## Selected Economic Indicators and Policy Assessment (Ireland, 2008–13) ## Source details **Canonical URL:** [Selected Economic Indicators and Policy Assessment (Ireland, 2008–13)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12264.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12264.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12264.pdf.json) --- ### Background: depth and drivers of the crisis - Property price collapse in 2008 triggered a sovereign–banking–real economy crisis. - Bank assets grew to some 500 percent of GDP during the boom. - Net foreign liabilities of the Irish banking system rose from about 20 percent to about 70 percent of GDP in the five years to mid-2008. - Wholesale funding rose to 55 percent of assets by mid-2008. - Public debt rose from 25 percent of GDP in 2007 to over 90 percent by 2010. - Government actions included: - blanket guarantee from September 2008; - transfer of distressed assets to NAMA from April 2009; - large-scale support for Anglo Irish and Irish Nationwide Building Society; - equity injections in other banks. - Fiscal cost of bank support cited as some 40 percent of GDP (Laeven and Valencia, 2012). ### Crisis dynamics and macroeconomic impact - Real GDP fell by 8 percent over 2007–10. - Nominal GNP slumped by 20 percent over 2007–10. - Tax revenues fell by 30 percent from 2007 to 2009. - Employment fell by 13 percent in the three years to 2010. - Unemployment rose by 9 percentage points to 13.6 percent in 2010; unemployment climbed past 14 percent in 2011 and hit 14.8 percent in Q1 2012. - CPI fell by 5½ percent from 2008 until 2010; deflation ended with low positive inflation in 2011. - By 2010 government recapitalized banks by €46.3 billion (equivalent to 30 percent of 2010 GDP); total recapitalization cost noted as €64.1 billion, or some 40 percent of GDP. ### Recent developments and outlook (2011–2013) - Real GDP grew by 1.4 percent y/y in 2011; export growth was 5.1 percent y/y in 2011. - Real private consumption projected to shrink by 1.9 percent in 2012. - Real GDP: expected to grow by about ½ percent in 2012. - 2013 projection: growth projected at 1½ percent. - Medium-term projection (2014–17): average annual growth of 2¾ percent; exports averaging 4½ percent growth. - Domestic demand contracted by 3.7 percent y/y in 2011; projected to turn positive only in 2014 and reach 2 percent y/y by 2015–17. - Household saving rate rose to 14 percent in 2011, compared with pre-crisis average of 8¼ percent. - Employment: fell a further 2 percent in 2011; unemployment expected to remain at almost 15 percent. - Inflation expected to be 1.4 percent in 2012. - Downside risk scenario: if real GDP expands by only ½ percent per year over the medium term, gross general government debt would rise to 129 percent of GDP by 2017. - Baseline debt path: gross general government debt peaks at 119 percent of GDP in 2013, then declines to 108 percent of GDP by 2017. ### Indicators through mid-2012 (selected) - Real GDP grew 1.2 percent y/y in Q1 2012, but fell 1.1 percent q/q. - Export volumes rose 6.1 percent y/y in Q1 2012. - Real fixed investment grew 8 percent in Q1 2012 (largely driven by aircraft purchases). - Service exports: computer service export values rose almost 20 percent in Q1 2012. - HICP inflation remained just under 2 percent y/y in mid-2012. - Industrial production expanded 5.3 percent y/y in Q2 2012. - PMI index of new export orders remained above 50 and increased in June and July 2012. - Retail sales (excluding automobiles) decline slowed to 1½ percent y/y in H1 2012, from a 2.6 percent decline in 2011. - Consumer sentiment improved in June 2012 and further in August 2012 to its highest level in almost 5 years. ### Housing market and mortgage arrears - Residential property prices: index has halved since its 2007 peak; nominal residential property prices declined 14.4 percent y/y in June 2012. - Dublin house prices (excluding apartments) dropped by 55 percent and were flat in H1 2012. - Mortgage lending and arrears (selected levels as of Mar-12 / Jun-12): - Outstanding mortgage stock: Dec-09 = 118.3; Dec-10 = 116.7; Dec-11 = 113.5; Mar-12 = 112.7; Jun-12 = 112.0 (billions of euros). - Mortgage loans in arrears over 90 days: Dec-09 = 5.3; Dec-10 = 8.6; Dec-11 = 13.9; Mar-12 = 15.4; Jun-12 = 16.5 (billions of euros). - Mortgage loans in arrears over 90 days as percent of outstanding: Dec-09 = 4.5 percent; Dec-10 = 7.4 percent; Dec-11 = 12.3 percent; Mar-12 = 13.7 percent; Jun-12 = 14.7 percent. - Restructured mortgages: Dec-10 = 10.4; Dec-11 = 13.3; Mar-12 = 14.2; Jun-12 = 15.1 (billions of euros). - Restructured mortgages in percent of outstanding: Dec-10 = 8.9 percent; Dec-11 = 11.7 percent; Mar-12 = 12.6 percent; Jun-12 = 13.5 percent. - Repossessions and voluntary surrenders (cumulative since 2009Q3): Dec-10 = 115; Dec-11 = 741,182; Mar-12 = 1,352; Jun-12 = 1,498 (note: table preserves source formatting). - Almost 14 percent of the total principal balance of owner-occupied residential mortgages outstanding was affected by arrears of 90 days or more as of end March 2012. - About half of total arrears arise from loans already restructured. - Repossessions and voluntary surrenders cumulated to 0.2 percent of the stock of mortgages on owner-occupied dwellings in the 11 quarters to March 2012. ### Banking sector performance and PCAR banks (AIB, BOI, PTSB) - Equity increased by €24 billion in 2011; average core tier 1 regulatory capital at 16½ percent of risk-weighted assets as of Q1 2012. - Preprovision profits turned negative in Q1 2012: minus 0.1 percent (annualized) of total average assets, down from 0.2 percent in 2011. - Nonperforming loans (NPLs) stand at 21 percent of gross loans (sector aggregate noted elsewhere). - Box 1 Q1 2012 key figures: - Risk-based core tier 1 ratio: 16½ percent. - Net preprovision operating profits: negative 0.1 percent of total average assets (down from 1.7 percent in Q4 2011). - Net interest margin fell by 40 basis points in Q1, to 0.8 percent of average assets. - Funding costs fell by 35 percent from Q4 2011. - ELG fee in Q1: 110 basis points, absorbing some 40 percent of the net interest margin (up from 28 percent in Q4 2011). - Fee income: 0.3 percent of average assets. - Operating costs: 1.1 percent of average assets. - Anticipated staff reductions: about 3,400 full-time equivalents by end 2013. - Underlying cash flow from operations estimated at minus €1.1 billion annually (after adjusting noncash revenue). - Provisions in Q1: 1.2 percent of assets, leading to net income loss of €1 billion and a negative ROA of 1.2 percent. - Selected balance-sheet changes (Q4 2011 → Q1 2012): - Total average assets: €328.2 bn → €323.3 bn, change -4.8, -1.5 percent. - Gross loans: €240.9 bn → €235.7 bn, change -5.2, -2.2 percent. - Loan loss provisions: €23.5 bn → €24.3 bn, change 0.8, 3.4 percent. - Gross NPLs: €47.0 bn → €48.9 bn, change 1.9, 4.0 percent. - Gross NPLs to gross loans (%): 19.5 → 20.7. - Provisions to gross NPLs (%): 50.0 → 49.7. - Net NPLs to net equity (%): 83.3 → 87.5. - Risk weighted assets (RWA): €166.8 bn → €160.4 bn, change -6.4, -3.8 percent. - CT1 to RWA (%): 16.4 → 16.5. - CT1 to total assets (leverage ratio %): 8.4 → 8.2. ### Credit developments, SME finance, and funding dynamics - New mortgage lending: €2.5 billion in 2011; €1.0 billion in H1 2012. - New loans to SMEs drawn down: around €2.2 billion in 2010 and 2011; slowed to €0.4 billion in Q1 2012. - Outstanding credit to SMEs stable at about €27 billion since late 2010. - ECB survey (six months to March 2012): 25 percent of Irish SMEs identify access to finance as the most pressing concern. - SME credit application rejection rates: Irish SMEs 17 percent (euro area average 13 percent); micro enterprises rejection rate: 38 percent. - Credit Review Office rulings: credit granted in 60 percent of cases referred. - PLAR deleveraging progress: €42 billion achieved by end April (out of an indicative three-year target of €70 billion). - By mid-2012, ECB refinancing of domestic banks was back to the pre-turmoil level. - Deposit and liquidity indicators: - Household and corporate deposits stabilized; deposit rates remain high relative to euro area averages. - Wholesale funding (selected levels): Dec-08 = 439.6 (bn euros), Dec-09 = 422.8, Dec-10 = 315.3, Dec-11 = 233.6, Jun-12 = 203.2. ### Market access and sovereign funding - Ireland returned to the sovereign bond market on July 26, 2012, issuing a new five-year and reopening an eight-year issue, raising €4.2 billion. - Average yield on July 26, 2012 issuance: 5.9 percent. - The euro area summit statement of June 29, 2012 reduced spreads by 80–100 basis points. - Financing needs in 2013 and 2014 were reduced by €1 billion through a bond swap. - Prefinancing increased gross debt temporarily by €3.2 billion (2 percent of GDP) in 2012; end-2012 cash buffer projected at €18 billion (11 percent of GDP). ### Public finances, consolidation, and revenue policy - General government balance (percent of GDP): 2008 = -7.3; 2009 = -13.9; 2010 = -30.9; 2011 = -12.8; 2012 (proj) = -8.3; 2013 (proj) = -7.5 (as tabulated). - General government gross debt (percent of GDP): 2008 = 44.5; 2009 = 64.9; 2010 = 92.2; 2011 = 106.5; 2012 = 117.7; 2013 = 119.3. - Cumulative budget measures in 2009–12 estimated to strengthen the structural primary balance by 8 percent of GDP; two-thirds of the adjustment was expenditure-led. - Medium-Term Fiscal Statement (November 2011) parameters: 5 percent of GDP consolidation over 2013–15 to deliver a deficit of 3 percent of GDP in 2015. - Planned measures and projections: - Maintain freeze on nominal wage and welfare rates to generate a further reduction in the expenditure ratio of about half 3½ percentage points of GDP by 2015 (as described). - Budget 2013 preparations: updated Medium-Term Fiscal Statement to be published in October; core features of a value-based property tax to be included in draft legislation at Budget 2013. - Revenue base-broadening options and contextual figures: - The 2011 combined spending on certain items was about 3½ percent of GDP. - Staff favored a value-based property tax "around the 0.5 percent mark". - The relatively-high 23 percent standard VAT rate applied to just half of consumption. ### External sector risks, IIP and external debt dynamics - Net international investment position (IIP) reached negative 100 percent of GDP (Q1 2012). - Gross external debt (non-IFSC) ≈ 300 percent of GDP at end Q1 2012; 40 percent of this was official external debt of general government and CBI. - Including IFSC, total external debt ≈ 1,025 percent of GDP in Q1 2012 (down from 1,075 percent at end-2011). - REER and competitiveness: - CPI-deflated REER fell 17.5 percent since 2008 peak. - ULC-deflated REER declined around 22 percent since 2008 peak. - CGER-type assessments: 8 percent to 12 percent overvaluation under different methods; staff noted moderate overvaluation around 5–10 percent elsewhere. - Current account: surplus of 1.1 percent of GDP in 2010 and 2011. - External-debt baseline and scenarios: - Baseline external debt paths: 2012 = 308.7; 2013 = 291.9; 2014 = 271.7; 2015 = 250.4; 2016 = 230.6; 2017 = 211.8 (percent of GDP series in Annex I Table 1). - Baseline external debt in 2017: 212 (in percent of GDP) per bound-test summary. - Historical scenario external debt in 2017: 316 (in percent of GDP). - Scenarios: Growth shock → 239 (external debt % of GDP); Combined shock → 241; Real depreciation (30% in 2013) → 200. - Debt sustainability highlights: - Under baseline (primary deficit declining towards 0.5 percent of GDP by 2019), gross general government debt projected to fall to 94 percent of GDP by 2021. - If GDP growth stagnated at ½ percent per year, debt would rise to 146 percent of GDP by 2021. - One-time 10 percent of GDP contingent liability shock would take debt to 105 percent of GDP in 2021 (baseline 94 percent). - Ireland contingent liabilities (percent of projected 2012 GDP): Senior NAMA bonds = 18.9; Guarantees for Emergency Liquidity Assistance = 10.0; Other Bank Liabilities covered by Eligible Liability Scheme = 18.6; Total = 47.5. ### Key risks assessment (interconnected downside risks) - Strong intensification of the euro area crisis — Relative Likelihood: Medium; Impact if Realized: High. - Stagnation of world growth — Relative Likelihood: Medium; Impact if Realized: Medium. - Increased reliance by banks on ELA — Relative Likelihood: Medium; Impact if Realized: Medium. - Delayed or insufficient improvement from June 29 commitments — Relative Likelihood: Medium; Impact if Realized: High. - Domestic demand revival further delayed — Relative Likelihood: Medium; Impact if Realized: Medium. - Unemployment increases become structural — Relative Likelihood: Medium; Impact if Realized: Medium. ### Policy implications, reforms and IMF staff recommendations - Financial sector strategy (three-pronged): reorganization, recapitalization, deleveraging. - PCAR stress test targeted minimum core tier 1 ratios of 10½ percent (baseline) and 6 percent (stress); aggregate recapitalization needs identified as €24 billion. - BlackRock Solutions conducted independent loan loss forecasts; PLAR deleveraging plan set targets; €70 billion of assets initially identified for deleveraging with more than half disposed or amortized by reporting. - Restoration of credit flow—priority actions: - Arrest deterioration in asset quality; accelerate mortgage arrears resolution strategies and SME workout functions. - Implement personal insolvency reform and ensure repossession framework complements it. - Regain profitability: reduce funding and operational costs; phase out ELG Scheme in an orderly manner. - Address banks’ funding constraints through strengthened capital, deleveraging, loan restructuring, and operational restructuring. - Staff supported a small Temporary Partial Credit Guarantee Scheme: state will guarantee 75 percent of creditors’ exposure, up to €150 million annually. - Growth-friendly consolidation and social protection: - Continue expenditure-led consolidation while protecting the vulnerable; target social supports (child benefit, medical cards, household benefits, subsidies on college fees). - Reform health and education to improve efficiency (examples: greater use of primary care and generics; align higher education funding with skills priorities). - Base-broadening revenue measures preferred to rate hikes; consider property tax (around 0.5 percent suggested), broaden PRSI, expand carbon tax, redesign vehicle taxes. - Labor market and activation: - Implement Pathways to Work; increase well trained case workers; consider private sector involvement in activation services with careful design. - Reform unemployment/welfare payment structures to reduce inactivity and unemployment traps; consider retaining reduced PRSI for lowest pay beyond 2013 if effective. - National Minimum Wage (NMW) for adults: €8.65 per hour; jobseeker payments about 62 percent of the NMW (assuming a 35 hour week). - Fiscal framework and program monitoring: - Continue to meet quantitative performance criteria and indicative targets; update Medium-Term Fiscal Statement and publish multi-annual expenditure ceilings. - Implement Fiscal Responsibility Bill and establish statutory Irish Fiscal Advisory Council. - Maintain prudent cash buffer; market funding plans include Treasury bills, bond issuance and amortizing bonds to pension funds. ### Program financing, IMF support and review timetable (selected figures) - Gross borrowing need (2008–13, bn euros): 2008 = 15.9; 2009 = 3.4; 2010 = 71.4; 2011 = 45.3; 2012 = 27.5; 2013 = 22.5. - Exchequer cash deficit (2008–13, bn euros): 2008 = 12.7; 2009 = 24.6; 2010 = 18.7; 2011 = 19.1; 2012 = 17.1; 2013 = 14.5. - Market financing (incl. retail) (2008–13, bn euros): 2008 = 4.9; 2009 = 53.3; 2010 = 23.2; 2011 = 1.4; 2012 = 8.1; 2013 = 6.6. - NTMA issuance in 2012: Treasury bills €0.5 billion on July 5; bonds €4.2 billion on July 26 at average yield just under 6 percent. - IMF Extended Arrangement (EFF): Amount Approved SDR 19,465.80 (SDR million); Amount Drawn SDR 15,027.43 (SDR million); schedule of purchases includes Seventh Review Purchase: SDR 758,000,000 (60 percent of quota). - Stock of Fund credit (end-period, millions of SDR): 2011 = 11,050; 2012 = 16,543; 2013 = 19,466. ### Program conditionality and data/reporting requirements (selected) - Cumulative Exchequer primary balance performance criteria: - From January 1, 2012: End-September 2012 (performance criterion) = -10.6 (bn euros); End-December 2012 (performance criterion) = -11.2 (bn euros). - From January 1, 2013: End-March 2013 (indicative target) = -3.6 (bn euros); End-June 2013 (indicative target) = 3 (bn euros) (table also lists -7.2). - Ceiling on the stock of central government net debt (indicative targets, bn euros): - End-June 2012 (provisional): 128.2; End-September 2012: 132.5; End-December 2012: 136.0; End-March 2013: 141.7; End-June 2013: 148.7. - Monitoring: Department of Finance, NTMA, and Central Bank of Ireland reporting timetables specified for a wide range of fiscal and financial indicators (monthly, quarterly, with stated lags). - Program reviews: next Article IV consultation expected on a 24-month cycle; staff supported completion of the Seventh Review. *Source: IMF staff summary and selected sections/tables from Ireland — 2012 Article IV Report (content unit _cr12264).