## _cr13163 ## Source details **Canonical URL:** [_cr13163](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13163.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13163.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13163.pdf.json) --- ### Impact of the Patent Cliff on the Irish Economy — Key findings and implications - Observed sectoral impact: - Production and exports of Irish chemical products fell sharply in H2 2012. - On average, industrial production of chemicals has fallen by around 10 percent since August 2012. - Chemicals exports declined by a similar amount. - Decline attributed mostly to a wave of patent expirations for several blockbuster drugs manufactured in Ireland. - Reasons for muted GDP and employment effect: - Chemicals constitute around 60 percent of merchandise exports (an increase of almost 15 percentage points since 2005). - Value added of the chemical sector was around 10 percent of total in 2011, much smaller than its share in total exports. - High import content (services import recording of royalty payments) dampens GDP impact as declining exports tend to be accompanied by smaller services imports. - Employment in the pharmaceutical sector estimated at around 24,500 people (around 1¼ percent of employment). - Implication: - Despite large pharmaceutical export values, the patent cliff’s impact on GDP and employment is likely to be modest. ### Recent macroeconomic developments and short-term outlook - Households and housing distress: - Household saving in 2012: 12½ percent of disposable income. - Household gross debt in 2012: 202 percent of disposable income. - Mortgage distress (2012): 15.8 percent of mortgages on primary dwellings are over 90 days in arrears. - Buy-to-let mortgages over 90 days in arrears: 26.9 percent. - SME and corporate loan distress: - Impaired loans rose to 25 percent of SME and corporate loans. - Banks’ rejection rate of SME loan applications: the 2nd highest in the EU. - Banks, NPLs and profitability: - Banks remained loss making in 2012 even before provisioning. - NPLs reported at a quarter of gross loans (24.8 percent of total loans reported elsewhere). - Provisioning: 48.4 percent of gross nonperforming loans at end 2012. - PCAR banks ran losses before provisions of €0.8 billion in 2012, or 0.2 percent of average assets. - By end 2013 PCAR banks project €1.1 billion in profits before provisions or 0.4 percent of average assets. - Real economy (selected 2012–Q1 2013 indicators): - Economy grew 0.9 percent y/y in 2012. - Domestic demand declined by 1½ percent y/y in 2012. - Private consumption declined 0.9 percent y/y in 2012; household disposable income rose 2½ percent y/y in H2 2012. - Real fixed investment picked up by 1.2 percent y/y in 2012. - Unemployment rate: 13.7 percent in Q1 2013, down from 15 percent a year earlier. - Employment growth: 1.1 percent y/y in Q1 2013; many new jobs were part-time for those seeking full-time. - If discouraged workers and involuntary part-time workers were included, overall unemployment would have remained above 24 percent. - HICP inflation declined to 1.1 percent y/y in Q1 2013. - External sector and FDI: - Current account surplus rose to almost 5 percent of GDP in 2012. - Net FDI inflows in 2012: 5 percent of GDP. - Strong services exports improved services balance by almost 3 percent of GDP from 2011. - Short-term export signals (2013): - Core retail sales: essentially flat year-on-year in first four months of 2013 after end-2012 highs. - Capacity utilization rose above 50 for first time in 18 months. - Fall in goods exports accelerated in first three months of 2013; industrial production only partly recovered from sharp fall in September 2012. - PMI on new export orders fell below 50 recently; declining export expectations among SMEs — indicators bode poorly for 2013 merchandise export growth. ### Financial markets, sovereign financing, and funding developments - Sovereign issuance and market access: - March 13 syndicated 10-year Irish sovereign bond: raised €5 billion at a yield of 4.15 percent; total bids almost €13 billion from almost 400 investors. - March new 10-year benchmark bond: post-issuance market yield decline recorded at 27 basis points (text truncated in source). - March 2013: NTMA also issued an existing 5-year bond amount €2.5 billion at a yield of 3.32 percent (Letter of Intent). - Short-term debt and bills: - Treasury bill auction of 3-month bills on May 16: bid-to-cover ratio around 4 and yield of 13 basis points. - Bank funding and deleveraging: - BoI issued €500 million in 5-year covered bonds at a yield of 2¾ percent; similar 3-year issue priced at 3⅛ percent earlier. - On May 29, BoI issued €500 million of 3-year senior unsecured bonds at a yield of 2.7 percent. - New household deposits attracted average rate of 1.2 percent; new corporate deposits 0.7 percent. - PCAR banks generated total deleveraging of €63.7 billion by February 2013. - ECB refinancing for PCAR banks fell to €35.6 billion in May 2013 from the January 2011 peak of €93 billion. - ECB‘s March 21 decision: extend for two years the own use bank bond program to augment collateral buffers. - Credit and lending developments: - Total credit to nonfinancial corporations declined 5.1 percent y/y in April. - Loans to Irish households declined 4.1 percent y/y in April; loans for house purchase down 2 percent y/y. - Residential mortgage loan draw downs fell 26 percent y/y in Q1 2013. - April 2013 Bank Lending Survey: small easing in credit standards for households; increase in demand for loans for house purchase; 8.7 percent y/y increase in loan approvals in April. - Lending contraction: credit to households and NFCs declined in recent years (credit to households and NFCs (eop) series). ### Housing market and property indicators - National residential property prices fell 2.6 percent in Q1 2013, bringing the index to a new low 51 percent below its pre-crisis peak. - Price decline driven by almost 4 percent fall outside Dublin. - Housing supply: Dublin stock ≈ 6 months‘ supply; regional markets inventories range 20–60 months. - Property transaction volumes rose 14 percent y/y in Q1 2013. - Rents and disposable incomes rising; housing affordability and implied rental yields appear positive by historical standards. ### Bank sector balance-sheet, NPLs, and provisioning - System and PCAR banks: - PCAR banks: net loans €197.2 billion, or 121 percent of GDP. - NAMA: net loans €22.8 billion, 14 percent of GDP. - Liquidation of IBRC will put loan assets €16 billion, 10 percent of GDP, up for valuation and sale by end 2013. - Credit union sector: net loans €4.1 billion, 2½ percent of GDP. - PCAR recapitalization: €24 billion recapitalized under PCAR 2011; average core tier 1 capital 14.7 percent of risk weighted assets by end 2012; Irish regulatory minimum 10½ percent. - Even after provisioning, NPLs exceed bank equity at 127 percent (up from 84 percent in 2011). - Tracker mortgage portfolios and profitability drag: - Tracker mortgages represent 60 percent of aggregate mortgage lending of AIB, BoI, and PTSB. - CBI study estimates average margin ~130 basis points over ECB rate, implying low average interest rate of about 1.8 percent currently. - Estimated profit drag from tracker mortgages: about 0.4 percent of average assets overall for PCAR banks; current negative carry estimated around 100 basis points allowing for Fund staff assumption of 150 basis points to cover operational costs, credit risk charges and cost of capital. - PTSB’s high exposure to tracker mortgages contributes to its inability to break even until 2016–17. - Provisioning and risk-weighted assets: - Provisioning coverage: 48.4 percent of gross NPLs at end 2012. - Need to review calculation of risk weighted assets and provisioning models given reliance on models with inadequate loan workout experience. ### Stress testing, SSM entry, and balance-sheet assessment - Timing and alignment with SSM: - Next joint European stress test now expected in first half of 2014 (SSM effective July 1, 2014); Ireland to align timing and methodology, delaying its own stress test from September 2013. - Interim priorities: preparatory work, strengthen bank profitability, assess bank balance sheets. - Planned work streams and benchmarks: - Forward-looking operating profit analysis for PCAR banks by end-September 2013 (proposed structural benchmark); include projected operating expenses, sensitivity to ECB rates and funding costs, and revenue contribution of modified/forborne/NPLs. - Tracker funding cost options: project reporting at end-June and end-September 2013. - External review of bank fee regulation by end-December 2013. - Preliminary balance sheet assessment by end-October 2013 (proposed structural benchmark), finalized by end-November 2013; elements include asset quality review, RWA review, and point-in-time capital adequacy estimates. - Methodological aspects (sample size/selection, third-party involvement) to be agreed by end July 2013; test parameters for benchmarking provisioning to be agreed by end September. ### Fiscal outturns, projections, and policy stance - 2012 and 2013 fiscal outturns: - Final 2012 general government deficit: 7.6 percent of GDP (some 1 percentage point below program ceiling). - Authorities committed to achieve 7.5 percent of GDP deficit target for 2013. - At end-April 2013: cumulative exchequer primary deficit close to 1 percent of GDP lower than corresponding point in 2012, and ¼ percent of GDP below authorities‘ profile; performance criterion on exchequer primary balance met by margin of 0.8 percent of GDP in Q1. - Budget implementation and measures: - Agreement with public service union leaders to achieve €300 million (0.2 percent of GDP) in 2013 and €1 billion by 2015 in pay and pension savings. - Residential property tax filings reached more than 1.5 million—compliance rate more than 90 percent; estimated yield 0.1 percent of GDP. - Legislation to charge private patients in public hospital beds expected by end-June. - Medium-term projections and targets: - Medium-term baseline: gradual recovery to about 2 percent in 2014 and 2¾ percent thereafter. - Macroeconomic Projections, Real GDP (percentage change): 2008 -2.1; 2009 -5.5; 2010 -0.8; 2011 1.4; 2012 0.9; 2013 1.1; 2014 2.2; 2015 2.7. - Current account (percent of GDP): 2008 -5.7; 2009 -2.3; 2010 1.1; 2011 1.1; 2012 4.9; 2013 3.2; 2014 3.9; 2015 4.0. - Household savings rate (percent of disposable income): 2008 10.0; 2009 14.9; 2010 12.0; 2011 10.7; 2012 12.5; 2013 11.6; 2014 10.5; 2015 9.6. - Household debt (percent of disposable income): 2008 211; 2009 209; 2010 218; 2011 215; 2012 202; 2013 197; 2014 189; 2015 180. - Nominal GDP (billions of euros): 2008 178.9; 2009 161.3; 2010 156.5; 2011 159.0; 2012 163.6; 2013 167.5; 2014 173.4; 2015 180.8. ### Debt sustainability, stress scenarios, and contingent liabilities - Baseline public debt path: - Gross public debt set to peak in 2013 at 123.3 percent of GDP and fall thereafter. - Annex I baseline: gross general government debt projected to fall to around 96 percent of GDP by 2021. - Low growth / stagnation scenarios: - If overall growth remained around 1 percent during 2014–18, general government deficit would fall to 3½ percent of GDP in 2015 without additional fiscal effort, then widen to almost 4 percent by 2018. - Debt would rise to about 130 percent of GDP by 2018 without additional measures. - With additional fiscal consolidation on the order of 3 percent of GDP over 2015–18, debt would peak around 127 percent of GDP and not start declining until 2017–18. - Under stagnation at 1 percent per year, debt could reach 136 percent of GDP by 2021 (Annex I). - Contingent liability scenarios: - Quantified contingent liabilities (percent of projected 2013 GDP): Senior NAMA bonds: 24.1; Other Bank Liabilities covered by ELG: 13.0; Total: 37.1. - Standard contingent liability scenario: combined cost realization of 10 percent of GDP would cause debt to rise over 130 percent of GDP before gradually declining to around 116 percent of GDP by 2018. - Sale of IBRC loan portfolio may have budgetary cost if government compensates NAMA for any shortfall relative to €12.9 billion initially paid in NAMA bonds. - Additional outlays possible from bank capital needs identified by SSM-aligned stress test in H1 2014 and restructuring of credit union sector. - External debt risks and projections: - Non-IFSC external debt end-Q4 2012: around 287 percent of GDP (down by over 35 percentage points from end-2011). - Total external debt including IFSC end-2012: around 1,002 percent of GDP. - Baseline external debt projection: around 200 percent of GDP by 2018. - Growth-shock and current-account shock scenarios can raise external non-IFSC