## _cr12336 ## Source details **Canonical URL:** [_cr12336](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12336.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12336.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12336.pdf.json) --- ### Public Health Spending Over-Run: sources, magnitude, and policy options - Net health sector spending expected to be about €0.5 billion (4½ percent or 0.3 percent of GDP) above budget in accrual terms. - Overspend broadly evenly distributed across: - Pay and pensions: higher-than-expected early retirements (including staff on career breaks and deferred pensions) and hiring of agency workers; higher agency costs from managing hospital activity. - Non-pay hospital expenses (net of fees collected): management issues and shortfalls in fees from private patients. - Medical-card subsidies: higher-than-budgeted number of medical cards and higher number and average cost of drugs per subscription, especially for elderly patients. - Budget correction objective: - Authorities committed to unwinding the over-run by bringing 2013 gross health expenditure to below the previously-set ceiling of €13.6 billion. - Policy options to unwind the over-run: - Pay bill: reduce overtime and premium payments via substantially improved work practices and rostering; reduce weekend stays of healthy patients. - Pharmaceuticals: recent agreement to reduce drug costs over four years; sharply raise generics use (currently less than one-fifth of prescription volume). - Medical cards (held by 40 percent of the population; near-universal coverage of persons over 70): better targeting via a more effective means-test for over-70s; more graduated coverage (e.g., GP-only cards); higher co-payments. - Private patients: increase cost recovery for private patients using public hospitals. *Source: Box 1. Public Health Spending Over-Run: Sources and Policy Options (excerpt).* ### Macroeconomic performance and near-term outlook - Growth and demand composition: - Real GDP grew ½ percent y/y in H1 2012. - Domestic demand dropped 3½ percent y/y in H1 2012 (private consumption -2¼ percent; public consumption -4¾ percent). - Net exports contributed 4¼ percentage points to growth in H1 2012. - Export growth eased to 3¾ percent y/y in H1 2012 from 5 percent in 2011; goods export volumes contracted 2¼ percent; nominal pharmaceutical exports fell 8¾ percent. - Services exports exceeded goods exports for the first time. - GNP growth: 2¼ percent in H1 2012; current account surplus rose to 2¾ percent of GDP in H1 2012. - Labor market and inflation: - Employment declined by 0.8 percent y/y in the first three quarters of 2012. - Unemployment: peak 15 percent in Q1 easing to 14.8 percent in Q3; around 60 percent of the unemployed without a job for more than a year; over one-third of youths unemployed; hypothetical unemployment would be around 20 percent if displaced workers had remained in the labour force. - HICP inflation rose to around 2 percent during the first ten months of 2012; energy price rises accounted for about 60 percent of overall inflation; core inflation averaged 1 percent y/y in the first ten months. - Key high-frequency indicators and projections: - Retail trade volumes edged up "1¼ percent y/y in July–October". - Industrial production rose until August; recent decline in export orders noted. - Projected Real GDP growth (annual percent change, Table 1): 2012:0.4; 2013:0.4 (Table 1) and alternative medium-term projection (Table 2): 2013:0.4; 2014:1.1; 2015:2.2; 2016:2.8; 2017:2.9. - Unemployment (Table 1): 2012:14.8; 2013:14.7. - HICP (annual average, Table 1): 2012:2.0; 2013:1.3. ### Fiscal performance, Budget 2013, and consolidation - 2012 fiscal outturn and targets: - Exchequer primary balance in the first ten months of 2012: 6.6 percent of GDP (1.1 percentage points below same period last year and 0.2 percentage points inside authorities' profile). - Authorities on track to deliver general government deficit within 8.6 percent of GDP target for 2012 (supplement notes achievement by margin of at least ¼ percent of GDP). - Revenues overall on-profile; UMTS license sale boosted 2012 capital receipts by 0.2 percent of GDP. - Health and social welfare overruns: - Gross social welfare spending overrun: 0.1 percent of GDP (mainly higher unemployment). - Health overspend projected at 0.3 percent of GDP for 2012 and characterized as more structural. - Budget 2013 consolidation and composition: - Programmed consolidation in 2013: €3.5 billion (2.1 percent of GDP); "new" consolidation measures announced: €2.9 billion (1.7 percent of GDP). - New measures composition (yields in € bn, Budget 2013 summary): - Revenue: 1.21 (Yield in 2013) | 1.70 (Full year effect) - Pay-related social insurance: 0.29 | 0.34 - Local property tax: 0.25 | 0.50 - Excises: 0.21 | 0.21 - Vehicle and carbon taxes: 0.16 | 0.18 - Personal income taxes: 0.14 | 0.43 - Capital taxes: 0.13 | 0.16 - Other (net of stimulus measures): 0.03 | -0.13 - Expenditure: 1.72 | 2.20 - Health: 0.78 | 1.17 - Social Protection: 0.39 | 0.45 - Education: 0.09 | 0.12 - Agriculture: 0.09 | 0.09 - Justice: 0.06 | 0.06 - Other: 0.31 | 0.31 - Total: 2.93 | 3.90 - Specific measures include introducing a property tax at 0.18 percent of self-assessed value, removing PRSI exemption of first €127 weekly earnings, capping pension tax reliefs to deliver pension incomes of €60,000 or less, expanding carbon tax base, and indirect tax increases on alcohol, tobacco, and vehicles. - Public sector pay and savings: €0.4 billion in public sector wage bill reductions tied to a targeted staff reduction of 7,000 relative to end-2012 ceiling and productivity gains; €0.4 billion in social welfare adjustments; €0.9 billion from tightening subsidies and programs (predominantly health). - Medium-term fiscal framework: - MTFS aims for deficit below 3 percent of GDP in 2015 and balanced composition of adjustment. - Consolidation 2013–15 in € billion: - 2013 Total: 3.5 (Expenditure: 2.25; Tax: 1.25) - 2014 Total: 3.1 (Expenditure: 2.0; Tax: 1.1) - 2015 Total: 2.0 (Expenditure: 1.3; Tax: 0.7) - Note: these amounts exclude savings from winding down the 2012 health overrun and some other balance improvements. ### Banking sector, deleveraging, asset quality, and financial supervision - PCAR banks: - Deleveraging: €13.8 billion by end-September 2012; total deleveraging since December 2010: €50 billion. - Eurosystem borrowings declining but remain large. - Covered bond issuance: BoI and AIB issued 3-year covered bonds without a state guarantee in late 2012. - Asset quality and profitability: - Gross non-performing loans rose to 23 percent of PCAR banks gross loans at end-September 2012, up from 17 percent a year earlier. - Provisioning coverage: 50 percent. - PCAR banks reported a €0.8 billion pre-provision loss (first three quarters of 2012) excluding non-recurrent items (-0.3 percent of average assets). - Under restructuring plans, these banks are not expected to break-even until 2014. - Capital ratios: Core Tier 1 ratios of 15.5 percent of risk-weighted assets and 7.5 percent of total assets. - Mortgage arrears and MARS: - Residential mortgages in arrears over 90 days reached 14.7 percent of mortgage loans for principal dwellings at end-June (CBI data); revised series show 15.1 percent by end-September 2012 in some tables and 16.8 in others (see mortgage arrears table). - Buy-to-let mortgages arrears >90 days: 25.5 percent by end-September. - MARS priorities: grow loan collection operations; engage households; offer sustainable loan modifications subject to tight eligibility; monitor KPIs; publish loan modification outcomes including re-defaults; ensure prudent provisioning for modifications. - Personal insolvency and SME frameworks: - Personal Insolvency Bill passed committee stage; expected to complete Oireachtas stages by year-end; aims to make the new insolvency framework operational by end January 2013 or shortly thereafter. - SME support: Temporary Partial Credit Guarantee scheme; CBI monitoring of SME arrears strategies; aim to move from short-term forbearance to durable restructuring. - Financial supervision and regulation measures: - Central Bank (Supervision and Enforcement) Bill to enhance powers; parliamentary discussions ongoing. - CBI self-assessing Basel Core Principles (BCP); external BCP assessment requested by end-March 2013 (proposed structural benchmark), completion by end-2013 targeted. - Resolution fund levy regulations issued on September 29; levy assessed on credit institutions using Pillar 1 capital base; contribution rate for credit unions assessed on total assets; authorities intend to recoup public resources provided to the Resolution Fund. - Credit Reporting Bill published in September 2012; aim to have Credit Register operational by end 2013. ### Debt sustainability, risks, and stress-test scenarios (Annex I) - Public debt trajectory and projections: - Gross general government debt projected to peak at 122 percent of GDP in 2013 (Annex I); projections in tables: 2012:118.3; 2013:122.5; 2014:121.7; 2015:118.0; 2016:115.3; 2017:112.1; 2021:97.4. - Ireland revised market issuance up by about €6.2 billion (3.8 percent of GDP) in 2013 to ensure a cash buffer on the order of €19 billion (12 percent of GDP) at end-2013. - Under baseline, primary deficit falls below debt-stabilizing threshold in 2014; automatic debt dynamics add about two percentage points per year to the debt ratio in 2012–13. - Gross general government debt projected to fall to 97 percent of GDP by 2021 under baseline. - Key risks and scenario outcomes: - Growth risk: stagnation at ½ percent per year would reduce debt-reducing effect to 0.6 percentage points per annum and result in debt reaching 146 percent of GDP by 2021. - Contingent liabilities: illustrative one-time contingent-liability shock of 10 percent of GDP in 2013 raises debt bound to 108 by 2021; a conservative contingent-liability-impact scenario on order of 10 percent of GDP considered. - Interest-rate risk: a 200 basis points permanent upward shift on new borrowing would increase effective interest on public debt by 96 basis points by 2019; only a permanent shock exceeding about 450 basis points would prevent long-run debt reduction. - Contingent liabilities composition (percent of projected 2012 GDP): - Senior NAMA bonds: 17.6 - Guarantees for Emergency Liquidity Assistance: 9.5 - Other Bank Liabilities covered by Eligible Liability Scheme: 13.6 - Total: 40.7 - External debt: - Non-IFSC external debt at end-Q2 2012: about 307 percent of GDP; projected to fall to 219 percent of GDP by 2017. - Total external debt including IFSC: around 1,040 percent of GDP at end-Q2 2012. - Stress-test outcomes (selected): - Public debt bound tests by 2021: baseline 97; growth shock (stagnation at 0.5 percent) 146; primary balance shock (½ sd) 121; interest-rate shock (permanent 200 bps) 104; combined standard shock 131. - External debt bound tests by projection horizon: baseline 219; historical-average scenario 316 by 2017; non-interest current account shock (½ sd) 240; combined shock 248. ### Program modalities, financing strategy, and conditionality - Programme monitoring and targets: - Quantitative performance criteria and indicative targets updated through September 2013; Exchequer primary balance performance criterion and net central government debt indicative targets specified. - TMU clarified that Exchequer primary balance for program monitoring excludes all payments related to IBRC Promissory Notes from January 2013 onwards. - Adjustors to the floor on the Exchequer primary balance include up/down adjustments for Exchequer outlays on credit union restructuring (capped at €250 million), receipts from state asset disposals, and other items. - Financing strategy and market access: - Authorities expanded 2013 funding plan from €4 billion to about €10½ billion including long-term bond issuance and retail funding; aim to end 2013 with a cash buffer covering about one year of financing needs. - Nonresidents hold 73 percent of outstanding securities. - Credit ratings: Fitch and S&P at 'BBB+'; Moody’s at 'Ba1'; Moody’s and S&P negative outlooks; Fitch stable (mid-November). - Fund relations and EFF: - EFF arrangement: Amount Approved (SDR million): 19,465.80; Amount Drawn: 15,785.43. - Eighth purchase requested: SDR 758 million; proposed total purchase amount in 2013: SDR 2,922 million. - Stock of Fund credit (end-2012, Table 10): 19,466 (millions of SDR); Stock of Fund credit in percent of quota: 1,548; in percent of GDP: 14.3. - Structural benchmarks and monitoring deliverables (selected): - Request external BCP assessment (end-March 2013). - Review progress in addressing mortgage arrears (end-June 2013). - Submit Budget 2013 to the Oireachtas (prior action — 5 December 2012). - Reporting and data provision schedules specified in Annex 1 (monthly, quarterly, and other frequencies across Department of Finance, NTMA, and CBI). ### Staff appraisal, key recommendations, and program support - Staff findings: - Authorities maintained consistent delivery on program; quantitative targets for the review were met and structural benchmarks observed. - Near-term growth prospects weak; baseline gradual recovery subject to significant risks. - Financial sector and structural reforms progressing; immediate priorities include arresting asset-quality deterioration and operational restructuring. - Key policy recommendations: - Fiscal: complete medium-term fiscal plans, clarify remaining measures for outer years, anchor consolidation with multi-annual expenditure ceilings, and implement structural reforms to generate durable savings while protecting services (notably health). - Budget 2013: deliver targeted consolidation of 2.1 percent of GDP through durable, equitable, and growth-friendly measures; better target social benefits; consider public sector pay-bill reductions and broaden revenue base (notably property tax). - Financial sector: ensure close supervision of banks, prudent provisioning for loan modifications, implement personal insolvency reforms with functioning repossession process, lower funding costs (orderly withdrawal of ELG), and reduce operational costs. - Labor market and social policy: reduce unemployment via recovery and activation measures (one-stop shops, private sector involvement), reform further education, and implement Housing Assistance Payment to reduce employment disincentives. - European support: timely and forceful delivery of European commitments—especially direct bank recapitalization by the ESM—would most decisively reduce sovereign exposure to banking contingent liabilities and support durable market access. - IMF staff supports completion of the eighth review and approval of the associated purchase. *Italic: IMF staff report content as provided in the source PDF.