* ### 1. Selected Economic Indicators, 2008–13 _______________________________________________________ 34 ### 1. Selected Economic Indicators, 2008–13 ### Background — An exceptionally deep banking crisis - The sovereign–banking–real economy crisis began in 2008 after a property price collapse and mounting bank losses. - Public debt rose from 25 percent of GDP in 2007 to over 90 percent by 2010. - Bank assets grew to some 500 percent of GDP during the boom years. - Net foreign liabilities of the Irish banking system rose from about 20 percent to about 70 percent of GDP in the five years to mid-2008. - Wholesale funding rose to 55 percent of assets by mid-2008. - Government actions included: - A blanket guarantee from September 2008. - Transfer of distressed assets to NAMA from April 2009. - Large-scale support for Anglo Irish and Irish Nationwide Building Society. - Equity injections in other banks (Section IV.A). - Fiscal cost of bank support cited as some 40 percent of GDP (Laeven and Valencia, 2012). - Ireland’s banking crisis is described as the second costliest in advanced economies since at least the Great Depression. ### Crisis dynamics and macroeconomic impact - Construction sector contraction and global trade collapse drove recession from 2008. - Employment fell by 13 percent in the three years to 2010. - Unemployment rose by 9 percentage points to 13.6 percent in 2010. - CPI fell by 5½ percent from 2008 until 2010. - Real GDP fell by 8 percent over 2007–10. - Nominal GNP slumped by 20 percent over 2007–10. - Tax revenues fell by 30 percent from 2007 to 2009. - Deficit (before bank support) rose to over 10 percent of GDP per year in 2009–10, from fiscal balance in 2007. - By 2010 government had recapitalized banks by €46.3 billion, equivalent to 30 percent of 2010 GDP. - Total recapitalization cost noted as €64.1 billion, or some 40 percent of GDP (partly referenced). ### Recent developments — A tentative export-led recovery - Real GDP grew by 1.4 percent y/y in 2011. - Export growth was 5.1 percent y/y in 2011. - Real exchange rate on a unit labor cost basis fell 20 percent from its 2008 peak. - Nominal effective exchange rate declined by 5 percent (contributing to competitiveness). - Staff estimate indicates some modest exchange rate overvaluation remains. - Domestic demand contracted by 3.7 percent y/y in 2011. - Private consumption declined by 2.4 percent y/y in 2011. - Household saving rate rose to 14 percent in 2011, compared with pre-crisis average of 8¼ percent. - Employment fell a further 2 percent in 2011 and unemployment climbed past 14 percent. - Current account surplus in 2011 remained at about 1 percent of GDP after a 3.3 percentage point of GDP rise in the trade balance and a 3.5 percentage point of GDP rise in income outflows. - Real GNP declined by 2.5 percent in 2011 even as real GDP grew. - Deflation in 2009–10 ended; low but positive inflation recorded in 2011 in GDP deflator and HICP. ### Indicators and signals through mid-2012 - Real GDP grew 1.2 percent y/y in Q1 2012, but fell 1.1 percent q/q. - Export volumes rose 6.1 percent y/y in Q1 2012. - Real fixed investment grew 8 percent in Q1 2012 (largely driven by aircraft purchases). - Unemployment rate hit 14.8 percent in Q1 2012. - Total employment fell 1 percent y/y in Q1 2012 with job losses in nine of 14 sectors. - Service exports performed well in Q1 2012; computer service export values rose almost 20 percent. - HICP inflation remained just under 2 percent y/y in mid-2012, compared with 2½ percent for the euro area. - Consumer sentiment improved somewhat in June 2012. - Retail sales (excluding automobiles) decline slowed to 1½ percent y/y in H1 2012, from a 2.6 percent decline in 2011. - Industrial production expanded 5.3 percent y/y in Q2 2012. - PMI index of new export orders remained above 50 and increased in June and July 2012. ### Housing developments and mortgage arrears - Nominal residential property prices declined 14.4 percent y/y in June 2012. - The index has halved since its peak in 2007. - Dublin house prices (excluding apartments) dropped by 55 percent and were flat in H1 2012. - As of end March 2012: - Outstanding mortgage stock: 112.7 (billion of euros) as of Mar-12 (table shows Outstanding: Dec-09 = 118.3; Dec-10 = 116.7; Dec-11 = 113.5; Mar-12 = 112.7). - Mortgage loans in arrears over 90 days: 15.4 (billion of euros) as of Mar-12. - Mortgage loans in arrears over 90 days as percent of outstanding: 13.7 percent as of Mar-12 (Dec-09 = 4.5 percent; Dec-10 = 7.4 percent; Dec-11 = 12.3 percent). - Restructured mortgages: 14.2 (billion of euros) as of Mar-12. - Restructured mortgages in percent of outstanding: 12.6 percent as of Mar-12 (Dec-10 = 8.9 percent; Dec-11 = 11.7 percent). - Repossessions and voluntary surrenders cumulative number since 2009Q3: 1352 as of Mar-12. - Almost 14 percent of the total principal balance of owner-occupied residential mortgages outstanding was affected by arrears of 90 days or more as of end March 2012 (noted in text as “almost 14 percent”). - About half of total arrears arise from loans already restructured. - Repossessions and voluntary surrenders cumulated to 0.2 percent of the stock of mortgages on owner-occupied dwellings in the 11 quarters to March 2012. ### Credit developments and bank funding - New mortgage lending: €2.5 billion in 2011; €1.0 billion in H1 2012. - New loans to SMEs drawn down remained around €2.2 billion in 2010 and 2011; slowed to €0.4 billion in Q1 2012. - Outstanding credit to SMEs stable at about €27 billion since late 2010. - ECB survey (six months to March 2012) finds 25 percent of Irish SMEs identify access to finance as the most pressing concern. - Rejection rate for Irish SME credit applications: 17 percent (euro area average 13 percent); micro enterprises rejection rate: 38 percent. - Domestic survey: of the 38 percent of SMEs seeking credit, 28 percent of requests were declined (excluding pending applications). - Credit Review Office rulings: credit granted in 60 percent of cases referred. - Deposit dynamics and bank deleveraging: - Household and corporate deposits stabilized, but deposit rates remain high relative to euro area averages. - PLAR deleveraging progress: €42 billion achieved by end April (out of an indicative three-year target of €70 billion). - By mid-2012, ECB refinancing of domestic banks was back to the pre-turmoil level. *Source: Ireland 2012 Article IV Report (selected sections and tables provided).* ### 14. The three PCAR banks continue to be well capitalized but their restructuring efforts ### 14. The three PCAR banks continue to be well capitalized but their restructuring efforts have not yet generated concrete improvements in financial performance (Box 1). ### PCAR banks—capitalization and short-term performance - Equity increased by €24 billion in 2011, leaving average core tier 1 regulatory capital at 16½ percent of risk-weighted assets as of Q1 2012. - Preprovision profits turned negative in Q1 2012, at minus 0.1 percent (annualized) of total average assets, down from 0.2 percent in 2011. - Five main factors depressing bank revenue generation: - a large legacy overhang of tracker mortgages indexed to (low) policy rates; - high fees on the Eligible Liabilities Guarantee (ELG) Scheme; - foregone interest on impaired loans; - high operational costs; - the high interest cost of deposits and covered bond funding issued to date. - Nonperforming loans (NPLs) stand at 21 percent of gross loans, highlighting the need for sizeable NPL workouts and faster operational restructuring to reduce costs. ### Box 1 — PCAR Banks’ Financial Performance, Q1 2012 (key figures and drivers) - Risk-based core tier 1 ratio: 16½ percent. - Net preprovision operating profits: negative 0.1 percent of total average assets (down from 1.7 percent in Q4 2011). - Net interest margin fell by 40 basis points in Q1, to 0.8 percent of average assets. - Funding costs fell by 35 percent from Q4 2011, but declines did not offset weakening interest income from higher loan impairments and low-yield tracker mortgages. - ELG fee in Q1: 110 basis points, absorbing some 40 percent of the net interest margin (up from 28 percent in Q4 2011). - Fee income: 0.3 percent of average assets, covering about one-quarter of banks’ operating costs. - Operating costs: 1.1 percent of average assets, consuming 1.3 times the banks’ net interest margin in Q1. - Anticipated staff reductions: about 3,400 full-time equivalents by end 2013. - Underlying cash flow from operations estimated at minus €1.1 billion annually (after adjusting noncash revenue for the unwind discount on impaired loans, about €1 billion per year). - Provisions in Q1: 1.2 percent of assets, leading to net income loss of €1 billion and a negative ROA of 1.2 percent. - Selected balance-sheet and income-statement figures (Q4 2011 → Q1 2012, q/q change): - Total average assets (TAA): €328.2 bn → €323.3 bn, change -4.8, -1.5 percent. - Gross loans: €240.9 bn → €235.7 bn, change -5.2, -2.2 percent. - Loan loss provisions: €23.5 bn → €24.3 bn, change 0.8, 3.4 percent. - Gross NPLs: €47.0 bn → €48.9 bn, change 1.9, 4.0 percent. - Gross NPLs to gross loans (%): 19.5 → 20.7, change 1.2. - Provisions to gross NPLs (%): 50.0 → 49.7, change -0.3. - Net NPLs to net equity (%): 83.3 → 87.5, change 4.2. - Risk weighted assets (RWA): €166.8 bn → €160.4 bn, change -6.4, -3.8 percent. - Core tier 1 capital (CT1) to RWA (%): 16.4 → 16.5. - CT1 to total assets = leverage ratio (%): 8.4 → 8.2. - Aggregated income-account highlights (Q4 2011 → Q1 2012): - Net interest margin: 1.0 → 0.7 → 0.8 (reported series shows 1.0 Q4 2011, 1.2 Q4 2011 column—table formatting preserved as in source). - Net fee income: 0.4 → 0.2 → 0.3. - Net trading gains: 0.9 → -0.1 → -0.1. - Gross operating income: 2.6 → 0.8 → 1.0. - Operating expenses: -0.9 → -0.9 → -1.1. - Preprovision profits (PPP): 1.7 → -0.1 → -0.1. - Loan loss & NAMA provisions: -6.9 → -1.0 → -1.2. - Net income: -5.2 → -1.0 → -1.2. - Return on equity: -79.0 → -13.9 (Q1 2012 value shown in table). - Footnotes and data sources: includes CBI and Fund staff estimates; net tax credits of €0.1 bn in Q1 2012 and €0.9 bn in Q4 2011 noted. ### Market access and sovereign funding developments - Ireland returned to the sovereign bond market on July 26, 2012, issuing a new five-year and reopening an eight-year issue, raising €4.2 billion, mostly subscribed by foreign investors. - Average yield on July 26, 2012 issuance: 5.9 percent. - The euro area summit statement of June 29, 2012 reduced spreads by 80–100 basis points. - Financing needs in 2013 and 2014 were reduced by €1 billion through a bond swap. ### Outlook—macroeconomic projections and key risks - Real GDP: expected to grow by about ½ percent in 2012, significantly slower than in 2011. - Components and projections: - Real private consumption projected to shrink by 1.9 percent in 2012. - Private investment already very low at 7½ percent of GDP. - Unemployment expected to remain at almost 15 percent. - Inflation expected to be 1.4 percent, driven by energy costs and administered prices. - 2013 projection: growth projected at 1½ percent, led by stronger export growth as trading partners recover. - Medium-term projection (2014–17): average annual growth of 2¾ percent, with exports averaging 4½ percent growth. - Domestic demand projected to turn positive only in 2014 and reach 2 percent y/y by 2015–17. - Downside risk scenario (slow growth): if real GDP expands by only ½ percent per year over the medium term, gross general government debt would rise to 129 percent of GDP by 2017. - Baseline debt path: gross general government debt peaks at 119 percent of GDP in 2013, then declines to 108 percent of GDP by 2017. ### Risk Assessment (summarized) - Key interconnected downside risks (relative likelihood: Medium unless noted; impacts vary from Medium to High): - Strong intensification of the euro area crisis — Relative Likelihood: Medium; Impact if Realized: High (heightened financial stress, renewed recession, reduced investor appetite for Irish bonds). - Stagnation of world growth — Relative Likelihood: Medium; Impact if Realized: Medium (softer demand from UK and US, lower net exports). - Increased reliance by banks on ELA — Relative Likelihood: Medium; Impact if Realized: Medium (reduced market funding prospects for banks, higher barriers to sovereign financing). - Delayed or insufficient improvement from June 29 commitments — Relative Likelihood: Medium; Impact if Realized: High (inadequate market financing access, continued bank profitability challenges). - Domestic demand revival further delayed — Relative Likelihood: Medium; Impact if Realized: Medium (weaker growth, harder fiscal adjustment). - Unemployment increases become structural — Relative Likelihood: Medium; Impact if Realized: Medium (lower potential growth, worse debt sustainability). ### Policy implications and reform implementation - Robust implementation of the June 29 euro area summit statement could markedly improve debt dynamics and market financing prospects: - Illustrative impact: if the ESM invested €24 billion in banks and proceeds were used for debt reduction, government debt would drop 14½ percentage points to 105 percent of GDP in 2013. - Refinancing the €28 billion in promissory notes (via long-term government securities or EFSF/ESM loan) would extend debt service and reduce near-term financing needs. - Financial sector reform strategy (three-pronged): reorganization, recapitalization, and deleveraging. - PCAR stress test targeted minimum core tier 1 ratios of 10½ percent (baseline) and 6 percent (stress); aggregate recapitalization needs identified as €24 billion. - BlackRock Solutions conducted independent loan loss forecasts; PLAR deleveraging plan set targets to reduce leverage and reliance on central bank funding. - Progress to date: - Reorganization: creation of two-pillar banking system; mergers and restructurings completed to form pillars and the Irish Bank Resolution Company (IBRC); Irish Life separated from Permanent TSB. - Recapitalization: aggregate recapitalization needs of €24 billion identified; equity injections completed in June 2012; total cost to the state limited to €17.8 billion through private capital raising and burden sharing with subordinated debtholders. - Deleveraging: core/noncore assets delineated; initial target to reduce loan-to-deposit ratios from 180 percent (end 2010) to no more than 122½ percent by end 2013; banks identified €70 billion of assets at outset, with more than half disposed or amortized; deleveraging advanced faster than planned. *Source: IMF staff summary of IMF Ireland 2012 Article IV report section on PCAR banks and related analysis.* ### 24. Creating the conditions for robust credit flow in support of sustained economic ### 24. Creating the conditions for robust credit flow in support of sustained economic recovery ### Key challenges for restoring credit flow - Arresting the deterioration in asset quality is essential. - Residential mortgage arrears rose during 2011; the CBI required banks to develop mortgage arrears resolution strategies. - Banks are accelerating work to build credit collection and workout functions. - Supervision of workout efforts for loans to SMEs has begun and should proceed apace given the sector’s importance for job creation. - Authorities introduced to parliament a comprehensive reform of the personal insolvency framework to help address borrower financial distress while maintaining debt service discipline; this will provide an important backstop to bilateral efforts to resolve distressed loans. - Progress with loan workout and resolution has not advanced as rapidly as desirable; consistent implementation and close monitoring of combined efforts are essential. - It will be important to ensure the repossession framework works efficiently so it complements the personal insolvency reforms. - Regaining profitability is necessary for banks to sustain new lending. - Interest margins are compressed by high deposit interest rates and guarantee fees. - It is appropriate to begin phasing out the ELG Scheme in an orderly manner while preserving access to funding. - Banks remain burdened by cost structures that are too high; reorganization of banks remains to be completed. - Plans to reduce operational expenses must be fully implemented in a timely manner; progress in achieving reasonable cost-to-income ratios should be reviewed periodically. - Banks’ funding constraints need to be addressed. - Strategy to regain market funding rests on strengthened capital, improved liquidity through deleveraging, loan restructuring to clarify asset values and reduce arrears, and operational restructuring to restore profitability. - Positive funding developments: the Irish deposit base has recovered somewhat recently; banks have obtained repo funding secured on U.K. collateral. - Difficulties remain in accessing material volumes of secured market funding to support new lending. - Increased risks of losses from deleveraging exist, with much of the banks’ more attractive foreign assets already sold and deleveraging by European banks on the rise. - In the absence of viable funding alternatives, banks may be unable to avoid increased reliance on Eurosystem funding when further bond maturities occur, resulting in substantial encumbrance of banks’ assets and renewed reliance on ELA if ECB-eligible collateral is exhausted, limiting potential market funding. - These circumstances undermine prospects for a revival of lending; a sustainable solution will need to be found for the euro area as a whole. - Economic uncertainty may constrict lending even if banks are well capitalized. - Lack of aggregate demand is critical to low investment and credit. - There appear to be pockets of creditworthy but credit constrained borrowers, notably in the SME sector. - Staff supported the roll out of a small Temporary Partial Credit Guarantee Scheme: the state will guarantee 75 percent of creditors’ exposure, up to €150 million annually. ### Authorities’ response and stance - Authorities broadly agreed with the analysis on main challenges in restoring credit flow. - Financial sector reform strategy adopted in March 2011 was considered effective in restoring financial stability. - Improving the quality of bank assets is a key priority; addressed through supervisory measures and reform of household bankruptcy. - Authorities are developing a roadmap to wean banks off the ELG Scheme while preserving financial stability. - Authorities support implementation by banks of restructuring plans to reduce operational costs. - On funding, authorities will continue to assist banks in developing collateral quality to increase scope for market funding but noted reviving bank funding markets is a broader euro area challenge. ### Growth-friendly consolidation that protects the vulnerable — context and measures - Pre-crisis fiscal trajectory and deterioration: - Nominal primary spending rose 140 percent over 2000–08 (11 percentage points of GDP in structural terms). - Welfare rates doubled (tripled in the case of the universal child benefit). - Number of public servants enlarged by 35 percent. - Public wages raised 60 percent. - Structural primary deficit rose to over 10 percent of GDP in 2008. - Consolidation implemented since the crisis: - Cumulative