debt by around 20 percentage points above baseline; combined shocks raise medium-term external debt to 228 percent of GDP in illustrative scenario. ### Policy priorities and recommendations (staff appraisal) - Financial sector priorities: - Ensure banks achieve public targets for mortgage arrears resolution and SME loan work-outs. - Review provisioning and risk-weighted assets; conduct comprehensive asset quality review and operating profit analysis ahead of SSM entry. - Consider measures to reduce tracker mortgage funding cost and explore options to defray potential costs (including tax changes) where feasible. - Prepare for potential bank capital needs with a strong financial backstop, including ESM equity backstop where private resources are inadequate. - Fiscal and structural policy: - Maintain steady fiscal consolidation and implement remaining Budget 2013 measures in full; retain buffers given smaller fiscal buffers in 2013. - Deferred significant additional consolidation to 2015 if growth weaker; any reassessment to await Budget 2014. - Manage final years of consolidation in the most growth-friendly manner while pursuing structural reforms to support jobs (SMEs) and reduce long-term unemployment. - Strengthen medium-term fiscal framework: bring Budget 2014 forward to October 15; assign Irish Fiscal Advisory Council role to endorse macroeconomic forecasts; make 3-year expenditure ceilings legally binding. - Labor market and activation: - Roll out Intreo offices and redeploy 300 case officers by end-2013; consider private provision of employment services by end-June. - Introduce simplified JobsPlus scheme in H2 2013 offering monthly payments for two years to firms hiring long-term unemployed. - SME support and state assets: - Roll-out three new SME funds to provide up to €850 million of new financing to SMEs. - Advance state asset disposals and public-private investment projects; use at least half of state asset sale proceeds for debt reduction. ### Monitoring, programme conditionality, and data provision - Programme monitoring and structural benchmarks: - Structural benchmarks include: publish update of 2011 Impairment Provisioning and Disclosure Guidelines by end-May 2013; undertake review of progress in addressing mortgage arrears by end-June 2013; forward-looking analysis of PCAR banks’ operating profits by end-September 2013; preliminary balance sheet assessment by end-October 2013. - Proposed performance criteria and reporting obligations across Department of Finance, NTMA, and Central Bank with specified reporting lags and frequencies (Annex 1: Provision of data). - Programme financing and requests: - Request for completion of tenth review and release of tenth purchase equivalent to SDR 831 million (Letter of Intent). - Aim for an end-year cash buffer sufficient to cover 12–15 months financing needs. - Medium-term market financing needs projected to rise to about €20-25 billion by end of decade (about 10 percent of 2020 GDP). *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 1. Impact of the Patent Cliff on the Irish Economy ________________________________________________ 7 ### Impact of the Patent Cliff on the Irish Economy ### Overview and Policy Planks - Review objective: support Ireland’s progress toward a durable return to market financing. - Three broad policy planks discussed: - Financial sector: ensure banks can support sustained recovery through timely action on lingering financial sector issues, including strong preparations for entry into the Single Supervisory Mechanism (SSM) and resolving nonperforming loans (NPLs). - Banking union: need to deal with banks’ remaining profitability issues and any further balance sheet repair needs to rebuild lending and support medium-term growth. - Timetable: European bank stress tests adjusted to be in accord with the July 2014 inception of the SSM; Ireland agreed to align its schedule with the European process. - Interim diagnostics: authorities to review banks’ provisioning, profitability, and risk weighted assets. - Enhancing asset quality: initial targets for durable resolution of impaired residential mortgages established in March; further development of this target framework and separate targets for SME loan resolution discussed. - Fiscal: maintain steady fiscal consolidation; careful implementation of Budget 2013 emphasized given smaller fiscal buffers this year. - Structural: implement policies to support job creation (including SMEs) and tackle long-term unemployment. ### Recent Macroeconomic Developments and Indicators - Households: - Household saving in 2012: 12½ percent of disposable income. - Household gross debt in 2012: 202 percent of disposable income. - Mortgage distress (2012): - 15.8 percent of mortgages on primary dwellings are over 90 days in arrears. - 26.9 percent of buy-to-let mortgages are over 90 days in arrears. - SME sector: - Impaired loans rose to 25 percent of SME and corporate loans. - Banks’ responses: combination of forbearance and rejection of SME loan applications—rejection rate the 2nd highest in the EU. - Bank profitability and NPLs: - Banks remained loss making in 2012 even before provisioning. - NPLs reported at a quarter of gross loans. - Real economy (2012): - Economy grew 0.9 percent y/y in 2012. - Domestic demand declined by 1½ percent y/y in 2012 (versus a 3¾ percent fall in 2011). - Private consumption declined 0.9 percent y/y in 2012, but firmed in H2 2012. - Household disposable income rose 2½ percent y/y in H2 2012—the first rise since 2008. - Real fixed investment picked up by 1.2 percent y/y in 2012 (largely due to aircraft purchases early in the year). - Labor market: - Unemployment rate: 13.7 percent in Q1 2013, down from 15 percent a year earlier. - Employment growth: 1.1 percent y/y in Q1 2013. - Many new jobs were part-time for employees seeking full-time work. - Regional disparity: difference in unemployment rates between Dublin and the South-East around 7¼ percentage points. - If discouraged workers and involuntary part-time workers were included, overall unemployment would have remained above 24 percent. - Inflation: - HICP inflation declined to 1.1 percent y/y in Q1 2013 (down from an average of 1.9 percent y/y in 2012). - External accounts: - Current account surplus rose to almost 5 percent of GDP. - Strong services exports improved the services balance by almost 