request.
- Irish 9-year government bond yield remains at 7.4 percent (yield on nine-year bonds), above the level of the Irish government’s last bond auction in September 2010.
- Developments primarily reflect rising spreads in other euro area countries; the end May referendum may also affect credit ratings.

### Real sector and inflation (overview and 2011 outcomes)
- Real GDP growth in 2011: 0.7 percent.
  - Growth relied on a surge in net exports and stock rebuilding in the first half of 2011.
  - Domestic demand, especially investment, weakened in the second half of 2011.
- Real GNP in 2011: a reduction of 2½ percent.
  - Net income outflows to non-residents rose by 16 percent.
- Nominal GDP in 2011: about ½ percent higher than earlier projected (smaller than expected decline in the GDP deflator).
- Industrial production: continued decline (industrial production declined ½ percent y/y in Q1 2012).
- Export performance 2011: exports rose 4 percent in 2011, with services exports particularly strong.
- Current account 2011: broadly balanced at 0.1 percent of GDP.
- HICP inflation in the first four months of 2012: averaged 1¾ percent y/y.
  - Energy accounted for three quarters of the increase.
  - Core inflation (mostly transport and insurance) contributed the remainder.
- VAT rate hike: about a 2 percentage point increase in the main VAT rate; little immediate pass-through evident.

### Labor market conditions
- Employment: rose by ½ percent in 2011Q4 (first quarterly increase since 2007).
- Unemployment: standardized unemployment rate averaged 14.4 percent in the first four months of 2012, in line with 2011 levels.
- Long-term unemployment: share rising to 60 percent.
- Youth indicators: number of persons under 25 on the Live Register declined by around 10 percent in the last year; youth unemployment about 30 percent (Figure 1 note).
- Other labor indicators: rising share of involuntary part-time employment; vacancy rates among the lowest in Europe.

### Competitiveness and external sector
- Competitiveness improvements continue, primarily reflecting productivity gains and relatively modest declines in private sector wages.
- Relative Unit Labor Cost in Manufacturing and Harmonized Competitiveness Indicators show improvement since 2009–2010, though gains slowed in late 2011.
- Labor productivity: has risen faster than in the euro area in recent years, with a small decline in the second half of 2011.
- Export market shares: continued gradual decline in Ireland’s market share in goods exports, suggesting further improvements may be needed.

### Indicators and outlook for early 2012
- Exporters Association data Q1 2012: modest overall export growth of 3.6 percent y/y.
  - Services exports: growing 8 percent y/y.
  - Goods exports: flat.
- Manufacturing and services PMIs rose above 50 in recent months (50+ indicates expansion), linked to rising export orders.
- Retail sales volume (ex. auto): a 1.8 percent fall in the six months ending April 2012; 2011 decline was 2.6 percent y/y.
- Conclusion: indicators consistent with weaker external demand growth but some moderation in domestic demand declines.

### Housing and household debt developments
- House prices:
  - Declined 16.4 percent y/y in April (2012).
  - Prices at half of their peak in September 2007.
  - Dublin prices rose in the last two months (prior to the report).
- Bank recapitalization stress scenario: factored in a decline of 18.8 percent in 2012; the 2011 fall in average house prices of 13.2 percent y/y was close to the baseline and within the stress scenario of a 17.4 percent decline.
- Stock of properties for sale: has eased.
- Housing affordability for first-time buyers: renewed improvements noted.
- New mortgage lending: remained low; loans for house purchases data show dormancy (Figure 3).

### Household balance sheet and debt burden
- Households’ net wealth:
  - Peaked in mid-2007; since declined by 37 percent largely due to collapse in housing prices.
- Household debt:
  - By 2011, household deleveraging reduced debt by 13 percent from its end-2008 peak.
  - Household debt burden in 2011: 208 percent of disposable income (total household liabilities in percent of four-quarter gross disposable income).
  - Net effect: overall household debt burden eased by only 3 percentage points to 208 percent of disposable income in 2011.
- Interest burden:
  - Four-quarter interest payments in percent of four-quarter gross disposable income declined modestly (figure indicates relief from lower interest rates).

### Mortgage arrears and restructurings
- Mortgages in arrears at end March 2012:
  - 10.2 percent of mortgage accounts (principal private residences).
  - 13.7 percent of mortgage balances.
- Restructured mortgages by end March 2012: 12.6 percent of mortgages by value restructured.
  - Predominant restructuring types (March 2012 shares):
    - Interest Only: 35%
    - Reduced Payment (greater than interest only): 18%
    - Reduced Payment (less than interest only): 14%
    - Term Extension: 12%
    - Arrears Capitalisation: 12%
    - Hybrid: 5%
    - Payment Moratorium: 4%
  - More than half of restructured loans are in arrears, indicating that deeper loan modifications are needed in some cases.

*Source: IMF staff report content provided in the unit _cr12147 - 1. Selected Economic Indicators, 2008–13.*

### 10.      Bank funding pressures appear to be easing as the overall level of deposits in the

### _cr12147 - 10.      Bank funding pressures appear to be easing as the overall level of deposits in the

### Bank funding and deposits
- The overall level of deposits in the banking system has stabilized (Figure 4).
- Deleveraging and a modest inflow of deposits into the three PCAR banks in 2011 (Allied Irish Banks, Bank of Ireland, and Permanent TSB) are offsetting maturing bank debt and have contributed to a gradual reduction in reliance on Eurosystem liquidity support in recent months.
- PCAR banks continue to access term funding collateralized by U.K. retail mortgages:
  - AIB secured the equivalent of €395 million on a 3-year term with a 250 basis point spread over three-month Libor.
  - BoI and PTSB completed similar transactions totaling €6.9 billion in late 2011.
- There are signs that competitive pressures on deposit rates may be easing.

### PCAR banks: capital, asset quality, profitability
- Capitalization:
  - At end-2011, Core Tier I capital for the PCAR banks averaged 16 percent, up from about 6 percent at end-2010, and above the regulatory minimum of 10.5 percent.
- Asset quality:
  - Nonperforming loans (NPLs) rose to 19.5 percent of total loans in 2011 from 12.1 percent at end-2010.
  - The rise in NPLs was partly driven by stricter CBI loan classification guidelines and by reduction in the value of performing loans due to deleveraging.
  - Provisioning coverage increased to 50 percent of NPLs from 42.7 percent in 2010, in line with new CBI provisioning guidelines.
- Profitability:
  - Profits before provisioning and extraordinary income declined to 0.2 percent of average assets, from 0.4 percent in 2010.
  - The deterioration in asset quality undermined banks’ capacity to generate sufficient net interest income to provide for loan losses.

### Deposits, credit developments, and liquidity (Figure 4 excerpts)
- Deposits:
  - Total private deposits and resident private deposits stabilized in 2006–12 period (Figure 4).
  - Deposit volumes refer to government guaranteed banks; interest rates refer to resident banks.
- Credit:
  - Credit to households and corporations continued to contract at stable rates (year-on-year percentage change).
  - SME credit picked up marginally in Q4 2011, driven by credit to manufacturing.
  - Credit standards are stable, but credit demand has started to show further weakness.
- Eurosystem borrowing:
  - Eurosystem liquidity support (proxied by CBI's Other claims on euro area credit institutions and Other assets) has been gradually reduced as funding pressures eased.

### Box 1 — Banks’ 2011 financial performance: key facts and drivers
- Operating profits fell to 0.2 percent of total average assets (TAA) in 2011 from 0.4 percent in 2010.
- Main factors for weak performance:
  - Low net interest margin (NIM):
    - NIM fell by 0.2 percentage points in 2011, to 0.9 percent.
    - Funding costs rose by an average of 35 basis points on interest bearing liabilities.
  - High operating costs:
    - Operating expenses reduced to 0.9 percent from 1 percent of TAAs, but accounted for 100 percent of NIM in 2011 (up from 85 percent in 2010).
  - Low net fee income:
    - Averaged only about 0.2–0.3 percent of TAA in 2010–11.
- Non-recurrent positive impacts on gross operating profit in 2011:
  - Smaller losses on discontinued operations (assets sold at generally higher valuations than assumed in PLAR).
  - Much higher non-recurrent gains associated with liability management exercises (LMEs) on subordinated debt, including conversion into equity.
- Profit and provisioning metrics:
  - Pre-provision profits (PPP) were 2 percent of TAA, insufficient to cover loan provisions of 3.8 percent of TAA (up from 2.9 percent in 2010).
  - Fall in the costs of discontinued operations from 1.5 percent of TAA in 2010 to 0.3 percent in 2011 mitigated year-over-year net income impact.
  - Net income (attributable) improved to a loss of 1.2 percent of TAA from a loss of 2.9 percent in 2010.
  - Return on equity (ROE) improved to minus 20 percent from minus 79 percent.
- Selected aggregated balance sheet and income statement figures (Covered Banks, change 2011):
  - Total assets: €326.3b (2011) from €368.1b (2010); change (−41.8) (−11.4).
  - Total average assets: €347.8b (2011) from €399.9b (2010); change (−52.1) (−13.0).
  - Gross loans: €240.9b (2011) from €276.8b (2010); change (−35.9) (−13.0).
  - Loan provisions (LLP): €23.5b (2011) from €14.3b (2010); change €9.2b (63.9).
  - NPLs: €47.0b (2011) from €33.5b (2010); change €13.5b (40.2).
  - % of NPLs to loans: 19.5 (2011), 12.1 (2010).
  - % LLP to NPLs: 49.9 (2011), 42.7 (2010).
  - Capital Tier 1 (CT1) to RWA: 27.2 (2011), 16.1 (2010).
  - CT1 to total assets (leverage): 8.3 (2011), 3.7 (2010).
  - Net income (attributable): (4.2) (€b) or (1.2)%TAA (2011) vs (11.7) (€b) or (2.9)%TAA (2010).
  - PPP net of non-recurrent: 0.8 (€b) or 0.2%TAA (2011) vs 1.7 (€b) or 0.4%TAA (2010).

### Fiscal outturn and near-term developments
- 2011 general government deficit:
  - 13.1 percent of GDP including 3.7 percent of GDP in bank recapitalization outlays classified as capital transfers by Eurostat.
  - Excluding bank recapitalization outlays, the general government deficit was 9.4 percent of GDP, under the program ceiling by 1.2 percent of GDP.
- Drivers of outperformance:
  - Firm expenditure control including at local government levels.
  - Robust revenue collection across major taxes.
  - Higher than expected bank-related income.
  - Cut in EU lending rates.
- Cumulative exchequer outturn January–April 2012:
  - Performance criterion on exchequer primary balance met with a margin of ¾ percent of GDP in Q1.
  - At end-April, cumulative revenues (after adjusting for favorable one-offs) were above the authorities’ profile by 0.3 percent of GDP and above last year’s collections by 0.7 percent of GDP.
  - Higher revenues were distributed across personal income tax, VAT, and corporation tax.
  - Current spending was above the authorities’ profile by 0.2 percent of GDP, mainly in social protection and health, owing to higher hospital activity, medical card issuance, and unemployment above budgeted levels.
  - Cumulative exchequer primary deficit at end-April was 0.2 percent of GDP below the authorities’ profile, and ½ percent of GDP below the same period last year.

### NAMA progress and strategy
- Asset disposals:
  - Total asset sales approved so far exceed €8 billion, of which about 90 percent were assets located outside Ireland.
  - NAMA may exceed its plans for €9 billion in asset sales by end 2013.
- Liquidity and targets:
  - NAMA cash balances were €4.6 billion at end March 2012, including a €3 billion short-term loan to IBRC.
  - NAMA’s interim target to redeem a total of €7.5 billion in senior bonds by end 2013 appears feasible.
- Evolving asset realization strategy (Box 2 highlights):
  - Vendor (Staple) Finance for commercial property, offering financing up to 70 percent to buyers.
  - Plan for a Qualified Investment Fund to be launched by late 2012 to attract institutional investors by asset type or geography.
  - Residential Deferred Payment pilot: deferred portion 20 percent payable only if property value has not fallen over next five years.
  - Proposed capital investment of €2 billion to enhance and complete commercial and residential projects over the period to 2016.
- NAMA financials (2011 unaudited draft vs 2010):
  - Assets: €30,580m (2011) vs €29,655m (2010).
  - Cash: €3,330m (2011) vs €837m (2010).
  - Operating profit: €1,010m (2011) vs €305m (2010).
  - Profit: €200m (2011) vs (−€1,180m) (2010).
  - Net impairment charge: (−€810m) (2011) vs (−€1,485m) (2010).