* ### 1. Public Health Spending Over-Run: Sources and Policy Options ..........................................9 ### 1. Public Health Spending Over-Run: Sources and Policy Options ### Background and sovereign/market developments - Ireland’s policy implementation continued: all quantitative macroeconomic targets for end-September 2012 were met and the two structural benchmarks for the review were observed. - Public debt is expected to peak just over 120 percent of GDP. - Delivery on European commitments—especially direct bank recapitalization—is identified as critical for durable market access and exit from official financing. - Sovereign bond yields and spreads: - Spreads on 2-year bonds have fallen 385 basis points from June 28, bringing yields down to 1.85 percent. - The long-term benchmark spread declined 270 basis points to bring yields to 4.45 percent. - Key policy and ECB actions that influenced markets include the June 29 euro area summit statement and the ECB‘s announcement of Outright Monetary Transactions (OMT). ### Growth, external sector, and composition of demand - Real GDP grew ½ percent y/y in H1 2012. - Domestic demand: dropped 3½ percent y/y in H1 2012. - Private consumption fell 2¼ percent. - Public consumption fell 4¾ percent. - Net exports contributed 4¼ percentage points to growth in H1 2012. - Exports and trade details: - Export growth eased to 3¾ percent y/y in H1 2012 from 5 percent in 2011. - Volume of goods exports contracted 2¼ percent (first fall since 2009), likely reflecting euro area weakness and a possible pharmaceutical "patent cliff." - Nominal exports of pharmaceutical products fell 8¾ percent. - Services exports exceeded goods exports for the first time. - GNP and current account: - Lower net income outflows raised GNP growth to 2¼ percent. - Current account surplus rose to 2¾ percent of GDP in H1 2012 (with a possible unwinding in H2). ### Labor market and inflation - Employment and unemployment: - Employment declined by 0.8 percent y/y in the first three quarters of 2012. - Unemployment: from a peak of 15 percent in Q1, eased modestly to 14.8 percent in Q3. - Around 60 percent of the unemployed have been without a job for more than a year. - Over one-third of youths in the labour force are unemployed. - If all employees who lost jobs since the crisis had remained in the labour force, the unemployment rate would be around 20 percent. - Inflation: - HICP inflation rate rose to around 2 percent during the first ten months of 2012. - Rapidly rising energy prices accounted for about 60 percent of the overall inflation rate. - Core inflation (excluding energy and unprocessed foodstuffs but including indirect taxes) averaged 1 percent y/y in the first ten months of 2012. - A 2 percentage point increase in the main VAT rate and increases in service prices contributed to core inflation. ### Household finances, housing, and lending - Household debt and arrears: - Household debt remains elevated at some twice household disposable income and 30 percent of household assets. - Residential mortgages in arrears over 90 days reached 14.7 percent of mortgage loans for principal dwellings at end-June. - Troubled residential mortgages for investment properties reached 28.9 percent (provisional CBI data). - National house prices: slowed declines to 8.1 percent y/y in October. - Repossessions and voluntary surrenders cumulatively ¼ percent of mortgages on owner occupied dwellings in the past three years. - Lending flows and SME finance: - Gross mortgage loans to households down 10.3 percent y/y in the first three quarters of 2012. - New SME loan drawdowns (excluding financial intermediation and property-related) down 20.7 percent y/y in first half of 2012. - Interest rates on SME loans (below €1 million) remain well above euro area average levels. - Quarterly bank lending survey indicates stable lending standards in Q3 2012, with some tightening of consumer lending but rising demand for mortgages and corporate loans. ### Banking sector, deleveraging, and asset management - PCAR banks and funding: - Deleveraging of PCAR banks: €13.8 billion by end September 2012, bringing total deleveraging since December 2010 to €50 billion. - Eurosystem borrowings by PCAR banks continue to decline but remain large. - Bank deposit rates have begun to decline but remain well above euro area levels. - Covered bond issuance: BoI and AIB issued 3-year covered bonds without a state guarantee in late 2012. - Asset quality and profitability: - Gross non-performing loans rose to 23 percent of PCAR banks gross loans at end September 2012, up from 17 percent a year ago. - Provisioning coverage at 50 percent. - For the first three quarters of 2012, PCAR banks reported a €0.8 billion pre-provision loss excluding non-recurrent items (-0.3 percent of average assets). - Under restructuring plans, these banks are not expected to break-even until 2014. - Capital ratios remain strong but under pressure: - Core Tier 1 ratios of 15.5 percent of risk-weighted assets. - Core Tier 1 ratios of 7.5 percent of total assets. - NAMA progress and plans: - Total asset disposals approved so far amount to €10½ billion, with proceeds of €6.2 billion received. - NAMA has repaid bonds in an amount of €3¼ billion to date, with additional redemptions expected before end 2012. - NAMA plans some €2 billion in capital projects in Ireland, phased in a back-loaded manner through 2016. - NAMA will make €2 billion of vendor financing available, expected to attract new investor equity in the order of €0.6-0.9 billion in 2013–14. ### Fiscal performance and public health overspend - Fiscal outturns and profiles: - Exchequer primary balance in the first ten months of 2012: 6.6 percent of GDP. - This was 1.1 percentage points below the same period last year and 0.2 percentage points inside the authorities‘ profile. - Revenues are overall on-profile; October softening in direct taxes (mainly corporation tax) was offset by robust VAT and other receipts. - The authorities sold the UMTS telecommunications spectrum license for 0.2 percent of GDP more than budgeted, boosting 2012 capital receipts and the general government balance. - Expenditure pressures: - Primary expenditure is within the budgetary envelope, but overruns in health and social welfare and anticipated unwinding of under-spends (especially in capital) may test aggregate expenditure limits. - Gross social welfare spending overrun: 0.1 percent of GDP (mainly due to unemployment above budget assumptions). - Drivers of the health overspend are projected at 0.3 percent of GDP for 2012 and are characterized as more structural in nature. *IMF staff report: Ireland — Selected sections from “Public Health Spending Over-Run: Sources and Policy Options”* ### Box 1. Public Health Spending Over-Run: Sources and Policy Options ### Box 1. Public Health Spending Over-Run: Sources and Policy Options ### Source of overrun - Net health sector spending is expected to be about €0.5 billion (4½ percent or 0.3 percent of GDP) above budget in accrual terms. - The overspending is distributed broadly evenly across: - The pay and pensions bill: - Overrun reflects higher-than-expected early retirements—including of staff already on career breaks and deferred pensions—and hiring of agency workers to replace retiring staff. - Higher agency costs also reflect pre-existing challenges in managing hospital activity and costs to budgeted levels. - Non-pay hospital expenses (net of fees collected): - Management issues were the main reason for overruns in the hospital sector. - Shortfalls in fees from private patients also contributed. - Subsidies in relation to medical cards: - Key drivers of the over-spend included higher than budgeted: (i) number of medical cards; and (ii) number and average cost of drugs per subscription, especially in relation to elderly patients. ### Budget correction objective - Authorities are committed to durably unwinding the over-run by bringing the 2013 gross health expenditure to below the previously-set ceiling of €13.6 billion. - Rationale: measures can deliver required savings without affecting service provision; Ireland‘s health spending is one of the highest in OECD, but health outcomes are near average. ### Policy options to unwind the over-run - Pay bill: - Reduce overtime and premium payments through substantially-improved work practices and rostering arrangements for key groups. - Improved rostering would enable broader hospital efficiencies, such as fewer weekend stays of healthy patients. - Pharmaceuticals: - A recent agreement will reduce the cost of pharmaceuticals over four years. - More substantial savings on drug costs are needed by sharply raising usage of generics, estimated by the OECD at less than one-fifth of prescription volume (the second lowest among OECD economies). - Medical cards (held by 40 percent of the population, with near-universal coverage of persons over 70): - Better targeting options include: - A more effective means-test to establish eligibility for the over-70s. - More graduated coverage of services (such as GP-only medical cards). - Higher co-payments. - Private patients: - There is scope for increased cost recovery in respect of private patients‘ use of public hospitals. *Source: Box 1. Public Health Spending Over-Run: Sources and Policy Options (excerpt).*> ### Box 3. Public Sector Pay Levels ### Box 3. Public Sector Pay Levels ### Key findings from CSO analysis - The CSO compares pay in the public and private sectors and documents a significant public wage premium, especially at the lower ends of the earnings distribution. - Staff's favored set of baseline estimates suggest a wage premium of 14 percent for a public sector employee earning the median wage relative to the private sector. - The premium varies across the earnings distribution: - 20 percent at the 25th percentile. - 14 percent at the median earner. - 7 percent at the 75th percentile. - The public wage premium would likely narrow by about 7 percentage points if account is taken of the pension-related deduction introduced in 2009 (described as essentially a progressive pay cut for public sector workers). - The premium would narrow by a further 2 percentage points if state-owned enterprise employees are excluded (state-owned enterprise employees earn higher salaries than the rest of the public sector). - Although narrowed significantly from 2007 due to the 13½ percent average net pay reduction over 2009–10, a public wage premium remains for the majority of public employees, especially at the lower ends of the earnings distribution. - The CSO source: CSO (2012), National Employment Survey 2009 and 2010: Supplementary Analysis (Figure 2.6). Chart caption: Public Sector Wage Premium Across Earnings Distribution (Percent, 2010). ### Methodology and robustness considerations - Estimates use appropriately weighted data to capture the representative worker and control for differences in worker characteristics (including higher average education among public employees). - Regressions that exclude firm size as a separate control produce the baseline premium estimates cited. - Footnote: Inclusion of firm size as a control reduces the estimated premium to about 6 percent for the median worker. - Staff rationale for excluding firm size: controls for education and skill are already included; incorrect specification of firm size for all public sector workers could bias results (e.g., overestimating monitoring costs for public school teachers). - The analysis excludes difficult-to-quantify factors such as greater job security, relatively generous defined-benefit pensions, and better leave arrangements enjoyed by the public sector, which would suggest the underlying public wage premium is higher. - Some of the observed premium can be explained by the public sector's better equal-pay policies for female workers, who account for almost two-thirds of the public service. ### Cross-country and sectoral context - Cross-country comparisons of public compensation support the conclusion that a public wage premium remains. - Staff previously noted that: - Ireland’s share of public compensation in government expenditure and the ratio of average public pay to per capita GNP are among the highest in the OECD (reference to 6th EFF review, Box 5; and Ireland - Selected Issues, Section III.D). - OECD at-a-glance reports find that public pay in Ireland is elevated, especially for school teachers and medical professionals. *Source: Box 3. Public Sector Pay Levels, _cr12336 - Box 3. Public Sector Pay Levels.* ### 34. Strengthening of financial supervision and regulation continues. Key measures include: ### 34. Strengthening of financial supervision and regulation continues. Key measures include: ### Financial supervision and regulatory measures - Reviewing banks’ financial performance relative to PCAR 2011 (MEFP ¶18). - Review to cover credit quality, loans loss provisions, losses from deleveraging, and pre-provision net revenue. - Will serve as a bridge to the next set of stress tests to be aligned with the timing of the next EBA exercise in 2013. - Supervisory and enforcement powers (MEFP ¶19). - The Central Bank (Supervision and Enforcement) Bill will enhance key powers of the CBI to investigate, issue orders, and enforce corrective actions. - Parliamentary discussions are ongoing; staff supports the authorities’ determination to move the Bill forward expeditiously. - External standards assessments (MEFP ¶19). - The CBI is conducting self-assessment of compliance with the Basel Core Principles (BCP) for Effective Banking Supervision. - The CBI will request an external assessment by end March 2013 (proposed structural benchmark), with the aim to be completed by end 2013. - A similar approach will be taken to the International Organization of Securities Commissions’ Objectives and Principles of Securities Regulation. - Resolution fund levy (MEFP ¶19). - Regulations governing its first year were issued on September 29 (structural benchmark). - The levy will be assessed on all credit institutions using Pillar 1 capital requirements as the base, with rates varying across domestic, foreign, and IFSC banks. - The contribution rate for credit unions is assessed on total assets. - The regulation will be reviewed in light of developments in EU policy. - The authorities confirmed their intention to recoup public resources provided to the Resolution Fund by the Minister for Finance. - Credit register (MEFP ¶20). - The Credit Reporting Bill was published in September 2012. - The authorities aim to have the Register operational by end 2013 to facilitate sound lending decisions and aid financial supervision. ### Enhancing growth and job creation (MEFP ¶21–¶23) - Investment sources and projects - Projects totaling 0.9 percent of GDP in education, transport, health care, and justice will be carried out through public-private partnerships with funds from the European Investment Bank, the National Pension Reserve Fund, and private investors. - Authorities continue to prepare selected state assets for disposal, with up to half of proceeds to be reinvested in job-rich projects. - Action Plan for Jobs (MEFP ¶22) - The Third Progress Report showed almost 90 percent of the plan completed by the end of September. - Going forward, focus will be on promoting access to finance and investment by SMEs, supporting indigenous start ups and assisting indigenous businesses to grow, and developing and deepening the impact of FDI. - Reforms to reduce unemployment (MEFP ¶23) - Engagement with the long-term unemployed. - In October, a new one-stop shop unemployment support service was launched, operating on the basis that welfare payments are contingent upon participation in activation programs and active job search. - Enhanced engagement through one-stop shops, the Local Employment Services Network, and other schemes. - Involvement of the private sector in providing employment services is expected to be operational by end-2013. - Further education reform. - In October, new legislation was published to reform the organization of further education. - By the end of the year legislation will be published to establish a central institution to coordinate and fund training and further education programs. - Housing assistance reform. - A new Housing Assistance Payment will replace the current rent supplement so that individual contribution depends on level of income and not employment status. - Necessary legislative amendments will be made in the first half of 2013. - The program will be piloted in the second half of 2013, to be fully operational as of January 2014. ### Program modalities and monitoring (MEFP tables 1–3) - Quantitative targets and TMU adjustments - Program monitoring updated until September 2013. - Quantitative performance criteria proposed for end-March 2013 (MEFP Table 2). - Performance criterion for the Exchequer primary balance unchanged for end-December 2012; the previously set end-March 2013 indicative target is converted into a performance criterion. - Indicative targets for end-September 2013 are proposed for the Exchequer primary balance and for net central government debt. - The TMU was modified to clarify that the definition of the Exchequer primary balance for programme monitoring purposes will exclude all payments related to the IBRC Promissory Notes from January 2013 onwards. - A set of adjustors to the floor on the Exchequer primary balance added to allow for Exchequer outlays on credit union restructuring (capped at €250 million) and for receipts from the disposal of state assets. - New structural benchmarks - Request for an external BCP assessment (end March 2013). - Review of progress in addressing mortgage arrears (end June 2013). ### Financing strategy and market access - Funding plan and market engagement (MEFP ¶24) - Authorities expanded their funding plan for 2013 from €4 billion at the last review to about €10½ billion, including long-term bond issuance and retail funding. - Goal is to end 2013 with a cash buffer covering about one year of financing needs to support market confidence. - Authorities have