3 percent of GDP from 2011. - Net FDI inflows in 2012: remained strong at 5 percent of GDP. ### Impact of the Patent Cliff (Box 1) — Key Findings - Observed developments: - Production and exports of Irish chemical products fell sharply in H2 2012. - On average, industrial production of chemicals has fallen by around 10 percent since August 2012. - Chemicals exports declined by a similar amount. - Decline attributed mostly to a wave of patent expirations for several blockbuster drugs manufactured in Ireland. - Reasons for a more muted impact on GDP and employment: - Chemicals constitute around 60 percent of merchandise exports (an increase of almost 15 percentage points since 2005). - The sector has a high (services) import content; value added of the chemical sector was around 10 percent of total in 2011, much smaller than its share in total exports. - Firms manufacturing pharmaceuticals in Ireland are typically foreign subsidiaries; exports are associated with significant royalty payments recorded in the Balance of Payments as imports of services, so declining exports tend to be accompanied by smaller services imports, dampening GDP impact. - Employment in the pharmaceutical sector estimated at around 24,500 people (around 1¼ percent of employment). - Implication: despite large pharmaceutical export values, the patent cliff’s impact on GDP and employment is likely to be modest. ### Short-Term Indicators and Outlook for Merchandise Exports - Core retail sales: eased notably in the first four months of 2013 from end-2012 highs; sales essentially flat year-on-year. - Capacity utilization: rose above 50 for the first time in 18 months, suggesting possible corporate investment increases. - Export signals: - Fall in goods exports accelerated in the first three months of 2013. - Industrial production only partly recovered from sharp fall in September 2012. - PMI on new export orders fell below 50 in recent months. - Declining export expectations among SMEs. - Implication: these indicators bode poorly for 2013 merchandise export growth. ### “Redomiciled Firms” and Their Impact (Box 2) - Characteristics of redomiciled firms: - Establish only headquarters in Ireland to consolidate profits for taxation at the Irish corporate rate, unlike traditional MNEs that invest in production. - Treated as Irish enterprises in national accounts and Balance of Payments (BOP); large foreign profits counted as income inflows, increasing the current account and GNP. - Undistributed profits raise the official current account balance and GNP because corresponding outflows are only recorded when dividends are paid to foreign owners. - Traditional multinationals’ profits are attributed to foreign owners and considered reinvested earnings, deducted from the current account and GNP even if not repatriated. - FitzGerald (2013) estimates (as reported): - Undistributed profits of redomiciled enterprises accounted for 1.1 percent of GDP in 2009 and rose to 4.3 percent of GDP in 2012. - Adjusting national accounts by stripping out these earnings: - Adjusted GNP fell more than officially recorded in 2009–11 and grew at a lower rate in 2012. - Adjusted current account balance was much smaller in 2012: by 2012 the adjusted current account surplus is estimated at 0.8 percent of GNP, some 5.3 percentage points below the official figure. - Adjusting the current account balance by excluding the estimate for undistributed profits of redomiciled companies results in a was 1.4 percent of GNP lower current account balance in 2009 (text as provided). ### Financial Market and Sovereign Financing Developments - Sovereign issuance: - March 13 syndicated 10-year Irish sovereign bond: raised €5 billion at a yield of 4.15 percent. - Total bids: almost €13 billion from almost 400 investors. - Treasury bill auctions: regular monthly auction of 3-month bills on May 16 had a bid-to-cover ratio around 4 and a yield of 13 basis points. - Sovereign yields: yields on the new 10-year Ireland sovereign issue recorded a 27 basis points decline in the post-auction market (text truncated in source). _Source: IRELAND — INTERNATIONAL MONETARY FUND (chapter: Impact of the Patent Cliff on the Irish Economy)._ ### 3.88 percent despite a relatively volatile market. These trends are consistent with broader ### _cr13163 - 3.88 percent despite a relatively volatile market. These trends are consistent with broader ### Market developments and sovereign yields - Portuguese and Spanish 10-year benchmark yields declined 27 and 44 basis points respectively. - Moody‘s reaffirmed the negative outlook on its rating for Ireland, which remains one-notch into speculative grade. - Ten-Year Sovereign Bond Yields: Irish 8-year government bond yield used since 1/1/2013 (chart referenced). - Two-Year Sovereign Bond Yields: comparative series for Portugal, Spain, Italy, Ireland (chart referenced). ### Bank funding, ECB borrowing, and deleveraging - Bank of Ireland (BoI) issued €500 million in 5-year covered bonds at a yield of 2¾ percent. - A similar 3 year issue four months earlier priced at 3⅛ percent. - On May 29, BoI issued €500 million of 3-year senior unsecured bonds at a yield of 2.7 percent. - New household deposits attracted an average rate of 1.2 percent; new corporate deposits attracted 0.7 percent. - Private sector deposits were flat in April after rising 2.3 percent y/y in March (March figure corrected for the impact of the liquidation of the Irish Bank Resolution Corporation). - PCAR banks generated total deleveraging of €63.7 billion by February 2013. - ECB refinancing for PCAR banks fell to €35.6 billion in May 2013 from the January 2011 peak of €93 billion. - ECB‘s March 21 decision: extend for two years the own use bank bond program to augment collateral buffers. - Eurosystem borrowing, PCAR Banks and IBRC (ELA eliminated in February 2013 as a result of the liquidation of IBRC) depicted in chart (billions of euros). ### Credit conditions and lending developments - Total credit to nonfinancial corporations declined 5.1 percent y/y in April. - Loans to Irish households declined 4.1 percent y/y in April; loans for house purchase down 2 percent y/y. - Residential mortgage loan draw downs fell 26 percent y/y in Q1 2013 (expiry of mortgage interest tax relief end-2012 reflected). - April 2013 Bank Lending Survey shows: - Small easing in credit standards for