### Outlook and risks (macroeconomic projections)
- 2012 growth prospects:
  - Growth for 2012 projected at about ½ percent, unchanged from the fifth review.
  - Net exports expected to continue driving growth, but with a smaller contribution as trading partner GDP growth is expected to fall to 0.7 percent from 1.6 percent in 2011.
  - Consumption projected to decline by 1.7 percent as real household disposable income weakens and savings remain elevated.
  - Fixed investment expected to continue declining, though at a slower pace than in 2011, partly due to fiscal consolidation.
- Ireland: Macroeconomic Projections, selected entries (percentage change or rates as shown):
  - Real GDP: 2012 = 0.5
  - Real domestic demand: 2012 = −2.1
    - Private consumption: 2012 = −1.7
    - Public consumption: 2012 = −2.0
    - Fixed investment: 2012 = −4.5
  - Net exports (contribution to growth): 2012 = 2.2
  - Nominal GDP (in billions of euros): 2012 = 159.2
  - GDP deflator: 2012 = 1.2
  - Current account (percent of GDP): 2012 = 0.9
  - Consumer Prices (HICP): 2012 = 1.7
  - Unemployment rate: 2012 = 14.3

*Source: IMF staff report text and figures provided in the content unit.*

### 16.      An external recovery underpins the projected strengthening in growth in coming

### 16.      An external recovery underpins the projected strengthening in growth in coming

### Growth outlook and key risks
- Baseline projection:
  - Net exports are expected to continue to be the main contributor to growth in 2013–14.
  - Revival in domestic demand is projected to be protracted: stabilization of demand in 2013, followed by a gradual pick up to about 2 percent growth by 2015–17.
  - Overall growth is projected to average 2½ percent in 2013–17.
  - This projected growth is characterized as low relative to the scale of underutilized resources.
- Interconnected risks to the outlook:
  - External demand and financial market conditions:
    - Given high openness of the Irish economy, continuation of weak trading partner growth would greatly hinder recovery prospects.
    - An intensification of euro area stress would heavily impact growth and the debt outlook through exports, and through household and business confidence and spending, with adverse effects on financial sector health.
  - Domestic demand:
    - Gradual resumption in private consumption and investment growth starting in 2013 hinges on:
      - bottoming out of housing prices,
      - some pick up in lending to SMEs and the younger cohort of households with less debt,
      - well targeted private debt restructuring over coming years,
      - public confidence that the crisis is being overcome to allow some easing in precautionary savings.
  - Bank lending:
    - Banks’ capitalization was greatly strengthened, but underlying profitability remained weak in 2011 due to low quality of loan portfolios that include significant legacy assets (see Box 3); these factors could hinder renewal of lending to households and SMEs including by limiting access to funding.
  - Unemployment:
    - Gradual recovery and slow reductions in unemployment could imply higher structural unemployment, limiting potential growth in the medium-term.
    - Ongoing high youth unemployment could risk sustained high emigration.

### Legacy assets from the credit boom: tracker mortgages (Box 3)
- More than half of all outstanding loans for house purchase continue to be so-called “tracker mortgages” following a sharp increase during the credit boom.
- Characteristics and legacy effects:
  - Banks discontinued offering tracker products in Ireland as the anchor, the ECB main refinancing rate, was sharply reduced in late 2008 and banks lost access to funding at low spreads over the ECB rate.
  - Terms on tracker loans can usually not be modified by the bank.
  - Many tracker mortgages were originated near the top of the boom, typically with high LTVs and low introductory margins.
  - These loans currently typically carry a 100–125 basis point margin over the ECB refinancing rate.
  - About half of Irish mortgages for owner-occupied houses are trackers, and almost two thirds of mortgages for buy-to-let properties.
- Implications for banks:
  - In addition to banks’ non-performing loans, these legacy assets hamper banks’ return to profitability, market funding, and private ownership.
  - As market funding costs for banks rose well above ECB refinancing rates, these products became a drag on bank profitability.
  - Selling a pool of tracker mortgages would entail a capital loss well above the credit losses allowed for in recapitalizing the banks, reflecting the fundamental change in bank funding markets since the crisis.
  - These assets are unattractive as collateral for market funding and they deter interest from private investors.

### Promissory notes and the structure of government debt
- Promissory notes challenge:
  - During 2010 some €30.7 billion (20 percent of GDP) in promissory notes were injected into two failed banks—since merged into the Irish Bank Resolution Company (IBRC)—following exceptional loan losses.
  - The annual payments of €3.1 billion due on the notes until 2023 added to political difficulties; to settle the payment due at end March 2012 the authorities placed a long-term government bond with a face value of €3.5 billion with IBRC.
  - The underlying set of transactions was complex and it is not expected that future promissory note payments can be financed in this manner.
- Policy need:
  - A more durable extension of the debt service schedule on promissory notes, matched by corresponding stability in the Eurosystem funding of IBRC, is needed to ensure political sustainability of the substantial medium-term fiscal consolidation planned, and to significantly reduce market financing requirements in the medium term and thereby facilitate regaining market access.

### Debt sustainability
- Projected gross debt path (Annex 1 reference):
  - Debt path is projected to peak at 121 percent of GDP in 2013 and to decline to 111 percent of GDP by 2017.
  - The upward shift in the gross debt path compared with the previous review reflects higher cash balances, which are expected to reinforce prospects for regaining access to market funding.
  - Scenario sensitivity: debt would rise to about 133 percent of GDP by 2017 if growth were to stagnate at ½ percent.
  - Disposal of state assets and the planned sale of Irish Life could modestly lower the debt path, but this may be offset to some extent in the next few years by potential outlays for restructuring the credit union sector.

### Policy discussions and program priorities
- Program objectives reviewed:
  - Achieving program objectives for recovery and regaining access to market funding.
  - Despite full implementation of the program by the authorities, weaker external environment and continuing uncertainty in financial markets weighed on progress in growth, job creation, and reduction of spreads.
- Areas of focus:
  - Financial sector work streams and personal insolvency reforms to ensure conditions to renew lending on a sustainable basis.
  - Fiscal policy discussions on the outlook for 2012 and deepening credibility of the plan for phased medium-term fiscal consolidation.
  - Structural reforms aimed at enhancing growth and employment.
  - Technical work on annual promissory note payments and banks’ large holdings of legacy assets to be addressed at forthcoming reviews.

### Financial sector reforms: restoring bank viability and restarting lending
- Integrated approach requirements:
  - (i) maintain banks’ solvency and ensure improvements in liquidity and profitability;
  - (ii) proactively address any remaining vulnerabilities in the financial system;
  - (iii) provide a well functioning framework to enhance quality of financial sector assets.
- Restoring profitability also requires:
  - deep operational restructuring of branch networks and staffing to rebalance costs relative to income,
  - lifting low net interest margins,
  - boosting fee income to realign Irish banks with European counterparts.
- Bank resilience, liquidity, and transparency:
  - PCAR 2011 provided a strong capital foundation with independent loan loss forecasts, a stringent stress test, and a significant buffer for loan losses after the three-year period of the stress test.
  - Authorities are working toward a further assessment of bank capital and strengthening banks’ capacity to manage distressed loans.
  - First phase of work in 2012 focuses on ensuring data integrity, independently reviewing asset quality based on loan sampling, and reviewing income recognition practices.
  - Platform components mentioned: Data Integrity and Verification (DIV); Asset Quality Review (AQR); Income recognition and re-aging; Distressed Credit Operations Review (DCOR); platform for loan loss forecasting.
- Restructuring distressed loans (immediate priorities):
  - Distressed Credit Operations Review (DCOR):
    - With technical support of an international firm, the CBI is assessing banks’ preparedness to workout troubled but sustainable residential mortgages and SME debts.
    - Recent review of residential mortgages showed that banks delay effective loan restructuring through forbearance; lack experienced and well trained staff in loan workouts; and have inadequate quality control.
    - Banks are working to address weaknesses and will prepare revised operational plans for distressed mortgages by end June.
  - Evaluation of arrears resolution strategies:
    - Completed for mortgage loans; banks have made revisions to address CBI concerns and will propose long-term loan modification techniques by end June.
  - Monitoring of restructuring implementation:
    - CBI is designing a monitoring system that sets key performance indicators at check points to assess banks’ performance in addressing distressed loans.
- Follow-up to PCAR 2011 and 2013 EBA exercise:
  - A rigorous stress test will be carried out leveraging phase one outputs, supported by reviews of critical issues including assessment of banks’ approaches to calculation of risk weighted assets, loan loss forecasting, and capital modeling.
  - Results will be published with the next EBA exercise to ensure consistency and avoid duplication.
  - Compliance with the minimum Core Tier 1 capital ratio of 10.5 percent for all PCAR banks (AIB, BoI and PTSB) will continue to be monitored by the CBI and developments relative to PCAR 2011 will be reviewed by the end of 2012.
- Deleveraging framework refinement (second half of 2012):
  - CBI and PCAR banks developed a reporting template based on end 2013 goals for the net stable funding ratio (NSFR) for the core assets of each bank.
  - Separate six-monthly nominal targets for deleveraging of non-core assets, including disposals and run-offs, will remain in place.
  - Moving away from an aggregate target for the loan-to-deposit ratio is expected to lessen pressure from deleveraging on core lending and deposit interest rates.

### Advancing financial institution restructuring — PTSB
- Assessment and decision:
  - Current PTSB is considered to be nonviable and needs deep restructuring.
  - Preliminary estimates by PTSB’s new management find that although the bank, as is, would remain adequately capitalized through 2016, it has persistent negative cash flow and poor loan quality.
  - Options like merging the good part of PTSB with another bank lacked interest; winding down PTSB estimated to have significant fiscal cost and was not favored by EC and ECB.
  - Authorities determined to split PTSB into three business units and prepare a detailed restructuring plan by end June; implementation will be monitored closely under the EU-IMF supported program.
- PTSB—The Way Forward (segregation into three units):
  - Retail Bank:
    - Would hold about half of PTSB assets.
    - Would aim by 2016 to have a significant minority share of new mortgage lending, expand its deposit base modestly, improve net interest margin by more cost effective funding structures, lower loan loss charges, and significantly reduce operating costs.
    - New management expects this unit to break even in 2015 and deliver a return on equity consistent with market benchmarks by 2016.
  - Asset Management Unit (AMU):
    - Would hold about one-third of PTSB assets, mostly non-performing or high-risk residential mortgages, low interest trackers, and non-core business.
    - Would have its own management team with a mandate to manage the assets for value within regulatory constraints to appropriate service standards.
    - According to preliminary estimates the AMU would have sufficient capital to remain capitalized over its lifetime.
  - Capital Home Loans (UK):
    - This mortgage business is low yielding but also has low NPLs and would continue to be actively managed with the view to seeking an eventual exit.
- Key implementation caveats:
  - Creating a viable Retail Bank rests on timely and complete separation of AMU assets together with intensive restructuring efforts.
  - If the Retail Bank remains legally and financially associated with the AMU, it will become increasingly difficult to deliver on plans and build a credible business model.
  - Completion of PTSB restructuring will require financial support from European partners.
  - Options discussed include transferring PTSB’s existing Eurosystem funding together with the AMU assets to the IBRC, or injecting high quality assets to replace the AMU assets, although the latter would entail additional European funding.
  - Specific funding modalities to be determined at coming program reviews.

### Credit union sector: restoration and restructuring
- Current situation:
  - The process of restoring solvency of the small but important credit union sector has begun.
  - Financial situation challenging with arrears of almost 20 percent of the €5.5 billion loans at end 2011.
  - Provisioning is very high, at about 80 percent of loans in arrears, but reported arrears may be lowered by forbearance.
- Actions taken:
  - Process to address 25 severely undercapitalized credit unions (with reserves of less than 7.5 percent) began in January with the court’s appointment, at CBI request, of a special manager at a large credit union.
  - Recapitalization of some other weak credit unions with funds from the sector’s Savings Protection Scheme.
  - CBI continues to closely monitor the weakest credit unions and may draw on Resolution Fund resources as needed.
  - Regulations for the levy on all credit institutions to recover resolution costs are expected to be approved by end September (structural benchmark).
- Restructuring framework under development:
  - Commission on Credit Unions’ final report recommends the sector be restructured on a voluntary, incentivized, and time-bound basis.
  - Report envisages restructuring funded by participating credit unions, the credit union sector, and exchequer funding on a recoverable basis, overseen by a new Restructuring Board, and subject to Central Bank regulatory approval.
  - Staff stressed that restructuring should not infringe on CBI’s resolution powers and any last resort funding from the Exchequer should be minimized and recouped from the sector over time.
  - Publication of the strengthened regulatory framework (structural benchmark), including fitness and probity and governance standards, has been delayed to September to allow incorporation of the Commission’s substantial recommendations.
  - Minister for Finance indicated overall resource needs on the order of €0.5 billion to €1 billion.