budget measures in the last four years (2009–12) are estimated to strengthen the structural primary balance by 8 percent of GDP. - The effort was expenditure-led (two-thirds of total measures). - Measures included a 14 percent cut in public wages, an 8 percent cut in welfare rates (except pensions), an almost 10 percent reduction in public service numbers from 2008, and savings in the non-pay current and capital budgets (17 and 63 percent, respectively). - Revenue-side measures included personal income tax base broadening (10 percent reduction in income tax bands, introduction of universal social charge, elimination of PRSI reliefs and exemptions), higher taxes on capital and savings, and a 2 point hike in the standard VAT rate to 23 percent in 2012. - Social outcomes and protection of vulnerable groups: - Consolidation preserved social cohesion and key public services while protecting the most vulnerable. - Political commitment to consolidation was affirmed by the new government (took office in March 2011). - The Croke Park Agreement stipulated future savings would be achieved through voluntary retirements and redundancies, rather than cuts in pay, with redeployment to protect services. - The June 2012 Progress Report of the CPA Implementation Body found significant targeted reductions in the wage bill had been achieved while protecting public services. - Ireland retained the second-lowest relative at-risk-of-poverty gap in Europe in 2010 despite a deeper crisis. ### Medium-term fiscal outlook and required consolidation - With the overall deficit expected to still exceed 8 percent of GDP in 2012, significant further consolidation is required over the medium term. - The Medium-Term Fiscal Statement (November 2011) set parameters for a 5 percent of GDP consolidation over 2013–15 to deliver a deficit of 3 percent of GDP in 2015. - The plan envisages continuation of an expenditure-led approach (maintaining the two-thirds share). - Maintaining a freeze on nominal wage and welfare rates is expected to generate a further reduction in the expenditure ratio of about half 3½ percentage points of GDP by 2015. - If additional consolidation is required in future updates, it should be spread over outer years (2014–15) while still reaching the medium-term fiscal goal. ### Risks to achieving consolidation goals - Despite strong capacity to deliver, risks remain: - After several successive years of adjustment, few low-hanging fruit remain; expenditure reductions become progressively more difficult in later phases of consolidation. - A weaker than expected growth recovery would erode savings from the nominal wage and welfare rate freeze. - Demographic outlook will put significant upward pressure on pension, education, and health spending over the medium to longer term. - Between 2012 and 2020, Ireland’s population of over-65 year olds will rise by about one-third, while there will be a roughly 15 percent increase in the number of primary school age children. ### Staff recommendations for growth-friendly and fair consolidation - Keep all high-quality expenditure and revenue options on the table to complete consolidation durably, while minimizing drag on demand and job creation and ensuring fair burden-sharing across income groups, generations and family types. - Specific approaches encouraged: - Better targeting the state’s social supports and subsidies to ensure support is directed to those who need it. - Reforming key government services, especially health and education. - Focusing revenue effort on base-broadening rather than rate hikes. - Staff recommended not ruling out any high-quality expenditure or revenue options, some of which may be needed as fallbacks in case shortfalls arise. ### Targeting spending and public service reform priorities - Better targeting of spending can deliver timely reductions while protecting the poor. - Targeting options include child benefit, medical cards, the household benefits package, and subsidies on college fees; in some cases targeting could be achieved by making benefits taxable. - State pensions have been exempted to date; a targeted reduction should be considered given the broad decline in consumer prices and expected 3 percent annual growth in the eligible population. - One approach: reduce or eliminate the premium—currently 5 percent—on the contributory pension over the means-tested pension. - Continued monitoring of adequacy of savings in the net public pay and pensions bill and of public service provision is urged. - Reforms of key public services to underpin medium-term savings: - Despite spending significantly more than the OECD average on health and education, Ireland’s performance indicators are around the OECD average; spending pressures in health in 2012 appear to have structural roots. - Health reforms could include new working models to minimize premium and overtime payments, greater use of primary care rather than hospital stays, and substantially increasing the currently low share of generic drug use. - Higher education reforms could include a new funding model that better aligns course availability with skills priorities, links college fees to costs and earnings potential while supporting low-income students through affordable loans and grants, and strikes an appropriate balance between degree and vocational education. - Savings from such reforms can take time to realize but are important to meet growing needs at manageable cost. *Source: Ireland — 2012 Article IV Report (chapter text provided).* ### 34. A base-broadening approach to raising revenue will help mitigate potential adverse ### A base-broadening approach to raising revenue will help mitigate potential adverse growth effects ### Revenue base-broadening and tax policy - Relative to other OECD economies, Ireland has a combination of high personal and indirect tax rates and relatively narrow tax bases. - Room exists to raise revenues without increasing marginal tax rates or undermining work incentives by broadening bases: - Special income tax reliefs—currently benefiting only those employees earning above the high entry point for income tax—could be better targeted to low-income taxpayers. - Options to broaden the PRSI base could be examined. - Planned introduction of a value-based property tax in 2013 will provide a progressive and stable source of revenue; staff favored around the 0.5 percent mark for this tax. - There is scope to expand the well designed carbon tax to all fuel types. - Vehicle taxes could be redesigned to provide significantly higher revenues while preserving environmental incentives. - Contextual fiscal figures preserved from the source: - The 2011 combined spending on these items was about 3½ percent of GDP. - Due to very high entry points for income tax and employee PRSI, Ireland’s effective PIT rates are quite low for persons earning up to 167 percent of average wage. - The relatively-high 23 percent standard VAT rate currently applies to just half of consumption. ### Authorities’ stance and fiscal consolidation - Authorities agreed further fiscal consolidation would be more difficult and concurred with much of staff’s analysis. - Emphasized priorities: - Improving prospects for growth and job creation to make budget adjustments more tolerable. - Keeping all high-quality expenditure and revenue options on the table to deliver durable consolidation. - Drawing on savings options identified in the 2011 Comprehensive Expenditure Review. - Benefits of the Croke Park Agreement in delivering a leaner and more effective public service while maintaining industrial peace. - Calibrating social transfers to budgetary resources, labor market developments and demographic pressures. - Specific savings and reform areas mentioned: greater use of generic drugs and primary care in health, and improved procurement. ### Supporting growth and reducing unemployment — reforms and measures - Reforms undertaken to boost medium-term growth and reduce unemployment include: - Reforms of sheltered sectors (legal and medical services): Legal Services Regulation Bill to increase transparency on legal costs and create oversight; reductions in margins on pharmaceuticals; measures to ease GPs obtaining contracts under the General Medical Services Scheme. - Improving competition enforcement: Competition (Amendment) Act 2012 effective July 2012; Competition Authority resources increased by about 25 percent. - Strengthening labor activation and training: Pathways to Work initiative (February 2012) focuses on intensifying engagement, aligning training with labor market needs, enforcement of activation requirements, strengthening employer links, and institutional reforms. - Facilitating labor market adjustment: Industrial Relations (Amendment) Bill (draft Dec 2011; law signed July 2012) to focus wage setting on economic conditions and competitiveness, provide safeguards where employers cannot pay, streamline EROs, and allow review/cancellation of REAs. Formal review of all EROs expected before re-negotiation, most likely starting in 2013. - Staff focus to increase employment-rich recovery and contain structural unemployment: - Education and training: - Expand return-to-education programs like Youthreach, Back to Education, or Springboard; short-term courses may be insufficient. - Course provision should be driven by effectiveness in meeting labor market needs; training outcomes should be evaluated regularly and used to decide course expansion/closure. - Prioritize timely creation of new authorities for further education and training (SOLAS and the Education and Training Boards); consider introduction of a voucher system for courses. - Reform Community Employment (CE) scheme: limit entry over time to jobseekers without other employment possibilities; ensure participants receive suitable training to secure employment after exit. - Activation, benefits, and employment services: - Increase well trained case workers; consider involving private sector firms in provision of activation services, especially for the long-term unemployed, with careful design. - Strictly apply sanctions to enforce mutual obligation requirements for jobseekers. - Reform welfare payments: current flat unemployment payments result in high replacement rates by international standards; highest replacement rates affect those also receiving housing benefits, creating unemployment and inactivity traps. - Labor costs and minimum wage considerations: - Almost 9 percent of the work force, or over 60 percent of the unemployed, have been out of work for over a year. - Consider retaining the reduced rate of PRSI for the lowest pay beyond 2013 if evaluation shows effectiveness. - National Minimum Wage (NMW) for adults is €8.65 per hour. - Jobseeker payments are about 62 percent of the NMW (assuming a 35 hour work week); this limits scope for reductions in the NMW given incentive concerns. - A reduction in the NMW should be considered given the broad fall in consumer prices including rents, and because it is notably above the minimum wage in Northern Ireland and the United Kingdom despite a highly integrated labor market; however, authorities had no immediate plan to materially reform Community Employment and coalition partners agreed to reverse an earlier reduction in the NMW. ### Banking sector, financial-sector reform, and risks - Banking crisis context and costs: - Determined actions taken to restructure, downsize, and recapitalize banks at a cumulative public cost of some 40 percent of GDP. - Remaining banking challenges and recommended actions: - Banking system still restructuring assets and operations; not yet meeting financing needs of the economy. - Arrest deterioration in bank asset quality; loan workout and resolution progress insufficiently rapid. - Sustain supervisory pressure for long-term solutions for distressed households and pursue similar approaches for SME loans. - Reforms of the personal insolvency framework are key, with repossession framework needing to complement these reforms in practice. - Returning banks to profitability requires reducing funding and operational costs; banks’ plans to reduce operational expenses must be fully implemented. - Develop a roadmap to phase out the costly ELG Scheme in an orderly manner while preserving access to funding. - Temporary ownership of the banks by the ESM could eliminate the need for guarantees, increase access to funding options, and improve bank profitability and value, thereby restoring lending capacity more quickly. ### Staff appraisal — summary findings and policy recommendations - Recovery, credibility, and remaining risks: - Policy actions have restored credibility; strong support from European partners and return to sovereign bond market evidence progress. - Underlying strengths allowed a return to growth in 2011 even as domestic demand declined. - Risks remain substantial: high and growing public debt, ongoing banking restructuring, household high debts and depleted net wealth, high unemployment causing skill erosion and emigration, SME debt distress and limited credit access, and euro area crisis-related uncertainty. - Fiscal policy guidance: - Fiscal consolidation remains necessary but should be conducted in as growth-friendly a manner as feasible. - Revival of domestic demand should be facilitated while enhancing competitiveness and readiness of the unemployed to take jobs. - Substantial further fiscal consolidation needed; combine strategies to limit growth impact while protecting public services and the vulnerable. - Careful targeting of spending, making some benefits taxable, targeted savings in state pensions, and possible further reductions in public sector wages if needed to meet wage bill targets. - Medium-term savings require deeper reforms of health and education to identify service priorities and deliver services more efficiently; the Croke Park agreement can facilitate implementation. - Considerable scope for further base broadening measures to raise revenues while containing drag on growth; introduction of a value-based property tax is important. - Unemployment reduction strategy: - Firm implementation of a broad-based approach is required. - Realizing Pathways to Work benefits requires additional well trained case workers; private sector involvement could be useful if well designed. - Facilitate mobility of jobseekers through regular monitoring of training outcomes and effective delivery of further education and training. - Reform structure of social benefits to avoid unemployment and inactivity traps for long-term unemployed receiving housing benefits. - Explore steps to reduce labor costs and promote a job-rich recovery. *2012 ARTICLE IV REPORT IRELAND — INTERNATIONAL MONETARY FUND* ### 48. The prospects for these efforts to succeed hinge on stabilization and recovery across ### _cr12264 - 48. The prospects for these efforts to succeed hinge on stabilization and recovery across ### Prospects and external dependencies - The prospects for these efforts to succeed hinge on stabilization and recovery across the euro area and strengthened European support. - Ireland’s small open economy has regained much of the competitiveness it lost during the boom, yet high trade and financial openness implies reliance on: - a revival of trading partner growth, and - calmer euro area financial conditions. ### European policy commitments and measures - Euro area leaders have pledged to: - break the vicious circle between banks and sovereigns by enabling the ESM to recapitalize banks directly, - treat similar cases equally, and - examine the situation of the Irish financial sector with the view of further improving the sustainability of Ireland’s well-performing adjustment program. ### Importance of meeting commitments - Meeting these commitments is critical to: - improving Ireland’s debt sustainability, - reviving sound lending, and - ensuring Ireland’s economic recovery and durable return to private financing. *Source: _cr12264 - 48. The prospects for these efforts to succeed hinge on stabilization and recovery across* ### 49. The next Article IV consultation with Ireland is expected to take place on a 24-month cycle. ### _cr12264 - 49. The next Article IV consultation with Ireland is expected to take place on a 24-month cycle. ### Article IV Consultation Timing - The next Article IV consultation with Ireland is expected to take place on a 24-month cycle. ### Real Sector and Inflation (2006–12) - Net exports were the main contributor to growth in Q1 2012. - The decline in consumption slowed somewhat. - Industrial production increased in the first half of 2012 together with export orders and sentiment indicators. - The current account returned to a deficit in the first quarter of 2012 due to strong income outflows. - Inflation stayed below 2 percent, with energy and administered prices being the main contributors. - Unemployment remained high, with over 60 percent long-term and youth unemployment at 30 percent. - Contributions to Real GDP Growth (Percent) chart spans 2007–2012Q1 showing components: Net exports, Inventories, Consumption, Investment. - Consumer sentiment (1995Q4=100) and PMI indicators presented for Jun-06 to Jun-12. - Manufacturing PMI (50+=expansion) and New export orders indicators shown for Jun-06 to Jun-12. - Current Account Balance Composition (Billions of euros) shown for 2006Q4–2011Q4. - Contribution to Annual HICP Inflation (Percentage points) shows Core inflation and Energy and unprocessed food from Jun-08 to Jun-12. - Unemployment Rates (Percent) panel shows Less than one year, Long-term, Youth unemployment (RHS) from 2006Q1–2012Q1. ### Housing Developments (2001–12) - Property prices have halved from their 2007 peak, with Dublin house prices flat in H1 2012. - Rental yields and the house price-to-income ratio may undershoot previous norms before stabilizing. - New mortgage lending has remained sluggish. - Falling incomes counteract households’ efforts to lower their debt burdens, yet there was a modest decline in 2011. - Arrears accumulation continued, with almost 14 percent of mortgages by value in arrears in March 2012. - Loan restructurings have primarily aimed at easing or stretching out loan service payments. - Residential Property Prices index (2005M1=100) shown for National and Dublin from Jan-05 to Jan-12. - Indicators of Housing Valuation Levels include House prices to disposable income per