households. - Increase in demand for loans for house purchase. - 8.7 percent y/y increase in loan approvals in April. - Lending rates on tracker mortgages eased following the ECB rate cut on May 2, but new lending mostly on Standard Variable Rate (SVR) basis where rates have been rising since 2009. - Lending contraction: Credit to households and NFCs (eop) series shows negative changes across recent years (chart referenced). ### Housing market and property - National residential property prices fell 2.6 percent in Q1 2013, bringing the index to a new low 51 percent below its pre-crisis peak. - Price decline driven by almost 4 percent fall outside Dublin. - Housing supply: Dublin stock ≈ 6 months‘ supply; regional markets inventories range 20–60 months. - Property transaction volumes rose 14 percent y/y in Q1 2013. - Rents and disposable incomes rising; housing affordability and implied rental yields appear positive by historical standards. ### Fiscal outturns and budgetary developments - Final 2012 general government deficit: 7.6 percent of GDP, some 1 percentage point below the program ceiling. - Supported by robust revenues (VAT, corporation tax and capital receipts, and a telecom license sale) and lower than budgeted capital and interest spending, outweighing overruns on health and social spending. - At end-April 2013: - Spending significantly lower than a year ago due to reductions in social protection and education outlays; remained within profile. - Cumulative tax revenues (after adjusting for one-offs) above year-earlier collections by about ¼ percent of GDP due to higher personal and corporate income taxes and stamp duties. - Tax revenues just ahead of authorities‘ profile despite disappointing VAT and excises. - Cumulative exchequer primary deficit at end-April close to 1 percent of GDP lower than corresponding point in 2012, and ¼ percent of GDP below authorities‘ profile. - Performance criterion on the exchequer primary balance met by a margin of 0.8 percent of GDP in Q1. - Notes for comparability on 2012 figures: - 2012 tax revenues exclude €251 million corporation tax payment delayed from December 2011. - IBRC promissory note payment of €3.06 billion settled through bond issuance excluded from capital expenditure for 2012. - Outlays in respect of IrishLife (€1.3 billion) and credit unions (€250 million) excluded from 2012 capital spending. - Proceeds of €1 billion from the sale of Bank of Ireland contingent capital notes excluded from 2013 other receipts. - Eligible Liabilities Guarantee scheme payments linked to promissory note transaction of €934 million excluded from 2013 current expenditure. ### Macro-financial outlook and baseline projections - Recent developments consistent with modest growth of about 1 percent in 2013. - External sector expected to remain main growth engine, albeit with smaller contribution than in 2012 due to pharmaceutical patent cliff, a strengthening of the euro relative to sterling, and weaker expected growth in trading partners per most recent WEO projections. - Private consumption expected to decline modestly as budget measures drag on disposable income, though employment and consumption trends suggest some upside potential. - Investment projected to rise modestly, reflecting SME indicators and possible improved bank willingness to lend given easing deposit costs and access to collateralized medium-term market funding. - Medium-term baseline: gradual recovery to about 2 percent in 2014 and 2¾ percent thereafter. - Trading partner growth projected to rise from 0.5 percent in 2013 to 1.7 percent in 2014, supporting export growth, domestic incomes, employment, and confidence. - Domestic demand expected to contribute from 2014 as labor market stabilizes, uncertainties decline, and savings gradually ease toward more normal levels. - Investment pickup expected as consumption revives; credit growth turning positive by 2015 supports recovery. - Macroeconomic Projections, 2008–15 (percentage change or indicator as shown): - Real GDP: 2008 -2.1; 2009 -5.5; 2010 -0.8; 2011 1.4; 2012 0.9; 2013 1.1; 2014 2.2; 2015 2.7 - Real domestic demand: 2008 -3.7; 2009 -11.0; 2010 -4.2; 2011 -3.7; 2012 -1.5; 2013 -0.5; 2014 1.0; 2015 1.8 - Private consumption: 2008 -0.1; 2009 -5.4; 2010 1.0; 2011 -2.4; 2012 -0.9; 2013 -0.3; 2014 1.2; 2015 1.6 - Public consumption: 2008 0.6; 2009 -4.4; 2010 -6.5; 2011 -4.3; 2012 -3.7; 2013 -2.0; 2014 -1.6; 2015 -0.7 - Fixed investment: 2008 -10.0; 2009 -27.6; 2010 -22.6; 2011 -12.6; 2012 1.2; 2013 1.0; 2014 4.0; 2015 6.0 - Exports: 2008 -1.1; 2009 -3.8; 2010 6.2; 2011 5.1; 2012 2.9; 2013 2.6; 2014 3.5; 2015 4.1 - Imports: 2008 -3.0; 2009 -9.7; 2010 3.6; 2011 -0.3; 2012 0.3; 2013 1.7; 2014 2.8; 2015 3.8 - Nominal GDP (billions of euros): 2008 178.9; 2009 161.3; 2010 156.5; 2011 159.0; 2012 163.6; 2013 167.5; 2014 173.4; 2015 180.8 - GDP deflator: 2008 -3.2; 2009 -4.6; 2010 -2.2; 2011 0.2; 2012 1.9; 2013 1.3; 2014 1.3; 2015 1.5 - Current account (percent of GDP): 2008 -5.7; 2009 -2.3; 2010 1.1; 2011 1.1; 2012 4.9; 2013 3.2; 2014 3.9; 2015 4.0 - Consumer Prices (HICP): 2008 3.1; 2009 -1.7; 2010 -1.6; 2011 1.2; 2012 1.9; 2013 1.3; 2014 1.3; 2015 1.6 - Unemployment rate (percent): 2008 6.4; 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 14.1; 2014 13.7; 2015 12.9 - Household savings rate (percent of disposable income): 2008 10.0; 2009 14.9; 2010 12.0; 2011 10.7; 2012 12.5; 2013 11.6; 2014 10.5; 2015 9.6 - Household debt (percent of disposable income): 2008 211; 2009 209; 2010 218; 2011 215; 2012 202; 2013 197; 2014 189; 2015 180 - Credit to households and NFCs (eop): 2008 8.8; 2009 -1.5; 2010 -3.4; 2011 -2.9; 2012 -4.0; 2013 -2.4; 2014 -0.9; 2015 0.6 ### Risks to the baseline recovery - Trading partner growth: weaker than projected recovery in trading partner growth from 2014 would negatively affect exports and consumer confidence; downside risk to euro area growth is high given lack of real sector response to monetary easing due to financial market fragmentation. - Financial market conditions: favorable access to markets for sovereign and banks may not persist if "search for yield" reduction in credit risk sensitivity unwinds (e.g., tapering of quantitative easing policies). - Lending revival and house prices: - Improved bank profitability and access to market funding needed to achieve positive net credit growth by 2015. - Recent falls in