*Source: IMF staff compilation from the provided content unit.*

### 30.      Efforts to facilitate bilateral resolution of household debt distress are being

### _cr12147 - 30.      Efforts to facilitate bilateral resolution of household debt distress are being

### Household debt workout strategy and bank supervision
- Majority of debt workouts for borrowers facing unsustainable payments intended to be arranged bilaterally, outside of the insolvency process (MEFP ¶11).
- With arrears rising more rapidly in 2011, the CBI is proactively exercising its supervisory powers to accelerate bilateral resolution.
- Banks are piloting restructuring options for unsustainable mortgage loans following the CBI’s review of their strategies for dealing with mortgage arrears.
- The CBI will monitor banks’ progress in arrears resolution against a set of key performance indicators to be discussed in future program reviews.
- Arrangements to ensure borrowers are well advised in negotiations with banks include a dedicated website.

### SME loan problems and policy measures
- At end-December 2011, about 20 percent of corporate and SME loans were impaired, mostly explained by the high level of past due loans of small enterprises.
- SMEs account for 68 percent of private employment; progress on resolving SME indebtedness is important to allow indebted but viable enterprises to recover and grow.
- The CBI has requested banks to submit strategies for dealing with problematic SME loans, including a review of banks’ debt collection operations, following an approach similar to mortgage loans.
- Government measures under development:
  - Establishing a microfinance fund.
  - Establishing a temporary partial guarantee scheme for small or specialized SMEs.
- Staff recommendation: ensure any initiative to facilitate SME lending is directed to performing borrowers or restructured borrowers showing good performance after restructuring, so public funds are not used by banks to keep troubled SMEs unresolved.

### Personal insolvency framework reform
- Drafting of legislation to reform the personal insolvency framework is underway (MEFP ¶12).
- The draft general scheme of the personal insolvency bill published in January proposes:
  - Modernization of the Bankruptcy Act.
  - Establishing a non-judicial debt settlement mechanism, including for mortgages.
- Authorities are refining the draft legislation drawing on public consultation inputs; staff supports the authorities’ revised timeline for publication.
- Important preparatory items to advance in parallel:
  - Preparation of guidance on applicable income and expenditure thresholds.
  - Clarification of the operation of payment orders in bankruptcy.
  - Assessment of whether there is a need to strengthen the role of courts regarding creditors’ property rights in personal insolvency arrangements.
  - Well-targeted eligibility criteria for debtors, including adequate engagement through the Mortgage Arrears Resolution Process.
  - Development of necessary infrastructure:
    - New Insolvency Service.
    - Enhanced resources at the Courts Service.
    - Licensing and monitoring regime for personal insolvency trustees.
  - Review effectiveness of the framework for repossessions to ensure efficient functioning by the time the new insolvency regime takes effect.

### Fiscal policy context and 2012 budget position
- Budget 2012 is on track for the program’s fiscal targets (MEFP ¶13).
- Authorities committed to unwind modest spending over-runs in health and social protection by year-end and to accommodate somewhat higher outlay for insurance sector support within the existing expenditure envelope.
- Given the better than expected general government balance out-turn for 2011 and on-track exchequer performance through April 2012, staff projects a 2012 general government deficit of 8.3 percent of GDP, in line with the authorities’ April 2012 Stability Programme Update (SPU) and within the 8.6 percent program ceiling.
- No change proposed in the quarterly performance criteria on the exchequer primary balance.
- Staff supports accommodating revenue shortfalls in the event of significantly weaker growth out-turn to protect the fragile economic recovery, and spreading over subsequent years the closure of any emerging fiscal gap arising from this accommodation.
- Budget 2012 provides for €396 million in liquidity support (temporary loan) to the insurance compensation fund (ICF); it is now anticipated that an additional €60 million will be required for this purpose, taking the required injection above budgetary allocations.

### Fiscal consolidation planning for 2013–15
- A package of specific measures is being developed to underpin the programmed consolidation effort over 2013-15 (MEFP ¶15).
- Budget 2012 identified measures and policy directions in relation to the majority of the €8.6 billion consolidation effort during 2013–15, but important decisions remain, especially on current spending.
- Authorities are working toward a more fully specified fiscal program by Budget 2013 to facilitate regaining access to market funding and reduce uncertainty.
- Areas of focused policy work with attention to equity:
  - Public wage bill:
    - Past approach: wage cuts in 2009–10 and reliance on voluntary reductions in employment accompanied by efficiency gains (Croke Park Agreement).
    - Authorities prefer maintaining controls on hiring and pursuing savings in non-core-pay entitlements (MEFP ¶14).
    - The second implementation report for the Croke Park Agreement, expected in June 2012, provides an opportunity to review targeted savings.
  - Social benefits:
    - Staff supports reforms to better target child income and working age supports while protecting the most vulnerable.
    - Staff encouraged reforming sick leave policies by requiring employers to pay for the first two to four weeks of illness.
  - Age-related spending:
    - Upcoming actuarial review of the Social Insurance Fund and the OECD review of pensions seen as opportunities to review rising age-related expenditures.
  - Property taxation:
    - Authorities decided to replace the flat annual household charge of €100 per household with a value-based property tax to be introduced in 2013 (MEFP ¶15).
    - An inter-departmental committee is analyzing design and collection issues and has engaged in a public consultation process.
    - Mission supports principle of a value-based property tax as a stable source of funding for local governments.

### Fiscal governance and legislation
- Draft legislation to implement the EU Fiscal Stability Treaty has been published (MEFP ¶16).
- Draft Fiscal Responsibility Bill (FRB) contains:
  - EU fiscal rules: the structural deficit ceiling of ½ percent of GDP, and the requirement to reduce excess public debt (i.e. above 60 percent of GDP) by 1/20th percentage points per annum.
  - An independent fiscal council: statutory basis to the Irish Fiscal Advisory Council (IFAC), allocation of an annual budget of €800,000, and limits on the Minister for Finance’s powers to terminate Council members’ contracts without due parliamentary process.
- Structural benchmark on the FRB was expected to encompass medium-term expenditure ceilings; authorities will give statutory basis to medium-term expenditure ceilings via additional legislation (MEFP ¶16).
- Future legislation could provide for best-practices in budgetary reporting and fiscal transparency.
- Staff discussed a new structural balance computation methodology with the authorities to capture key cyclical factors affecting fiscal performance; factors include developments in housing and equity prices in addition to output. A draft computation by staff was discussed with Irish authorities and staffs of the EC and ECB (Annex II).

### Structural reforms: growth, jobs, and labor market measures
- Authorities establishing a working group to review and adapt strategy for growth and job creation, enhancing competitiveness and flexibility while safeguarding social cohesion (MEFP ¶17).
- Authorities support EU-wide initiatives to enhance growth and are exploring mobilizing EIB investments and unused EU Budget funds.

Progress on jobs initiatives (MEFP ¶18–19)
- Pathways to Work initiative (announced in February) aims to improve employment activation policies through:
  - Early identification of jobseekers at risk of long-term unemployment with profiling, group interviews, subsequent one-to-one interviews, and direction to appropriate training programs.
  - Assignment of individual case workers to strengthen engagement with unemployment services; current number of unemployed per case worker is above international best practice, potentially impeding effectiveness.
  - Developing proposals to engage private sector providers to supply case management and employment services.
  - Establishing enforcement mechanisms to penalize non-compliant jobseekers (e.g., those who do not attend required interviews, refuse training, or take up jobs); close monitoring needed to ensure sanctions are applied.
- Action Plan for Jobs (from February) supports employment creation via:
  - Support for indigenous start-ups and high growth mid-sized companies.
  - Further enhancing SME credit and R&D incentives.
  - Pursuing targeted growth in the Green economy and the ICT sector.
  - In April, authorities released a First Progress Report on implementing these measures.
- Review of the structure of social payments (MEFP ¶18) is important to avoid unemployment traps from unduly high replacement rates for the long-term unemployed.

### Labor regulation and sectoral wage agreement reforms
- Amendments to proposed reforms of sectoral wage agreements are in train.
- Draft legislation published earlier provides for reforms of Employment Regulation Orders (EROs) and Registered Employment Agreements (REAs); additional amendments approved by Government and on track for parliamentary submission by mid-June.
- Amendments will:
  - Allow more timely variation to REAs by setting time limits on each stage of the process.
  - Allow a maximum of two consecutive exemptions (rather than one) from an obligation to pay the minimum salary under the REA if necessary to safeguard employment.
  - Clarify employers’ obligations related to consultation with workers on an “inability to pay” clause.
  - Limit the number of wages set by each ERO to a maximum of three.

*Italic: IMF staff report excerpts as provided in the source content.*

### 41.      The authorities’ state asset disposal program aims to enhance the economy’s

### _cr12147 - 41.      The authorities’ state asset disposal program aims to enhance the economy’s

### State asset disposal program: scope, timing, and use of proceeds
- Program announced in February: asset sales of up to €3 billion comprising:
  - energy companies (part of Bord Gais Eireann’s Energy business and some of Electricity Supply Board’s non-strategic power generation capacity),
  - a forestry company (Coillte, excluding land),
  - remaining state shares in the national airline (Aer Lingus).
- Preparatory work, including regulatory reforms, scheduled to be completed by end 2012 to facilitate expected commencement of sales in 2013 depending on market conditions.
- Use of proceeds:
  - At least half of realized proceeds will be earmarked to reduce debt.
  - The remainder to be reinvested in viable projects that meet strict ex ante cost-benefit criteria to expand employment while meeting program fiscal targets.
  - Change in reinvestment share: increase from one-third to one-half amounts to up to ¼ percent of GDP, having negligible impact on Ireland’s debt outlook.

### Program modalities and monitoring
- Quantitative and indicative targets:
  - Quantitative performance criteria proposed for end-September 2012.
  - Performance criterion for the Exchequer primary balance unchanged for end-June 2012.
  - Previously set end-September 2012 indicative target converted into a performance criterion.
  - End-March 2013 indicative target proposed for the Exchequer primary balance.
  - Indicative target proposed for net central government debt for end-March 2013.
  - Technical modification (TMU): debt issued to IBRC in relation to repayments on Promissory Notes included in definition of the Exchequer primary balance.
- Structural benchmarks:
  - One new structural benchmark: submit an updated restructuring plan for PTSB.
  - Dates for other benchmarks modified: fiscal responsibility legislation and regulation of credit unions proposed to be moved to September 2012.
  - Date for publication of next PCAR to be specified at a later review when EBA announces timetable for next EU-wide stress test.
- Official financing arrangements and disbursements:
  - Bilateral agreements with Sweden and Denmark concluded.
  - Denmark disbursed a first tranche of €0.1 billion; Sweden’s first disbursement expected shortly.
  - Program total external financing envelope: €67.5 billion.
  - Disbursed to date: 71 percent or €48 billion (European partners disbursing some €32 billion; the Fund the equivalent of €16 billion at program exchange rates).
  - At completion of this review, some €4.1 billion will be disbursed—including the equivalent of €1.4 billion by the Fund—so total official financing of €15 billion will remain once that disbursement is made.
- Market funding needs and cash buffers:
  - Gross market funding needs are just under €4 billion in 2012.
  - Authorities plan to raise this via resumption of Treasury bill auctions in second half of 2012, continued retail funding, and rollovers of commercial paper; also seeking to facilitate pension fund investments into government annuities.
  - Projected 2012 year-end cash balance: €13.5 billion (provides cushion against market funding shortfall in H2 2012).
  - Market funding needs—excluding rollovers of Treasury bills or commercial paper—increase to some €6 billion in the first half of 2013.
  - Feasibility of issuing government bonds in 2013 depends on improved euro area market conditions, continued program implementation progress, and outlook for growth and government debt.
  - Any market funding shortfall could be temporarily covered by drawing down cash, but use of cash buffers could be a negative signal for financial markets.