capita (ratio) and Rental yield (percent). - Loans for House Purchases (Billions of euros) series from 2006–2012. - Household Debt and Interest Payments (Percent of disposable income) panel with Debt burden, Interest burden, Effective interest rate. - Mortgages in Arrears: Arrears over 180 days and Arrears 91 to 180 days (Percent of total mortgage value). - Restructured Mortgages by Type, March 2012 (Percent of total): Interest Only 35%, Reduced Payment (greater than interest only) 18%, Reduced Payment (less than interest only) 14%, Term Extension 12%, Arrears Capitalisation 12%, Payment Moratorium 4%, Hybrid 5%. ### Credit Developments (2006–12) - The level of private sector deposits has stabilized. - Credit to households and corporations continue to contract at stable rates. - Total SME credit remains flat since end 2010, despite sectoral differences. - Credit standards tightened modestly recently, and credit demand has shown further weakness. - Bank Deposits (Billions of euro) series Apr-09–Mar-12 shows Non-resident deposits; Resident private deposits, foreign-owned banks; Resident private deposits, covered banks. - Loans Outstanding to Irish Residents (Year-on-year percentage change) shows households and non-financial corporations from Apr-09–Apr-12. - Outstanding SME Credit 1/ (Billions of euros) shows Gross new lending and Outstanding amounts (RHS) Mar-10–Mar-12. - Outstanding SME Credit by Sector 1/ (2010Q1=100) includes Agriculture, Manufacturing, Construction, Wholesale/Retail Trade & Repairs, Hotels and Restaurants. - Changes in Credit Standards (2006Q1=100, + = tightening) and Changes in Credit Demand (2006Q1=100) for Corporate, Mortgage, Consumer through 2012Q2. ### General Government Finances and Fiscal Adjustment (2007–15) - Two-fifths of the 11 percent of GDP primary balance improvement (2010–15) will be achieved by end 2012. - 90 percent of the improvement is structural, in line with the programmed phasing of consolidation. - Given the weaker recovery in nominal domestic demand, tax measures will not raise revenues as a share of GDP. - Primary expenditures will fall by 10 percent of GDP, being broadly evenly spread across components. - A 3 percent of GDP overall deficit, and 2½ percent of GDP primary surplus, are targeted for 2015. - It will take time to unwind the increase in net debt, three-fifths of which arose from bank support costs. - Revenues, Primary Expenditure and Balance (Percent of GDP) series for 2010–2015 present Revenue (incl. capital receipts), Primary expenditure (excl. bank support), Primary balance (excl. bank support, RHS). - Consolidation Measures and Structural Primary Balance (Percent of GDP) series for 2010–2015. - Revenue Composition (Percent of GDP) and Primary Expenditure Components (Percent of GDP) for 2010–2015. - Headline, Primary and Structural Balance 1/ (Percent of GDP) for 2007–2015; Sources of Increase in Debt-to-GDP Ratio (Percent of GDP) showing Bank support costs, Interest-growth differential, Primary deficit (excl. bank support), Net general government debt (RHS). ### Selected Macroeconomic Indicators and Projections (Tables 1 & 2) - National accounts (constant prices): Real GDP 2008–2013 shows -2.1, -5.5, -0.8, 1.4, 0.4, 1.4 for 2008–2013 respectively in one table and a detailed medium-term scenario table through 2017. - Domestic demand, Private consumption, Public consumption, Gross fixed investment, Net exports, Exports and Imports of goods and services listed with annual percentage changes for 2008–2013 and extended projections to 2017 in Table 2. - Real GNP, Gross national saving (in percent of GDP), Gross investment (in percent of GDP). - Prices, wages and employment: Harmonized index of consumer prices 3.1, -1.7, -1.6, 1.1, 1.4, 1.0 (2008–2013 as shown); Average wage, whole economy and Unemployment rate numbers provided. - Money and credit (end-period) and Financial and asset markets (end-period) indicators including Three-month interbank rate, Government bond yield (in percent, 10-year) 4/ with values 4.4, 4.9, 9.2, 8.5, 6.2... for 2008–2012 in the summary table. - Public finance (in percent of GDP): General government balance 5/ -7.3, -13.9, -30.9, -12.8, -8.3, -7.5 for 2008–2013 (as tabulated); General government gross debt 44.5, 64.9, 92.2, 106.5, 117.7, 119.3. - External trade and balance of payments (percent of GDP): Balance of goods and services 9.0, 15.9, 18.6, 21.9, 24.1, 25.7 (2008–2013). ### General Government Finances Detailed (Table 3, 2008–17) - Revenue (in billions) series 2008–2017: 63.0, 54.1, 53.2, 54.2, 55.8, 57.3, 60.0, 62.5, 64.5, 67.2. - Direct taxes, Indirect taxes, Other revenue breakdowns with precise component values for 2008–2017. - Expenditure (ex. bank support) and components: Current, Interest payments, Goods and services, Compensation of employees, Current transfers, Capital (excl. bank support), Gross capital formation, Capital transfers. - Bank support costs series includes 0.0, 4.0, 30.9, 5.8, 0.0... - Overall balance (ex. bank support) and Including bank support series: e.g., Overall balance (ex. bank support) 4/ -13.1, -18.5, -17.6, -14.5, -13.4, -12.5, -8.6, -5.4, -4.1, -3.5. - Primary balance (ex. bank support) and Including bank support series. - Memorandum items (in percent of GDP) including Revenue 35.2, 33.6, 34.0, 34.1, 34.5, 34.5, 34.8, 34.7, 34.3, 34.1. ### External and Financial Vulnerability Indicators (Table 4) - Exports (annual percent change, value in euros) 2008–2013: 8.3, -1.4, -2.5, 7.8, 5.7, 3.9. - Imports (annual percent change) 9.5, -1.1, -10.1, 6.6, 2.8, 1.9. - Terms of trade (goods, annual percent change) -1.5, -2.3, 1.7, -1.2, -2.9, -0.1. - Current account balance (in percent of GDP) -5.4, -5.7, -2.3, 1.1, 1.1, 1.8. - Capital and financial account balance (in percent of GDP) 6.4, 9.0, -1.4, 4.2, -18.0, -14.8. - U.S. dollar per euro (period average) and U.K. pound per euro (period average) series provided. - Financial markets indicators: General government debt (in percent of GDP) 25.0, 44.5, 64.9, 92.2, 117.7; Government bond yield (10-year, end-period) 4.5, 4.4, 4.9, 9.2, 8.5, 6.2. - Financial sector risk indicators: Annual credit growth rates to Irish resident private sector 20.1, 8.8, -1.7, -3.7, -2.9, -3.3; Non-performing loans (in percent of total loans) 0.8, 2.6, 9.0, 8.6, 9.1, 9.8; Total provisions for loan losses (in percent of total loans) 0.4, 1.2, 4.0, 4.2, 4.8, 5.2. - Regulatory capital to risk-weighted assets of domestic banks (in percent) 10.7, 10.6, 10.9, 10.4, 17.5, 17.8. - Deposits to M3 ratio 1/ 1.4, 1.4, 1.4, 1.5, 1.2, 1.3. - Loan-to-deposit ratio vis-à-vis Irish residents 2.1, 2.2, 2.1, 2.1, 2.1, 2.1; vis-à-vis total 2.1, 2.2, 2.2, 2.1, 2.1, 2.0. - Banking concentration and ownership indicators: No. of banks accounting for 25 percent of total assets: 3,2,2,2,2,2; No. of banks accounting for 75 percent of total assets: 15,14,13,13,14,14; Share of state-owned banks in total assets (in percent) 0.0, 0.0, 6.0, 8.0, 18, 19; Share of foreign-owned banks in total assets (in percent) 32.2, 62.0, 65.0, 66.0, 62, 59. ### Balance of Payments Summary (Table 5, 2008–17) - Current account balance (in billions of euros) and percent of GDP tracked: Current account balance series present both levels and percent of GDP (e.g., Current account balance -10.2, -3.8, 1.8, 1.8, 3.0, 4.5, 6.3, 6.9, 7.3, 7.6 for 2008–2017 in level table). - Trade, services, and income balances displayed with credit and debit components. - Capital and financial account balance and components: Direct investment, Portfolio investment, Other investment, Change in reserve assets. - Net errors and omissions and Financing gap and Program financing breakdown including IMF and EU contributions (e.g., IMF 0.0, 0.0, 0.0, 12.6, 6.5, 3.5... in one projection table). - Current account (percent of GDP) summary: -5.7, -2.3, 1.1, 1.1, 1.8, 2.7, 3.7, 3.8, 3.9, 3.8 for 2008–2017. ### Aggregate Banking Sector and Monetary Survey (Table 6) - Aggregate balance sheet of domestic market credit institutions (Dec-08 to Jun-12) presented with Assets and Liabilities totals: Assets 801, 798, 742, 634, 604 (Dec-08, Dec-09, Dec-10, Dec-11, Jun-12). - Asset breakdown: Claims on Central Bank of Ireland 9, 12, 8, 46; Claims on Irish resident Other MFIs 125, 129, 123, 92, 81; Claims on Irish resident non MFIs 374, 363, 357, 338, 332; General government 39, 43, 42, 45; Private sector 371, 354, 314, 296, 287; Claims on non-residents 250, 241, 206, 147, 138; Other assets 44, 54, 47, 52, 46. - Liabilities breakdown: Liabilities to Eurosystem 1/ 455, 89, 95, 72, 76; Deposits of Irish resident non MFIs 170, 180, 161, 144, 145; Deposits of non-residents 271, 229, 137, 98, 90; Debt securities 100, 98, 64, 52, 41; Capital and reserves 41, 53, 71, 91, 97. - Money and credit indicators: Net foreign assets -100, -75, -67, -39...; Irish Resident Broad money (M3) 194, 208, 173, 169, 168; Irish Resident Narrow money (M1) 78, 100, 97, 90, 89. - Public sector credit and Private sector credit levels and percent changes provided (e.g., Private sector credit 207.4, 219.4, 200.8, 186.1, 177.8). - Memorandum items: Credit to deposits (in percent) 222.8, 200.8, 200.0, 209.2, 201.7; Deposits from Irish Private Sector (y-o-y percent change) 1.1, 2.1, -9.8, -9.2, -2.8. - Wholesale funding (billions of euros) 439.6, 422.8, 315.3, 233.6, 203.2 and related series. *Source: 2012 Article IV Report: Ireland (IMF), content unit _cr12264 - 49.* ### Annex I. Assessing Ireland’s External Sector Risks ### Annex I. Assessing Ireland’s External Sector Risks ### Summary - Ireland’s net international investment position (IIP) reached negative 100 percent of GDP; large valuation changes contributed to this deterioration. - Gross external debt for the non-IFSC sector stood at around 300 percent of GDP at end of Q1 2012, 40 percent of which was official external debt of the general government and CBI. - The current account recorded a surplus of 1.1 percent of GDP in 2010 and 2011, after peak deficits of over 5 percent of GDP in 2007–08. - Real effective exchange rate (REER) indicators point to moderate overvaluation, by around 5–10 percent; standard CGER-type assessments indicate 8 percent to 12 percent overvaluation under different methods. - Unemployment is 14.8 percent, highlighting the need for further competitiveness gains to support a job-rich recovery. ### Net International Investment Position and External Debt - Net IIP (excluding the IFSC) deteriorated from about minus 55 percent of GDP in the years to 2007 to minus 92 percent of GDP in 2009 and remained around that level since. - The value of Ireland’s gross foreign assets halved during the financial crisis; foreign liabilities fell to a smaller extent, enlarging the negative net IIP. - Rising gross government debt contributed to the negative net position as authorities resorted to official funding. - Net external liabilities of the CBI grew due to increased reliance of domestic banks on Eurosystem funding, which largely substituted for private wholesale lending, de facto reducing external risks. - At the end of Q1 2012: - Gross external debt (non-IFSC) ≈ 300 percent of GDP. - Share of gross external debt that was official external debt of general government and CBI = 40 percent. ### Current Account Improvement - Exports have risen 14 percent since 2009: - Goods exports growth = 9 percent. - Services exports growth = over 20 percent. - Merchandise imports in 2011 stood 15 percent below their pre-crisis peak. - Current account balance: - Surplus of 1.1 percent of GDP in 2010 and 2011. - Peak deficits were over 5 percent of GDP in 2007–08. ### Real Exchange Rate Developments - Since the peak in 2008: - CPI-deflated REER fell 17.5 percent. - ULC-deflated REER declined around 22 percent. - Productivity improvements and falling ULCs were major factors in depreciation, accompanied by: - Labor shedding of some 16 percent since 2008. - Unemployment rate = 14.8 percent. - Nominal labor costs fell by 3 percent since the 2009 peak; euro area nominal labor costs rose 4½ percent during the same period. - Compositional changes overstated competitiveness improvement; CBI (2011) estimates compositional effects could account for 40 percent of the decline in the headline ULC between 2007 and 2010. ### Real Exchange Rate Assessment (CGER-type and variants) - Direct estimation deviations: - CGER-type Equilibrium Real Exchange Rate method → 8 percent overvaluation. - External Balance Assessment → 12 percent overvaluation. - CGER-type Macrobalance Approach: - Norm for the current account = 0.6 percent of GDP deficit. - Projected underlying current account = 2.4 percent of GDP (medium-term projection adjusted for output gaps). - Projection allows for 2.5 percent real exchange rate depreciation given high unemployment; this approach suggests the exchange rate is fairly valued. - CGER-type Sustainability Approach variant: - To reduce net IIP liability to 35 percent of GDP in ten years would require running a current account surplus of around 4 percent of GDP each year. - Stabilizing the current account at that level thereafter would require additional depreciation, implying around 3.5 percent overvaluation. ### Policy implications and risks - Further competitiveness gains are important to accelerate unemployment reduction and support a job-rich recovery driven by tradable sectors. - IIP improvement is expected over time due to: - Private saving exceeding investment to reduce private debt. - Continued fiscal consolidation needed for public debt sustainability. - External-sector risks are moderated but not negligible; improvements in competitiveness facilitate adjustment with higher overall activity. ### Debt and Contingent Liability Highlights (selected figures) - General government debt: - Upward revision in nominal GDP by 1.6 percent in 2011 lowered the debt ratio by some 1.7 percentage points. - Debt projected to peak at 119 percent in 2013. - Under baseline (primary deficit declining towards 0.5 percent of GDP by 2019), gross general government debt projected to fall to 94 percent of GDP by 2021. - Prefinancing: - Prefinancing increased gross debt temporarily by €3.2 billion (2 percent of GDP) in 2012. - End-2012 cash buffer projected to increase to €18 billion (11 percent of GDP) before returning to previous levels during 2013. - Risks to debt sustainability: - If GDP growth stagnated at ½ percent per year, debt would rise to 146 percent of GDP by 2021. - A temporary slowdown to ½ percent in 2013 (vs projected 1.4 percent) would peak debt at 120 percent of GDP before declining to 96 percent by 2021. - A standard 10 percent contingent liability shock would take debt to 105 percent of GDP in 2021 (baseline 94 percent). - A sustained additional funding cost shock of 200 basis points would have negligible short-run impact; if sustained, it would increase the effective interest rate by 140 basis points in 2021 and debt would decline to 101 percent of GDP in 2021. - External debt forecasts and scenarios: - Non-IFSC external debt fell to around 300 percent of GDP at end of Q1 2012 (from 322 percent in 2011). - Including the IFSC, total external debt ≈ 1,025 percent of GDP in Q1 2012 (down from 1,075 percent at end-2011). - Net IIP deteriorated to 100 percent of GDP as IFSC’s net IIP turned negative, while non-IFSCs reduced external exposure. - By 2017, external debt expected to fall to 212 percent of GDP in the baseline. - Historical-average macro scenario would bring external debt to over 316 percent of GDP in 2017. - Permanent ½ standard deviation shock to growth would raise medium-term debt-to-GDP to 239 percent. - Permanent ½ standard deviation shock to the non-IFSC current account would raise debt by around 22 percentage points compared to baseline in the medium term. - Standard combined shock (¼ standard deviation to current account, interest rates, and GDP growth) would increase debt to 241 percent of GDP in the medium term. - Ireland contingent liabilities (in percent of projected 2012 GDP): - Senior NAMA bonds = 18.9 - Guarantees for Emergency Liquidity Assistance = 10.0 - Other Bank Liabilities covered by Eligible Liability Scheme = 18.6 - Total = 47.5 *Source: IRELAND 2012 ARTICLE IV REPORT, Annex I (IMF staff).