returned to the bond market in July and placed amortizing bonds in August; they have continued regular Treasury bill issues and are engaging to broaden their investor base and move to regular bond issuance. - Risks to market access - Prospective funding needs require Ireland to place sizable amounts on bond markets each year; substantial international participation required. - Nonresidents hold 73 percent of outstanding securities. - Ireland’s credit rating remains at the threshold of speculative grade; ratings agencies identify a number of risks (Box 5). - Exceptional access criteria continue to be met but are subject to significant risks. ### Credit ratings and risks (Box 5) - Current ratings and outlooks - Fitch Ratings and S&P maintain long-term sovereign ratings in the low investment grade ('BBB+'). - Moody’s rates Ireland at the top of the speculative grade ('Ba1'). - Moody’s and S&P attach negative outlooks; Fitch’s outlook was revised to stable in mid-November. - Agencies’ concerns - Public debt: high public debt and fiscal deficits are a major concern, mitigated by political support for fiscal consolidation and the strong budgetary track record. - Financial sector: two agencies point to rising NPLs and the low foreclosure rate as sources of risk, while taking comfort in bank capitalization. - Growth: economic stagnation is a risk due to the debt overhang, fiscal consolidation, limited private sector credit associated with deleveraging, and weak external demand. - Financing gaps: Moody’s is concerned that financing gaps could emerge after the end of the current program, necessitating a second EU-IMF supported program. - Potential for rating action - Upgrades linked to improvements in debt dynamics, growth recovery, and European support. - Removing negative outlooks or actual upgrades could occur if likelihood of euro area assistance for bank support costs increases and if medium-term growth prospects become more favorable. ### Staff appraisal — key findings and recommendations (paragraphs 41–47) - Program performance and macro outlook - Authorities have maintained consistent delivery on their program; quantitative targets for the review were met and all structural benchmarks observed. - Fiscal outturns for 2012 remain on track; financial sector and structural reforms are progressing. - Near-term growth prospects are weak; baseline outlook for gradual recovery over the medium-term is subject to significant risks. - The outlook for net exports has weakened with lower trading partner growth prospects. - Fiscal policy recommendations - Authorities should complete medium-term fiscal plans by clarifying remaining measures needed to underpin consolidation in the outer years. - Updated MTFS provides for a phased path toward a deficit below 3 percent of GDP in 2015 and a balanced composition of adjustment between expenditures and revenues. - If growth is weaker than projected in 2013, any significant additional adjustment efforts should be deferred to 2015. - Effective implementation of structural reforms to generate savings while protecting public services is critical. - Progress on institutional fiscal reforms — Fiscal Responsibility Bill, multi-annual expenditure ceilings, and increased transparency — will support sound fiscal policy and debt reduction. - Budget 2013 design - Budget 2013 needs to deliver the targeted consolidation of 2.1 percent of GDP through durable, equitable, and growth-friendly measures. - Authorities are considering measures including better targeting of social benefits and subsidies, public sector pay-bill reductions through allowances and working hours, and revenue base broadening, most notably a property tax. - Measures should begin to contain the fiscal implication of ageing. - Multi-annual expenditure ceilings should anchor consolidation, especially through durable savings in the health sector in 2013. - Financial sector priorities - Immediate priorities: arrest deterioration in asset quality and advance operational restructuring. - Ensure close supervision of banks’ efforts and prudent provisioning for loan modifications. - Implement personal insolvency reforms complemented by a well functioning repossession process to maintain debt service discipline. - Continue efforts to lower funding costs, including orderly withdrawal of the ELG scheme and steps to reduce operational costs. - Breaking the bank-sovereign loop would have the greatest benefit for strengthening profitability and lending capacity. - Labor market and social policy priorities - Reduce unemployment via recovery in growth and ensuring job seekers remain in the labor force and acquire useful skills. - Rollout of integrated employment services is key, including increased engagement with the long-term unemployed and timely private sector involvement. - Reform further education to align training with market needs. - Establish the Housing Assistance Payment to reduce employment disincentives from current housing supports. - European support and exit from official financing - Continued strong policy implementation is essential to preserve market access; timely exit from official support cannot be assured without forceful delivery of European pledges. - The most definitive way to forestall a return to market dysfunction would be decisive direct bank recapitalization by the ESM, which would reduce public debt directly and insulate the sovereign from potential contingent liabilities from the banking sector. *Source: IMF staff report text as provided.* ### 48. Staff supports the authorities’ request for completion of the eighth review. ### _cr12336 - 48. Staff supports the authorities’ request for completion of the eighth review. ### Real sector and inflation - Net exports remained the main contributor to growth in the first half of 2012. - Retail trade volumes edged up "1¼ percent y/y in July–October". - Industrial production continued to rise until August; recent decline in export orders may signal worsening prospects. - Current account remained in surplus in the first half of 2012 as strong net exports outweighed income outflows. - Inflation averaged "2 percent in the first three quarters", driven mostly by increases in energy and administered prices. - Unemployment remained high: over "60 percent" long term; youth unemployment rose to "34 percent". ### Household finance and housing developments - Household savings remain elevated, with half of savings devoted to debt reduction. - Household debt burdens have started to decline only recently due to declining incomes. - Mortgages in arrears increased: indicators show arrears over "180 days" and arrears "91 to 180 days" rising (chart indicators). - Property prices halved from peak levels; the decline in property prices slowed thereafter. - Rental yields and the house price-to-income ratio moved toward more normal levels. - Market turnover remained subdued, in part due to dormant new lending. - Loans for house purchases (source: Irish Banking Federation/PWC) show low gross new lending and outstanding amounts (chart series for 2003–2012). ### Credit developments (2006–12) - Level of private sector deposits stabilized; bank deposits composition includes non-resident deposits, resident private deposits in foreign-owned banks, and resident private deposits in covered banks. - Credit to households and corporations continued to contract as repayments exceeded lending (year-on-year percentage change negative for households and non-financial corporations across series). - Outstanding SME credit remains low; gross new lending and outstanding amounts show low levels (Gross new lending and Outstanding amounts (RHS) in thousands; Outstanding SME Credit 1/ in Billions of euros). - No SME sectors recorded a significant rise in credit outstanding across Agriculture, Manufacturing, Construction, Wholesale/Retail Trade & Repairs, Hotels and Restaurants (index, 2010Q1=100). - Credit standards broadly stable with some tightening in consumer lending; credit demand for mortgages and tentatively corporate credit appears to be rising. - Adjusted growth rate of credit to households and non-financial corporations shown as negative in recent years. ### Competitiveness indicators - Competitiveness improved, aided by nominal depreciation of the euro. - Part of competitiveness gains reflects a shift to higher value-added sectors. - Private wages declined only modestly but significantly relative to the euro area (Hourly Labor Costs in Manufacturing: Ireland vs Euro area, 2006=100). - Labor productivity rose faster than in the euro area in recent years (Real Labor Productivity, 2005=100, SA). - Improvements not yet reflected in rising market shares (Export Shares: Exports of services, goods, goods and services as percent of world non-oil imports). ### General government finances and fiscal consolidation - Two-fifths of the "11 percent of GDP" primary balance improvement (2010–15) will be achieved by end-2012. - Fiscal consolidation is front-loaded and expenditure-led. - Given weaker recovery in nominal domestic demand, tax measures will not raise revenues as a share of GDP. - Primary expenditures projected to fall by "10 percent of GDP", reflecting evenly spread durable savings. - Targets for 2015: overall deficit of "3 percent of GDP", and primary surplus of "2½ percent of GDP". - Net debt increase will take time to unwind; "three-fifths" of the increase arose from bank support costs. - Revenues, primary expenditure and balance (Percent of GDP) series presented for 2010–2015. - Composition of fiscal consolidation (Percent of GDP) indicates further "5% of GDP effort over the period of 2013-2015". - Revenue composition (Percent of GDP) and primary expenditure components (Percent of GDP) shown across 2010–2015. ### Macroeconomic projections and key indicators (selected exact figures from tables) - Real GDP growth (annual percent change): 2008:-2.1; 2009:-5.5; 2010:-0.8; 2011:1.4; 2012:0.4; 2013:0.4 (Table 1). - Net exports contribution to growth (1/ Contribution to growth): 2008:1.4; 2009:4.5; 2010:3.0; 2011:5.4; 2012:2.7; 2013:1.8 (Table 1). - Real GNP: 2008:-1.8; 2009:-8.1; 2010:0.9; 2011:-2.5; 2012:-0.5; 2013:0.3 (Table 1). - Gross national saving (in percent of GDP): 2008:16.3; 2009:13.5; 2010:13.1; 2011:11.3; 2012:11.7; 2013:12.5 (Table 1). - Harmonized index of consumer prices (annual average): 2008:3.1; 2009:-1.7; 2010:-1.6; 2011:1.2; 2012:2.0; 2013:1.3 (Table 1). - Employment (annual average): 2008:-0.7; 2009:-7.8; 2010:-4.0; 2011:-1.8; 2012:-1.2; 2013:0.0 (Table 1). - Unemployment rate (in percent): 2008:6.4; 2009:12.0; 2010:13.9; 2011:14.6; 2012:14.8; 2013:14.7 (Table 1). - General government balance (excl. bank support, percent of GDP): 2008:-7.3; 2009:-11.5; 2010:-10.7; 2011:-9.1; 2012:-8.3; 2013:-7.5 (Table 1). - General government gross debt (percent of GDP): 2008:44.5; 2009:64.9; 2010:92.2; 2011:106.5; 2012:118.3; 2013:122.5 (Table 1). - Current account (percent of GDP): 2008:-5.7; 2009:-2.3; 2010:1.1; 2011:1.1; 2012:2.3; 2013:3.1 (Table 1). ### Medium-term scenario (2008–17) highlights - Projected Real GDP growth (annual percent change): 2012:0.4; 2013:0.4; 2014:1.1; 2015:2.2; 2016:2.8; 2017:2.9 (Table 2). - Current account (percent of GDP) projected: 2012:1.8; 2013:2.3; 2014:3.1; 2015:3.8; 2016:4.0; 2017:4.1 (Table 2). - Unemployment rate (percent) projected: 2012:14.8; 2013:14.7; 2014:14.2; 2015:13.4; 2016:12.5; 2017:11.7 (Table 2). - General government gross debt (percent of GDP) projected to peak and then decline: 2012:121.7; 2013:119.7; 2014:118.0; 2015:115.3; 2016:112.1; 2017: (Table 2 shows series across years). ### Public finance detailed figures (Table 3, selected) - Revenue (in percent of GDP): 2008:63.0; 2009:54.1; 2010:53.2; 2011:54.2; 2012:55.5; 2013:57.3 (Table 3). - Expenditure (ex. bank support, percent of GDP): 2008:76.1; 2009:72.6; 2010:70.0; 2011:68.7; 2012:69.0; 2013:69.7 (Table 3). - GG primary balance (ex. bank support, percent of GDP): 2008:-10.7; 2009:-15.2; 2010:-11.8; 2011:-9.3; 2012:-7.1; 2013:-3.0 (Table 3). - Net lending/borrowing (ex. bank support, percent of GDP): 2008:-13.1; 2009:-18.5; 2010:-16.8; 2011:-14.5; 2012:-13.5; 2013:-12.4 (Table 3). ### External and financial vulnerability indicators (2008–12, selected) - Exports (annual percent change, value in euros): 2008:-1.4; 2009:-2.5; 2010:7.8; 2011:5.7; 2012:5.0 (Table 4). - Imports (annual percent change, value in euros): 2008:-1.1; 2009:-10.1; 2010:6.6; 2011:2.8; 2012:2.6 (Table 4). - Government bond yield (10-year, end-period): 2008:4.4; 2009:4.9; 2010:9.2; 2011:8.5; 2012:4.9 (Table 4). - Annual credit growth to Irish resident private sector (adjusted): 2008:8.8; 2009:-1.5; 2010:-3.4; 2011:-2.9; 2012:-3.9 (Table 4). - Non-performing loans (in percent of total loans): 2008:2.6; 2009:9.0; 2010:8.6; 2011:9.1; 2012:9.9 (Table 4). - Regulatory capital to risk-weighted assets of domestic banks (percent): 2008:10.6; 2009:10.9; 2010:10.4; 2011:17.5; 2012:17.7 (Table 4). ### Balance of payments and financing (2008–17, selected) - Current account balance (in billions of euros): 2008:-10.2; 2009:-3.8; 2010:1.8; 2011:1.8; 2012:3.8; 2013:5.2 (Table 5, columns in billions). - Current account balance (percent of GDP): 2008:-5.7; 2009:-2.3; 2010:1.1; 2011:1.1; 2012:2.3; 2013:3.1 (Table 5). - Capital and financial account balance (percent of GDP): 2008:9.0; 2009:-1.4; 2010:4.2; 2011:-18.0; 2012:-13.3; 2013:-10.2 (Table 5). ### Monetary and banking sector snapshots (selected) - Aggregate balance sheet of domestic market credit institutions (Dec-08 to Sep-12) assets and liabilities series show total assets: Dec-08:801; Dec-09:798; Dec-10:742; Dec-11:634; Mar-12:610; Jun-12:604; Sep-12:567 (Table 6). - Irish resident broad money (M3) levels: Dec-08:194; Dec-09:208; Dec-10:173; Dec-11:169; Mar-12:169; Jun-12:168; Sep-12:170 (Table 6). - PCAR banks aggregated profit and loss (Q1-Q3 2011 vs Q1-Q3 2012): Total average assets (TAA) 2011:333.5 EUR bn; 2012:321.1 EUR bn. Net income 2011:0.5 EUR bn; 2012:0.2 EUR bn. Gross NPLs to gross loans (%) 2011:17.0; 2012:23.1 (Table 7). - General government financing requirements and sources (2008–13): gross borrowing need series and gross financing sources presented; gross borrowing need examples: 2008:15.9; 2009:63.4; 2010:71.4; 2011:45.3; 2012:29.2; 2013:26.5 (Table 8). ### IMF program status and Fund credit indicators - Staff supports completion of the eighth review (opening statement). - Schedule of Reviews and Purchases (Table 9): Board approval of arrangement on December 16, 2010 with purchase SDR "5,012,425,200" (Percent of quota "399"). Subsequent reviews and purchases listed through Twelfth review; Eight Review: December 12, 2012 observance of end-September 2012 performance criteria, completion of Eight Review, Purchase "758,000,000" SDR, "60" percent of quota. Total purchases "19,465,800,000" SDR (Percent of quota "1,548"). - Indicators of Fund credit (Table 10): Disbursement and stock series: Disbursement shows 2010:11,050; 2011:5,493; 2012:2,922 (in millions of SDR). Stock (end of period) series: 2010:11,050; 2011:16,543; 2012:19,466 (in millions of SDR). - Stock of Fund credit in percent of quota: 2010:879; 2011:1,315; 2012:1,548 (Table 10). - Stock of Fund credit in percent of GDP: 2010:7.9; 2011:12.3; 2012:14.3 (Table 10). _Italic: IMF staff report content as provided in the source PDF._ ### ANNEX I. DEBT SUSTAINABILITY ANALYSIS ### ANNEX I. DEBT SUSTAINABILITY ANALYSIS ### General government debt: baseline and dynamics - Ireland‘s projected market issuance revised up by about €6.2 billion (3.8 percent of GDP) in 2013 to ensure a cash buffer on the order of €19 billion (12 percent of GDP) at end 2013 (about one year of funding requirements). - Gross general government debt projected to peak at 122 percent of GDP in 2013—up from 119 percent at the seventh review—while net debt is little changed. - Under the baseline macroeconomic projection, planned fiscal adjustment will put Ireland’s debt ratio on a declining path from 2014. - Ireland‘s primary deficit is programmed to fall below its debt stabilizing threshold in 2014. - Automatic debt dynamics (interest rate–growth differential) add about two percentage points per year to the debt ratio in 2012–13, before stronger growth from 2015. - The interest rate–growth differential averages 0.6 percent over 2015-21. - Gross general government debt projected to fall to 97 percent of GDP by 2021. ### Risks to public debt sustainability - Growth risk: - If real GDP growth stagnates at ½ percent per year in the medium term, the debt-reducing effect would decrease to 0.6 percentage points per annum (from 2.8 percentage points in the baseline), and debt would reach 146 percent of GDP by 2021. - Stagnant growth could increase debt via higher bank restructuring costs and slower fiscal consolidation. - Contingent liabilities: - The government has explicit guarantees that continue to decline as NAMA bonds mature and the ELG scheme is phased out; it owns NAMA and IBRC with heavy exposure to Irish and U.K. property markets. - Quantification uncertainty: IBRC management expects resolution costs could be €25 billion (previous estimates €29 billion to €34 billion), contingent on UK and Irish property markets; IBRC tier 1 capital ratio as of end June estimated at 13.6 percent. - NAMA expects to at least break even if Irish property prices recover to end-2009 levels by 2020; NAMA cumulative impairment provision of €2.88 billion through June 2012; net discounted unrealized surplus of €1.82 billion at end-2011 implying potential net loss of about €1 billion. - A conservative scenario allowing for overall contingent-liability impact on the order of 10 percent of GDP—including NAMA and IBRC—is considered reasonably conservative. - Interest-rate risk: - Baseline includes unchanged, elevated interest rates and does not incorporate recent declines in spreads. - High share of fixed-rate and official borrowing shields Ireland from rising rates. - A 200 basis points upward shift on new borrowing would increase the effective interest on Ireland‘s stock of public debt by 96 basis points by 2019, slowing the debt ratio decline. - Only a permanent shock exceeding about 450 basis points on all short-term and new lending would prevent Ireland from lowering its debt in the long run. - Upside from asset sales: - Current assumptions do not include proceeds from state asset disposals of up to €3 billion (2 percent of GDP), at least half of which are to be used for debt reduction. - No allowance for potential additional costs from restructuring/resolution of credit unions beyond €0.5 billion (sum of €0.25 billion already placed in the Resolution Fund and €0.25 billion expected to be placed in the Credit Union Fund by end 2012). - No allowance for ESM equity investments in the banking sector or other bank equity divestments is made. ### Contingent liabilities — composition (in percent of projected 2012 GDP) - Senior NAMA bonds: 17.6 - Guarantees for Emergency Liquidity Assistance: 9.5 - Other Bank Liabilities covered by Eligible Liability Scheme: 13.6 - Total: 40.7 ### External debt: levels, projections, and risks - Non-IFSC external debt: - At end-Q2 2012, total external non-IFSC debt about 307 percent of GDP (down from 322 percent at end-2011; above 300 percent in Q1 2012). - About one third of the quarterly increase reflected a rise in official government debt as authorities drew funds under the EU-IMF program. - Central bank external debt rose due to increased Target 2 liabilities; financial institutions deleveraged, reducing their external debt. - External debt forecast: - By 2017, external debt expected to fall to 219 percent of GDP. - Scenario risks (non-IFSC): - Historical-average macro scenario would bring external debt to around 316 percent of GDP in 2017 (failing to stabilize debt-to-GDP over five years). - Permanent ½ standard deviation shock to growth (renewed recession in 2013 and sluggish growth thereafter) would raise external debt-to-GDP to 247 percent in the medium term (about 28 percentage points above baseline). - Permanent ½ standard deviation shock to the non-IFSC current account (excluding interest payments) would raise the medium-term debt ratio by around 20 percentage points vs. baseline. - A standard combined shock of ¼ standard deviation applied to the current account, interest rates, and the GDP growth rate would increase medium-term external debt to 248 percent of GDP. - Total external debt including IFSC: - Around 1,040 percent of GDP at end-Q2 2012 (below end-2011 level of 1,075 percent of GDP). - IFSC sector reduced gross external debt by 22 percentage points of GDP in the first half of the year. - Net international investment position fell to 94 percent of GDP. ### Key projections and numerical highlights (selected from Annex I tables) - General government gross debt trajectory (percent of GDP): 2007: 24.8; 2008: 44.2; 2009: 65.2; 2010: 92.2; 2011: 106.5; 2012: 118.3; 2013: 122.5; 2014: 121.7; 2015: 118.0; 2016: 115.3; 2017: 112.1; 2018: 108.5; 2019: 104.6; 2020: 100.9; 2021: 97.4. - Change in general government debt (percent of GDP): 2012: 11.8; 2013: 4.2; 2014: -0.8; 2015: -3.7; 2016: -2.7. - Primary deficit (percent of GDP): 2012: 4.4; 2013: 1.8; 2014: -0.6; 2015: -2.7; 2016: -3.3; 2017: -3.8; 2018: -4.1; 2019: -4.6; 2020: -4.5; 2021: -4.4. - Revenue and grants (percent of GDP): 2012: 34.2; 2013–2021 (constant): 34.0. - Primary (noninterest) expenditure (percent of GDP): 2012: 38.6; 2013: 36.3; 2014: 36.3; 2015: 34.2; 2016: 31.9; 2017: 30.9; 2018: 30.9; 2019: 29.9; 2020: 29.4; 2021: 29.6. - Automatic debt dynamics contribution (percent of GDP): 2012: 1.8; 2013: 2.9; 2014: 1.3; 2015: 0.4; 2016: 0.3; 2017: 0.6; 2018: 0.6; 2019: 0.8; 2020: 0.8; 2021: 0.9. - Real GDP growth (percent): 2012: 0.4; 2013: 1.1; 2014: 2.2; 2015: 2.8; 2016: 2.9; 2017: 2.9; 2018–2021: 2.5 (each year 2018–2021: 2.5). - Average nominal interest rate on public debt (percent): 2012: 3.8; 2013: 4.9; 2014: 4.8; 2015: 4.8; 2016: 4.8; 2017: 5.0; 2018: 4.7; 2019: 4.9; 2020: 4.9; 2021: 5.0. - External debt (non-IFSC) levels (percent of GDP): 2007: 258.9; 2008: 305.0; 2009: 325.6; 2010: 333.7; 2011: 322.1; 2012: 308.9; 2013: 294.2; 2014: 275.8; 2015: 255.8; 2016: 236.8; 2017: 218.8. - Change in external debt (percent of GDP): 2012: -13.2; 2013: -14.7; 2014: -18.4; 2015: -20.0; 2016: -19.0; 2017: -18.0. - Current account deficit, excluding interest payments (percent of GDP): 2012: -20.3; 2013: -18.1; 2014: -17.2; 2015: -17.8; 2016: -17.9; 2017: -17.9. - External debt-to-exports ratio (percent): 2017: 220.7. - Gross external financing need (percent of GDP): 2017: 11.3. ### Stress-test scenarios (selected outcomes from Annex I Figures) - Public debt bound tests: - Baseline average projection: 97 (general government debt in percent of GDP). - Growth shock (stagnation at 0.5 percent per annum): 146 by 2021. - Primary balance shock (one-half standard deviation): 121 by 2021. - Interest rate shock (permanent 200 basis point shock to short-term debt and new market lending): 104 by 2021. - Combined standard shock (permanent 1/4 standard deviation to growth, interest rate, and primary balance): 131 by 2021. - Contingent liabilities illustrative one-time 10 percent of GDP shock in 2013: 108 by 2021. - External debt bound tests: - Baseline: 219 (external debt in percent of GDP by projection horizon). - Historical-average scenario: 316 by 2017. - Non-interest current account shock (permanent ½ standard deviation): 240 by 2017. - Combined shock (standard combined): 248 by 2017. - Growth shock (permanent ½ standard deviation): 247 by medium term. - Real depreciation shock (one-time real depreciation of 30 percent in 2013): 212 by projection horizon. *Source: ANNEX I. DEBT SUSTAINABILITY ANALYSIS* ### ANNEX II. FUND RELATIONS ### ANNEX II. FUND RELATIONS ### Membership and Fund Positions - Membership: Joined August 8, 1957; Article VIII. - General Resources Account (SDR Million; Percent of Quota): - Quota: 1,257.60; 100.00 - Fund holdings of currency: 16,784.46; 1,334.64 - Reserve position in Fund: 258.57; 20.56 - SDR Department (SDR Million; Percent of Allocation): - Net cumulative allocation: 775.42; 100.00 - Holdings: 646.54; 83.38 - Outstanding Purchases and Loans (SDR Million; Percent of Quota): - Extended Arrangements: 15,785.43; 1,255.20 ### Financial Arrangements under the Extended Fund Facility - Arrangement: - Type: EFF - Approval Date: 12/16/10 - Expiration Date: 12/15/13 - Amount Approved (SDR million): 19,465.80 - Amount Drawn (SDR million): 15,785.43 - Request at eighth review: - Eighth purchase requested in an amount equivalent to SDR 758 million. - Proposed total purchase amount in 2013: SDR 2,922 million. ### Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs) - By year: - 2012 Total: 99.52 - 2013 Total: 412.25 - 2014 Total: 506.89 - 2015 Total: 1,062.76 - 2016 Total: 2,654.23 - Components: - Principal (shown only where listed): 535.20 in 2014; 2,173.15 in 2015 - Charges/Interest: - 2012: 99.52 - 2013: 412.25 - 2014: 506.89 - 2015: 527.56 - 2016: 481.08 ### Exchange Rate Arrangement and Restrictions - Currency: euro; floats freely and independently against other currencies. - Ireland has accepted the obligations of Article VIII, Sections 2, 3, and 4. - 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 — Central Bank of Ireland (CBI) - Finalized: March 2011. - Overall finding: CBI has a relatively strong safeguards framework in place. - Specifics: - Financial statements audited in accordance with international standards and published. - Governance and control systems adhere to good practices. - Recommendations made to address heightened risks from the financial crisis (notably liquidity lending) and to improve transparency; also to strengthen de-jure autonomy. - Progress reported: - 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. - CBI and DoF considering strengthening arrangements for financial autonomy of the CBI; may require changes to central bank legislation and other regulations, to be prepared in consultation with the ECB. ### Article IV Consultations and Review Missions - Last Article IV consultation concluded on September 10, 2012 (IMF Country Report No. 12/284). - Article IV consultations on a 24-month cycle. - Eighth Review under the Extended Arrangement: - Discussions held in Dublin during October 16-25, 2012. - IMF mission composition listed (head: Craig Beaumont) with specialists from EUR, FAD, LEG, MCM, SPR; EC and ECB teams participated; Executive Director‘s office representatives participated. - Meetings with: Minister for Finance; Minister for Public Expenditure and Reform; Governor of the Central Bank and Deputy Governor for Financial Regulation; Chief Executives of the National Treasury Management Agency and National Asset Management Agency; senior officials and representatives from Fiscal Council, various Departments, Central Statistics Office, Economic and Social Research Institute, banks and market analysts. ### Technical Assistance and Resident Representation - Technical Assistance (Department — Purpose — Date): - STA — Balance of Payments Statistics — January 2011 - STA — Monetary and Financial Statistics — January 2011 - Resident Representative: - Mr. Peter Breuer assumed his post in September 2011. ### Attachment I — Letter of Intent: Key Policy Commitments and Status (Dublin, 29 November 2012) - Programme commitment: - Government remains firmly committed to the programme and preparing Budget 2013 against adverse international environment. - Market developments noted: euro area leaders‘ June 29 commitment to decouple sovereign and banking debt issues; ECB OMT decision; these aided market access and enabled launch of first bond issue under the programme in late July and renewal of Treasury bill auctions. - Performance under programme (eighth review): - Met commitments under EU/IMF programme in terms of policy reforms and quantitative targets (MEFP Tables 1 and 2). - Performance criteria met: - End-September 2012 cumulative Exchequer primary balance met with a margin. - Indicative target on stock of Central Government net debt met with a margin. - Continuous performance criterion on non-accumulation of external payment arrears met. - Structural benchmarks met: - Published Credit Union Bill 2012 on September 28 (strengthening regulatory framework for credit unions). - Issued regulations on September 28 to establish a levy across credit institutions to recoup costs of resolving vulnerable institutions. - Market access and financing plans: - Move towards fully regaining market access during 2013. - Maintain a strong cash buffer; propose to leave phasing of purchases unchanged with total purchases of SDR 2,922 million in 2013. - Proposed program monitoring: - Establish quantitative performance criteria for end-March 2013 (MEFP Table 3). - Two new structural benchmarks: - Request external assessment of observance of the Basel Core Principles for Effective Banking Supervision (end-March 2013). - Undertake review of progress in addressing mortgage arrears (end-June 2013). - Technical Memorandum of Understanding (TMU) explains measurement of programme targets. - Request: - Completion of the eighth review under the Extended Arrangement and availability of SDR 758 million at completion. ### Attachment II — Memorandum of Economic and Financial Policies: Recent Developments and Outlook - Growth and labor market: - Real GDP growth: ½ percent y/y in the first half of 2012. - GNP growth: 2¼ percent y/y in the first half of 2012. - Current account surplus: 2.7 percent of GDP in the first half of 2012. - Unemployment: 14.8 percent. - HICP inflation: rose to 2.0 percent y/y during the first three quarters of 2012. - Outlook: Growth strengthening to over 1 percent projected for 2013, with risks from weaker trading partner growth and domestic demand contraction. - Market funding: - Sovereign bond yields fell dramatically over the summer 2012; 8-year bond yields down to below 5 percent after ECB OMT announcement. - Authorities emphasize continued strong policy implementation and timely delivery of European commitments to improve financial sector sustainability. ### Fiscal Policies — 2012 Performance and Budget 2013 Strategy - 2012 fiscal outturn and targets: - End-September targets on exchequer primary balance and central government net debt met with margins of 0.8 and 1.5 percentage points of GDP, respectively. - On track to deliver general government deficit within 8.6 percent of GDP target for 2012. - Health spending overrun: - Authorities alert to overrun in current health spending; committed to contain health expenditure in 2013 within the €13.6 billion departmental ceiling for 2013 set in the Comprehensive Expenditure Report 2012-14, including fully correcting the 2012 overrun. - Measures to contain health costs include: - Reduce drug costs (lower generic prices, increase share of generics). - Enhance hospital efficiency (work practice and rostering reforms, reduce average length of hospital stays, increase share of day treatments, minimise unnecessary return outpatient visits). - Improve charging regime for private patients in public hospitals and increase collection of charges. - Better target spending within primary care re-imbursement scheme. - Medium-Term Fiscal Statement (MTFS) and consolidation path: - Implementing consolidation measures of at least €8.6 billion over 2013–15 to bring general government deficit below 3 percent of GDP by 2015. - Fiscal Consolidation 2013–15, in € billion: - 2013 Total: 3.5 - Expenditure: 2.25 - Current: 1.70 - Capital: 0.55 - Tax: 1.25 - 2014 Total: 3.1 - Expenditure: 2.0 - Current: 1.9 - Capital: 0.1 - Tax: 1.1 - 2015 Total: 2.0 - Expenditure: 1.3 - Current: 1.3 - Capital: 0.0 - Tax: 0.7 - Note: The amounts above include estimated tax carryovers of some €0.3 billion, €0.2 billion and €0.3 billion in 2013, 2014 and 2015, respectively; but exclude savings arising from measures to unwind the 2012 overrun in health spending and additional general government balance improvements as set out in the MTFS. - Budget 2013 (prior action; to be submitted December 5): - Package to achieve general government deficit below program ceiling of 7.5 percent of GDP includes: - Primary current expenditure adjustments of €1.7 billion (excluding measures to unwind 2012 health overrun). - Reductions in capital spending of €0.55 billion. - New tax measures of €1 billion. - Additional general government balance improvements, including local government sub-sector measures as set out in the MTFS. - Consolidation approach and specifics: - Current expenditure measures: - Accelerated reduction in public sector wage bill, targeting unjustified pay allowances for elimination or medium-term restructuring. - Review of social transfers, including universal benefits, to identify savings while protecting the most vulnerable and minimising work disincentives; student contributions increased and means-test for maintenance grants tightened. - Tax measures: - Introduction of property tax: recurrent tax on value of private residences from July 1, 2013 to replace the household charge; collected centrally by the Revenue Commissioners. - Tax base broadening for personal income taxes and PRSI by better targeting reliefs and tightening allowances. - Raising indirect tax revenues: recalibrate CO2 band structure for vehicle registration and motor taxes; options for other indirect taxes, including excises, are being considered. - At Budget 2013, authorities will specify tax and spending measures for 2014–15 to the extent possible to reduce residual consolidation and uncertainty. - Fiscal institutions and transparency: - Fiscal Responsibility Bill to be signed into law on November 27, establishing independence of the Irish Fiscal Advisory Council and fiscal rules for deficits and debt. - Legislation published to provide statutory basis for multi-annual expenditure ceilings. - Enhanced Exchequer statement published at end-September 2012; further strengthening of reporting of general government accounts and fiscal risks planned. - Public service reforms: - Ongoing rollout of shared services, public procurement reforms, identification of opportunities for external service delivery. - Public Service Agreement operating to eliminate waste and manage reduction in public sector headcount while minimising impact on service levels; engagement with staff interests to leverage Agreement. *Source: ANNEX II. FUND RELATIONS (As of October 31, 2012).