### Staff appraisal: progress, risks, and policy priorities
- Program implementation and market reaction:
  - Authorities demonstrated ownership by maintaining policy implementation despite challenges.
  - All quantitative targets for end March 2012 were met.
  - Fiscal, financial, and structural reforms progressing as envisaged.
  - Financial markets initially reflected efforts via significant narrowing of bond spreads, but recent renewal of euro area financial tensions has widened spreads regionally.
- Growth and jobs—central to program success:
  - Strengthening growth is essential for debt sustainability and regaining market access; otherwise substantial additional fiscal adjustment in a low growth environment risks a vicious cycle (rising unemployment, higher arrears and loan losses, renewed erosion of bank capital).
  - Authorities reviewing and adapting strategy for growth and job creation; amendments to proposed sectoral wage reforms will enhance labor demand benefits.
  - Continued progress on jobs initiatives is essential; additional resources may be needed to strengthen labor activation effectiveness, potentially through private provision.
  - Need close monitoring of sanctions application for non-compliant jobseekers and ensuring social payment structures avoid unemployment traps for long-term unemployed.
  - Reinvesting part of state asset disposal proceeds offers near-term growth stimulus; maximize longer-run benefits through sound regulatory frameworks and strong competition enforcement.
- Fiscal consolidation and budget design:
  - 2012 Budget on track in first four months of 2012; revenue projections prudent; authorities committed to unwind modest spending overruns by year end.
  - Any revenue shortfall from significantly weaker growth should be accommodated to protect the fragile recovery, yet recouped in subsequent years to support debt sustainability.
  - Work on a package of specific measures to underpin fiscal consolidation for 2013–15 (public sector wage bill, targeting of social benefits, age-related spending, property taxation) should be completed by Budget 2013 to support regaining market access.
  - Fiscal responsibility bill: give statutory basis to the Irish Fiscal Advisory Council and enshrine EU fiscal rules; together with legislation to underpin medium-term expenditure ceilings to create a strong framework for continued prudent fiscal policies and debt reductions after the program.
- Financial sector restructuring and vulnerabilities:
  - Integrated approach required to restore banks’ long-term viability and restart lending to support recovery.
  - Central bank should continue consistent application of supervisory powers to strengthen banks’ capacity to manage distressed loans.
  - Intensive work on reforming the personal insolvency framework is essential; success depends on appropriate eligibility criteria, income and expenditure thresholds, and timely establishment of operational infrastructure.
  - Fundamental, time-bound restructuring of the credit union sector needed with stronger regulatory and governance standards while minimizing fiscal cost and recouping costs from the sector over time.
  - Stronger financial support from European partners required to address remaining financial system vulnerabilities:
    - Putting PTSB on a sound footing requires intensive restructuring over a number of years and timely separation of a significant portion of legacy and non-performing assets.
    - Funding a carve-out with Irish government securities is inconsistent with restoring PTSB’s viability or program goals for regaining market access.
    - A number of modalities exist for stronger European financial support to enable PTSB’s restructuring; specific approach to be determined at coming reviews.
  - Broader European measures would enhance effectiveness:
    - Extending term of promissory notes and associated Eurosystem funding, and placing banks’ legacy assets in a vehicle that does not rely on market funding, would enhance banks’ prospects to support recovery and help sovereign return to market.
    - Temporary European equity participation in state-owned banks would weaken bank-sovereign linkages, immediately enhance debt sustainability, and improve prospects to attract private owners.
    - Given escalation of euro area financial tensions, stronger European support would be most effective as part of a broader plan to stabilize financial markets and strengthen euro-area growth.

*Italicized source attribution: IMF Staff Report (content unit: _cr12147 - 41. The authorities’ state asset disposal program aims to enhance the economy’s).*

### 51.      Staff supports the authorities’ request for completion of the Sixth Review.

### Staff supports the authorities’ request for completion of the Sixth Review

### Staff recommendation
- Staff supports the authorities’ request for completion of the Sixth Review.

### Macroeconomic outlook and national accounts (constant prices)
- Real GDP: -3.0 (2008), -7.0 (2009), -0.4 (2010), 0.7 (2011), 0.5 (2012), 1.9 (2013).
- Domestic demand: -4.0 (2008), -12.5 (2009), -4.9 (2010), -3.0 (2011), -2.1 (2012), 0.0 (2013).
  - Private consumption: -1.1 (2008), -6.9 (2009), -0.8 (2010), -2.8 (2011), -1.7 (2012), 0.3 (2013).
  - Public consumption: 0.5 (2008), -4.5 (2009), -3.8 (2010), -3.7 (2011), -2.0 (2012), -1.5 (2013).
  - Gross fixed investment: -10.2 (2008), -28.7 (2009), -24.9 (2010), -10.6 (2011), -4.5 (2012), 1.0 (2013).
- Net exports (contribution to growth): 1.3 (2008), 3.5 (2009), 3.7 (2010), 4.5 (2011), 2.2 (2012), 1.9 (2013).
  - Exports of goods and services: -1.1 (2008), -4.2 (2009), 6.3 (2010), 4.1 (2011), 3.0 (2012), 4.0 (2013).
  - Imports of goods and services: -3.0 (2008), -9.3 (2009), 2.7 (2010), -0.7 (2011), 1.0 (2012), 2.8 (2013).
- Real GNP: -2.8 (2008), -9.8 (2009), 0.3 (2010), -2.5 (2011), -0.1 (2012), 1.4 (2013).
- Gross national saving (percent of GDP): 15.9 (2008), 11.4 (2009), 11.5 (2010), 10.6 (2011), 10.8 (2012), 11.6 (2013).
  - Private saving: 18.7 (2008), 19.6 (2009), 20.1 (2010), 18.1 (2011), 18.3 (2012), 18.7 (2013).
  - Public saving: -2.8 (2008), -8.2 (2009), -8.6 (2010), -7.5 (2011), -7.5 (2012), -7.1 (2013).

### Prices, wages, labor
- Harmonized index of consumer prices (annual average): 3.1 (2008), -1.7 (2009), -1.6 (2010), 1.1 (2011), 1.7 (2012), 1.2 (2013).
- Average wage, whole economy: 3.5 (2008), -0.1 (2009), -2.2 (2010), -0.7 (2011), 0.3 (2012), 0.8 (2013).
- Employment (annual average): -1.1 (2008), -8.1 (2009), -4.2 (2010), -2.1 (2011), -0.8 (2012), 0.7 (2013).
- Unemployment rate (in percent): 6.3 (2008), 11.8 (2009), 13.6 (2010), 14.4 (2011), 14.3 (2012), 13.7 (2013).

### Money, credit, and financial markets
- Irish resident private sector credit (adjusted growth): 8.8 (2008), -1.7 (2009), -3.7 (2010), -2.9 (2011), -3.3 (2012).
- Three-month interbank rate (end-period): 2.9 (2008), 0.7 (2009), 1.0 (2010), 1.4 (2011), 1.2 (2012).
- Government bond yield (percent, 10-year; for 2011, 9 year used): 4.4 (2008), 4.9 (2009), 9.2 (2010), 8.5 (2011), 6.9 (2012).
- Annual change in ISEQ index (in percent): -33.8 (2008), -23.4 (2009), 13.2 (2010), 3.0 (2011), 7.3 (2012).
- House prices (annual change): -5.9 (2008), -18.3 (2009), -13.1 (2010), -13.2 (2011), -16.3 (2012).

### Financial sector vulnerability indicators
- General government debt (in percent of GDP): 44.2 (2008), 65.1 (2009), 92.5 (2010), 108.2 (2011), 117.6 (2012).
- Non-performing loans (in percent of total loans): 0.8 (2008), 2.6 (2009), 9.0 (2010), 8.6 (2011), 9.1 (2012).
- Total provisions for loan losses (in percent of total loans): 0.4 (2008), 1.2 (2009), 4.0 (2010), 4.2 (2011), 4.8 (2012).
- Regulatory capital to risk-weighted assets of domestic banks (percent): 10.7 (2008), 10.6 (2009), 10.9 (2010), 10.4 (2011), 17.5 (2012).
- Bank return on assets (before tax, percent): 0.7 (2008), -0.3 (2009), -1.6 (2010), -3.1 (2011), -0.9 (2012).
- Bank return on equity (before tax, percent): 16.4 (2008), -8.0 (2009), -40.6 (2010), -67.6 (2011), -18.2 (2012).
- Deposits to M3 ratio: 1.4 (2008), 1.4 (2009), 1.4 (2010), 1.5 (2011), 1.2 (2012).
- Loan-to-deposit ratio vis-à-vis Irish residents: 2.1 (2008), 2.2 (2009), 2.1 (2010), 2.1 (2011), 2.1 (2012).

### Public finance and fiscal projections (percent of GDP unless indicated)
- General government balance: -7.3 (2008), -14.0 (2009), -31.2 (2010), -13.1 (2011), -8.3 (2012), -7.5 (2013).
  - General government balance (excl. bank support): -7.3 (2008), -11.5 (2009), -11.4 (2010), -9.4 (2011), -8.3 (2012), -7.5 (2013).
- Primary balance (excl. bank support): -6.0 (2008), -9.5 (2009), -8.3 (2010), -6.0 (2011), -4.2 (2012), -1.9 (2013).
- General government gross debt: 44.2 (2008), 65.1 (2009), 92.5 (2010), 108.2 (2011), 117.6 (2012), 121.2 (2013).
- General government net debt: 24.4 (2008), 42.2 (2009), 74.9 (2010), 96.4 (2011), 105.6 (2012), 109.5 (2013).

### General Government Finances (detailed items and projections, selected)
- Revenue (in percent of GDP): 35.0 (2010), 33.9 (2011), 34.5 (2012), 35.3 (2013), 57.1 (2014), 60.2 (2015), 62.6 (2016), 64.7 (2017), 67.5 (2018).
- Direct taxes (in percent of GDP): 17.7 (2010), 17.5 (2011), 17.4 (2012), 18.1 (2013), 18.3 (2014), 18.5 (2015), 18.8 (2016), 19.1 (2017), 19.1 (2018), 19.2 (2019).
  - Personal income tax: 13.2 (2010), 11.8 (2011), 11.3 (2012), 13.8 (2013), 14.7 (2014), 15.2 (2015), 16.0 (2016), 17.0 (2017), 17.9 (2018), 19.0 (2019).
- Expenditure (ex. bank support, percent of GDP): 42.3 (2010), 45.4 (2011), 55.9 (2012), 44.6 (2013), 43.0 (2014), 42.3 (2015), 39.9 (2016), 38.0 (2017), 36.9 (2018), 36.2 (2019).
- Interest payments (percent of GDP): 1.4 (2010), 2.0 (2011), 3.1 (2012), 3.4 (2013), 4.1 (2014), 5.6 (2015), 5.5 (2016), 5.6 (2017), 5.3 (2018), 5.5 (2019).
- Overall balance (ex. bank support): -7.3 (2010), -11.5 (2011), -11.4 (2012), -9.4 (2013), -8.3 (2014), -7.5 (2015), -4.7 (2016), -2.9 (2017), -2.2 (2018), -1.7 (2019).
- Primary balance (ex. bank support): -6.0 (2010), -9.5 (2011), -8.3 (2012), -6.0 (2013), -4.2 (2014), -1.9 (2015), 0.8 (2016), 2.6 (2017), 3.1 (2018), 3.8 (2019).
- Structural balance: -11.4 (2010), -11.0 (2011), -10.1 (2012), -7.8 (2013), -6.2 (2014), -5.7 (2015), -3.6 (2016), -2.5 (2017), -2.2 (2018), -2.1 (2019).
- Structural primary balance (percent of nominal potential GDP): -10.4 (2010), -8.7 (2011), -6.7 (2012), -4.3 (2013), -2.1 (2014), -0.1 (2015), 2.0 (2016), 3.1 (2017), 3.1 (2018), 3.4 (2019).
- Nominal GDP (in billions of euros): 180.0 (2008), 160.6 (2009), 156.0 (2010), 156.4 (2011), 159.2 (2012), 164.2 (2013), 171.0 (2014), 178.7 (2015), 186.9 (2016), 195.4 (2017).