* ### Annex I Table 1. Ireland: Public Sector Debt Sustainability Framework, 2007-2021 1/ ### _cr12264 - Annex I Table 1. Ireland: Public Sector Debt Sustainability Framework, 2007-2021 1/ ### Public debt bound-test results and scenario labels - Baseline (general government debt): 94 (in percent of GDP) - Growth shock (general government debt): 146 (in percent of GDP) - Primary balance (PB) shock (general government debt): 118 (in percent of GDP) - Interest-rate shock (general government debt): 101 (in percent of GDP) - Combined shock (general government debt): 127 (in percent of GDP) - Contingent liabilities shock (general government debt): 105 (in percent of GDP) - Historical (general government debt): 138 (in percent of GDP) - Notes on shocks: - The interest rate shock is a permanent 200 basis point shock applied to short-term debt and new market lending. - The growth shock is a stagnation of growth at 0.5 percent per annum. - The primary balance shock is a one-half standard deviation shock. - Permanent 1/4 standard deviation shocks are applied to the growth rate, interest rate, and primary balance in alternate sensitivity tests. - One-time 10 percent of GDP shock to contingent liabilities occurs in 2013 (for the contingent liabilities scenario). ### Public debt related indicators shown in figure captions and boxes - Baseline and historical scenarios: Baseline: 94 (in percent of GDP); Historical: 138 (in percent of GDP) - Primary balance shock and no policy change scenario (constant primary balance) — box values: - Baseline: 2.8 - Scenario: 0.3 - Historical: -1.7 - Interest rate shock — box values: - Baseline: 2.5 - Scenario: 0.5 - Historical: 1.9 - Growth shock — box values: - Baseline: 3.4 - Scenario: 4.1 - Historical: 3.1 ### External debt bound-test results and scenario labels (Annex I Table 2 / Figure 2) - Baseline (external debt): 212 (in percent of GDP) - Historical (external debt): 316 (in percent of GDP) - Interest-rate shock (external debt): 221 (in percent of GDP) - Non-interest current account (CA) shock (external debt): 234 (in percent of GDP) - Combined shock (external debt): 241 (in percent of GDP) - Real depreciation shock (30% depreciation) (external debt): 200 (in percent of GDP) - Growth shock (external debt): 239 (in percent of GDP) - Notes on external-debt shocks: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance in sensitivity tests. - One-time real depreciation of 30 percent occurs in 2013 (for the real depreciation scenario). - For historical scenarios, the historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead. ### External debt dynamics and decomposition (selected rows from Annex I Table 1, External Debt Sustainability Framework) - 1 Baseline: External debt: - 2007: 258.9 - 2008: 305.0 - 2009: 325.6 - 2010: 333.7 - 2011: 322.1 - 2012: 308.7 - 2013: 291.9 - 2014: 271.7 - 2015: 250.4 - 2016: 230.6 - 2017: 211.8 - 2021: -0.8 - 2 Change in external debt: - 2007: 51.7 - 2008: 46.1 - 2009: 20.6 - 2010: 8.1 - 2011: -11.6 - 2012: -13.4 - 2013: -16.7 - 2014: -20.2 - 2015: -21.3 - 2016: -19.8 - 2017: -18.8 - 3 Identified external debt-creating flows (4+8+9): - 2007: -2.6 - 2008: 22.8 - 2009: 36.2 - 2010: 18.0 - 2011: -0.8 - 2012: -9.2 - 2013: -13.1 - 2014: -16.2 - 2015: -16.9 - 2016: -15.9 - 2017: -15.0 - 4 Current account deficit, excluding interest payments: - 2007: 1.0 - 2008: -6.2 - 2009: -5.5 - 2010: -14.1 - 2011: -19.2 - 2012: -20.3 - 2013: -19.7 - 2014: -18.5 - 2015: -18.7 - 2016: -18.6 - 2017: -18.4 - 5 Deficit in balance of goods and services: - 2007: -5.5 - 2008: -5.0 - 2009: -11.1 - 2010: -13.8 - 2011: -17.0 - 2012: -17.8 - 2013: -19.2 - 2014: -20.0 - 2015: -20.7 - 2016: -21.1 - 2017: -21.3 - 6 Exports: - 2007: 69.0 - 2008: 72.0 - 2009: 78.0 - 2010: 86.8 - 2011: 91.0 - 2012: 92.1 - 2013: 94.0 - 2014: 95.5 - 2015: 96.4 - 2016: 97.6 - 2017: 98.6 - 7 Imports: - 2007: -63.5 - 2008: -66.9 - 2009: -66.8 - 2010: -73.0 - 2011: -73.9 - 2012: -74.3 - 2013: -74.9 - 2014: -75.4 - 2015: -75.7 - 2016: -76.5 - 2017: -77.4 - 8 Net non-debt creating capital inflows (negative): - 2007: 0.0 - 2008: -0.6 - 2009: -2.5 - 2010: 6.0 - 2011: 2.6 - 2012: -7.2 - 2013: -6.8 - 2014: -6.3 - 2015: -6.1 - 2016: -5.7 - 2017: -5.4 - 9 Automatic debt dynamics 1/: - 2007: -3.7 - 2008: 29.6 - 2009: 44.2 - 2010: 26.1 - 2011: 15.7 - 2012: 18.3 - 2013: 13.3 - 2014: 8.6 - 2015: 7.9 - 2016: 8.5 - 2017: 8.7 - 10 Contribution from nominal interest rate: - 2007: 8.3 - 2008: 15.4 - 2009: 10.9 - 2010: 16.1 - 2011: 21.0 - 2012: 19.4 - 2013: 17.6 - 2014: 15.6 - 2015: 15.3 - 2016: 15.3 - 2017: 15.1 - 11 Contribution from real GDP growth: - 2007: -10.6 - 2008: 5.8 - 2009: 18.5 - 2010: 2.6 - 2011: -4.7 - 2012: -1.1 - 2013: -4.2 - 2014: -7.0 - 2015: -7.4 - 2016: -6.8 - 2017: -6.3 - 12 Contribution from price and exchange rate changes 2/: - 2007: -1.5 - 2008: 8.5 - 2009: 14.8 - 2010: 7.4 - 2011: -0.6 - 2012: .......... - 13 Residual, incl. change in gross foreign assets (2-3) 3/: - 2007: 54.3 - 2008: 23.3 - 2009: -15.6 - 2010: -9.8 - 2011: -10.8 - 2012: -4.2 - 2013: -3.7 - 2014: -4.0 - 2015: -4.4 - 2016: -3.9 - 2017: -3.7 - External debt-to-exports ratio (in percent): - 2007: 375.2 - 2008: 423.9 - 2009: 417.7 - 2010: 384.4 - 2011: 354.1 - 2012: 335.2 - 2013: 310.4 - 2014: 284.7 - 2015: 259.8 - 2016: 236.3 - 2017: 214.8 - Gross external financing need 4/ (levels): - 2007: 17.7 - 2008: 57.3 - 2009: 393.9 - 2010: 354.7 - 2011: 337.5 - 2012: 330.6 - 2013: 325.7 - 2014: 320.9 - 2015: 316.3 - 2016: 312.8 - 2017: 309.1 - Gross external financing need 4/ (in percent of GDP): - 2007: 9.4 - 2008: 32.0 - 2009: 244.3 - 2010: 226.7 - 2011: 212.3 - 2012: 204.5 - 2013: 196.3 - 2014: 186.1 - 2015: 175.5 - 2016: 166.1 - 2017: 157.0 ### Scenario with key variables at their historical averages (10-Year) - Scenario headline figures (10-Year): 10-Year 308.7, 310.1, 311.6, 313.1, 314.7, 316.2 (presented as a series labeled "10-Year") ### Key macroeconomic assumptions underlying the baseline (selected series) - Nominal external interest rate (in percent): - Historical: 4.3 - Baseline series: 5.6, 3.2, 4.8, 6.4, 4.6, 1.3, 6.1, 5.9, 5.6, 5.9, 6.4, 6.8 - Growth of exports (in percent): - Historical: 8.4 - Baseline series: -1.2, -2.3, 8.0, 6.5, 4.0, 4.7, 2.9, 4.8, 5.5, 5.6, 5.8, 5.7 - Growth of imports (in percent): - Historical: 9.5 - Baseline series: 0.0, -10.0, 6.0, 2.9, 2.7, 1.7, 2.1, 3.4, 4.7, 4.9, 5.5, 5.8 - Current account balance, excluding interest payments: - Historical: -1.0 - Baseline series: 6.2, 5.5, 14.1, 19.2, 5.6, 8.4, 20.3, 19.7, 18.5, 18.7, 18.6, 18.4 - Net non-debt creating capital inflows: - Historical: 0.0 - Baseline series: 0.6, 2.5, -6.0, -2.6, -2.9, 4.1, 7.2, 6.8, 6.3, 6.1, 5.7, 5.4 ### Definitions and formula notes included in the table footnotes - 1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt. - 2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator). - 3/ For projection, line includes the impact of price and exchange rate changes. - 4/ Gross external financing need is defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. - 5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. - 6/ Debt-stabilizing non-interest current account: long-run, constant balance that stabilizes the debt ratio assuming that key variables remain at their levels of the last projection year. *Source: Annex I Table 1 and Table 2, "Ireland: Public Sector Debt Sustainability Framework, 2007-2021" and "Ireland: External Debt Sustainability Framework, 2007-2017" (2012 Article IV Report).* ### 11. Preparations are being advanced to implement the new personal insolvency ### 11. Preparations are being advanced to implement the new personal insolvency framework. ### Personal insolvency framework and implementation preparations - The Personal Insolvency Bill introduced to parliament at the end of June proposes three new debt settlement procedures and amends the Bankruptcy Act, including by shortening the automatic discharge period to 3 years in judicial bankruptcy. - Payments under a settlement are determined based on debtors’ payment capacity while safeguarding a reasonable standard of living, with debt service discipline upheld by: - stringent eligibility criteria; - creditor vote by qualified majority; and - court approval. - The involvement of the courts in the debt settlement procedures is welcomed, although adequate personnel and operational resources will need to be redeployed to this important area. - The draft legislation is expected to be developed further at the committee stage of parliamentary discussions scheduled for September, prior to its expected adoption later this year (MEFP ¶11). - Staff recommendations and essential pending guidance: - Staff recommended refinements, such as regarding the procedures for the valuation of assets, to enhance effectiveness. - Pending guidance on reasonable household expenses and on the licensing and supervision of personal insolvency practitioners is essential for a well-balanced and efficient reform outcome (MEFP ¶12). ### Fiscal policies: recent outturns and near-term prospects - Exchequer primary deficit to end-July 2012 was 4.5 percent of GDP (excluding bank-related costs and delayed 2011 corporation tax receipts), which was 0.7 percent of GDP below the corresponding period of 2011. - The end-June 2012 performance criterion on the cumulative exchequer primary balance was met by a healthy margin of ½ percent of GDP (MEFP Table 2). - Revenue performance drivers and offsets: - Income tax, VAT and corporation tax collections drove a total revenue over performance of 0.3 percentage points of GDP. - Much of this surplus was offset by additional health spending and jobseeker payments owing to higher unemployment. - Health sector overrun reflected: - inability to meet budgetary targets on hospital activity; - under-collection of income from private health insurers; - a smaller-than-planned shift to generic drugs; and - higher-than-expected expenditure in respect of “grace period” retirements. - For 2012, a general government deficit of 8.3 percent of GDP is projected, within the program ceiling of 8.6 percent of GDP; this projection assumes revenue over performance in the first half will be maintained and that announced corrective measures will cap the health sector overrun at its current level. - Net central government debt was below the corresponding end-June indicative target by 1.2 percent of GDP owing to higher-than-expected revenues and lower-than-profiled interest costs. - Public service employment and paybill: - At end-March 2012, the public service was about 1 percent smaller than the end-2012 target of 294,000, and 9 percent below the end-2008 peak. - Continued progress in reducing the paybill is needed to ensure an adequate and durable reduction in the still-high public service paybill. - Budget 2013 preparations: - An updated Medium-Term Fiscal Statement will be published in October, setting out consolidation amounts and composition needed to credibly deliver a general government deficit below 3 percent of GDP by 2015 (MEFP ¶16). - Authorities are analyzing strategic reform options including introduction of a value-based property tax, to be included in draft legislation at the time of Budget 2013 (MEFP ¶17). - Fiscal governance and transparency: - A Fiscal Responsibility Bill has been published; it includes two EU fiscal rules, a structural deficit ceiling and a debt ratio reduction rule. - The Bill gives statutory basis to the Irish Fiscal Advisory Council, guarantees its annual budget, and provides parliamentary safeguards related to Council member contract terminations. - Authorities plan to provide a statutory basis for multi-annual nominal expenditure ceilings by amending other legislation (MEFP ¶18). - Authorities will likely publish intra-year profiles for all major revenue and expenditure items and the overall exchequer balance next year. - Authorities are consolidating responsibilities for general government debt reporting at CSO and refining their methodology for debt forecasting. ### Growth, investment, and labor market measures - EIB support and capital investments: - Authorities will use EIB support together with other sources of funding to supplement Exchequer capital investments in sectors including education, transport, and healthcare (MEFP ¶19). - These projects will be implemented over a number of years, with ongoing budgetary costs peaking below 0.1 percent of GDP. - Together with reinvesting half of privatization proceeds, this provides about 1½ percent of GDP in capital expenditure in the next few years. - Labor activation and unemployment: - Under the Pathways to Work strategy, services for the unemployed are being progressively integrated, with pilot programs underway in four locations to be expanded to an additional 10 sites by year end. - Resource and training needs of employment centers are being examined by end September, as is the engagement of private sector firms in activation services (MEFP ¶20). - To reduce disincentives to work, authorities will replace rental assistance for those with long-term housing needs with a new Housing Assistance Payment (MEFP ¶21). ### Program modalities and financing - Program monitoring updates (MEFP Tables 1–3): - Quantitative performance criteria are proposed for end-December 2012. - The performance criterion for the Exchequer primary balance is unchanged for end-September 2012. - The previously set end-December 2012 indicative target has been amended to take into account a capital contribution for ESM and converted into a performance criterion. - Indicative targets for net central government debt are raised to reflect the payment for Irish Life to complete PTSB’s recapitalization. - An end-June 2013 indicative target for the Exchequer primary balance is proposed as well as an indicative target for net central government debt for end-June 2013. - Structural benchmarks for end-September 2012 are unchanged; structural benchmarks for 2013 will be identified during the eighth review. - Market access and issuance in 2012: - Authorities issued €0.5 billion in Treasury bills on July 5, and €4.2 billion in bonds on July 26 (5-year and 8-year tenors) at an average yield of just under 6 percent. - A €1 billion switch of two bond issues was undertaken to extend maturities. - Further Treasury bill issues are planned for the remainder of 2012, together with issuance of amortizing bonds targeted at pension funds. - Overall market funding, together with rollovers of commercial paper and retail debt issuance, is expected to be around €8 billion over 2012 as a whole (excluding debt issued to IBRC in relation to the March 2012 promissory note payment). - Cash balance and 2013 financing needs: - A cash balance of about €18 billion is projected for end 2012. - Large debt service payments in the second quarter of 2013 include: - a €5.6 billion bond redemption; - under current arrangements, a €3.1 billion payment on promissory notes; and - potentially a further €3.1 billion when IBRC’s repurchase agreement with the BoI matures. - The financing plan for remainder of 2013 aims to maintain market access, with about €4½ billion required to ensure an adequate cash position at end 2013; additional market funding could be appropriate to prefund a €7.6 billion redemption due in early 2014. - Financing assurances and risks: - Financing has been identified for the 12 months ahead, bolstered by European partners, but significant risks persist given Ireland’s high debt burden, sovereign-banking linkages, uncertainties about medium-term growth, and the euro area crisis. - European commitments from July 2011 and October 2011 to continue providing support to all countries under programs until they have regained market access, provided they fully implement those programs, provide assurance. - The June 29 summit statement affirmed the imperative to break the vicious circle between banks and sovereigns and to examine the Irish financial sector to further improve program sustainability. - Exceptional access criteria assessment: - Under the baseline macroeconomic framework, debt sustainability is expected to be maintained over the medium term, although subject to significant risks if growth does not strengthen or if further contingent liabilities materialize. - As debt sustainability is not assured with high probability, the program relies on the exemption afforded to cases posing systemic international spillover risks given elevated euro area fragility. - There are adequate prospects to retain and expand access to private capital markets before Fund repurchases begin in July 2015, contingent on timely approval of stronger European support, with risks from sovereign debt market stress in the euro area remaining high. - Ireland’s policy program is sound and adjustment is being delivered; prospects for program success would be improved by more benign market conditions and more effective policy action at the European level. ### Staff appraisal: progress, risks, and policy priorities - Program implementation and outcomes to date: - Half way through the extended arrangement, the Irish authorities maintain very strong ownership and implementation of their adjustment program. - All performance criteria and indicative targets for end June were met, two structural benchmarks were observed, and financial sector, fiscal and structural reforms have proceeded as expected. - Irish bond spreads narrowed over the past quarter despite euro area distress, reflecting confidence in authorities’ program and optimism after the June 28–29 euro area summit. - Nonetheless, the economic recovery is tentative and unemployment remains unacceptably high. - Financial sector priorities: - Returning banks to profitability is needed for sustainable lending and requires implementation of restructuring plans to reduce operational costs and weaning banks off the costly ELG scheme in an orderly manner that protects funding. - Advances in banks’ strategies for dealing with mortgage arrears should move increasingly to the implementation phase. - CBI plans for close monitoring of banks’ progress are welcomed; similar frameworks should be promptly established for distressed credit to SMEs. - Conservative valuation and provisioning for loan modifications is needed to strengthen market confidence in bank balance sheets. - The personal insolvency bill will facilitate addressing debt distress while preserving debt service discipline; operational issues such as determining a reasonable standard of living and licensing and supervision of personal insolvency practitioners should be timely addressed. - Fiscal consolidation credibility and Budget 2013 guidance: - Consistent sound budget implementation continues in 2012; effectiveness of measures to contain health expenditure overruns should be ensured. - Significant further consolidation is necessary to durably place public debt on a downward trajectory. - The Fiscal Responsibility Bill, statutory basis for multi-annual expenditure ceilings, enhancements of budgetary transparency and the Medium-Term Fiscal Statement update contribute to consolidation credibility. - Budget 2013 can reinforce the framework through focus on high quality, durable and equitable measures, including a value-based property tax, especially by specifying most fiscal measures for 2013–15. - If the growth outlook deteriorates further, any significant additional fiscal adjustment need should be spread over 2014–15 to avoid stifling the nascent recovery, while respecting the medium-term anchor of a 3 percent of GDP general government deficit in 2015. - Need for European support: - Timely approval of further strengthening of European support is needed to put the program on a clear path to successful completion. - The June 29 summit facilitated almost €6 billion in financing in July, signaling market confidence in Ireland’s policies. - Commitment to stronger European support, especially ESM investments in the equity of Irish banks, offers real prospects for Ireland to exit reliance on official financing. *Source: IMF staff report content unit _cr12264 - 11. Preparations are being advanced to implement the new personal insolvency framework.