* ### 11. The key objective of our financial sector policy is to improve the health of the ### _cr12336 - 11. The key objective of our financial sector policy is to improve the health of the ### Financial sector policy objective - Key objective: improve the health of the banking sector and revive sound lending to support the economic recovery. - Continued challenges for PCAR banks: significant asset quality, profitability, and liquidity challenges. - Priority actions for banks: - (i) manage loan portfolios to arrest deterioration of asset quality; - (ii) improve profitability through reductions in funding and operational costs; - (iii) advance bank restructuring. - Note: Effectiveness aided by timely delivery of further European support as indicated in the euro area summit statement of June 29, 2012. ### Residential mortgage arrears resolution (MARS) - Mortgage arrears resolution is a top priority; supervision focuses on: - (i) set up and grow efficient loan collection operations; - (ii) engage effectively with households in arrears; - (iii) address unsustainable debt durably. - Observed issue: rise in long dated arrears has continued; banks have run pilots and in some cases gone live with strategies. - Supervisory and policy steps: - Close supervision of banks’ progress in achieving a durable reduction in mortgage arrears via MARS, ensuring: - (i) borrowers in arrears are contacted in a timely fashion; - (ii) subject to tight eligibility criteria, distressed debtors are offered sustainable loan modification options; - (iii) other durable solutions adopted where appropriate, including repossession proceedings, voluntary surrender, or mortgage to rent. - Monitor each bank’s performance relative to already-defined key performance indicators and bank-specific targets for reviewing new and existing individual arrears cases. - Continue implementation of framework to monitor loan modification effectiveness; publish banks’ reported data on loan modifications, including re-defaults of modified loans. - Ensure appropriately prudent provisioning treatment of loan modifications; engage with banks and review proposed provisioning for all advanced loan modification products. - In consultation with EC, ECB, and IMF staff, update where necessary the 2011 Impairment Provisioning and Disclosure guidelines for assumptions on all categories of advanced loan modifications. - Review the Code of Conduct for Mortgage Arrears commencing in early 2013 to account for developments including the forthcoming Personal Insolvency legislation and longer term loan modifications. - Legislation by end March 2013 to remedy issues identified by case law in the 2009 Land and Conveyancing Law Reform Act to remove unintended constraints on banks to realise collateral value. - Undertake a review of progress in addressing mortgage arrears by end-June 2013 (proposed structural benchmark). ### Personal insolvency framework - Personal Insolvency Bill status: passed the committee stage in the Dáil; expected to complete all Oireachtas stages by year-end. - Further amendments to be introduced ahead of enactment, including licensing and regulation of personal insolvency practitioners. - Operational infrastructure targets: - Make new insolvency framework operational by end January 2013 or shortly thereafter. - Director Designate of the Insolvency Service resourced to: - (i) develop necessary IT infrastructure as early as possible in 2013; - (ii) hire and train staff; - (iii) publish guidelines for reasonable allowable household expenditures for debtors (in context of Debt Relief Notice process); - (iv) conduct an information campaign for those concerned by the new insolvency processes. - Mortgage Advisory Service established and accessible via internet; debtors can consult independent financial advisors upon lender authorisation when offered advanced mortgage modification/long term forbearance under MARS. ### SME balance sheet resolution and insolvency efficiency - Objective: resolve SME balance sheet challenges to restore capacity to invest and create jobs. - Temporary Partial Credit Guarantee scheme launched to facilitate lending to eligible SMEs. - Issues: highly indebted Irish SMEs (often real estate-related) face financing constraints. - Policy steps: - CBI will monitor banks’ implementation of SME arrears resolution strategies; CBI findings communicated to PCAR banks in August. - Banks to move from short-term forbearance to durable restructuring solutions and deploy adequate operational capacity. - Improve efficiency of corporate insolvency framework for SMEs drawing on Company Law Review Group recommendations: - By end-year prepare amendments to designate the Circuit Courts as competent for examinership of companies within EU small company thresholds (e.g., balance sheet below €4.4 million). - Consider further enhancements to reduce costs and achieve efficiency gains, including potential for an administrative body to facilitate SME restructuring. ### Returning PCAR banks to profitability and ELG withdrawal - Priority: return PCAR banks to profitability; finalize roadmap for orderly withdrawal of the ELG Scheme. - Continue to encourage reductions in funding costs and operating cost savings to reduce pre-provision operating losses. - Inter-agency working group led by Department of Finance to develop ELG withdrawal strategy; finalise by end-2012. ### Bank restructuring progress - PTSB initial internal reorganisation completed with separation into three discrete business units with separate management accounts; monitor performance against proposed benchmarks for the three units. - AIB and PTSB have submitted restructuring plans to the competent EC authority aiming to restore core profitability. ### Credit union sector reform and funding - Credit Union Bill 2012 published on September 28; Bill focuses on prudential regulation, governance, restructuring and stabilisation. - Refinements to Bill to clarify that unreimbursed public resources provided for restructuring will be recouped in full by levy on the credit union industry. - Restructuring process led by a Restructuring Board (ReBo) to underpin sustainability in a planned and time-bound manner; ReBo to work with credit unions on restructuring proposals subject to CBI approval. - Government action: transfer €250 million to a Credit Union Fund by end 2012. - Request for an adjustor to the performance criterion on the exchequer primary balance and the indicative target on the stock of central government net debt. ### PCAR 2011 review - Provide by end 2012 a report reviewing developments relative to PCAR 2011. - Report scope: analyse indicators of banks’ financial performance versus PCAR base and stress case assumptions; assess impact of economic driver evolution. - Indicators to include: credit quality, loan loss provisions, losses from deleveraging, and pre-provision net revenue. - Analysis to account for significant deviations from PCAR 2011 assumptions (e.g., liability management exercises) and provide details on evolution of risk weighted assets. ### Strengthening financial supervision and regulation - Key deliverables: - Supervision and Enforcement Legislation: finalise Central Bank (Supervision and Enforcement) Bill; committee stage amendments expected to be finalised shortly. - Banking supervision and securities regulation: - CBI internal self-assessment of observance of revised Basel Core Principles (BCP) for Effective Banking Supervision underway. - Request external BCP assessment by end March (proposed structural benchmark), aiming for completion by end-December 2013. - Complete IOSCO Objectives and Principles of Securities Regulation self-assessment and request external assessment with aim to be completed by end-December 2013. - Resolution fund levy: regulations issued in September for a levy on credit institutions to accumulate funding over medium to long term to build a fund for resolution actions of €100m; intend to recoup public resources provided to Resolution Fund mainly for credit union resolution; review regulation upon publication of EU directive on recovery and resolution of credit institutions and investment firms. - Risk weighted assets (RWA): CBI enhancing approach to Credit Risk and RWA supervision including annual model performance reviews, assessing RWA calculation, and reviewing banks’ approaches to RWA forecasting and stress testing in advance of PCAR 2013; complete reviews and issue mitigating actions for concerned banks by end 2012. ### Credit register - Implement effective credit register to facilitate sound lending and aid supervision. - Data protection issues delayed finalisation of Credit Reporting Bill 2012 published last September; consultation process commenced for Committee Stage amendments. - After parliamentary process, Central Bank to undertake procurement with goal of Register operational by end 2013. ### Structural reforms: enhancing growth and job creation - Supplement exchequer capital expenditure programme by €1.4 billion through public-private partnerships with European Investment Bank, National Pension Reserve Fund, and private investors commencing in 2013; projects in education, transport, health care, and justice. - Proceed with disposal of state assets in energy generation and forestry sectors in 2013; sale of minority stake in Aer Lingus contingent on market conditions and antitrust concerns. - Use at least half of proceeds from asset disposals to reduce public debt; remaining proceeds to be reinvested in job-rich commercial projects consistent with fiscal targets. ### Action Plan for Jobs and business environment measures - Implementing Action Plan for Jobs; almost 90 percent of planned measures implemented by end September, including: - Establishing new Technology Centres in Cloud Computing, Learning Technologies and Financial Services. - Launching Microfinance Fund for businesses with up to 10 employees. - Initiating intra-agency partnership Smart Futures to promote careers in science. - Measures to reduce cost of doing business: reduced stamp duty and capital gains tax incentives for certain property types. - Continued focus in 2013 and beyond on access to finance and investment for SMEs, supporting indigenous start-ups, assisting indigenous business growth, and deepening foreign direct investment impact. ### Activation, training, and social welfare reforms to reduce unemployment - Pathways to Work and Intreo: - Launched Intreo one-stop shop unemployment support service in four locations; expect ten offices operational by end-2012. - Aim to triple number of ‘live’ offices to 30 by end of 2013, with a further 30 before end of 2014. - Under Intreo, engagement with job seekers contractual; welfare payments contingent on participation with sanctions for lack of engagement. - Engagement with long-term unemployed via Local Employment Services Network, targeted Community Employment and work placement schemes, training, and employer incentives to meet Pathways to Work targets. - Private sector involvement: - Established cross-departmental working group for engaging private employment services firms. - By end-February 2013 prepare draft remuneration contracts aligned with international best practice with external expert support. - Issue tender for private services by end March 2013; services expected operational by end-2013. - Further education reform: - Legislation published to establish 16 Education and Training Boards replacing 33 Vocational Education Committees. - Action plan for establishing SOLAS to be completed by end-November; publish legislation to launch SOLAS by end-December. - Completed financial review of Community Employment programme; prepare comprehensive review of activation programs by end-January 2013. - Housing assistance reform: - Replace current rent supplement for long-term housing need with Housing Assistance Payment (HAP), operated by relevant housing authority, enabling integrated social housing market and differential rent to support employment take-up. - Required legislative actions and timing: - Address non-discretionary deduction of rent via Social Welfare Budget Bill, 2012 (by end December 2012) to amend Household Budgeting Scheme. - Social Welfare & Pensions Bill, 2013 in Spring 2013 (by end June 2013) to facilitate non-discretionary deduction on a wider level. - Enact Housing (Miscellaneous Provisions) Bill, 2012 (summer 2013). - Implementation timeline: HAP piloted in second half of 2013 and made fully operational in 2014 with general roll out and commencement of transfers from early January 2014. ### Programme financing and monitoring - Financing strategy: - Return to Treasury bond and bill issuances in July; instituted monthly Treasury bill auctions with yields now below 1 percent. - Raised €1 billion in long-term funding with initial issue of amortising bonds targeted at domestic pension funds. - Plan to broaden investor base, move to regular bond issuances accounting for rising share of financing, and continue tapping sources such as amortising bonds when market conditions favourable. - Maintain prudent cash buffer; aim to end the programme with a buffer covering around one year of financing needs. - Monitoring framework: - Implementation monitored through quarterly and continuous performance criteria, indicative targets, structural benchmarks, and quarterly programme reviews as envisaged since arrangement inception on 3 December 2010. - Programme compliance with Memorandum of Understanding on Specific Policy Conditionality. - Technical Memorandum of Understanding (TMU) defines quantitative performance criteria and indicative targets. - Government targets for exchequer primary balance monitored via quarterly performance criteria; net central government debt is an indicative target. - Continuous performance criterion on non-accumulation of external payment arrears. - Progress on structural reforms monitored through structural benchmarks. *Source: IMF country report content unit _cr12336 (provided text).