### External sector and balance of payments
- Current account (percent of GDP): -5.6 (2008), -2.9 (2009), 0.5 (2010), 0.1 (2011), 0.9 (2012), 1.8 (2013), 2.8 (2014), 3.6 (2015), 3.7 (2016), 3.9 (2017).
- Balance of goods and services (percent of GDP): 9.0 (2008), 15.2 (2009), 18.8 (2010), 21.2 (2011), 23.2 (2012), 24.7 (2013).
- Balance of income and current transfers (percent of GDP): -14.6 (2008), -18.1 (2009), -18.4 (2010), -21.1 (2011), -22.3 (2012), -22.9 (2013).
- Exports (value, annual percent change): 8.3 (2008), -1.4 (2009), -2.8 (2010), 8.1 (2011), 4.8 (2012), 4.5 (2013).
- Imports (value, annual percent change): 9.5 (2008), -1.1 (2009), -9.6 (2010), 5.7 (2011), 3.0 (2012), 2.6 (2013).

### General government financing requirements and sources (in billions of euros)
- Gross borrowing need: 15.9 (2008), 63.4 (2009), 71.4 (2010), 45.3 (2011), 29.3 (2012), 23.2 (2013).
- Exchequer cash deficit: 12.7 (2008), 24.6 (2009), 18.7 (2010), 19.1 (2011), 18.4 (2012), 14.5 (2013).
- Amortization: 3.1 (2008), 27.7 (2009), 17.3 (2010), 9.7 (2011), 9.3 (2012), 8.7 (2013).
  - Medium-and long-term amortization: 0.1 (2008), 5.1 (2009), 1.2 (2010), 4.8 (2011), 5.9 (2012), 6.0 (2013).
  - Short-term amortization: 3.0 (2008), 22.6 (2009), 16.2 (2010), 4.9 (2011), 3.4 (2012), 2.7 (2013).
- Bank recapitalization costs: 0.0 (2008), 11.0 (2009), 35.3 (2010), 16.5 (2011), 1.6 (2012), 0.0 (2013).
- Gross financing sources: 15.9 (2008), 63.4 (2009), 71.4 (2010), 10.8 (2011), 6.6 (2012), 13.1 (2013).
  - Market financing (incl. retail): 34.9 (2008), 53.3 (2009), 23.2 (2010), 1.4 (2011), 3.8 (2012), 13.1 (2013).
  - Cash drawdowns: -19.0 (2008), 10.0 (2009), 17.3 (2010), 9.3 (2011), -0.6 (2012), 0.0 (2013).
- Financing gap and program financing:
  - Financing gap: 0.0 (2008), 0.0 (2009), 0.0 (2010), 34.6 (2011), 22.7 (2012), 10.1 (2013).
  - EFSM/EFSF financing: 0.0 (2008), 0.0 (2009), 0.0 (2010), 21.5 (2011), 13.6 (2012), 5.1 (2013).
  - IMF financing: 0.0 (2008), 0.0 (2009), 0.0 (2010), 12.6 (2011), 6.3 (2012), 3.6 (2013).

### Monetary survey and banking sector (selected, end-period)
- Aggregate balance sheet of domestic market credit institutions (assets, in billions of euros): 801 (Dec-08), 798 (Dec-09), 742 (Dec-10), 634 (Dec-11), 610 (Mar-12).
- Claims on Irish resident non-MFIs (in billions of euros): 374 (Dec-08), 363 (Dec-09), 357 (Dec-10), 338 (Dec-11), 337 (Mar-12).
- Claims on non-residents (in billions of euros): 250 (Dec-08), 241 (Dec-09), 206 (Dec-10), 147 (Dec-11), 139 (Mar-12).
- Irish Resident Broad money (M3, in billions of euros): 194 (2008), 208 (2009), 182 (2010), 182 (2011), 185 (2012).
- Private sector credit (publications note): 394 (2008), 375 (2009), 335 (2010), 324 (2011), 319 (2012).
- Credit to deposits (percent): 222.8 (2008), 200.8 (2009), 200.0 (2010), 209.2 (2011), 205.5 (2012).
- Wholesale funding (billions of euros): 439.6 (2008), 422.8 (2009), 315.3 (2010), 233.6 (2011), 212.7 (2012).
- Wholesale funding (percent of assets): 54.8 (2008), 53.0 (2009), 44.8 (2010), 36.8 (2011), 36.3 (2012).

### Fund program, reviews, purchases, and Fund credit indicators
- Schedule of reviews and purchases (selected):
  - Board approval of arrangement: December 16, 2010 — SDRs: 5,012,425,200 — Percent of quota: 399.
  - First and Second Reviews: May 16, 2011 — SDRs: 1,410,000,000 — Percent of quota: 112.
  - Third Review: August 15, 2011 — SDRs: 1,319,000,000 — Percent of quota: 105.
  - Fourth Review: December 14, 2011 — SDRs: 3,309,000,000 — Percent of quota: 263.
  - Fifth Review: February 15, 2012 — SDRs: 2,786,000,000 — Percent of quota: 222.
  - Sixth Review: June 15, 2012 — SDRs: 1,191,000,000 — Percent of quota: 95.
  - Seventh Review: September 15, 2012 — SDRs: 758,000,000 — Percent of quota: 60.
  - Eighth Review: December 15, 2012 — SDRs: 758,000,000 — Percent of quota: 60.
  - Ninth Review: March 15, 2013 — SDRs: 831,000,000 — Percent of quota: 66.
  - Tenth Review: June 15, 2013 — SDRs: 831,000,000 — Percent of quota: 66.
  - Eleventh Review: September 15, 2013 — SDRs: 681,000,000 — Percent of quota: 54.
  - Twelfth Review: November 15, 2013 — SDRs: 579,374,800 — Percent of quota: 46.
  - Total scheduled purchases: 19,465,800,000 SDRs — Percent of quota: 1,548.
- Indicators of Fund credit (stock and obligations, selected):
  - Fund credit disbursements (in millions of SDR): 11,050 (2011), 5,493 (2012), 2,922 (2013).
  - Stock of Fund credit (end-period, in millions of SDR): 11,050 (2011), 16,543 (2012), 19,466 (2013), 19,466 (2014), 18,931 (2015), 16,757 (2016), 13,862 (2017), 10,617 (2018), 7,373 (2019), 4,129 (2020), 1,420 (2021), 349 (2022).
  - Stock of Fund credit (In percent of quota): 879 (2011), 1,315 (2012), 1,548 (2013), 1,548 (2014), 1,505 (2015), 1,332 (2016), 1,102 (2017), 844 (2018), 586 (2019), 328 (2020), 113 (2021), 28 (2022).
  - Stock of Fund credit (In percent of GDP): 8.0 (2011), 12.2 (2012), 13.9 (2013), 13.4 (2014), 12.5 (2015), 10.6 (2016), 8.4 (2017), 6.2 (2018), 4.1 (2019), 2.2 (2020), 0.7 (2021), 0.2 (2022).

*Source: IMF staff estimates and tables contained in the provided document.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### General Government Debt: baseline and drivers
- Baseline debt scenario shifted upward due to higher cash buffers in the medium term.
- End-2011 gross debt increased by €5.2 billion (2.8 percent of GDP) versus the 5th review, mainly from higher financing generating higher cash buffers, including the timing of EFSF funding and higher rollovers of commercial paper by NAMA.
- Authorities plan to:
  - Maintain the higher cash buffer for the remainder of the program.
  - Augment it with part of the cash savings from payment of the Promissory note through a bond placement in March 2012.
  - Unwind cash balances over time in the post-program period.
- Despite the upward shift, debt trajectory is expected to remain below the initial program projection peak of 125 percent of GDP.
- Medium-term fiscal consolidation underpins a declining debt path after 2013; a primary surplus above the long-run debt stabilizing primary balance puts debt on a downward trajectory in 2014.
- A review of interest expenditure forecasts slightly reduces the contribution of the interest/growth differential.

### Risks to the baseline and stress scenarios
- Low growth scenario:
  - Real GDP growth stagnating at 0.5 percent (projected in 2012) leads debt-to-GDP to 133 percent by 2017 and 151 percent by 2021.
  - Primary surplus would remain below the threshold required to stabilize debt → unsustainable debt dynamics.
- Contingent liabilities:
  - Relate to banks under the ELG scheme, the IBRC, and NAMA.
  - Removal of the UK subsidiary of BoI from ELG coverage noted.
  - No expectation of contingent liabilities from PCAR banks given recapitalization under PCAR 2011 and restructuring plans of PTSB; however, renewed recession or euro area tensions could produce loan losses and capital needs.
  - IBRC meets capital adequacy; NAMA received assets at heavy discounts averaging 62 percent.
  - One-time 10 percent of GDP contingent liability shock in 2013 would shift the debt ratio peaking at 131 percent of GDP in 2013 and declining to 106 percent of GDP by 2021.
- Interest rate shock:
  - High share of fixed-rate borrowing shields immediate effects.
  - A 200 basis point shock applied to short-term debt and new market borrowing increases the effective interest rate by 140 basis points by 2021.
  - Under this shock, debt would decline more gradually to 103 percent of GDP in 2021.

### External Debt: trends and stresses
- Total external debt:
  - Fell to 1,075 percent of GDP at end-2011 from 1,105 percent of GDP at end-2010.
  - Improvement mainly from fall in non-IFSC liabilities; IFSC sector reduced external exposure by 5 percentage points.
- Net international investment position:
  - Increased by around 10 percentage points to 102 percent of GDP in 2011.
- Non-IFSC external debt:
  - Declined to 310 percent of GDP at end-2011.
  - Projected to fall to 218 percent of GDP by 2017 — a decline of 90 percentage points relative to end-2011 — but remains elevated with substantial risks.
- External stress scenarios:
  - Historical-averages macro scenario would produce external debt of 382 percent of GDP in 2017 (fails to stabilize ratio).
  - Permanent growth shock → 2017 debt-to-GDP ratio of 250 percent.
  - Current account shock → 238 percent in 2017.
  - Currency depreciation: a 30 percent depreciation in 2013 would peak external debt at 318 percent of GDP in 2013, declining to 215 percent in 2017.

### Key projections and numerical highlights (selected series)
- Baseline: General government debt (percent of GDP), selected years:
  - 2007: 24.8
  - 2008: 44.2
  - 2009: 65.2
  - 2010: 92.5
  - 2011: 108.2
  - 2012: 117.6
  - 2013: 121.2
  - 2014: 119.7
  - 2015: 116.2
  - 2016: 113.6
  - 2017: 110.4
  - 2018: 106.9
  - 2019: 103.0
  - 2020: 99.4
  - 2021: 95.8
- Change in general government debt (percent of GDP), 2007–2021 (selected):
  - 2008: 19.4
  - 2009: 20.9
  - 2010: 27.3
  - 2011: 15.7
  - 2012: 9.4
  - 2013: 3.7
  - 2014: -1.5
  - 2015: -3.5
  - 2016: -2.6
  - 2017: -3.2
- Identified debt-creating flows (4+7+12), percent of GDP (selected):
  - 2008: 8.7
  - 2009: 23.9
  - 2010: 35.9
  - 2011: 20.0
  - 2012: 6.4
  - 2013: 3.9
  - 2014: -0.1
- Primary deficit (percent of GDP), selected years:
  - 2007: -1.1
  - 2008: 6.0
  - 2009: 9.7
  - 2010: 8.3
  - 2011: 6.0
  - 2012: 4.2
  - 2013: 1.9
  - 2014: -0.8
  - 2015: -2.6
  - 2016: -2.9
  - 2017: -3.7
- Automatic debt dynamics (contribution, percent of GDP), selected:
  - 2008: 2.8
  - 2009: 7.4
  - 2010: 5.1
  - 2011: 3.2
  - 2012: 2.2
  - 2013: 2.0
  - 2014: 0.7
  - 2015: 0.4
  - 2016: 0.2
  - 2017: 0.5
- General government debt-to-revenue ratio (percent), selected:
  - 2007: 68.5
  - 2008: 126.5
  - 2009: 193.1
  - 2010: 267.8
  - 2011: 307.6
  - 2012: 338.7
  - 2013: 348.7
  - 2014: 340.3
  - 2015: 331.7
  - 2016: 327.9
  - 2017: 319.6