deposit rates positive for net interest margin prospects, but risks remain regarding effectiveness of loan restructuring and benefits for loan performance and collateral usable for funding. - Lack of lending increases risk of downside to house prices from mortgage resolution process, with parallel effects on SME asset values. - Fiscal consolidation: measures totaling 3 percent of GDP in 2014–15 could have a greater near-term drag on growth than assumed, partly depending on composition; about 1¾ percent of GDP in measures remain to be identified. ### Public debt projections and contingent liability scenarios - Baseline: gross public debt set to peak in 2013 at 123.3 percent of GDP and fall thereafter. - Low growth scenario: - If overall growth remained around 1 percent during 2014–18, general government deficit would fall to 3½ percent of GDP in 2015 without additional fiscal effort, then widen to almost 4 percent by 2018. - Debt would rise to about 130 percent of GDP by 2018 without additional measures. - With additional fiscal consolidation on the order of 3 percent of GDP over 2015–18, debt would peak around 127 percent of GDP and not start declining until 2017–18. - Contingent liabilities: - Sale of IBRC loan portfolio may have budgetary cost if government compensates NAMA for any shortfall relative to €12.9 billion initially paid in NAMA bonds. - Additional outlays possible from bank capital needs identified by SSM-aligned stress test in H1 2014 and restructuring of credit union sector. - Shortfall at NAMA could crystallize depending on property price developments until 2020; no estimates available. - Standard contingent liability scenario (Annex I): combined cost realization of 10 percent of GDP would cause debt to rise over 130 percent of GDP before gradually declining to around 116 percent of GDP by 2018. ### Policy discussions and priorities - Persistent fragility in debt sustainability requires policy actions to underpin lasting growth recovery and continued fiscal consolidation. - Financial sector strategy should proactively resolve loans to reduce uncertainties around asset values and address potential contingent liabilities in a structured manner that protects financial stability. - Final years of fiscal consolidation must be managed in the most growth-friendly manner possible while structural reforms address remaining hurdles to growth and job creation. ### Financial sector: size, NPLs, and profitability (PCAR banks and other sectors) - PCAR banks: net loans €197.2 billion, or 121 percent of GDP. - Credit union sector: net loans €4.1 billion, 2½ percent of GDP (to be addressed under Credit Union Restructuring Board). - NAMA: net loans €22.8 billion, 14 percent of GDP; resolving assets by 2020. - Liquidation of IBRC will put loan assets €16 billion, 10 percent of GDP, up for valuation and sale by end 2013. - PCAR recapitalization: €24 billion recapitalized under PCAR 2011, bringing average core tier 1 capital to 14.7 percent of risk weighted assets by end 2012 (above market norms and Irish regulatory minimum of 10½ percent). - Even after provisioning, NPLs exceed bank equity at 127 percent (up from 84 percent in 2011), indicating need for high reported capital while resolution works out NPL values. - Loan-to-deposit ratio: average down to 124 percent by end 2012 from 182 percent at end 2010; Eurosystem funding halved. - Immediate concerns: - Nonperforming loans: 24.8 percent of total loans, a drain on market confidence, cash flows, and source of operational costs hindering lending capacity. - Profitability: 2012 PCAR banks ran losses before provisions of €0.8 billion, or 0.2 percent of average assets. - By end 2013, PCAR banks project €1.1 billion in profits before provisions or 0.4 percent of average assets. - Projected profitability still short of covering normal provisioning and insufficient to build capital for new lending. - Tracker mortgages (~30 percent of net loans) are a key drag on profitability; PTSB‘s high exposure contributes to inability to break even until 2016–17. - Bank funding improvement measures: phasing out of ELG contributed to profitability prospects. ### Box — Tracker mortgage portfolios and impact on profitability - Tracker mortgages: variable rate set at fixed margin above ECB policy rate; used for primary dwellings and buy-to-let; represent 60 percent of aggregate mortgage lending of AIB, BoI, and PTSB. - Many tracker mortgages originated around housing boom peak. - Recent CBI study estimates average margin ~130 basis points over ECB rate, implying low average interest rate of about 1.8 percent currently. - Tracker mortgages cause substantial drag on Irish banks’ profitability: - Sharp cuts in ECB rates since 2008 led to equal reduction in tracker rates. - Cost of deposits and other funding have fallen notably less, producing significant "negative carry" on tracker mortgages. - If all tracker mortgages funded at average deposit rate, current negative carry estimated around 100 basis points allowing for Fund staff assumption of 150 basis points to cover operational costs, credit risk charges and cost of capital. - Given scale of tracker mortgages in PCAR banks, overall profit drag estimated about 0.4 percent of average assets. - Recent easing in deposit rates helps but funding costs unlikely to decline enough to make tracker portfolios profitable while ECB rates remain close to zero bound. *Italic: IMF staff summary of content unit _cr13163 - 3.88 percent despite a relatively volatile market. These trends are consistent with broader* ### 13. Although PCAR banks’ reported capital is high, provisioning and risk weighted assets ### 13. Although PCAR banks’ reported capital is high, provisioning and risk weighted assets need to be reviewed ### Capital adequacy, provisioning, and risk-weighted assets - Bank capital is tracking between the base and stress scenarios from PCAR 2011; arrears are tracking closer to that exercise‘s stress scenario, while housing collateral values are higher than in the base scenario and deleveraging costs notably smaller than projected. - Use of models despite inadequate loan workout experience to underpin relevant parameters suggests a need to review: - Provisioning: 48.4 percent of gross nonperforming loans at end 2012. - Calculation of risk weighted assets. ### Stress testing and entry to the SSM - The Irish authorities will align forthcoming stress tests with those for the SSM and strengthen preparations for smooth entry into the banking union (MEFP ¶10). - Timing and sequencing: - Next joint European stress test exercise is now expected to take place in the first half of 2014 (SSM effective by July 1, 2014). - Ireland will align timing and methodology of its bank stress test with the SSM exercise, delaying Ireland‘s own stress test from September 2013. - Interim priorities: strengthen bank profitability and assess bank balance sheets (MEFP ¶11). ### Key implication - A single capital exercise fully consistent with SSM standards was preferred to support financial stability despite the delay; in the interim, banks and authorities will prioritize preparatory work and balance sheet assessments. ### *Source: IMF staff report text provided.