* ### 26. We authorise the IMF and the European Commission to publish the Letter of ### _cr12336 - 26. We authorise the IMF and the European Commission to publish the Letter of ### Authorization - We authorise the IMF and the European Commission to publish the Letter of Intent and its attachments, and the related staff report. ### Programme monitoring: performance framework (Table 1 highlights) - Quantitative Performance Criteria - Cumulative exchequer primary balance — End-September 2012 — Observed - Indicative Target - Ceiling on the stock of central government net debt — End-September 2012 — Observed - Continuous Performance Criteria - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government — Continuous — Observed - Structural Benchmarks (selected measures and status) - Define the criteria to run stringent stress tests scenarios — End-December 2010 — Observed - Agree on terms of reference for the due diligence of bank assets by internationally recognised consulting firms — End-December 2010 — Observed - The Central Bank will direct the recapitalisation of the principal banks (AIB, BoI and EBS) to achieve a capital ratio of 12 percent core tier 1 — End-February 2011 — Not observed (1/) - Submit to Dáil Éireann the draft legislation on a special resolution regime — End-February 2011 — Observed (2/) - The Central Bank to complete the assessment of the banks’ restructuring plans — End-March 2011 — Observed - Complete the diagnostic evaluation of banks’ assets — End-March 2011 — Observed - Complete stress tests (PCAR 2011) — End-March 2011 — Observed - Complete a full assessment of credit unions’ loan portfolios — End-April 2011 — Observed - Finalise plans for the recapitalisation of Irish Life and Permanent — End-May 2011 — Observed - Establish a Fiscal Advisory Council — End-June 2011 — Observed - Complete the recapitalisation of Allied Irish Banks, Bank of Ireland, Irish Life and Permanent and EBS Building Society — End-July 2011 — Observed - Submit the Supervision and Enforcement Bill to Oireachtas — End-July 2011 — Observed - Complete the legal merger procedures of Allied Irish Bank and EBS Building Society — End-September 2011 — Observed - Publish a memorandum of understanding governing the relationship of the Department of Finance and the Central Bank in relation to banking sector oversight — End-October 2011 — Observed (3/) - The merger of Irish Nationwide Building Society and Anglo-Irish bank — End-December 2011 — Observed - Central Bank to issue guidance to banks for the recognition of accounting losses incurred in their loan book — End-December 2011 — Observed - Finalise a strategy to guide the development of broader legal reforms around personal insolvency, including significant amendments to the Bankruptcy Act 1998 and the 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 with broad coverage and consistent with the fiscal consolidation targets — 2012 Budget day in early December 2011 — Observed - Updated restructuring plan for the PTSB detailing the actions needed to ensure viability of its core businesses — End-June 2012 — Observed - Submit to parliament, as part of the Fiscal Responsibility Bill, a legal framework for the Fiscal Advisory Council ensuring its independence — End-September 2012 — Observed - Publish legislation to strengthen the regulatory framework for credit unions, including making legislative provision for effective governance standards and prudential requirements — End-September 2012 — Observed - Approve regulations to establish a charge levied across credit institutions to recoup over time the costs of resolving vulnerable institutions — End-September 2012 — Observed - Footnotes and clarifications from Table 1 - (1/) Central Bank directions were issued within the required timeframe. However, completion of the capital injections required was postponed by the Minister for Finance until after the General Election. These directions are now superseded by the Central Bank’s PCAR directions of 31 March 2011. - (2/) In practice this was submitted to the Seanad as discussed in paragraph 21 of the MEFP, as the Dáil was dissolved owing to the elections. - (3/) Effective end-October 2011 and posted on November 8, 2011. ### Quantitative targets and outcomes (selected figures from Table 2) - Cumulative exchequer primary balance 2/ (In billions of Euros) — Targets and Outcomes - 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: -11.4 — Outcome: -10.1 - 31-Dec-12 Target (Indicative Target 4/): -11.2 - 31-Mar-13 Target: -3.7 - 30-Jun-13 Target: -4.3 - 30-Sep-13 Target: -4.9 - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government 3/ - All test dates: 0 (Target) and 0 (Outcome) where applicable - Ceiling on the stock of central government net debt 1/ (In billions of Euros) - 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 — Outcome: 130.0 - 31-Dec-12 Indicative Target: 135.5 - 31-Mar-13 Indicative Target: 143.1 - 30-Jun-13 Indicative Target: 149.2 - 30-Sep-13 Indicative Target: 150.4 ### Upcoming prior action and proposed structural benchmarks (Table 3) - Financial sector policies (proposed structural benchmarks) - Request an external BCP assessment in support of efforts to strengthen financial supervision and regulation (MEFP ¶19) — End-March 2013 — Proposed structural benchmark - Undertake a review of progress in addressing mortgage arrears (MEFP ¶12) — End-June 2013 — Proposed structural benchmark - Fiscal policies - Submit Budget 2013 to the Oireachtas (MEFP ¶6) — 5 December 2012 — Prior action ### Technical Memorandum of Understanding (TMU) — key definitions and adjustments - Programme exchange rates - For programme purposes, foreign currency-related assets, liabilities, and flows evaluated at “programme exchange rates” except items affecting government fiscal balances (measured at current exchange rates). - Programme exchange rates (as of December 30, 2011): €1 = 1.2939 U.S. dollar and €1 = 0.842786 SDR. - Exchequer balance and Exchequer primary balance - Exchequer balance: difference between total receipts into, and total expenditure out of, the Exchequer Account (sum of current and capital balances). - Exchequer primary balance: Exchequer balance excluding net debt interest payments in the service of the National Debt. - From January 2013 all payments related to the IBRC promissory notes are excluded from the Exchequer primary balance measure used for programme monitoring purposes.2 - Adjustments to the floor on the Exchequer primary balance (quantitative performance criterion) - (i) Downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy (loans to banks, investments in equity, unrequited recapitalisation, purchases of troubled assets). - (ii) Upward by proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts. - (iii) Upward by receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012. - (iv) Downward by the amount of these receipts spent on growth-enhancing projects not included in Budget 2013, up to no more than half of these receipts. - (v) Downward for Exchequer contributions to the Resolution Fund for the resolution of credit institutions, and upward for any Exchequer recoupment from the Resolution Fund of such outlays. - (vi) Downward for Exchequer contributions to the Credit Union Fund for the restructuring of credit unions up to €250 million cumulatively, and upward for any Exchequer recoupment from the Credit Union Fund of such outlays. - Any other financial operation by Government to support banks or other credit institutions including credit unions, including the issuance of guarantees or provision of liquidity, will be reported to EC, IMF, and ECB staffs. - Measurement and reporting of the Exchequer primary balance - The floor is measured cumulatively from the start of the calendar year. - Specified cumulative Exchequer primary balance targets (In billions of Euros) from January 1, 2012: - End-December 2012 (performance criterion): -11.2 - From January 1, 2013: - End-March 2013 (performance criterion): -3.7 - End-June 2013 (indicative target): -4.3 - End-September 2013 (indicative target): -4.9 - Revenue adjustor to the Exchequer primary balance floor - The floor will be adjusted upward (downward) for the full amount of any over-performance (under-performance) in Exchequer tax revenues, pay-related social insurance contributions (PRSI) and national training fund contributions against the current projection. - Projection for cumulative Exchequer tax revenue & other receipts (In billions of Euros) from January 1, 2012: - End-December 2012 (projection): 44.1 - From January 1, 2013 (projections): - End-March 2013: 10.2 - End-June 2013: 20.9 - End-September 2013: 32.2 - Any policy changes impacting the revenue projection will lead to a reassessment of the adjustor in program reviews. - Central government net debt: definition and adjustments - Net central government debt = National Debt less liquid assets of the National Pensions Reserve Fund (NPRF). - National Debt = total outstanding principal borrowed by central government and not repaid as of the test date, less liquid assets available for redemption at the same date (Exchequer cash balances, Exchequer deposits, investments in investment grade sovereign bills). NPRF liquid assets include the asset classes above plus marketable securities such as equities, government bonds and other listed investments. NPRF shares in domestic Irish banks and NPRF’s non-liquid discretionary portfolio are excluded from liquid assets. - Adjustments to the ceiling on the central government net debt (indicative target): - (i) Upward for debt arising from payments for bank restructuring under the programme. - (ii) Downward by proceeds from sales of bank equity held by the government or NPRF treated as Exchequer or NPRF receipts. - (iii) Downward by receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012. - (iv) Upward by the amount of these receipts spent on growth-enhancing projects not included in Budget 2013, up to no more than half of these receipts. - (v) Upward for Exchequer contributions to the Resolution Fund and downward for any Exchequer recoupment. - (vi) Upward for Exchequer contributions to the Credit Union Fund up to €250 million cumulatively, and downward for any Exchequer recoupment. - (vii) Downward by the amount liquidated from the NPRF non-liquid discretionary portfolio. - (viii) Downward (upward) by valuation gains (losses) in the NPRF liquid portfolio. - Programme exchange rates apply to all non-Euro denominated debt. - Note: Although all payments related to the IBRC promissory notes are excluded from the Exchequer primary balance measure, they are included in the Central Government net debt measure used for programme monitoring purposes.4 - Central government net debt outstanding stock (In billions of Euros) — provisional/indicative figures - End-September 2012 (provisional): 130.0 - End-December 2012 (indicative target): 135.5 - End-March 2013 (indicative target): 143.1 - End-June 2013 (indicative target): 149.2 - End-September 2013 (indicative target): 150.4 - Non-accumulation of external payments arrears - Central government will accumulate no external payments arrears during the programme period. - External payment arrear defined as a payment by the central government on its contracted or guaranteed external debt not made within five business days after falling due, excluding any contractual grace period. - The performance criterion applies on a continuous basis. - Stock of external payments arrears calculated based on the schedule of external payment obligations reported by the National Treasury Management Agency. - Reporting requirements (data and timing) - Department of Finance: report to EC, IMF and ECB staff, with a lag of no more than seven days after the test date, the Exchequer primary balance, Exchequer tax revenues, payments for bank restructuring under the programme, proceeds from sales of bank equity treated as Exchequer receipts, receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012 and associated outlays on growth-enhancing projects not included in Budget 2013, Exchequer outlays for the resolution and restructuring of credit unions, any return of such outlays to the Exchequer and recoupment by the Exchequer from the Resolution Fund and the Restructuring and Stabilisation Fund. - National Treasury Management Agency: provide 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 within three months of the test date; and the final stock of the central government system external payments arrears to the EC, IMF and ECB staff, with a lag of not more than seven days after the arrears arise. - Central Bank of Ireland: provide on a quarterly basis, bank by bank data on the assets of government guaranteed banks, including loans and provisioning by period overdue (90+days and less than 90 days) and category of borrower, 40 working days after the end of each quarter. *Content drawn from the Letter of Intent, attachments, and Technical Memorandum of Understanding dated November 29, 2012, as provided in the source PDF.* ### 1. The Irish Government remains firmly committed to the programme, as illustrated by ### The Irish Government remains firmly committed to the programme, as illustrated by ### Commitment and recent market developments - Government affirms firm commitment to the EU/IMF-supported programme and strong performance in implementing agreed policy frameworks and measures. - Noted adverse international economic environment contrasted with sharply falling yields on Irish government bonds in recent months, reflecting: - Ireland's strong performance. - Euro area leaders' June 29 commitment to decouple sovereign and banking debt issues and to specifically examine the Irish financial sector to improve sustainability of Ireland's adjustment programme. - The ECB's decision on Outright Monetary Transactions. - Improved market conditions enabled: - Launch of the first bond issue under the programme in late July. - Renewal of regular Treasury bill auctions. - Focus entering final year of the 3yr programme: - Measures to successfully exit the programme. - Further deepening access to market funding during 2013 to exit reliance on official financing. - Timely implementation of euro area leaders' commitments seen as greatly supportive. ### Programme performance and key measures implemented - For the eighth review, commitments under the programme met in policy reforms and quantitative targets. - Fiscal consolidation: - 2012 cumulative exchequer balance through end-September was ahead of the programme profile. - For 2012 as a whole, the general government deficit is projected to be below the 8.6% of GDP programme ceiling. - Alert to health sector overruns and taking structural measures to correct them. - Budget 2013 will be presented to the Dail on December 5 to underpin deficit reduction in 2013 and future years. - Legislation and institutional measures introduced to the Dail by end-September, including measures to: - Reform the personal insolvency framework. - Establish a Central Credit Register. - Strengthen the Credit Union legislative framework. - Provide legal basis for the Irish Fiscal Advisory Council and medium-term expenditure ceilings. - Launch advisory service for distressed mortgage borrowers. - Statutorily require Credit Unions under the Deposit Guarantee Scheme to maintain an amount in the Deposit Protection account in the central bank. - Introduce a levy to fund the credit institutions resolution fund. - Progress reforms on activation policies, prepare identified non-strategic state assets for eventual disposal, and reform sectoral wage setting mechanisms (legislation approved). - Take steps to introduce water meters, centralize water services provision, and ensure a sound financial footing for Irish Water per the programme timeline. - Banking and credit union sector restructuring: - Two out of three PCAR banks are well advanced in reaching their end-2013 asset deleverage targets. - Central Bank has formalized non-core asset deleverage targets for PCAR banks and introduced an advanced monitoring framework to improve net-stable-funding and liquidity coverage ratios. - Revised restructuring plans for both AIB and PTSB submitted to the European Commission. - Further actions implemented to address loan arrears and unsustainable debts in banks' mortgage and SME portfolios. ### Request and institutional coordination - In light of performance and commitment, Ireland requests: - Completion of the eighth review. - Release of the eighth EFSF/EFSM disbursement of EUR 0.8 billion. - Authorities continue to work with staff of the European Commission, the ECB, and the IMF on follow-up to the 29 June statement by Heads of State and Government of the euro area. - Reiteration that full delivery of programme commitments and severing the link between banks and the sovereign will enable a successful exit and return to sustained private market funding. - Authorities consider policies in Letters of Intent of 3 December 2010, subsequent letters, and this letter as adequate but stand ready to take corrective actions if circumstances change and will consult ex-ante with the European Commission, the ECB, and the IMF. ### Memorandum of Understanding (seventh update): conditionality and monitoring - Seventh update of the MoU details general economic policy conditions embedded in Council Implementing Decision 2011/77/EU on Union financial assistance to Ireland. - Quarterly EFSM disbursements subject to quarterly reviews based on: - Observance of quantitative performance criteria. - Respect for EU Council Decisions and Recommendations under the EDP. - Positive evaluation of progress on MEFP and the updated MoU policy criteria. - If targets are expected to be missed, additional action will be taken. - Authorities commit to measures to ensure successful implementation and minimise costs to taxpayers while protecting the most vulnerable, including: a. Rigorously implement fiscal policy consistent with EDP requirements; Departments of Finance and Public Expenditure and Reform to ensure effective tax collection and tight supervision of expenditure to achieve primary deficit target in cash and general government nominal budget deficit on ESA95 basis. Any additional unplanned revenues must be allocated to debt reduction. Nominal value of Social Welfare pensions will not be increased. b. Continue to strengthen fiscal framework and reporting in line with EU requirements. c. Use at least half of proceeds from state asset sales for debt reduction; reinvest remainder in commercially-oriented projects meeting ex-ante cost-benefit criteria, enhancing employment and preserving long-term fiscal sustainability, including Programme and EDP fiscal targets. d. Continuously monitor financial markets to exploit opportunities to return to commercial funding as soon as possible. e. Enhance activation services to tackle high and persistent long-term unemployment, improve ratio of vacancies filled off the live register, focus on re-training, and implement sanctions to ensure incentives; advance new activation measures building on Pathways to Work. f. Ensure no further exemptions to competition law unless consistent with the EU/IMF Programme goals and economy needs. g. Ensure NAMA: (i) maintains highest governance, accountability and transparency; (ii) reduces operational costs; (iii) contributes to restoration of Irish property market and meets asset disposal targets, including redemption of €7.5 billion worth of senior bonds by end 2013. h. Ensure credit union restructuring under Central Bank regulatory approval, minimise Exchequer funding, recoup any Exchequer support from the sector over time, and utilize Resolution Fund resources if required. i. Ensure continued compliance with minimum Core Tier 1 Capital ratio of 10.5% for all PCAR banks (AIB, BOI, and PTSB). j. Consult ex-ante with European Commission, ECB, and IMF on adoption of policies not in the Memorandum that could materially impact programme objectives. - Monitoring and information provision commitments: - Provide all information required to monitor progress and track economic and financial situation. - Provide a compliance report on fulfillment of conditionality prior to release of installments. - Ensure reliable and regular availability of budgetary and other data as detailed in Annex 1. ### Actions for the ninth review (to be completed by end Q4-2012): Fiscal consolidation - Government will publish a budget for 2013 consistent with a general government deficit ceiling of 7.5% of GDP and in line with Council Recommendations under Ireland's EDP. - 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 (Inclusive of carryover from 2012), 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 €54.3 billion, involving deficit 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 European Commission, IMF, and ECB staff, substitute measures with others of equally good quality based on options from the Comprehensive Review of Expenditure (CRE). - Authorities will take measures to unwind the overrun in health spending and contain health expenditure in 2013 to within the €13.6 billion departmental ceiling set in the Comprehensive Expenditure Report 2012-14. - Government will publish a medium-term fiscal statement covering 2013-2015 consistent with further reduction of the General Government deficit in line with EDP Council Recommendation. - DPER and DECLG to agree a protocol to ensure local government sector is managed in balance over the medium term and ensures a balanced budget in 2013. ### Financial sector reforms (actions and monitoring) - Capital assessment: - Authorities will provide a review of developments in the PCAR banks relative to PCAR 2011; overall results to be published by end January 2013. Details to be agreed with Commission, ECB, and IMF staff. - Deleveraging: - Authorities, in consultation with Commission, IMF, and ECB staff, will assess banks' deleveraging based on existing nominal targets for disposal and run-off of non-core assets in line with 2011 Financial Measures Programme. - Fire sales of assets will be avoided, as will excessive deleveraging of core portfolios to avoid impairing credit flow. - Funding and liquidity monitoring: - Authorities will provide a detailed assessment of banks' progress towards relevant Basel III requirements using the advanced monitoring framework. - Asset quality: - Authorities will provide assessments of banks' work-out of non-performing mortgage portfolios per agreed key performance indicators; a set of key performance indicators for SMEs will be developed. - Authorities will monitor each PCAR bank’s performance against key performance indicators for resolving problem loans and bank-specific targets for reviewing new and existing individual arrears cases. - Authorities will publish banks' reported data on loan modifications, including re-defaults of modified loans, to permit analysis of resolution approaches. - Reorganisation: - Authorities will report on progress implementing the strategy for reorganisation of Irish credit institutions, including steps to strengthen the credit union sector, and will discuss with Commission, IMF, and ECB staff. - Financial Supervision: - Authorities will present a comprehensive report on progress implementing the Central Bank of Ireland's action plan for strengthening supervision of credit institutions. - Authorities will report on banks' progress with strategies to address loan arrears and unsustainable debts in mortgage and SME loan portfolios. - Authorities will enhance Credit Risk and RWA supervision, including annual model performance reviews, assessing RWA calculation and reviewing banks' approaches to RWA forecasting and stress testing in advance of PCAR 2013; complete reviews and issue mitigating actions. ### Personal insolvency and structural reforms - Personal Insolvency Reform: - Draft Personal Insolvency Bill will provide framework for licensing and regulation of Personal Insolvency Practitioners. - Enhancing access to finance for SMEs: - Authorities will report on a survey of SMEs' demand for credit covering the six months to September 2012, including whether SMEs sought credit, approval/refusal rates, conditions and criteria attached to approvals, reasons for refusals, use of non-bank finance, turnover, profitability and employment levels. - Authorities will complete a separate study assessing effectiveness of the Credit Review Office. - Authorities will improve corporate insolvency framework for SMEs, including preparing amendments to designate Circuit Courts as competent for examinership of companies within EU small company thresholds (e.g., balance sheet below €4.4 million). *Source: Letter and Memorandum of Understanding (seventh update) submitted by Irish authorities as provided in the content unit.* ### 23. On the basis of a report on developments to be provided by the authorities by end Q4 ### _cr12336 - 23. On the basis of a report on developments to be provided by the authorities by end Q4 ### Review requirement and competition law enforcement - On the basis of a report on developments to be provided by the authorities by end Q4 2012, the authorities, in consultation with staff of the European Commission, IMF and the ECB, will review whether sufficient progress has been made toward the goal of strengthening competition law enforcement by ensuring the availability of effective sanctions for infringements of Irish competition law and Articles 101 and 102 of the Treaty on the Functioning of the European Union and the functioning of the Competition Authority, and whether additional measures will be required. ### State asset disposals - Government will complete, if necessary, relevant regulatory, legislative, corporate governance and financial reforms required to bring to the point of sale the assets it has identified for disposal. - For each asset and/or group of assets, the government will provide a report to the staff of the European Commission, the IMF, and the ECB on progress achieved and remaining steps towards to the point of sale. ### Water services reform - The authorities will ensure assignment of economic regulatory oversight over the water sector, including price setting powers, is provided for by way of legislation to the Commission for Energy Regulation. - The Government will also ensure that interim arrangements are in place for the establishment of Irish Water. ### Actions for the tenth review (actions to be completed by end Q1-2013) — Financial sector reforms - Capitalisation - The authorities will report on the evolution of regulatory capital within the PCAR banks up to the end of December 2012, and will present and discuss their findings with the staff of the European Commission, the IMF, and the ECB. - Deleveraging - The authorities, in consultation with the staff of the European Commission, the IMF, and the ECB, will assess banks' deleveraging based on the existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme. - Fire sales of assets will be avoided, as will any excessive deleveraging of core portfolios, so as not to impair the flow of credit to the domestic economy. - Funding and liquidity monitoring - The authorities will provide staff of the European Commission, the IMF, and the ECB with a detailed assessment of banks' progress towards the relevant Basel III requirements using the advanced monitoring framework. - Following finalisation of the Capital Requirements Directive legislative text, the authorities will establish draft guidance for the creation and subsequent holding of liquidity buffers by banks for issue in advance of the entry into force of the regulations. - In addition, the authorities will monitor the liquidity buffers held by banks in accordance with the Capital Requirements Regulation. - 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. - The authorities will monitor each PCAR bank‘s performance relative to already-defined key performance indicators for progress in resolving problem loans, and also against bank specific targets for reviewing new and existing individual arrears cases. - The authorities will publish banks‘ reported data on loan modifications, including re-defaults of modified loans, to permit analysis of the effectiveness of alternative resolution approaches in improving debt service performance. - Having secured adequate protections for debtors' principal private residence through the enactment of the Personal Insolvency Bill, the authorities will introduce legislation remedying the issues identified by case law in the 2009 Land and Conveyancing Law Reform Act, so as to remove unintended constraints on banks to realise the value of loan collateral under certain circumstances. - Reorganisation - The authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions, including any steps to strengthen the credit union sector, and discuss it with the staff of the European Commission, the IMF, and the ECB. - Financial supervision - The authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland‘s action plan for strengthening supervision of credit institutions and discuss it with the staff of the European Commission, the IMF, and the ECB. - The authorities will report on banks' progress with the implementation of their strategies to address loan arrears and unsustainable debts in banks' mortgage, and SME loan portfolios. - The authorities will ensure appropriately prudent provisioning treatment of loan modifications, continue to engage with banks and review the proposed provisioning treatment for all advanced loan modification products, and, in consultation with staff of the EC, ECB, and the IMF, update where necessary the 2011 Impairment Provisioning and Disclosure guidelines. ### Actions for the tenth review (actions to be completed by end Q1-2013) — Structural reforms - Health sector - The authorities will conduct a study to compare the cost of drugs, prescription practices and the usage of generics in Ireland with comparable EU jurisdictions. - Efficient social support expenditure - The authorities will complete by end January a review of the labour market activation policies in place to enable the unemployed to return to active employment against the targets set out in the 'Pathways to Work' plan, with a view to increasing the impact of the interventions made and services provided by: - implementing key service elements such as profile-based activation in all offices; - extending one-stop shops to more offices; - bringing forward necessary steps to outsource training and activation; and - broadening coverage of policy initiatives to long-term unemployed. ### Actions for the eleventh review (actions to be completed by end Q2-2013) — Financial sector reforms - Capital assessment - The authorities will agree with the staff of the European Commission, the ECB and IMF on the specific features of the methodology for the PCAR 2013 stress test exercise. - Deleveraging - The authorities, in consultation with the staff of the European Commission, the IMF, and the ECB, will assess banks' deleveraging based on the existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme; fire sales and excessive deleveraging of core portfolios will be avoided. - Funding and liquidity monitoring - The authorities will provide staff with a detailed assessment of banks' progress towards the relevant Basel III requirements using the advanced monitoring framework. - The authorities will also monitor the liquidity buffers held by banks in accordance with the Capital Requirements Regulation. - Asset quality - The authorities will provide staff 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, monitor PCAR banks' performance against these KPIs and bank-specific targets, and publish banks‘ reported data on loan modifications, including re-defaults. - The authorities will undertake a review of progress in addressing mortgage arrears. - Reorganisation and supervision - The authorities will report on progress in implementing the strategy for the reorganisation of Irish credit institutions and discuss with EU/IMF/ECB staff. - The authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland‘s action plan for strengthening supervision of credit institutions and discuss it with EU/IMF/ECB staff. - The authorities will review the implementation of the 2011 CBI Provisioning and Disclosure guidelines by the covered banks with reference to the end-2012 published financial statements. - Upon publication of the EU directive establishing a framework for the recovery and resolution of credit institutions and investment firms, the authorities will review the Resolution fund levy regulation. ### Actions for the eleventh review (actions to be completed by end Q2-2013) — Structural reforms - State assets - The authorities will report to the staff of the European Commission, the IMF, and the ECB on the quantum of the proceeds of any realised asset sales to date; for assets yet to be disposed, report on progress made and remaining steps. - Labour market reform - The authorities will report to staff on the impact on the labour market of reforms to sectoral wage-setting mechanisms undertaken under the programme. - Water services reform - The Commission for Energy Regulation will carry out consultations to determine the framework for household water charges with a view to start charging by the end of the EU-IMF programme period and will conduct consultations in due course to determine the pricing methodology for the non-domestic sector. - The Government will publish a Water Services Bill with the aim of defining the regulatory framework for the water sector under a national public utility setting and providing for the establishment of Irish Water in its final form, with prior engagement with the European Commission as appropriate. ### Actions for the twelfth review (actions to be completed by end Q3-2013) — Financial sector reforms - Capital assessment - The authorities will complete the PCAR 2013, conducting another rigorous stress test