### External debt framework: key figures (selected)
- Baseline: External debt (percent of GDP), selected:
  - 2007: 257.3
  - 2008: 303.2
  - 2009: 327.0
  - 2010: 334.8
  - 2011: 309.7
  - 2012: 299.2
  - 2013: 284.8
  - 2014: 267.7
  - 2015: 250.1
  - 2016: 233.5
  - 2017: 218.4
- Change in external debt (percent of GDP), selected:
  - 2008: 45.9
  - 2009: 23.8
  - 2010: 7.8
  - 2011: -25.0
  - 2012: -10.5
  - 2013: -14.4
  - 2014: -17.1
  - 2015: -17.7
  - 2016: -16.6
  - 2017: -15.1
- Identified external debt-creating flows (4+8+9), percent of GDP (selected):
  - 2008: 22.7
  - 2009: 39.5
  - 2010: 21.5
  - 2011: -3.1
  - 2012: -6.8
  - 2013: -10.8
  - 2014: -12.7
- Current account deficit, excluding interest (percent of GDP), selected:
  - 2007: 1.0
  - 2008: -6.2
  - 2009: -5.6
  - 2010: -14.0
  - 2011: -18.7
  - 2012: -16.0
  - 2013: -14.7
  - 2014: -15.9
  - 2015: -17.1
  - 2016: -17.0
  - 2017: -16.2
- External debt-to-exports ratio (percent), selected:
  - 2007: 375.2
  - 2008: 423.9
  - 2009: 417.7
  - 2010: 383.0
  - 2011: 338.4
  - 2012: 324.3
  - 2013: 302.2
  - 2014: 281.1
  - 2015: 259.8
  - 2016: 239.7
  - 2017: 221.5
- Gross external financing need (in billions of US dollars), selected:
  - 2007: 17.7
  - 2008: 57.3
  - 2009: 393.9
  - 2010: 355.1
  - 2011: 333.3
  - 2012: 327.6
  - 2013: 324.5
  - 2014: 320.8
  - 2015: 317.0
  - 2016: 315.5
  - 2017: 314.9
- Gross external financing need (in percent of GDP), selected:
  - 2007: 9.3
  - 2008: 31.8
  - 2009: 245.3
  - 2010: 227.6
  - 2011: 213.0
  - 2012: 205.8
  - 2013: 197.5
  - 2014: 187.5
  - 2015: 177.4
  - 2016: 168.8
  - 2017: 161.2

### Scenarios and bound tests summarized
- Public debt bound tests (general government debt in percent of GDP):
  - Interest rate shock: permanent 200 basis point shock to short-term debt and new market lending; increases effective interest rate by 140 basis points by 2021; debt in that scenario falls to 103 percent of GDP in 2021.
  - Growth shock: stagflation/stagnation at 0.5 percent per annum; debt-to-GDP reaches 133 percent by 2017 and 151 percent by 2021.
  - Primary balance shock: one-half standard deviation shock; produces higher debt trajectories (see table for scenario values).
  - Contingent liabilities shock: one-time 10 percent of GDP shock in 2013 → peak debt 131 percent of GDP in 2013; 106 percent by 2021.
- External debt bound tests:
  - Historical-average scenario: external debt 382 percent of GDP in 2017.
  - Permanent growth shock → 250 percent in 2017.
  - Current account shock → 238 percent in 2017.
  - 30 percent real depreciation in 2013 → peak 318 percent in 2013, decline to 215 percent in 2017.
  - Combined shocks produce higher external debt trajectories (see figures and tables).

*Annex I. Debt Sustainability Analysis (source content)._

### Annex II. Calculating a Structural Fiscal Balance for Ireland

### Annex II. Calculating a Structural Fiscal Balance for Ireland

### Purpose and methodological criteria
- Structural fiscal balances are used to remove one-off revenues and expenditures, cyclical factors, and other temporary effects from the headline fiscal balance to judge the underlying fiscal position.
- Methodology selection criteria for Ireland:
  - Simplicity, transparency and replicability.
  - Ability to capture Ireland-specific factors (the large asset price cycle and budget sensitivity thereto).
  - Reasonable consistency with actual pre- and post-crisis budgetary relaxation and consolidation.

### Adjustments and gaps corrected
- The adopted structural balance corrects headline fiscal indicators for four gaps:
  - Real output gap.
  - Equity price gap.
  - House price gap.
  - Unemployment gap (affecting unemployment benefits).
- Fundamental (potential) levels estimated for:
  - Real output, house prices, equity prices, and unemployment.
- Specific modelling choices:
  - Output gap: Hodrick-Prescott filter applied to the logarithm of real GDP with a smoothing parameter of 25.
  - House and equity price fundamentals: set at the average of 2014–17 projected levels, with growth rates for 2012 onward taken from the baseline PCAR 2012 scenario.
  - Unemployment gap: based on the OECD’s estimates of the natural rate of unemployment.

### Budgetary elasticities and expenditure assumptions
- Budgetary elasticities for tax heads with respect to the four gaps were taken from OECD work (Girouard and Andre, 2005; Price and Dang, 2011).
- Where elasticity estimates for an individual tax type were not available with respect to the output gap, a unit elasticity is assumed.
- Expenditure elasticities:
  - Standard assumption of zero elasticity for all expenditures, excluding unemployment benefits.
  - Unemployment benefits: assumed cost of 0.2 percent of GDP per 0.1 percentage point of cyclical unemployment.

### Key results and interpretation
- Structural primary balance trend:
  - Structural primary deficit peaked at -10.4 percent of potential GDP in 2008.
  - Deterioration between 2000 and 2008, especially after 2005.
  - Improvement began after 2008 on the back of major consolidation efforts (beginning in the second half of 2008).
  - Improvement in the initial consolidation years appears small relative to reported measures due to:
    - A substantial portion of initial measures being needed to arrest fiscal pressures implied in the no-policy-change scenario.
    - A fall in potential GDP and structural revenue, and a surge in structural unemployment during 2009–10.
- Projected path:
  - Structural primary balance projected to improve from -4.8 percent of potential GDP at end-2011 to +3.3 percent of potential GDP in 2015.
  - The 8 percent of GDP turnaround is broadly consistent with the planned consolidation amounts in the Medium-Term Fiscal Statement of November 2011, once full tax carryover effects of Budget 2011 measures are taken into account.

### Implementation notes and caveats
- The calculation of structural fiscal balances is non-trivial and no single method is appropriate for all countries and periods.
- Alternative approaches warrant analysis (for example, to take account of the scale of the collapse in construction).
- The approach used explicitly incorporates corrections for large asset price cycles given Ireland’s pre-crisis boom and subsequent collapse in housing and asset prices.

*Source: Annex II. Calculating a Structural Fiscal Balance for Ireland*

### 4. Publication of the results of the PCAR exercise will be aligned with the timing of

### _cr12147 - 4. Publication of the results of the PCAR exercise will be aligned with the timing of

### Publication of PCAR results and follow-up stress test
- Publication of the results of the PCAR exercise will be aligned with the timing of the next EBA exercise.
- A rigorous stress test will be carried out leveraging phase one outputs; it will continue to be based on robust loan-loss forecasts and feature a high level of transparency.
- The stress test will draw on assessment of banks’ calculation of risk weighted assets, loan loss forecasting, and capital modeling.
- Focus will be on bank balance sheets following implementation of technical work addressing legacy and nonperforming loans.
- Compliance with the minimum capital ratio of 10.5 percent for all PCAR banks (AIB, BOI and PTSB) will continue to be monitored by the Central Bank.
- Developments relative to PCAR 2011 will be reviewed by the end of Q4 and overall results will be published.
- Agreement on specific features of the methodology will be reached with staff of the European Commission, ECB, and IMF.

### Deleveraging framework and funding stability
- Deleveraging of non-core assets (disposals and run-offs) will continue to be governed by six-monthly targets for the nominal volume, with safeguards against fire sales.
- Modified framework will emphasize the net stable funding ratio (NSFR) with a view to replacing loan-to-deposit ratio targets.
- By end June, the CBI will propose goals for banks’ NSFRs for end 2013, based on banks’ submissions of current NSFR ratios and forecasts as they move towards adoption of the Basel III requirements.
- The CBI will supervise progress toward the NSFR goal.

### Disclosure, provisioning, and asset quality transparency
- Quality and level of disclosure and provisioning of the PCAR banks have been enhanced.
- Banks’ 2011 financial statements have shown a significant improvement in data disclosed to markets and in the level of loan provisioning.
- Plans to continue deepening efforts by reviewing and enhancing implementation of the disclosure and provisioning guidelines in the PCAR banks during 2012, taking account of the independent asset quality review under FMP 2012.

### Reducing Government support for PCAR banks
- Department of Finance working with other Irish authorities to ensure State support under the Eligible Liabilities Guarantee (ELG) scheme and other contingent guarantee mechanisms declines over time.
- Objective: allow banks to rebuild independent operation on a stabilised basis and resume normalised operations as envisaged under the Relationship Frameworks.

### Financial and operational restructuring of ELG-covered banks
- Ongoing financial and operational restructuring of ELG covered banks will be monitored closely.
- Relationship frameworks ensure businesses are run on a commercial arms length basis.
- AIB’s new management is updating its restructuring plan to enhance revenue, right-size costs, and restructure operations; plan to be submitted to the European Commission by end September 2012.
- For PTSB: segregation and timely removal of certain legacy and non-performing assets required; updated restructuring plan for PTSB detailing actions to ensure viability of core businesses (in line with EC state aid rules) to be submitted by end June 2012 (proposed structural benchmark).
- PTSB restructuring plan will include quarterly performance benchmarks for each business unit and will not be premised on additional capital injections from the State.
- Work on financial and operational restructuring of PTSB will continue apace; separate work to dispose of Irish Life when market conditions permit.

### Credit unions: restructuring and legislative reforms
- Commission on Credit Unions final report includes wide ranging recommendations on restructuring the sector.
- Restructuring principles:
  - (i) ensure financial stability and long term sustainability of the sector;
  - (ii) completion of restructuring in as short a timeframe as possible under a clear plan identifying Credit Unions appropriate for restructuring, subject to Central Bank approval;
  - (iii) first call for funding should be on the credit unions concerned or the sector as a whole;
  - (iv) any Exchequer funding should be minimised, provided only in context of a restructuring plan in compliance with EU state aid rules, and recouped from the sector over time.
- CBI will continue inspections to determine financial condition of weakest credit unions; resolution powers of the CBI may be engaged drawing on Resolution Fund resources.
- Legislation to strengthen the Credit Unions’ regulatory framework (enhancing governance and prudential requirements) will be published during the third quarter (modified structural benchmark).
- Regulations for the Resolution Fund levy on all credit institutions will be approved by end September (structural benchmark).

### Enhancing asset quality, arrears, and borrower engagement
- Continue efforts to address loan arrears and unsustainable debts; improve framework for banks and borrowers to address mortgage arrears and non-performing SME loans.
- CBI reviewed banks’ submissions on strategy for dealing with mortgage arrears; banks are strengthening strategies accordingly.
- CBI will monitor banks’ progress against key performance indicators to be defined by end May.
- Banks will complete pilots of restructuring options recommended by the Inter-Departmental Mortgage Arrears Working Group and provide a fully operational menu of available workout options by end 2012.
- CBI will provide guidance under the Code of Conduct for Mortgage Arrears (CCMA) to promote more effective lender-borrower dialogue.
- Dedicated website will be revised and further developed; information campaign under the umbrella of the Citizens Information Board to be run.
- Programme to facilitate access to professional financial advisory services, funded by banks, is being examined and planned for activation by end September.

### Personal insolvency framework reforms
- Refining proposed reforms to facilitate resolution of unsustainable debt while upholding Ireland’s strong debt servicing tradition.
- Draft general Scheme of the Personal Insolvency Bill published in January.
- Proposed reforms modernize the Bankruptcy Act, align discharge period more closely with international practice, and establish a non-judicial debt settlement mechanism, including for mortgages.
- Well targeted eligibility criteria, including adequate engagement through the Mortgage Arrears Resolution Process, and safeguards for creditor rights to be included.
- Draft legislation balancing debtor and creditor rights to be published before the start of the summer recess of the Oireachtas.
- Guidance on broad principles for applicable income/expenditure to be prepared.
- Reform will require development of relevant infrastructure, including a new Insolvency Service; advance planning has commenced.