* ### 29. Staff supports the authorities’ request for completion of the Seventh Review. ### _cr12264 - 29. Staff supports the authorities’ request for completion of the Seventh Review. ### Financing requirements and sources (Table 1 highlights) - Gross borrowing need (2008–13, in billions of euros): 15.9 (2008), 3.4 (2009), 71.4 (2010), 45.3 (2011), 27.5 (2012), 22.5 (2013). - Exchequer cash deficit 1/ (2008–13, in billions of euros): 12.7 (2008), 24.6 (2009), 18.7 (2010), 19.1 (2011), 17.1 (2012), 14.5 (2013). - Amortization (2008–13, in billions of euros): 3.1 (2008), 27.7 (2009), 17.3 (2010), 9.7 (2011), 8.8 (2012), 7.9 (2013). - Bank recapitalization (2008–13, in billions of euros): 0.0 (2008), 11.0 (2009), 35.3 (2010), 16.5 (2011), 1.6 (2012), 0.0 (2013). - Gross financing sources 3/ (2008–13, in billions of euros): 15.9 (2008), 3.4 (2009), 1.4 (2010), 10.8 (2011), 5.8 (2012), 11.1 (2013). - Market financing (incl. retail) 4/ (2008–13, in billions of euros): 4.9 (2008), 53.3 (2009), 23.2 (2010), 1.4 (2011), 8.1 (2012), 6.6 (2013). - Cash drawdowns (2008–13, in billions of euros): -19.0 (2008), 10.0 (2009), 17.3 (2010), 9.4 (2011), -5.2 (2012), 4.5 (2013). - Financing gap (2008–13, in billions of euros): 0.0 (2008), 0.0 (2009), 0.0 (2010), 34.5 (2011), 21.7 (2012), 11.3 (2013). - EFSM/EFSF (2008–13, in billions of euros): 0.0 (2008), 0.0 (2009), 0.0 (2010), 21.5 (2011), 12.3 (2012), 6.4 (2013). - IMF (2008–13, in billions of euros): 0.0 (2008), 0.0 (2009), 0.0 (2010), 12.6 (2011), 6.5 (2012), 3.5 (2013). Memorandum items (selected, in billions of euros) - Exchequer cash balance 6/: 22.0 (2008), 21.8 (2009), 12.3 (2010), 12.9 (2011), 18.1 (2012), 13.6 (2013). - General government debt 7/: 79.6 (2008), 104.6 (2009), 144.2 (2010), 169.3 (2011), 190.4 (2012), 197.9 (2013). - Treasury bills, bonds and retail: 72.0 (2008), 96.3 (2009), 110.4 (2010), 101.6 (2011), 104.3 (2012), 103.0 (2013). - Promissory notes: 0.0 (2008), 0.0 (2009), 0.0 (2010), 30.9 (2011), 28.3 (2012), 22.7 (2013). General government debt (in percent of GDP) - Total: 44.5 percent (2008), 64.9 percent (2009), 92.2 percent (2010), 106.5 percent (2011), 117.7 percent (2012), 119.3 percent (2013). - Treasury bills, bonds and retail: 40.2 percent (2008), 59.7 percent (2009), 70.5 percent (2010), 63.9 percent (2011), 64.5 percent (2012), 62.1 percent (2013). - Promissory notes: 0.0 percent (2008), 0.0 percent (2009), 0.0 percent (2010), 19.7 percent (2011), 17.8 percent (2012), 15.6 percent (2013). Sources noted in table: Department of Finance; National Treasury Management Agency; and IMF staff estimates. - Footnotes of table (as stated): 1/ Includes allowance for amortization of Promissory notes and contingency for collateral on hedging transactions. 2/ Gross amortization of Treasury bills, Exchequer notes, and commercial paper. 3/ Includes stock-flow adjustment arising from the March 2012 payment of Promissory notes. 4/ Gross issuance including rollovers. 5/ Placement of a bond for the March 2012 payment of Promissory notes to IBRC. 6/ Includes buffer from financing contingency. 7/ Includes local debt, other national debt, and other general government debt on consolidated level. ### Schedule of IMF reviews and purchases (Table 2 highlights) - Board approval of arrangement: December 16, 2010 — Purchase: SDR 5,012,425,200 (399 percent of quota). - First and Second Reviews: May 16, 2011 — Purchase: SDR 1,410,000,000 (112 percent of quota). - Third Review: August 15, 2011 — Purchase: SDR 1,319,000,000 (105 percent of quota). - Fourth Review: December 14, 2011 — Purchase: SDR 3,309,000,000 (263 percent of quota). - Fifth Review: February 15, 2012 — Purchase: SDR 2,786,000,000 (222 percent of quota). - Sixth Review: June 13, 2012 — Purchase: SDR 1,191,000,000 (95 percent of quota). - Seventh Review: September 15, 2012 — Purchase: SDR 758,000,000 (60 percent of quota). - Eighth Review: December 15, 2012 — Purchase: SDR 758,000,000 (60 percent of quota). - Ninth Review: March 15, 2013 — Purchase: SDR 831,000,000 (66 percent of quota). - Tenth Review: June 15, 2013 — Purchase: SDR 831,000,000 (66 percent of quota). - Eleventh Review: September 15, 2013 — Purchase: SDR 681,000,000 (54 percent of quota). - Twelth Review: November 15, 2013 — Purchase: SDR 579,374,800 (46 percent of quota). - Total (all purchases listed): SDR 19,465,800,000 (1,548 percent of quota). - Note: 1/ Incorporates proposed rephasing of the fifth, seventh and eighth purchase at the Fourth Review. ### Indicators of Fund credit (Table 3 highlights) - Disbursement (2011–13, in millions of SDR): 11,050 (2011), 5,493 (2012), 2,922 (2013) shown as disbursement entries. - Stock of Fund credit (end of period, in millions of SDR): 11,050 (2011), 16,543 (2012), 19,466 (2013), remaining at 19,466 in 2014, then 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: 7.9 (2011), 12.2 (2012), 14.2 (2013), 13.7 (2014), 12.8 (2015), 10.8 (2016), 8.6 (2017), 6.3 (2018), 4.2 (2019), 2.3 (2020), 0.8 (2021), 0.2 (2022). ### Letter of Intent — program performance and requests (Attachment I highlights) - Date and signatories: Dublin, 20 August 2012; signed by Michael Noonan, T.D., Minister for Finance, and Patrick Honohan, Governor of the Central Bank of Ireland. - Key assertions: - "Once more, for the seventh quarterly review, all programme targets have been met." - Ireland recorded stronger growth than expected in 2011; real GDP grew by 1.4 percent in 2011 (MEFP later). - NTMA issued €4.2 billion in long-term bonds in July and resumed Treasury Bill auctions. - Launched a multi-year (2012-2018) stimulus package worth €2.25 billion for public infrastructure, employment-enhancing and commercial projects, and augmenting Exchequer investment plans. - Requests: completion of the seventh review and that the seventh purchase in an amount equivalent to SDR 758 million becomes available at completion. - Proposes leaving phasing unchanged with total purchasing amount equivalent to SDR 1,516 million over remainder of 2012 (including this review), and SDR 2,922 million in 2013. - Proposes establishing quantitative performance criteria for 31 December 2012 as set out in the attached MEFP. ### Memorandum of Economic and Financial Policies — Recent developments and outlook (Attachment II, section A) - Growth and external position: - "Real GDP grew by 1.4 per cent in 2011." - Current account on the balance of payments recorded a second consecutive surplus, "1.4 per cent of GNP." - Private sector employment grew "1.2 percent y/y." - Unemployment rose to "14.8 percent in the first quarter." - HICP inflation averaged "1.8 percent" in the first six months of the year. - Outlook: - Growth prospects for remainder of 2012 and into 2013 described as modest. - Yields on Irish sovereign bonds "have fallen sharply" after the June 28–29, 2012 euro area Summit. - Ireland successfully returned to the Treasury Bill market. ### Memorandum of Economic and Financial Policies — Financial sector policies (Attachment II, section B) - PTSB restructuring: - Restructuring plan submitted end-June; PTSB reorganising into three units: (i) core retail bank; (ii) asset management unit for certain legacy assets; (iii) U.K. residential mortgage operation (to be divested as conditions permit). - Separate management accounts for each unit to be established by end-September; quarterly performance benchmarks to be established for each unit by PTSB. - Viability of core retail bank requires timely legal and financial separation of the asset management unit; separation hinges on further sector-wide restructuring measures still to be specified. - Deleveraging and liquidity supervision: - CBI will assess deleveraging based on existing nominal targets for disposal and run-offs of non-core assets in line with the 2011 Financial Measures Programme and avoid fire sales. - Prepare banks for Basel III liquidity ratios under CRD IV by supervising developments in banks’ net stable funding ratio. - ELG Scheme: - Plan to phase out the ELG Scheme in an orderly manner; inter-agency working group led by the Department of Finance to develop a roadmap by end-2012. - Stress testing and provisioning: - CBI developing credit data and documentation remediation actions for PCAR banks as part of risk mitigation plans; risk mitigation plans to be updated by end-September 2012. - Collateral valuation guidelines to be revised by end-December 2012. - Where loan arrears are capitalised, loans will not be re-set to performing status until a minimum of 6 months appropriate repayment track record is achieved. - Supervisory enhancements: - Annual supervisory reviews for PCAR banks in line with PRISM. - Enhancements to Credit Risk, Risk Weighted Asset (RWA) supervision including annual model performance reviews and RWA forecasting and stress testing ahead of PCAR 2013. - Supervision and Enforcement Bill to strengthen supervisory powers; enhancements at Committee stage. - Credit unions: - Preparing regulations for the Resolution Fund levy to be adopted by end-September (structural benchmark). - General scheme of a bill strengthening the regulatory framework for credit unions published in late June; will establish a Restructuring Board and enable use of Resolution Fund resources if required. - Mortgage arrears resolution: - By year-end, banks to roll out options under Mortgage Arrears Resolution Strategy (MARS); pilots for a number of options set out in recommendations of the Inter-Departmental Mortgage Arrears Working Group. - Mortgage Advisory Services to be augmented by end-September with independent financial advisers, funded by banks. - CBI to develop key performance indicators to track implementation of mortgage arrears resolution strategies and to publish them quarterly starting end-December 2012; KPIs for SMEs to be developed by end-December 2012. - Insolvency framework: - Personal Insolvency Bill introduced to the Oireachtas in June to establish Debt Settlement Arrangement (DSA) and Personal Insolvency Arrangement (PIA) with creditor vote by qualified majority and court approval; Bill will modernise Bankruptcy Act 1988 by shortening the automatic discharge period. *Source: IMF staff estimates; Department of Finance; National Treasury Management Agency; and excerpts from the Letter of Intent and Memorandum of Economic and Financial Policies in the attached document.* ### 12. In parallel, we are advancing preparations to implement the new personal ### _cr12264 - 12. In parallel, we are advancing preparations to implement the new personal ### Personal insolvency framework: implementation progress and outstanding issues - Appointment expected soon of a Director-Designate of the Insolvency Service to oversee establishment and fine-tuning of the law. - Target for Insolvency Service to become operational in January 2013 or very shortly thereafter. - Significant legal and operational issues to be addressed during the Autumn session commencing in September, including: - Licensing and supervision of personal insolvency practitioners. - Evolution of reasonable household expenses and necessary trade or business expenses guidelines for debtors. - Such guidelines to be prepared by end-year and will be crucial for approved intermediaries in operation of the Debt Relief Notice process and useful to personal insolvency practitioners in negotiation of a DSA or PIA. - Commitment: review measures necessary for implementation of the framework. ### C. Fiscal Policies — performance, targets, and institutional measures - Budget 2012 and near-term fiscal stance: - On track to deliver a budget deficit within the 8.6 percent of GDP target for 2012. - End-June performance criterion on the exchequer primary balance and the indicative target on net debt were met. - Strong revenue collection despite weakening external environment and higher unemployment. - Alert to pressures in health and social protection spending and commitment to manage expenditure to remain within budget. - Public service workforce and paybill management: - Public workforce now 9 percent smaller than the peak at end-2008. - Personnel reduction targets for 2012 surpassed; re-deployments gathering pace. - Some recruitment flexibility may be needed where retirements created skills shortages or needs have risen. - Reining in overtime costs through enhanced workforce planning and management. - Completed comprehensive reviews of sick pay and allowance policies as basis for further cost-saving reforms. - Budget 2013 preparations and medium-term fiscal framework: - Finalising a new Employment Control Framework to fix departmental resource allocations for next year. - Mid-October publication planned for an updated Medium-Term Fiscal Statement setting out macroeconomic and fiscal projections out to 2015 and consolidation amounts/composition needed to bring the general government deficit below 3 percent of GDP by 2015. - Strategic reform analysis to protect growth, equity, and durability of consolidation: - Spending-side measures: better targeting social supports and subsidies; attenuate work disincentives from social assistance payment structures; contain ageing-related spending pressures. - Tax-side measures: broaden the base and develop additional stable revenue sources, including introduction of a value-based property tax. - Core features of its design and collection to be included in draft legislation at the time of Budget 2013. - Strengthening national fiscal framework and transparency: - Approval of end-May referendum cleared way for parliamentary ratification of the Treaty on Stability, Coordination and Governance. - Draft legislation published to implement the Treaty; will enshrine independence and adequate resourcing of the Irish Fiscal Advisory Council and include an automatic correction mechanism for deviations from fiscal targets. - Legislation to give statutory basis to multi-annual expenditure limits to be published by end September. - Preparatory work begun to enhance regular fiscal reporting on an exchequer and general government basis. - Consolidate responsibilities for debt reporting at the CSO and refine methodology for general government debt forecasting in the Department of Finance (taking into account recommendations of the External Review of the Compilation of General Government Debt Statistics). ### D. Growth and structural reforms — investment, asset sales, and labour activation - Investment and asset disposal plans: - Plan to avail of increased European Investment Bank (EIB) capacity to supplement exchequer capital programme through PPP projects with non-Exchequer funding (sectors: education, transport, health care). - Disposal plans advancing in energy generation, aviation, and forestry sectors; no regulatory or legislative obstacles identified to commence sales process in 2013. - Commitment to use at least half of proceeds to reduce public debt; remainder to be reinvested in job-rich commercial projects consistent with fiscal targets once realised. - Unemployment and activation measures: - Pathways to Work activation strategy: progressive rollout of integrated services system for the unemployed (profiling, individual career progress plans, benefits granted by case workers). - Pilot programs underway in four locations; plan to implement at ten further sites across the country by year-end. - Examination of resource levels and training needs for new integrated employment centres; consideration of engaging private sector firms for provision of activation services, especially for long-term unemployed. - Update on engagement with private sector and resource/training issues to be prepared by end-September 2012. - Intensifying employer engagement to increase notification of vacancies and encourage recruitment from the Live Register. - Welfare reform to reduce work disincentives: - Transfer responsibility for provision of rental assistance for persons with long-term housing need from Department of Social Protection to housing authorities via a new Housing Assistance Payment. - Commencement date agreed as 1 January 2013, subject to further legal and administrative consideration by Government. - Initiative intended to help reduce net replacement rates for some groups of long-term unemployed. - DECLG and DSP will report on housing assistance reform, including introduction of the new Housing Assistance Payment, by end September 2012. ### E. Programme financing and monitoring — financing status, market access, and monitoring framework - Financing developments and market access: - Programme remains adequately financed. - Returned to the Treasury Bill market for first time since September 2010, raising €500 million through Treasury Bill issuance. - Raised €4.2 billion by selling long-term bonds on favourable terms from a broad investor base in July. - Maintaining close contacts with market participants aiming to regain sustainable bond market access in 2013. - Examining alternative funding sources, including sale of amortising bonds to pension funds. - Maintaining a prudent cash buffer given external risks. - Euro area leaders’ commitment to meet financing needs until market access regained offers a backstop if financial market conditions deteriorate, provided programme remains on track. - Monitoring and conditionality: - Policies monitored through quarterly and continuous performance criteria, indicative targets, structural benchmarks, and quarterly programme reviews as envisaged in Letters of Intent since inception of arrangement on 3 December 2010. - Programme in compliance with Memorandum of Understanding on Specific Policy Conditionality. - Technical Memorandum of Understanding (TMU) defines quantitative performance criteria and indicative targets (Table 2). - Government’s targets for the exchequer primary balance monitored through quarterly performance criteria; net central government debt is an indicative target. - Continuous performance criterion on non-accumulation of external payment arrears on external debt contracted or guaranteed by the central government. - Progress on structural reforms monitored through structural benchmarks (Tables 1 and 3). - Government authorises IMF and European Commission to publish the Letter of Intent, attachments, and related staff report. ### Key quantitative outcomes and targets (as reported) - Budget/fiscal outcomes and targets: - Target budget deficit for 2012: within 8.6 percent of GDP. - Public workforce reduction: 9 percent smaller than the peak at end-2008. - Market financing operations: - Treasury Bill issuance: €500 million (July). - Long-term bond issuance: €4.2 billion (July). - Programme monitoring Table 1 (selected items and statuses): - Cumulative exchequer primary balance, End-June 2012: Observed. - Ceiling on the stock of central government net debt, End-June 2012: Observed. - Continuous performance criterion — Ceiling on accumulation of new external payments