based on robust loan-loss forecasts, assessment of banks‘ calculation of risk weighted assets, loan loss forecasting, and capital modelling; results and methodology will be published in full and on a bank-by-bank basis, discussed with staff of European Commission, the IMF, and the ECB, and aligned with the timing of the next EBA exercise; authorities will ensure banks are adequately capitalised. - The authorities will report on the evolution of regulatory capital up to the end of June 2013 within the banks covered by the PCAR and present and discuss findings with staff of the European Commission, the IMF, and the ECB. - Deleveraging - The authorities will assess banks' deleveraging against existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme and avoid fire sales and excessive deleveraging of core portfolios. - Funding and liquidity monitoring - The authorities will provide staff with a detailed assessment of banks' progress towards relevant Basel III requirements using the advanced monitoring framework. - Asset quality - The authorities will provide staff with assessments of banks' performance on non-performing mortgage and SME portfolios against agreed KPIs, monitor PCAR banks' performance, and publish banks‘ reported data on loan modifications, including re-defaults. - Reorganisation and supervision - The authorities will report and discuss progress on reorganisation of Irish credit institutions and steps to strengthen the credit union sector with EU/IMF/ECB staff. - The authorities will present a comprehensive report on progress implementing the Central Bank of Ireland‘s action plan for strengthening supervision and discuss with EU/IMF/ECB staff. - The authorities will report on banks' progress with strategies to address loan arrears and unsustainable debts in mortgage and SME loan portfolios. ### Actions for the twelfth review (actions to be completed by end Q3-2013) — Structural reforms - Access to SME credit - Based on experience of the operation of the Insolvency Service in the personal insolvency reform, the authorities will consider the appropriateness of further enhancements to the company law framework to reduce costs and achieve efficiency gains, including the potential for an administrative body to facilitate SME restructuring. - Water services reform - The Government‘s budgetary perspective will be based on Irish Water becoming substantially self-funded over time. ### 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, discussing compliance with asset disposal and run-off targets in nominal value terms with EU/IMF/ECB staff. - Funding and liquidity - 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 monitor the liquidity buffers held by banks in accordance with the Capital Requirements Regulation. - Asset quality - The authorities will provide staff with assessments of banks' performance in work-out of non-performing mortgage and SME portfolios against agreed KPIs, monitor PCAR banks' performance, and publish banks‘ reported data on loan modifications, including re-defaults. - Reorganisation and supervision - The authorities will provide a final report on progress implementing the strategy for the reorganisation of Irish credit institutions, including any steps to strengthen the credit union sector, and discuss with EU/IMF/ECB staff. - 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 with EU/IMF/ECB staff. - The authorities will provide a final report on banks' progress with implementation of strategies to address loan arrears and unsustainable debts in banks' mortgage and SME loan portfolios. - The authorities will ensure that the Central Credit Register is operational. ### Annex 1 — Provision of data (reporting frequencies and responsibilities) - Coordination - 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. *Prepared by the European Department (In consultation with other departments); Approved by Ajai Chopra and Lorenzo Giorgianni; December 11, 2012* ### 1. This supplement provides an update on economic and policy developments since ### _cr12336 - 1. This supplement provides an update on economic and policy developments since ### Fiscal performance and near-term targets - Cumulative exchequer primary balance through end-November 2012 was -5.5 percent of GDP, 0.1 percent of GDP under the authorities’ profile, but 1.4 percent of GDP higher than the balance obtaining over the same period last year. - Aggregate revenues are about ¼ percent of GDP lower than expected during the review mission even after incorporating the 0.2 percent of GDP in higher proceeds from the telecom license sale. - Current expenditure over-runs stabilized at 0.2 percent of GDP, offset by capital underspends. - Given performance-criteria adjustments for revenue deviations, end-December 2012 targets are not at risk. - The 2012 general government balance target of 8.6 percent of GDP is expected to be achieved by a margin of at least ¼ percent of GDP. ### Budget 2013: consolidation and composition - Budget 2013 includes a €3.5 billion consolidation for 2013, meeting the prior action for this review. - Programmed consolidation in 2013: €3.5 billion (2.1 percent of GDP). - After exclusions and additions, "new" consolidation measures announced in Budget 2013 amount to €2.9 billion (1.7 percent of GDP), comprised of: - Revenue measures: €1.2 billion (0.7 percent of GDP) - Current expenditure measures (net of fees and charges): €1.7 billion (1.0 percent of GDP) - Composition table (as presented): - Programmed Consolidation in 2013: 3.5 | 2.1 - Less: Capital savings previously announced: -0.5 | -0.3 - Carryover from measures in previous years: -0.6 | -0.4 - Revenue: -0.2 | -0.1 - Current expenditure: -0.4 | -0.3 - Additional dividends from state-owned enterprises: -0.1 | -0.1 - Add: Measures to offset health spending pressures: 0.7 | 0.4 - "New" consolidation measures announced in Budget 2013: 2.9 | 1.7 - Revenue measures: 1.2 | 0.7 - Current expenditure (net of fees and charges): 1.7 | 1.0 ### Revenue measures and tax-base changes - Key base-broadening and revenue measures include: - Introducing a property tax for home owners at the rate of 0.18 percent of self-assessed value, with a higher rate for houses valued above €1 million. - Removing the exemption of the first €127 of weekly earnings for employee PRSI. - Subjecting unearned income to PRSI. - Capping tax relief benefiting contributors to private pension funds to a level that delivers pension income of €60,000 or less. - Removing the universal social charge subsidy for persons over 70 years old with an annual pension above €60,000. - Expanding the carbon tax base to include solid fuels. - A 3 percentage point increase in the capital gains and deposit interest retention tax rates is expected to be progressive. - Indirect tax increases on alcohol, tobacco, and vehicles. - Stimulus-style or growth-supporting measures: one-off permission until 2015 for early withdrawal of up to 30 percent of additional voluntary contributions to pension funds, and targeted tax reliefs for house purchasers and small and medium enterprises, including start ups and those undertaking research and development. - Savings from New Fiscal Measures Announced in Budget 2013 (yields in € bn): - Revenue: 1.21 (Yield in 2013) | 1.70 (Full year effect) - Pay-related social insurance: 0.29 | 0.34 - Local property tax: 0.25 | 0.50 - Excises: 0.21 | 0.21 - Vehicle and carbon taxes: 0.16 | 0.18 - Personal income taxes: 0.14 | 0.43 - Capital taxes: 0.13 | 0.16 - Other (net of stimulus measures): 0.03 | -0.13 - Expenditure: 1.72 | 2.20 - Health: 0.78 | 1.17 - Social Protection: 0.39 | 0.45 - Education: 0.09 | 0.12 - Agriculture: 0.09 | 0.09 - Justice: 0.06 | 0.06 - Other: 0.31 | 0.31 - Total: 2.93 | 3.90 ### Current expenditure measures and public sector pay - Gross nominal departmental expenditure ceilings for 2013 set in December 2011 remain the anchor. - A social protection increase of €0.15 billion is provided to accommodate 2012 pressures from higher-than-budgeted unemployment. - The €1.7 billion in new savings to deliver unchanged ceilings are composed of: - €0.4 billion in public sector wage bill reductions, enabled by a targeted reduction in staff numbers of 7,000 relative to the end-2012 ceiling and productivity gains being negotiated with public service unions. - €0.4 billion in social welfare adjustments, led by cuts in universal benefits (a €10 per month reduction in child benefit and reduced free telephone and electricity allowances for the elderly) and shortening the duration of the Jobseeker Benefit entitlement by three months. - €0.9 billion from tightening a range of subsidies and programs, predominantly in health. - Health savings measures include lower cost drug procurement, reduced fees for services by medical professionals, higher co-payments on drugs, a slightly more stringent means test for medical cards for persons over 70 years old, and higher charging for private patients in public hospitals. - Education measures include reduced allocations for colleges and vocational education centers, a 3 percent higher income threshold for eligibility to college grants, and a 10 percent (€250) increase in the annual student contribution to college fees. ### Implementation risks, buffers, and medium-term prospects - Staff assessment: measures can achieve program fiscal targets if fully implemented, but buffers have narrowed and many measures increase implementation risks. - Revenue base for 2012 is modestly lower (¼ percent of GDP) than anticipated during the mission; higher non-tax revenues are expected to offset the impact for 2013. - Critical implementation priorities: - Full implementation from the outset of specified health sector savings and ongoing management of slippages, since some measures (e.g., charging private patients in public hospitals) have uncertain yields. - Careful preparation for the introduction of and compliance with the property tax. - Agreement with public sector unions on steps to ensure additional pay bill savings of at least €0.4 billion in 2013 (and €1 billion through 2015) is needed as soon as possible. - Distributional considerations: - The overall distributional impact of the budget package is unclear. - Staff supported a number of progressive measures (property tax, tightening pension reliefs, extending PRSI to unearned income) and measures to better target social supports, while noting that some measures (removal of PRSI exemption for the first €127 of weekly earnings) impact more equally across income groups; persons earning less than €18,304 are protected. - ESRI initial analysis (covering just under one-third of new measures) finds for 2013 an income reduction of 0.9 percent for the middle three income groups, 1.1 percent for the lowest income group, and 0.6 percent for the top income group for the measures included in the analysis. ### Medium-term consolidation over 2014–15 - Full year effect of new 2013 measures exceeds 2013 yield, implying a carryover of about €1 billion annually for outer years. - If public sector union negotiations deliver targeted outcomes, they would imply €0.5 billion in additional annual savings over 2014–15. - Authorities’ commitment to introduce metered water charging is expected to raise about €0.5 billion in 2015. - These items, together with smaller items, amount to €2.2 billion, just over two-fifths of the programmed consolidation effort of €5.1 billion for 2014–15. - Need to specify additional new measures in the next two budgets is limited to a relatively manageable 1¾ percent of GDP. - Staff sees scope for: broadening the income tax base via adjustments in bands and credits; potential further pay and pension bill savings; and better targeting social supports and subsidies, including steps to reduce growth in age-related spending. ### Real and financial sector developments - High-frequency indicators are consistent with low growth of just under ½ percent in 2012. - Registered unemployment declined to 14.6 percent in November. - PMIs remain strong, especially in the services sector. - Industrial production in October rose only modestly from the sharp slump in September. - Irish government bond spreads relative to bunds have widened about 35 basis points on the 9-year benchmark, broadly in line with other euro area sovereign bonds. - National Treasury Management Agency acquired holdings of bonds maturing in April 2013 and cancelled €0.5 billion, reducing principal outstanding on this issue to €5.1 billion. - Authorities are seeking a one year extension of the Eligible Liability Guarantee scheme through 2013 while preparing for the possibility of phasing out the scheme by mid-2013. - Mortgage approvals show some pick-up since mid-2012 with year-to-date approvals of residential mortgages up by 9 percent y/y; the total value of approvals of €2.4 billion represents just about 2 percent of the outstanding stock of mortgages. ### Mortgage arrears and repossessions (Central Bank of Ireland data) - Residential mortgages in arrears over 90 days: - Dec-09: 5.3 (in percent of outstanding: 4.5) - Dec-10: 8.6 (in percent of outstanding: 7.4) - Dec-11: 13.7 (in percent of outstanding: 12.0) - Mar-12: 15.0 (in percent of outstanding: 13.3) - Jun-12: 15.8 (revised as of December 2012; in percent of outstanding: 14.1) - Sep-12: 16.8 / 15.1 (table records both 16.8 outstanding and 15.1 in percent of outstanding; revised as of December 2012) - Restructured mortgages (in percent of outstanding): - Dec-10: 10.4 - Dec-11: 13.3 - Mar-12: 14.2 - Jun-12: 15.1 - Sep-12: 13.9 - Repossessions and voluntary surrenders (cumulative since 2009Q3): - Dec-09: 2 - Dec-10: 115 - Dec-11: 741 - Mar-12: 1,182 - Jun-12: 1,352 - Sep-12: 1,498 - (Note: text states repossessions and voluntary surrenders continued at about 150 per quarter, similar to the pace in 2011.) - Observations: - Value of residential mortgages in arrears for over 90 days rose in Q3 to 15.1 percent of total mortgage loans, up from 14.1 at end-June (text). - Early arrears cases (less than 90 days) declined once corrected for technical factors. - A fall in the share of restructured mortgages is largely a reclassification effect; about half of restructures are payments of interest only or reduced payments that are smaller than interest only. - Buy-to-let (BTL) mortgages show greater impairment: - Mortgages in arrears of more than 90 days accounted for 25.5 percent of total BTL mortgage loans by end-September, up from 23.9 percent at end-June. ### IMF Executive Board action, outlook, and risks - IMF Executive Board completed the eighth review under the Extended Fund Facility and approved disbursement equivalent to SDR 0.758 billion (about €0.89 billion or about US$1.17 billion), bringing total disbursements under the EFF to SDR 16.5434 billion (about €19.37 billion or about US$25.49 billion). - The EFF arrangement: SDR 19.4658 billion (about €22.79 billion or about US$29.99 billion) — about 1,548 percent of Ireland’s IMF quota. - Macroeconomic outlook: - Projected growth of 1.1 percent in 2013 and 2.2 percent in 2014. - Public debt expected to peak at 122 percent of GDP in 2013. - Key downside risks highlighted: - Further weakening of growth in Ireland’s trading partners. - Gradual revival of domestic demand impeded by high private debts, drag from fiscal consolidation, and banks’ limited ability to lend. - If growth remains low, public debt could continue to rise, partly reflecting potential renewed bank capital needs. - Policy messages from IMF staff: - Full implementation of the 2013 budget is needed; if 2013 growth disappoints, any additional fiscal consolidation should be deferred to 2015 to protect the recovery. - Vigorous implementation of financial sector reforms is needed to revive sound bank lending: arrest deterioration of asset quality, reduce operating costs, and lower funding costs through orderly withdrawal of guarantees. - Personal insolvency reform should facilitate out-of-court resolution of household debt distress, especially if complemented by a well functioning repossession process to maintain debt service discipline. - Continued strong Irish policy implementation and forceful delivery of European pledges to improve program sustainability are essential to break the sovereign–bank vicious circle and support medium-term growth and debt reduction. *Prepared by the European Department; Approved by Ajai Chopra and Lorenzo Giorgianni; December 14, 2012.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12336.pdf_