### Fiscal policy outcomes and targets
- 2011 deficit (excluding bank support costs) is now estimated at 9.4 percent of GDP, benefitting in part from reduced EU lending rates.
- 2011 outturn is within programme ceiling of 10.6 percent of GDP.
- Targets for end March 2012 on the exchequer primary balance and net debt were achieved with a margin.
- On track to achieve the 8.6 percent of GDP deficit target for 2012.
- Finance bill and two social welfare bills to implement Budget 2012 have been passed by the Dail.
- Vigilance on risks including spending pressures; maintain careful and proactive budget management to contain spending to budget allocations.
- Public service reductions: end-2012 ceiling of 294,000 is set to be achieved, with indications numbers already fell below this level in the first quarter of 2012.
- Savings expected from targeted reductions in overtime, sick pay, and other non-core-pay entitlements.
- Advance preparation of a fully specified and equitable package of measures to underpin medium-term fiscal consolidation.
- Department of Social Protection to present options for social welfare reforms in context of Budget 2013.
- Design of a value-based property tax for implementation in 2013 to replace the household charge.

### Institutional fiscal reforms
- Draft legislation to implement the European Treaty on Stability, Coordination and Governance published in context of forthcoming referendum.
- Draft legislation gives statutory basis to the Irish Fiscal Advisory Council, providing for its independence and adequate resourcing.
- Multi-annual expenditure limits to be anchored in appropriate legislation to be published by end September 2012.

### Structural reforms to support growth and employment
- Working group established to review and adapt strategy for stronger output and employment growth given weaker external circumstances.
- Emphasis on boosting domestic demand and job creation while preserving fiscal consolidation.
- Pathways to Work and Action Plan for Jobs to help reduce unemployment; innovative and flexible demand side measures also required.
- Exploring increased European Investment Bank funding for growth-enhancing projects in Ireland to accelerate project delivery.
- Ensure EU Budget resources focused on maximising job creation and spend unused Structural funding if available.
- Exploring possibility of a “Growth Fund” to leverage support for job creation activities.
- Reinvest a significant portion of proceeds of asset disposals in job-rich projects consistent with fiscal targets.

### Labour activation and demand-side policies
- Pathways to Work: accelerate profiling to identify jobseeker training needs; strengthen one-to-one engagement; raise vacancies filled off the Live Register; fortify sanctions system.
- By end June, prepare progress report on assessment of activation and training policies, including progress on new data collection system and possibility to engage private sector activation firms; further report by end September.
- Explore options to attenuate adverse employment incentives from social payments through a cross-departmental report.
- Action Plan for Jobs measures: support indigenous start-ups and high-growth mid-sized companies, enhance SME credit and R&D incentives, pursue targeted growth in the Green economy and ICT sector.
- Consider adapting existing flexible public service working arrangements.

### State asset disposals
- Identified state assets for disposal following rigorous process.
- By end June 2012, develop detailed outline of necessary work, including regulatory reforms, to be completed by end 2012 to facilitate expected commencement of sales process in 2013.
- Use at least half of proceeds from state asset sales for debt reduction; details on timing and implementation to be agreed.
- Remainder of realised proceeds to be reinvested in commercially-natured projects meeting ex ante cost benefit criteria, enhancing employment and preserving long term fiscal sustainability, including Programme and EDP fiscal targets.

### Competitiveness and public utility reforms
- Increasing resources of the Competition Authority to improve capacity to tackle anti-competitive behaviour.
- Transfer responsibility for water service provision from local authorities to a regulated water utility and roll out a domestic water metering program.
- Reforms aim to raise efficiency of water usage while protecting poor households, creating employment, and placing long-term funding of water services on a sustainable footing.

### Programme financing, monitoring, and transparency
- Programme remains adequately financed; bilateral agreements with Sweden and Denmark concluded.
- Maintaining contact with market participants to facilitate return to market financing; market conditions permitting, seeking to resume Treasury bill issuance in the second half of 2012.
- Implementation monitored through quarterly and continuous performance criteria, indicative targets, structural benchmarks, and quarterly programme reviews as envisaged since arrangement inception on 3 December 2010.
- Continuous performance criterion on non-accumulation of external payment arrears applies.
- Technical Memorandum of Understanding (TMU) defines quantitative performance criteria and indicative targets; Government’s targets for exchequer primary balance monitored through quarterly performance criteria and net central government debt is an indicative target.
- Government authorises IMF and European Commission to publish the Letter of Intent and its attachments, and the related staff report.

*Source: _cr12147 - 4. Publication of the results of the PCAR exercise will be aligned with the timing of*

### 1. Cumulative exchequer primary balance 2/

### _cr12147 - 1. Cumulative exchequer primary balance 2/

### Cumulative Exchequer primary balance (performance criteria and indicative targets)
- Cumulative Exchequer primary balance (In billions of Euros) From January 1, 2012:
  - End-June 2012 (performance criterion): -9.0
  - End-September 2012 (performance criterion): -10.6
  - End-December 2012 (indicative target): -10.9
  - End-March 2013 (indicative target): -6.5

- Exchequer primary balance measurement and scope:
  - The Exchequer balance is the difference between total receipts into, and total expenditure out of, the Exchequer Account (single bank account of the Central Fund at the Central Bank of Ireland).
  - Exchequer primary balance = Exchequer balance excluding net debt interest payments in the service of the National Debt, but including debt issued to IBRC to settle Promissory Note payments.
  - The floor on the Exchequer primary balance (quantitative performance criterion) is measured cumulatively from the start of each calendar year.
  - The floor will be adjusted downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy (including loans to banks, investments in equity (requited recapitalisation), unrequited recapitalisation, and purchases of troubled assets).
  - The floor will be adjusted upward by proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts.
  - The floor will be 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 of such outlays by the Exchequer from the Resolution Fund.
  - Any other financial operation by Government to support banks, including the issuance of guarantees or provision of liquidity, will be reported to EC, IMF, and ECB staffs.

### Adjustor for revenue out-/over-performance and revenue projections
- The floor on the Exchequer primary balance will be adjusted upward (downward) for the full amount of any over-performance (under-performance) in Exchequer tax revenues, pay-related social insurance (PRSI) and national training fund contributions against the current projection.
- Cumulative Exchequer tax revenue & other receipts (In billions of Euros) From January 1, 2012 (projections):
  - End-June 2012 (projection): 19.7
  - End-September 2012 (projection): 30.7
  - End-December 2012 (projection): 43.8
  - End-March 2013 (projection): 10.0
- Any policy changes, including in administration and enforcement of taxes, which impact the revenue projection set out above will lead to a reassessment of the adjustor in the context of program reviews.

### Ceiling on the accumulation of new external payments arrears
- Performance criterion:
  - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government: 0 (repeated across reporting dates).
- Definition and application:
  - The central government will accumulate no external payments arrears during the programme period.
  - An external payment arrear is defined as 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.

### Ceiling on the stock of central government net debt (indicative targets)
- Definition and scope:
  - 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 at the same date (including Exchequer cash balances, 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 above and all marketable securities such as equities, government bonds and other listed investments. NPRF shares in domestic Irish banks and the NPRF’s non-liquid discretionary portfolio are excluded from liquid assets.
  - The programme exchange rates apply to all non-Euro denominated debt.

- Central government net debt (In billions of Euros) Outstanding stock:
  - End-March 2012 (provisional): 123.0
  - End-June 2012 (indicative target): 128.8
  - End-September 2012 (indicative target): 130.9
  - End-December 2012 (indicative target): 133.3
  - End-March 2013 (indicative target): 141.7

- Adjustments to the ceiling:
  - The ceiling will be 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).
  - The ceiling will be adjusted downward by proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer or NPRF receipts.
  - The ceiling will be 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 from the Resolution Fund.
  - The ceiling will be adjusted downward by the amount liquidated from the NPRF non-liquid discretionary portfolio.
  - The ceiling will be adjusted downward (upward) by valuation gains (losses) in the NPRF liquid portfolio.
  - The ceiling will be adjusted upward (downward) by the amount of any final upward (downward) revision to the stock of end-December 2011 central government net debt.

### Programme exchange rates and valuation rules
- For programme purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “programme exchange rates”, with the exception of items affecting government fiscal balances, which will be measured at current exchange rates.
- Programme exchange rates are those that prevailed on December 30, 2011:
  - €1 = 1.2939 U.S. dollar
  - €1 = 0.842786 SDR

### Structural benchmarks (selected from Table 3: Ireland: Upcoming Structural Benchmarks under the Programme for 2012)
- Financial sector policies:
  - Submit an updated restructuring plan for PTSB detailing the actions needed to ensure viability of its core businesses (MEFP, ¶9).
    - Date: End-June 2012
    - Status: Proposed structural benchmark
  - Publish legislation to strengthen the regulatory framework for credit unions, including making legislative provision for effective governance standards and prudential requirements (MEFP Nov. 28, 2011, ¶19).
    - Date: End-September 2012
    - Status: Modified structural benchmark
  - Approve regulations to establish a charge levied across credit institutions to recoup over time the costs of resolving vulnerable institutions (MEFP Feb. 10, 2012, ¶9).
    - Date: End-September 2012
    - Status: Structural benchmark
- Fiscal policies:
  - Submit to parliament, as part of the Fiscal Responsibility Bill, a legal framework for the Fiscal Advisory Council ensuring its independence (MEFP Feb. 10, 2012, ¶21).
    - Date: End-September 2012
    - Status: Modified structural benchmark

*Attachment III. Technical Memorandum of Understanding (TMU), 30 May 2012*

### 14.      Performance criteria under the programme will be monitored using data supplied

### _cr12147 - 14.      Performance criteria under the programme will be monitored using data supplied

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

### Programme implementation and financing statements (selected excerpts)
- The Irish Government remains firmly committed to the programme, noting continued strong implementation of programme policies and that all programme targets have been met or in some cases exceeded.
- Financing and market access:
  - The Government is examining ways for the programme to place greater focus on encouraging economic growth to assist market re-entry.
  - Request for sixth EFSF/EFSM disbursement of EUR 2.3 billion based on performance.
  - Intention to regain access to market financing through issuance of Treasury bills during 2012 as conditions permit, prior to envisioned return to bond markets in 2013.
- Fiscal performance highlights:
  - Cumulative exchequer balance through end-March 2012 was ahead of the programme profile.
  - 2012 general government deficit is projected to be at, or within the 8.6% of GDP programme ceiling.
  - Latest EDP returns confirmed the 2011 underlying general government deficit, at 9.4% of GDP, was kept well below the 10.6% of GDP envisaged under the programme and the Council Recommendation.

### Key fiscal policy commitments
- Rigorously implement fiscal policy consistent with the requirements of the excessive deficit procedure, including:
  - Ensuring the primary deficit target in cash (see Table 1 of MEFP and the Technical Memorandum of Understanding, TMU) and the general Government nominal budget deficit on ESA95 basis are achieved.
  - Any additional unplanned revenues must be allocated to debt reduction.
  - The nominal value of Social Welfare pensions will not be increased.
- Use of asset sale proceeds:
  - Use at least half of the proceeds from state asset sales for eventual debt reduction while reinvesting the remainder of the total realised proceeds in commercially oriented projects that meet ex-ante cost benefit criteria, enhance employment and preserve long term fiscal sustainability.
- Consultation and coordination:
  - 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.

### Financial sector reforms and conditional actions for the seventh review (to be completed by end Q2-2012)
- Capitalisation and assessment actions:
  - Government will ensure that the recapitalisation of PTSB, as identified in the 2011 Prudential Capital Assessment Review (PCAR), is completed.
  - Under the Financial Measures Programme (FMP), the authorities will carry out: (i) an independent asset quality review; (ii) a distressed credit operations review; (iii) a data integrity validation exercise; and (iv) an income recognition and re-ageing project. Authorities will report on progress following completion.
- Asset quality and workout:
  - Authorities will assess banks' progress with work-out of non-performing portfolios per Central Bank milestones; banks will prepare revised operational plans for distressed mortgage portfolios, conclude a cohort analysis of their mortgage portfolio, and propose long-term loan modification techniques.
- Deleveraging and liquidity standards:
  - Authorities will provide updates on banks' implementation of deleveraging plans under PLAR 2011 and monitor deleveraging of non-core assets against six-monthly nominal volume targets; fire sales of assets will be avoided.
  - Framework modifications will emphasize the Net Stable Funding Ratio (NSFR) with NSFR goals for end-2013 consistent with deleveraging objectives and Basel III requirements.
  - Authorities, in consultation with EC, IMF and ECB staff, will monitor Liquidity Coverage Ratios (LCR) to ensure convergence to Basel III standards by relevant dates.
  - Authorities will establish draft rules for creation and holding of liquidity buffers by banks in preparation of the new Capital Requirements Regulation entering into force in January 2013.
- Reorganisation and restructuring:
  - Authorities will report on the strategy for reorganisation of Irish credit institutions and ensure PTSB continues financial and operational restructuring, segregating a core retail bank from legacy and non-performing assets; PTSB will prepare an updated restructuring plan in line with EU state aid rules, not premised on additional State capital injections, and safeguarding financial stability.
- Financial supervision:
  - Authorities will present a comprehensive report on progress implementing the Central Bank of Ireland’s action plan to strengthen supervision of credit institutions.
  - Authorities will report on banks' progress implementing mortgage arrears resolution strategies and provide guidance under the Code of Conduct for Mortgage Arrears.
  - Results of the review of distressed credit operations for non-performing SME loans, including SME commercial real estate debts, will be available to EC, ECB and IMF staff.