* --- ### Addressing NPLs ### Comprehensive NPL resolution strategy (ninth review) - Components: - Establish framework of residential mortgage resolution targets for principal mortgage lenders. - Review consumer protection rules for mortgages in arrears. - Address unintended impediments to repossession. - Activate the new personal insolvency framework. - Update bank provisioning guidelines. - Strategic goal: achieve a durable reduction in arrears by pushing banks to pursue sustainable borrower solutions and removing impediments. ### Central Bank of Ireland (CBI) implementation (MEFP ¶4) - Mortgage arrears resolution targets: - After establishing a framework of public targets for restructuring arrangements (text table), CBI‘s next step is to propose a target by end-June for arrangements to be concluded by end-2013, and will establish such targets soon thereafter, before completion of the eleventh review at the latest. - Monitoring: - Based on on-site reviews of the PCAR banks, CBI is pushing banks to strengthen collection of early arrears, treatment of late arrears, assessment of Standard Financial Statements, and legal enforcement units. ### Progress and expectations - Current status: number of durable restructuring arrangements concluded remains modest. - Banks are stepping up engagement and proposing sustainable solutions; conversions from proposals to concluded arrangements are expected to ramp up during the year. - Structural benchmark: thorough stock taking at midyear (end-June) to inform adjustments. ### Modifications to Code of Conduct on Mortgage Arrears (CCMA) (MEFP ¶5) - Amendments to be issued by end June: - Replace cap on unsolicited borrower contacts at 3 per month with requirement that lender communications be proportionate and guided by board-approved contact policies. - Clarify definition of a non-cooperative borrower, limiting certain CCMA protections to borrowers engaging constructively. - Link CCMA provisions and personal insolvency procedures to clear path for insolvent borrowers seeking insolvency arrangements. - Staff views: - Caution against excessive complexity and subjectivity in CCMA. - If a sustainable restructuring arrangement is refused by the borrower, staff favors lifting CCMA protections against repossession after a brief review period. ### Repossession framework (MEFP ¶6) - Bill published amending Land and Conveyancing Law Reform Act 2009 to ensure availability of summary repossession proceedings for mortgages created prior to December 2009 (except pending cases). - Bill adds provisions for adjournments to accommodate borrower consultations with insolvency practitioners. - Passage of the Bill by parliament expected before the summer recess. - Operational measures: - Six specialized judges appointed for personal insolvency cases; further court resources to be added if needed. - Staff favored exploring measures to enhance repossession efficiency, e.g., reducing frequency and duration of adjournments. - CBI reviewing banks‘ policies on management of repossessed properties and vendor financing; findings may feed into prudential guidance and conflict-of-interest policy. ### Residential Mortgage Arrears Resolution Targets (summary items from CBI table) - Coverage: ACC Bank, AIB, BoI, KBC Bank Ireland, PTSB, and Ulster Bank. - Timeline highlights: - Targets to be announced on a rolling quarterly basis for 2013–2014. - Terms being met: 75 75 75 75 (percent of arrangements concluded) for the quarters shown. - Sustainable solutions proposed: 20 30 50 (percent of customers 90+ days in arrears) across indicated quarters. - Arrangements concluded: No target / TBA by Q3 (percent of customers 90+ days in arrears). ### Personal insolvency framework and multi-lender scheme (MEFP ¶7) - Insolvency Service: - Established on March 1 pursuant to the Personal Insolvency Act 2012. - Will begin to accept applications from late June with a view to completing the first arrangements by October. - Published Reasonable Living Expenses Guidelines for debtors. - Published regulations for personal insolvency practitioners and developed training syllabus for licensing. - CBI pilot: - Three month pilot with lenders to facilitate restructuring of secured and unsecured distressed consumer debts in multi-lender context; includes a decision tree to guide cooperation. Pilot will conclude with a review. ### SME loan restructuring - Authorities pushing for substantial progress before year end. - Key performance indicators for SME debt resolution reported as of end March and are being analyzed by the CBI. - SME loan restructuring targets for PCAR banks to be set by end June. - On-site supervisory visits in H2 2013 to include individual SME loan file reviews and operational reviews. ### Provisioning for restructured mortgages and updated guidelines - CBI reviewing 2011 Impairment Provisioning and Disclosure Guidelines and considering new provisioning rules for restructured residential mortgages (structural benchmark, MEFP ¶10, 9th review). - Update aims to set clear definitions and principles underpinning banks‘ provisioning models to level out differences in conservatism around model inputs and management judgment. - CBI is minded to introduce rules-based provisioning requirements on all mortgage loans in arrears greater than 90 days which have not been restructured on a sustainable basis with effect from end 2014. ### *Source: IMF staff report text provided.