arrears: Continuous — Observed. - Structural benchmark examples: - Finalise strategy to guide development of broader legal reforms around personal insolvency (including significant amendments to the Bankruptcy Act 1998 and creation of a new structured non-judicial debt settlement and enforcement system): End-December 2011 — Observed. - Introduce a medium-term expenditure framework with binding multi-annual expenditure ceilings: 2012 Budget day in early December 2011 — Observed. - Submit to parliament legal framework for the Fiscal Advisory Council ensuring its independence: End – September 2012 — Observed. - Table 2 excerpt (Ireland: Quantitative Performance Criteria and Indicative Targets, selected series, in billions of Euros): - Cumulative exchequer primary balance (targets and outcomes across dates shown): - 30-Sep-11 Target: -20.2; Outcome: -18.3 - 31-Dec-11 Target: -22.3; Outcome: -21.0 - 31-Mar-12 Target: -6.9; Outcome: -5.7 - 30-Jun-12 Target: -9.6; Outcome: -8.7 - 30-Sep-12 Target: -10.6; 31-Dec-12 Target: -11.2; 31-Mar-13 Target: -3.6; 30-Jun-13 Target: -7.2 - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government: - All reporting dates: Target/Outcome: 0 / 0 - Ceiling on the stock of central government net debt (targets and outcomes across dates shown): - 30-Sep-11 Target: 115.9; Outcome: 111.7 - 31-Dec-11 Target: 117.2; Outcome: 115.7 - 31-Mar-12 Target: 125.0; Outcome: 123.0 - 30-Jun-12 Target: 130.1; Outcome: 128.2 - 30-Sep-12 Target: 132.5; 31-Dec-12 Target: 136.0; 31-Mar-13 Target: 141.7; 30-Jun-13 Target: 148.7 ### Upcoming structural benchmarks for 2012 (selected) - Financial sector policies (structural benchmarks, End-September 2012): - Publish legislation to strengthen regulatory framework for credit unions, including legislative provision for effective governance standards and prudential requirements. - Approve regulations to establish a charge levied across credit institutions to recoup over time the costs of resolving vulnerable institutions. ### Technical Memorandum of Understanding (TMU) — key methodological notes - TMU dated August 20, 2012 sets out definitions of indicators subject to performance criteria and indicative targets under arrangement supported by the Extended Fund Facility (EFF). - Valuation rules: - For programme purposes, all foreign currency-related assets, liabilities, and flows evaluated at “programme exchange rates,” except items affecting government fiscal balances, which are measured at current exchange rates. - Programme exchange rates are those that prevailed on December 30, 2011 as shown on the IMF’s website: €1 = 1.2939 U.S. dollar and €1 = 0.842786 SDR (accessed 19 January 2012). - Exchequer balance and Exchequer primary balance: - Exchequer balance defined as difference between total receipts into, and total expenditure out of, the Exchequer Account (sum of current and capital balances). - Exchequer primary balance defined as Exchequer balance excluding net debt interest payments in service of the National Debt, but including debt issued to IBRC to settle Promissory Note payments. *Document: Letter of Intent / MEFP and attachments (including TMU) as provided in the supplied content.* ### 5. For the purposes of the programme, the floor on the Exchequer primary balance ### _cr12264 - 5. For the purposes of the programme, the floor on the Exchequer primary balance ### Exchequer primary balance: definition and adjustments - The floor on the Exchequer primary balance (quantitative performance criterion) will be adjusted downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy. Such payments may include, inter alia,: - loans to banks, - investments in their equity (requited recapitalisation), - unrequited recapitalisation, - purchases of troubled assets, - which are carried out in line with programme objectives. - The floor will be adjusted upward by the amount of 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. - Measurement rule: The floor on the Exchequer primary balance (quantitative performance criterion) in each year will be measured cumulatively from the start of that calendar year. ### Cumulative Exchequer primary balance targets (In billions of Euros) - From January 1, 2012: - End-September 2012 (performance criterion): -10.6 - End-December 2012 (performance criterion): -11.2 - From January 1, 2013: - End-March 2013 (indicative target): -3.6 - End-June 2013 (indicative target): 3 - (cumulative End-June 2013 figure also listed as) -7.2 Note: these figures are presented in the source table exactly as above. ### Adjustment for tax and related revenue out-/over-performance - The performance criterion on the Exchequer primary balance (floor) will be adjusted upward (downward) for the full amount of any over-performance (under-performance) in: - Exchequer tax revenues, - pay-related social insurance contributions (PRSI), - national training fund contributions, - against the current projection listed in the document. - Exchequer tax receipts are comprised of: income tax (including the universal social charge), value added tax (VAT), corporation tax, excise duties, stamp duties, capital gains tax, capital acquisitions tax and customs duties. - Any policy changes, including in administration and enforcement of taxes, which impact the revenue projection will lead to a reassessment of the adjustor in the context of program reviews. ### Cumulative Exchequer tax revenue & other receipts (In billions of Euros) - From January 1, 2012: - End-September 2012 (projection): 30.7 - End-December 2012 (projection): 44.1 - From January 1, 2013: - End-March 2013 (projection): 10.2 - End-June 2013 (projection): 20.9 ### Ceiling on the stock of Central Government net debt: definition and adjustments - Definition for programme purposes: - Central government net debt = National Debt less liquid assets of the National Pensions Reserve Fund (NPRF). - National Debt = total outstanding principal borrowed by central government and not repaid as of the test date, less liquid assets available for redemption of those liabilities at the same date. - Liquid assets comprise Exchequer cash balances (including cash in the Capital Services Redemption Account), Exchequer deposits with commercial banks and other institutions, and investments in investment grade sovereign bills. - For the programme, NPRF liquid assets include the asset classes listed above and also all marketable securities such as equities, government bonds and other listed investments. - NPRF shares in domestic Irish banks, as well as the NPRF’s non-liquid discretionary portfolio, are excluded from the definition of liquid assets. - Adjustments to the ceiling on central government net debt (indicative target): - 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, unrequited recapitalisation, purchases of troubled assets). - Adjusted downward by proceeds from sales of bank equity held by the government or NPRF treated as Exchequer or NPRF receipts. - Adjusted upward for Exchequer outlays for the resolution of credit unions, and downward for any return of such outlays to the Exchequer and for recoupment by the Exchequer from the Resolution Fund. - Adjusted downward by the amount liquidated from the NPRF non-liquid discretionary portfolio. - Adjusted downward (upward) by valuation gains (losses) in the NPRF liquid portfolio. - Programme exchange rates will apply to all non-Euro denominated debt. - The ceiling will be adjusted upward (downward) by the amount of any final upward (downward) revision to the stock of end-June 2012 central government net debt. ### Central government net debt targets (In billions of Euros) - Outstanding stock: - End-June 2012 (provisional): 128.2 - End-September 2012 (indicative target): 132.5 - End-December 2012 (indicative target): 136.0 - End-March 2013 (indicative target): 141.7 - End-June 2013 (indicative target): 148.7 ### Non-accumulation of external payments arrears - Commitment: The central government will accumulate no external payments arrears during the programme period. - Definition: An external payment arrear = 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 will apply on a continuous basis. - The stock of external payments arrears will be calculated based on the schedule of external payment obligations reported by the National Treasury Management Agency. ### Reporting requirements and data timetables - Data monitoring: 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. - Department of Finance reporting (lag of no more than seven days after the test date): - Exchequer primary balance, - Exchequer tax revenues, - payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy, - proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts, - Exchequer outlays for the resolution of credit unions, - any return of such outlays to the Exchequer and recoupment of such outlays by the Exchequer from the Resolution Fund. - National Treasury Management Agency reporting: - Provisional figures on the outstanding stock of net government debt, including an unaudited analysis of NPRF holdings, with a lag of no more than seven days after the test date. Revised figures will be provided within three months of the test date. - Will provide the final stock of the central government system external payments arrears to EC, IMF and ECB staff, with a lag of not more than seven days after arrears arise, per paragraph 12. - Central Bank of Ireland reporting: - 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, 40 working days after the end of each quarter. ### Selected programme-related facts and announcements (from Letter of Intent and MOU text) - Ireland returned to international capital markets in July 2012 with the NTMA issuing both Treasury Bills and long-term bonds totaling €4.7 bn in new funding. - Ireland launched a multi-year (2012-2018) stimulus package worth €2.25 billion to be financed through Public-Private Partnerships (PPPs) with EIB and private sector participation. - The 2012 general government deficit is projected to be at, or below, the 8.6% of GDP programme ceiling. - Request for completion of the seventh review and the release of the seventh EFSF/EFSM disbursement of EUR 1 billion. - The financing outlook noted a large bond redemption in January 2014 and reported that recent issuance had reduced the associated funding hurdle. *Source: IMF/EC/ECB programme documents as contained in the provided content unit.* ### 10.5 percent for all PCAR banks (AIB, BOI, and PTSB). ### _cr12264 - 10.5 percent for all PCAR banks (AIB, BOI, and PTSB). ### Programme monitoring and conditionality - Consult ex-ante with the European Commission, the ECB and the IMF on adoption of policies not included in this Memorandum but that could have a material impact on the achievement of programme objectives. - Provide the European Commission, the ECB and the IMF with: - All information required to monitor progress during programme implementation and to track the economic and financial situation. - A compliance report on the fulfilment of the conditionality prior to the release of the instalments. - Reliable and regular availability of budgetary and other data as detailed in Annex 1. - Explicit numeric target noted: 10.5 percent for all PCAR banks (AIB, BOI, and PTSB). ### Actions for the eighth review (actions to be completed by end Q3-2012) Financial sector reforms - Deleveraging - Assess banks' deleveraging based on existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme. - Avoid fire sales and excessive deleveraging of core portfolios to not impair the flow of credit to the domestic economy. - Funding and liquidity monitoring - Establish an advanced monitoring framework covering in detail all factors affecting banks' Net Stable Funding Ratio (NSFR) to enable close monitoring towards relevant Basel III requirements. - Provide a detailed assessment of banks' progress towards the relevant Basel III requirements using the advanced monitoring framework to staff of the European Commission, the IMF, and the ECB. - Asset quality - Provide assessment of banks' performance with the work-out of their non-performing mortgage portfolios in accordance with the agreed key performance indicators. - Reorganisation - Report on progress implementing the strategy for the reorganisation of Irish credit institutions, including steps to strengthen the credit union sector. - Publish legislation to strengthen the credit union legislative framework taking account of the comprehensive recommendations in the Commission on Credit Unions Report. - Regulations to introduce requirement, under terms of the Deposit Guarantee Scheme, for credit unions to maintain an amount in the Deposit Protection account at the Central Bank. - Adopt regulations underpinning the Resolution Fund Levy to recoup Exchequer resources provided for the resolution of troubled credit unions. - Financial Supervision - Present a comprehensive report on progress in implementing the Central Bank of Ireland's action plan for strengthening supervision of credit institutions. - Report on banks' progress with strategies to address loan arrears and unsustainable debts in mortgage and SME loan portfolios. - Government to present to Dáil Éireann legislation to establish a statutory credit risk register. - AIB’s new management team to update its restructuring plan; submit plan to the European Commission for approval under State Aid rules. Structural reforms - Personal debt - Ensure a programme to facilitate access by distressed borrowers to professional financial advisory services, funded by banks, will be operational. - State assets - Building on indicative timetable for asset sales provided at end-Q2 2012, government to provide progress report for each asset and/or group of assets identified for disposal covering progress achieved and remaining steps towards point of sale. - Efficient social support expenditure (Department of Social Protection actions) - Continue introduction of one-stop shops, employer engagement by NEES, and roll-out of job matching. - Continuously monitor activation system performance and report on: - Reducing the average duration of staying on the live register. - Increasing the fraction of vacancies filled off the live register. - Ensuring engagement with employment services as a pre-condition for receipt of jobseeker payments. - Carrying out profiling, group and individual engagement through interviews. - Increasing number of unemployed referred to training courses and employment supports. - Providing data on live register broken down by continuous duration, and on probability of exit by various durations. - Providing summary statistics on those in receipt of penalty sanctions by duration of unemployment and prioritise progress on data analysis by exit destination and length of penalty period. - Report on progress implementing an improved data collection system in light of the March 2012 external evaluation. - In the context of Budget 2013, DSP will present options to Government having regard inter alia to results of the July 2012 actuarial review of the social insurance fund. - DECLG and DSP to report on housing assistance reform, in particular introduction of the new Housing Assistance Payment. - Health sector - Authorities to specify quantified measures to eliminate the spending overrun by year end. - Labour market reform - Further advance passage of the Industrial Relations (Amendment) Bill 2011 through the parliamentary process. - Utilities sector - Report on progress for transfer of water services provision from local authorities to Irish Water and roll-out of domestic water metering programme with a view to start charging by the end of the EU-IMF programme period. - Consider and update on general government debt and deficit treatment implications of establishment of Irish Water. - Structural fiscal reforms - Publish legislation to anchor multi-annual expenditure limits. - Publish draft legislation to enshrine commitment to sound public finances, give statutory basis to the Irish Fiscal Advisory Council and provide for the Council’s independence and adequate resourcing. ### Actions for the ninth review (actions to be completed by end Q4-2012) Fiscal consolidation - Publish a budget for 2013 aiming for a further reduction of the General Government deficit in line with fiscal targets set out in the Council Recommendation in context of the excessive deficit procedure. - Consolidation measures for 2013 will amount to at least €3.5 billion (based on MTFS November 2011), including: - Revenue measures to raise at least €1.25 billion, including: - A broadening of personal income tax base. - A value-based property tax. - A restructuring of motor taxation. - A reduction in general tax expenditures. - An increase in excise duty and other indirect taxes. - Expenditure reductions necessary to achieve an upper limit on voted expenditure of €54 billion, involving consolidation measures of €2.25 billion, including: - Social expenditure reductions. - Reduction in total pay and pensions bill. - Other programme expenditure and reductions in capital expenditure. - Government may, in consultation with staff of the European Commission, the IMF, and the ECB, substitute measures with others of equally good quality based on options identified in the Comprehensive Review of Expenditure (CRE). Financial sector reforms - Capital assessment - Provide staff of the European Commission, the ECB and the IMF a review of developments in the covered banks relative to PCAR 2011 by end-November. Overall results will be published; authorities to agree details with staff. - Deleveraging - Continue assessment based on existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme; avoid fire sales and excessive deleveraging. - Funding and liquidity monitoring - Provide detailed assessment of banks' progress towards Basel III requirements using advanced monitoring framework. - Asset quality - Provide assessment of work-out of non-performing mortgage portfolios and develop a set of key performance indicators for SMEs. - Liquidity buffers - Following finalisation of the Capital Requirements Directive legislative text, establish draft guidance for creation and holding of liquidity buffers by banks in advance of entry into force of regulations. - Reorganisation & Financial Supervision - Report on reorganisation strategy progress and present comprehensive report on Central Bank of Ireland’s action plan for strengthening