### Structural reforms (selected)
- Utility sector:
  - Authorities will supply programme partners with a detailed, time-bound implementation plan for transfer of water services provision from local authorities to Irish Water and the plan for roll-out of a domestic water metering programme with a view to starting charging by the end of the EU-IMF programme period.
- Competition policy:
  - Authorities will increase resourcing of the Competition Authority to ensure adequate enforcement capacity based on the Q1 2012 review.
- Efficient social support expenditure and activation:
  - Department of Social Protection will provide an evaluation of actions taken regarding jobseeker payments recipients who do not attend activation interviews.
  - Building on Pathways to Work, introduce one stop shop pilots, NEES employer engagement and job matching.
  - Continuously monitor activation performance and report on progress in: reducing average duration on the live register; increasing fraction of vacancies filled off the live register; ensuring engagement with employment services as a pre-condition for jobseeker payments; carrying out profiling, group and individual engagement through interviews; increasing referrals to training and employment supports; and providing live register data broken down by continuous duration and probability of exit by duration.
  - Report progress on implementing an improved data collection system to enable ongoing evaluation, in light of the March 2012 external evaluation.
- State assets:
  - Government will outline specific regulatory, legislative, corporate governance and financial reforms needed to allow the asset sale programme to proceed, and set an ambitious calendar with indicative timelines for sales.
- Labour market:
  - Building on the Industrial Relations (Amendment) Bill 2011, authorities will present Dáil amendments to: (i) allow two consecutive exemptions to the inability to pay clause for EROs and REAs within the overall two year time limit where necessary to safeguard employment; and (ii) ensure timely processing of variations to an REA.
  - Authorities will explore attenuating adverse employment incentives from social payment structures through a cross-departmental report.

### Programme monitoring and information provision
- Authorities commit to providing:
  - All information required to monitor progress during programme implementation and to track the economic and financial situation.
  - A compliance report on fulfilment of conditionality prior to release of instalments.
  - Reliable and regular availability of budgetary and other data as detailed in Annex 1.

_Italic: Source: Attachment IV–V, Letter of Intent (European Commission) and Memorandum of Understanding on Specific Economic Policy Conditionality (fifth update), Dublin, 30 May 2012 and 25 June 2012, extracted from the provided content unit._

### 2. Actions  for  the  eighth  review  (actions  to  be  completed  by  end  Q3-

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

### Financial sector reforms — Deleveraging, Reorganisation, Supervision
- Deleveraging:
  - The authorities, in consultation with the staff of the European Commission, the IMF and the ECB, will assess banks' performance vis-à-vis the agreed deleveraging targets including asset disposals and run-off.
  - Actual and forecast net stable funding ratios (NSFRs), loan-to-deposit ratios (LDR) and asset disposals shall be reported by the banks to the Central Bank of Ireland every six months.
  - The Central Bank will oversee the remedial actions to be taken by any bank in case of actual or likely breach of the targets.
  - In addition to providing the six-monthly report, the authorities will update the staff of the European Commission, the IMF and the ECB on progress in the intervening quarters.
  - The authorities, in consultation with the staff of the European Commission, the IMF and the ECB, will monitor closely the evolution of the LCR in order to ensure convergence to Basel III standards by the relevant dates.
- Reorganisation:
  - The authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions, including any steps to strengthen the credit union sector, and discuss it with the staff of the European Commission, the ECB and the IMF.
  - Authorities will publish the legislation to strengthen the credit unions legislative framework taking account of the comprehensive recommendations in the Commission on Credit Unions Report.
  - As recommended by the interim and final reports of the Commission on Credit Unions, the legal provision that requires, under the terms of the Deposit Guarantee Scheme, credit unions to maintain an amount in the Deposit Protection account at the Central Bank will be commenced by regulations.
  - The authorities will also adopt regulations underpinning the Resolution Fund Levy to recoup Exchequer resources provided for the resolution of troubled credit unions.
- Financial Supervision:
  - The 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.
  - The authorities will report on banks' progress with the implementation of their strategies to address loan arrears and unsustainable debts in banks' mortgage, and SME loan portfolios.
  - Government will present to Dáil Éireann legislation to establish a statutory credit risk register.
  - AIB’s new management team will update its restructuring plan to enhance revenue, right-size costs, and restructure operations. This plan will be submitted to the European Commission.

### Structural reforms — Personal debt regime, State assets, Social support
- Personal debt regime:
  - Government will introduce legislation to reform the personal debt regime to the Oireachtas before the start of the summer recess, with the objective of increasing the speed and efficiency of proceedings while at the same time mitigating moral hazard and maintaining credit discipline.
  - A programme to facilitate access to professional financial advisory services, funded by banks, will be activated.
- State assets:
  - Government will report to programme partners on progress, including details of the timetable for publication of necessary legislation to allow the asset disposal programme to proceed and carry out identified reforms of corporate governance in state-owned assets.
- Efficient social support expenditure:
  - In the context of Budget 2013, the Department of Social Protection will present options to Government for consideration, having regard, inter alia, to the results of the actuarial review of the social insurance fund.

### Structural fiscal reforms — Fiscal framework
- The Government will publish legislation to anchor its already operational multi-annual expenditure limits.
- Government will publish draft legislation which enshrines the commitment to sound public finances, gives statutory basis to the Irish Fiscal Advisory Council and provides for the Council’s independence and adequate resourcing.

### (End Q3-2012 actions summarized)

---

### Annex 1. Provision of data
- Coordination:
  - The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to all external programme partners.
- To be provided by the Department of Finance in consultation with the Department of Public Expenditure and Reform as appropriate:
  - F.1 Monthly data on adherence to budget targets (Exchequer statement, details on Exchequer revenues and expenditure with information on Social Insurance Fund to follow as soon as practicable). — Monthly, 10 days after the end of each month
  - F.2 Updated monthly report on the 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
- To be provided by the NTMA:
  - N.1 Monthly information on the central 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 working days after the end of each month
  - N.3 Data on the National Debt — Monthly, 15 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 the National Debt. — Monthly, 30 working days after the end of each month
  - N.5 Updated estimates of financial sources (bonds issuance, other financing sources) for the Exchequer Borrowing Requirement / National Debt 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 including LDR and NSFR 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
  - C.7 Deleveraging reports including (i) progress achieved towards interim target; and (ii) actual and planned asset disposals. — Quarterly, 35 working days after the end of the reference period.

*Prepared by the European Department (In consultation with other departments); Approved by Ajai Chopra and Martin Mühleisen; June 7, 2012.*

### 1.      This supplement provides an update on the outcome of the recent referendum in

### This supplement provides an update on the outcome of the recent referendum in

### Referendum outcome and market reaction
- Ireland’s referendum on May 31, 2012 supported amending Ireland’s constitution to allow ratification of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.
- A total of 60.3 percent of votes cast were in favor of the constitutional amendment, with turnout of 51 percent of the electorate.
- Ratification of the Treaty ensures eligibility for potential future support from the European Stability Mechanism.
- There was a decline in 2-year bond spreads of 85 basis points in the following days, coinciding with modest general easing of financial tensions in the euro area.
- The nine-year bond yield is little changed at close to 7.4 percent.

### Fiscal developments and exchequer outturn
- The May exchequer returns suggest fiscal performance remains in line with the budgetary profile during the first five months of 2012.
- The cumulative exchequer primary deficit at end-May, including the payment on the promissory note via bond issuance to the IBRC, was €6.4 billion (4 percent of GDP).
- That deficit was 0.1 percent of GDP under the authorities’ profile, and 1.3 percentage points of GDP narrower than the deficit for the same period in 2011.
- Adjusting for bank-related income of 0.6 percent of GDP that was received a month earlier this year, the improvement is ¾ percent of GDP from the same period in 2011.
- Forty percent of the full-year tax revenue target has now been collected, with income tax, VAT and corporation tax continuing to over perform modestly.
- The expenditure overrun seen in earlier months has moderated and now amounts to less than 0.1 percent of GDP.

### Real sector indicators and labor market
- Employment gains registered in the last quarter of 2011 were partly reversed in the first quarter of 2012.
- The unemployment rate rose to 14.8 percent, the highest level since 1994.
- Consumer sentiment continued to recover in April, although it remains low by historical standards.
- Exports of goods were almost flat in the first quarter.
- The PMI index of new export orders remains above 50.
- Industrial production rose by 2.8 percent y/y in April, with growth recorded in both the modern and the traditional sectors.
- Consumer prices remained stable for the second consecutive month in May, bringing the annual HICP inflation rate to 1.9 percent y/y.

### IMF Executive Board: Sixth review and disbursement
- The Executive Board completed the sixth review of Ireland’s performance under a three-year, SDR 19.47 billion arrangement under the Extended Fund Facility (EFF).
- Completion of the review enables immediate disbursement of an amount equivalent to SDR 1.191 billion (about €1.4 billion; or about US$1.8 billion).
- Total disbursements under the EFF to date are SDR 15.027 billion (about €18.2 billion; or about US$22.8 billion).
- The arrangement for Ireland was approved on December 16, 2010, and is part of a financing package amounting to €85 billion (about US$106.5 billion) also supported by European partners and bilateral loans.
- Real GDP is projected to expand by ½ percent in 2012, down from 0.7 percent in 2011.
- The budget annual deficit target is 8.6 percent of GDP; budget remained on track through the first five months of the year.
- At the end of May, the cumulative primary deficit was 1.3 percentage points of GDP narrower than in the same period last year, and just below the authorities’ profile for the year.
- Some 40 percent of the full-year tax revenue target has now been collected.
- The expenditure overrun has moderated to less than 0.1 percent of GDP.
- Overall level of deposits in the banking system is stable.

### Financial sector and structural reforms; policy priorities highlighted by IMF
- Financial sector reforms are advancing: authorities are deepening reform efforts to improve the quality of bank assets and facilitate resolution of household debt distress, and are developing a framework to strengthen the credit union sector.
- Authorities are developing a package of specific measures to further underpin the 2013–15 consolidation.
- Authorities are reviewing and adapting their strategy for growth and job creation in view of the challenging external environment.
- IMF policy recommendations and priorities emphasized by Mr. David Lipton:
  - If real GDP growth expected for 2012 were to weaken notably, accommodating a potential revenue shortfall would help protect the fragile recovery.
  - Specify by Budget 2013 the measures to underpin the 2013–15 fiscal consolidation.
  - Further implementation of the authorities’ fiscal institutional reform plans to help Ireland regain market access.
  - Bolster growth and job creation: enhance resources for engaging actively with jobseekers and avoid unemployment traps in the social payments structure.
  - Reinvest a portion of state asset disposals to support job creation and strengthen competition enforcement to harness growth benefits of divestments.
  - Financial sector reforms should lay the basis for banks to make sound loans in support of the recovery, including by improving capacity to manage distressed assets.
  - Early preparation of the new personal insolvency framework is needed to address household debt distress while protecting debt service discipline.
  - Restructuring of PTSB should be carefully implemented, including through timely separation of certain legacy and nonperforming assets.
  - Emphasized that Ireland’s fiscal consolidation and policy reforms would be most effective as part of broader European efforts to stabilize financial markets and strengthen growth in the euro area.

*IMF staff supplement and Press Release No. 12/222, June 13, 2012.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12147.pdf_