supervision; report on strategies to address loan arrears and unsustainable debts. Structural reforms - Competition - Review, on basis of report by end Q4 2012, whether sufficient progress has been made to strengthen competition law enforcement and the functioning of the Competition Authority and whether additional measures required. - Efficient social support expenditure - Provide evaluation of progress on labour market activation measures against 'Pathways to Work' targets. - State asset disposals - Complete regulatory, legislative, corporate governance and financial reforms required to bring identified assets to point of sale; provide reports on progress and remaining steps. ### Actions for the tenth review (actions to be completed by end Q1-2013) Financial sector reforms - Capitalisation - Report on evolution of regulatory capital within PCAR banks up to end of December 2012 and present findings to staff of the European Commission, the IMF, and the ECB. - Capital assessment - Agree with staff of the European Commission, the ECB and IMF on specific features of the methodology. - Deleveraging - Continue assessment per 2011 Financial Measures Programme; avoid fire sales and excessive deleveraging. - Funding and liquidity monitoring - Provide detailed assessment of progress towards Basel III requirements using advanced monitoring framework. - Monitor liquidity buffers held by banks in accordance with the Capital Requirements Regulation effective since January 2013. - Asset quality - Provide assessment of work-out of non-performing mortgage and SME portfolios in accordance with agreed key performance indicators. - Reorganisation and Financial supervision - Report on reorganisation progress and present comprehensive report on Central Bank of Ireland’s action plan; review implementation of the 2011 CBI Provisioning and Disclosure guidelines by the covered banks. ### Actions for the eleventh review (actions to be completed by end Q2-2013) Financial sector reforms - Capital assessment - Complete the PCAR 2013. Conduct a rigorous stress test building on PCAR 2011 and the FMP 2012, based on robust loan-loss forecasts and a high level of transparency; focus on bank balance sheets after implementation of technical work addressing legacy and nonperforming loans. - Discuss results with staff of European Commission, the IMF, and the ECB before publication; align timing with next EBA exercise. - Publish results and methodology in full and on a bank-by-bank basis and ensure banks are adequately capitalised. - Deleveraging - Continue assessment based on existing nominal targets for disposal and run-off of non-core assets in line with 2011 Financial Measures Programme; avoid fire sales and excessive deleveraging. - Funding and liquidity monitoring - Provide detailed assessment of progress towards Basel III requirements using advanced monitoring framework. - Monitor liquidity buffers held by banks in accordance with the Capital Requirements Regulation effective since January 2013. - Asset quality - Provide assessment of work-out of non-performing mortgage and SME portfolios per agreed key performance indicators. - Reorganisation and Financial supervision - Report on reorganisation progress; present comprehensive report on Central Bank of Ireland’s action plan; report on banks' progress addressing loan arrears and unsustainable debts in mortgage and SME portfolios. Structural reforms - State assets - Report to staff of the European Commission, the IMF, and the ECB on quantum of proceeds of any realised asset sales to date; for assets yet to be disposed, report on progress made and remaining steps. - Labour market reform - Report on impact on labour market of reforms to sectoral wage-setting mechanisms undertaken under the programme. ### Actions for the twelfth review (actions to be completed by end Q3-2013) Financial sector reforms - Capital assessment - Report on evolution of regulatory capital up to the end of June 2013 within banks covered by the PCAR and present findings to staff of the European Commission, the IMF, and the ECB. - Deleveraging - Continue to assess deleveraging based on existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme; avoid fire sales and excessive deleveraging. - Funding and liquidity monitoring - Provide detailed assessment of progress towards Basel III requirements using advanced monitoring framework. - Monitor liquidity buffers held by banks in accordance with the Capital Requirements Regulation effective since January 2013. - Asset quality - Provide assessment of work-out of non-performing mortgage and SME portfolios in accordance with agreed key performance indicators. - Reorganisation and Financial Supervision - Report on progress implementing strategy for reorganisation of Irish credit institutions and present comprehensive report on Central Bank of Ireland’s action plan; report on banks' progress with strategies to address loan arrears and unsustainable debts in mortgage and SME loan portfolios. *Source: _cr12264 - 10.5 percent for all PCAR banks (AIB, BOI, and PTSB). Canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12264.pdf* ### 6. Actions for the thirteenth review (actions to be completed by end ### 6. Actions for the thirteenth review (actions to be completed by end Q4-2013) ### Financial sector reforms — Deleveraging - The authorities will produce a final report of the banks' implementation of their deleveraging plans under the PLAR 2011. Their compliance with the asset disposal and run-off targets in nominal value terms will be discussed with the staff of the European Commission, the IMF, and the ECB. - The authorities will produce a final report on progress towards compliance with Basel III liquidity and funding requirements by the relevant dates. - The authorities will also monitor the liquidity buffers held by banks in accordance with the Capital Requirements Regulation effective since January 2013. ### Financial sector reforms — Asset quality - The authorities will provide staff of the European Commission, the IMF, and the ECB with their assessment of banks' performance with the work-out of their non-performing mortgage and SME portfolios in accordance with the agreed key performance indicators. ### Financial sector reforms — Reorganisation - The authorities will provide a final 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 together with the European Commission, the IMF, and the ECB. ### Financial sector reforms — Financial Supervision - The authorities will present a final comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss it together with the European Commission, the IMF, and the ECB. - The authorities will provide a final report on banks' progress with the implementation of their strategies to address loan arrears and unsustainable debts in banks' mortgage, and SME loan portfolios. - The authorities will ensure that the statutory credit risk register is operational. ### Annex 1. Provision of data — Overview - During the programme, the following indicators and reports shall be made available to the staff of the European Commission, the IMF, and the ECB by the Irish authorities on a regular basis. - The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to the staff of the European Commission, the IMF, and the ECB. ### 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, NSFR and LCR outturns and forecasts. — Quarterly, 40 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 from the banks 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 deleveraging in line with the 2011 Financial Measures Programme; and (ii) actual and planned asset disposals. — Quarterly, 40 working days after the end of the reference period. ### Fund relations and program context (selected items) - Membership Status: Joined August 8, 1957; Article VIII - Quota: 1,257.60 (SDR Million) — 100.00 percent of Quota - Fund holdings of currency: 16,026.48 (SDR Million) — 1,274.37 percent of Quota - Reserve position in Fund: 258.57 (SDR Million) — 20.56 percent of Quota - Net cumulative allocation (SDR): 775.42 — 100.00 percent of Allocation - Holdings (SDR): 644.24 — 83.08 percent of Allocation - Outstanding Purchases and Loans: Extended Arrangement 15,027.43 (SDR Million) — 1,194.93 percent of Quota - Financial Arrangement (EFF): Approval Date 12/16/10; Expiration Date 12/15/13; Amount Approved 19,465.80 (SDR million); Amount Drawn 15,027.43 (SDR million) - Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs): Principal 2012–2016 line shows 535.20 and 2,173.15; Charges/Interest 192.01 388.84 477.51 496.56 450.06; Total 192.01 388.84 477.51 1031.76 2623.22 (as presented) - Exchange Rate Arrangement: Ireland’s currency is the euro, which floats freely and independently against other currencies. Ireland has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions, other than restrictions notified to the Fund under Decision No. 144 (52/51). ### Safeguards assessment summary (Central Bank of Ireland) - The safeguards assessment found the CBI has a relatively strong safeguards framework in place. - Financial statements are audited in accordance with international standards and published. - Governance and control systems adhere to good practices. - Recommendations included addressing heightened risks from the financial crisis (notably liquidity lending), improving transparency, and strengthening the de-jure autonomy of the central bank. - Progress made: strengthened internal governance and control procedures for ELA; brought forward publication dates for audited financial accounts; clarified accounting framework for areas not covered by ECB guidelines; formally approved revised investment guidelines. - The CBI and DoF are considering how to strengthen arrangements for financial autonomy of the CBI, which may require changes to central bank legislation and changes in other related regulations, to be prepared in consultation with the ECB. ### Statistical issues — Data adequacy and standards - General: Data provision is broadly adequate for surveillance. - National accounts and real sector data: Quarterly national accounts are currently published within three months of its reference period. Industrial production and retail sales data published within six weeks; employment data within 3 months; some non-SDDS series published one and a half years later (e.g., household disposable income). Employment and unit labor costs, and national income and expenditure data usually available with a three-month lag. - Wages and earnings statistics: The quarterly Earnings, Hours and Employment Costs Survey replaces the four-yearly Labor Cost Survey and other short-term earnings surveys; results comparable across sectors and include more detail, but data are available with more than six months lag. - Government finance statistics: Authorities publish Exchequer returns monthly and quarterly, but only annual data are available for general government finances. Authorities are working to strengthen analytical content of exchequer reporting and enhance reporting and forecasting for general government. - External data: Quarterly balance of payments compiled by the Central Statistics Office are in line with BPM5, with historical data from 1998; some discrepancies remain between exports and imports data from national accounts and balance of payments. International investment position published with a six months lag. - Data standards: Ireland is subject to Eurostat and ECB requirements and timeliness standards. Ireland subscribes to the Fund’s Special Data Dissemination Standard and uses SDDS flexibility option on the timeliness of the wages and earnings and central government debt data. No data ROSC is available. ### Table of Common Indicators (selected items, as of August 2, 2012) - Exchange Rates: Date of Latest Observation 8/2/2012; Date Received 8/2/2012; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation June 2012; Date Received 8/01/2012; Frequency M M M - Reserve/Base Money: June 2012; 8/01/2012; M M M - Broad Money: June 2012; 8/01/2012; M M M - Central Bank Balance Sheet: June 2012; 07/13/2012; M M M - Consolidated Balance Sheet of the Banking System: June 2012; 07/06/2012; M M M - Interest Rates: Date of Latest Observation 8/2/2012; Date Received 8/2/2012; Frequency D D D - Consumer Price Index: June 2012; 7/12/2012; M M M - Revenue, Expenditure, Balance and Composition of Financing – General Government: 2011; 5/15/2012; A A A - Revenue, Expenditure, Balance and Composition of Financing – Central Government: June 2012; 7/4/2012; M M M - Stocks of Central Government and Central Government-Guaranteed Debt: 2012:Q1; 5/15/2012; Q Q Q - External Current Account Balance: 2012:Q1; 7/12/2012; Q Q Q - Exports and Imports of Goods and Services: 2012:Q1; 7/12/2012; Q Q Q - GDP/GNP: 2012:Q1; 7/12/2012; Q Q Q - Gross External Debt: 2012:Q1; 8/2/2012; Q Q Q ### Supplementary information (update as of August 31, 2012) - The supplement provides an update on economic and financial developments since the issuance of the staff reports on August 22, 2012 (EBS/12/102 and SM/12/220). The additional information does not change the thrust of the staff appraisal. - Following sales of Treasury bills and bonds in July, the government has recently placed €1.0 billion of long-term amortizing bonds at an average yield of 5.91 percent. - On August 23, the National Treasury Management Agency sold a series of amortizing bonds, with final maturity dates ranging from 15 to 35 years in a fixed price tap offer. - The total take-up is €0.4 billion higher than assumed in Table 1 of the Seventh Review, further enhancing the cash balance and reducing future funding needs. - Since the staff reports were issued, Irish bond spreads have been broadly stable, after declining significantly from late June. - Recent real sector indicators: consumer sentiment improved further in August, to its highest level in almost 5 years; retail sales (excluding motor vehicles) rebounded by 1.1 percent m/m in July. - In annual terms, retail sales declined 1.4 percent in the first seven months, consistent with the projected decline in private consumption. - Wages and working hours remained essentially flat in Q2 from a year earlier, with sectoral differences: wages in the accommodation and food industry falling over 5½ percent y/y while the science and technology sector registered an almost 6 percent y/y wage increase. *Prepared by European Department; August 21, 2012 (contents as presented in the source PDF).* ### 4. The rate of decline in house prices slowed to 13.6 percent y/y. Residential property ### 4. The rate of decline in house prices slowed to 13.6 percent y/y. Residential property ### House prices and housing market developments - Residential property prices rose 0.2 percent in July, with the monthly increase led by price increases outside Dublin. - Since the start of 2012: - House prices have been broadly flat in Dublin. - Dublin apartment prices fell 10 percent during January to July 2012. - Residential property values outside Dublin declined by 6 percent in the same period. - The rate of decline in house prices slowed to 13.6 percent y/y. ### Mortgage arrears, restructurings, and repossessions - Residential mortgage arrears continued to increase in the second quarter, with almost 15 percent of mortgages (by value) on owner occupied dwellings in arrears. - The increase in arrears and restructuring appears to be slowing modestly in recent quarters. - The level of arrears remains within the adverse scenario of the Prudential Capital Assessment Review (PCAR). - The number of repossessed or surrendered properties increased by 146 to a cumulative 1,498 since 2009Q3. - Census data from 2011 show that among households with mortgages, 8.7 percent of primary income earners are without a job, highlighting the nexus between unemployment and mortgage arrears. ### Ireland: Residential Mortgage Arrears (billions of euros) — selected series (as reported) - Period columns: Dec-09 Dec-10 Dec-11 Mar-12 Jun-12 - Outstanding: 118.3 116.7 113.5 112.7 112.0 - Mortgage loans in arrears over 90 days 1/: 5.3 8.6 13.9 15.4 16.5 - in percent of outstanding: 4.5 7.4 12.3 13.7 14.7 - Restructured mortgages: n.a. 10.4 13.3 14.2 15.1 - in percent of outstanding: n.a. 8.9 11.7 12.6 13.5 - Repossessions and voluntary surrenders 2/: 2 115 741,182 1,352 1,498 Notes excerpted from table: - Source: Central Bank of Ireland. - 1/ Includes restructured mortgages in arrears over 90 days. - 2/ Cumulative number since 2009Q3. ### Macroeconomic and policy context linked to housing sector - The economic contraction and banking crisis led to large household debt burdens and high unemployment: - Real GDP contracted 8 percent during 2008-10. - CPI deflated by 5½ percent during 2008-10. - Unemployment recently approached 15 percent (noted elsewhere). - House prices fell to half of their peak levels. - Household debt burdens of some 210 percent of disposable income are cited as a contributing factor to high mortgage arrears. - Authorities’ policy goals: repair the banking system, put public finances on a sound footing, and foster domestic activity and job creation via structural reforms. - Authorities implemented strategies to reorganize, recapitalize, and downsize the banking system, restoring strong capital ratios and stabilizing deposits; nonperforming loans remain high and bank profitability and lending are weak. ### Executive Board and staff recommendations related to housing and financial sector - Emphasize need to arrest deterioration in bank asset quality and regain bank profitability to restore credit provision. - Support continued supervisory engagement to promote banks’ implementation of durable solutions for households’ mortgage arrears and advancing similar approaches for loans to SMEs. - Reforms of the personal insolvency framework recommended to help address debt distress while preserving debt service discipline; repossession framework should complement these reforms. - Noted that temporary ESM ownership of Irish banks could reduce funding costs, boosting profitability and ability to support economic recovery. - Central Bank of Ireland (CBI) plans to monitor banks’ progress on mortgage arrears strategies are welcomed; similar monitoring frameworks urged for distressed SME credit. *IMF staff report excerpts as presented in the supplied content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12264.pdf_