* --- ### Assuring sustained capital adequacy ### Work stream on bank profitability (MEFP ¶11) - Purpose: preparatory work for SSM entry and to address PTSB‘s viability challenges. - Components and timelines: - Operating profit analysis: - PCAR banks to prepare forward-looking analysis of operating profits by end September 2013 (proposed structural benchmark). - Analysis to include evolution of projected operating expenses, sensitivity analysis to ECB interest rates and funding costs, and contribution to revenues of modified, forborne and nonperforming loans. - CBI will critically review and report results to banks to consider capacity of operating profits to absorb provisioning needs. - Tracker funding cost options: - Ongoing project reporting at end-June and end-September 2013 to explore options to reduce funding cost of tracker mortgages on a sustainable basis. - Will quantify profit contribution of tracker mortgages, identify options to reduce funding costs, assess feasibility and costs/benefits. - Follow-up: engage external parties including European institutions as needed; explore options to defray potential costs, such as eliminating tax deductibility of mortgage interest up to low tracker rates. - External review of bank fee regulation: - Banks‘ noninterest income amounted to only 0.3 percent of average assets in 2012. - External review by end-December 2013 of regulatory framework will consider fee regulation frameworks in other countries. ### Comprehensive balance sheet assessment (timeline) - Preliminary assessment by end-October 2013 (proposed structural benchmark), finalized by end-November 2013. - Elements: - Asset quality review: - Quantitative assessment of loan provisions to review classification of NPLs and forbearance. - Review processes, key inputs and assumptions for specific and collective provisioning and estimate associated sensitivities. - Results to be reported to banks and used by CBI as benchmark for review of end-2013 provisioning. - Central bank‘s updated Impairment Provisioning and Disclosure Guidelines will be key input. - Methodological aspects (sample size/selection for loan file reviews and involvement of third parties independent of banks) to be agreed by end July. - Test parameters for benchmarking provisioning to be agreed by end September. - Risk-weighted assets: - Review appropriateness of risk weighted asset calculations; assess key model inputs and assumptions, including sensitivity analysis. - CBI to inform banks and issue Risk Mitigation Plans where necessary for implementation by end December 2013. - Balance sheet assessment: - Estimate of banks‘ point-in-time capital adequacy will use inputs from asset quality review and RWA review. - Banks will be advised of results to inform financial planning and SSM preparations. ### *Source: IMF staff report text provided.* --- ### Fiscal policy ### 2013 fiscal targets and buffers (MEFP ¶12) - Exchequer performance closely aligned with authorities‘ profile through end April. - Full implementation of remaining measures in second half of the year critical to reach 2013 targets and medium-term consolidation goals. ### Expenditure measures - Agreement with public service union leaders to achieve targeted pay and pension bill savings: - €300 million (0.2 percent of GDP) in 2013. - €1 billion by 2015. - Agreement modifies earlier proposal by allowing pay cuts for higher paid workers to be reversed in 2017–18 and revising freezes on automatic increments. - Balloting of agreement by some unions expected over next few weeks; legislation to implement pay cuts by July 1. - Authorities need to press ahead with budgeted non-wage savings (e.g., staff redeployments, reconfiguration of public service delivery) while closely monitoring health spending. ### Revenue measures - By end-May, residential property tax filings reached more than 1.5 million—indicating a compliance rate of more than 90 percent. - Deadline for payments is July 1, with an estimated yield of 0.1 percent of GDP. - Legislation in preparation to charge private patients in public hospital beds, expected to be enacted by end-June. ### Potential one-off shocks in 2013 - Scale of potential compensation to NAMA related to IBRC loans acquired as part of promissory note transaction will be clear once valuation and bidding processes are completed by late 2013. - Payment of Allied Irish Bank‘s dividends on preference shares held by the government via issuance of ordinary shares (0.2 percent of GDP) may be reclassified as a deficit increasing transfer, as occurred in 2012. - Upside: additional proceeds may be available from sale of state assets currently in the pipeline. ### Policy advice on adjustment path - Maintain steady budgetary adjustment to safely reach medium-term fiscal targets. - Staff supports accommodating revenue shortfalls if growth outturn is significantly weaker. - Any significant additional consolidation to reach the 2015 deficit target should be deferred to 2015 where adjustment burden is lighter. - Staff would not support reductions in agreed scale of fiscal consolidation in 2014–15 on basis of interest savings from the promissory note transaction. - Planned fiscal adjustments: €3.1 billion in 2014 and €2.0 billion in 2015. ### 2015 deficit forecast and medium-term framework - Authorities’ April 2013 Stability Programme Update (SPU) forecasts the 2015 deficit to fall to 2.2 percent of GDP. - SPU uses adjustment path outlined in Budget 2013 as technical assumption; decision on specific adjustment path to bring deficit below 3 percent of GDP by 2015 to be made closer to October 2013. - Staff supports reassessment to incorporate 2013 budget performance and updated growth projections, while retaining a buffer to safely meet ceilings: - 5.1 percent of GDP in 2014. - Less than 3 percent of GDP in 2015. - SPU projects, on a technical basis, continued improvement in structural balances by restraining annual expenditure growth to 1 percent to reach a balanced budget by 2019. ### Strengthening medium-term fiscal framework and EU compliance - To implement the ―Two Pack‖: - Budget 2014 to be brought forward to October 15. - Irish Fiscal Advisory Council to be assigned role of independently endorsing macroeconomic forecasts used for budget and stability program. - Legislation progressing to make operational 3-year ceilings on aggregate and departmental expenditure legally binding and consistent with expenditure benchmark under the Stability and Growth Pact (MEFP ¶14). - Once bill enacted, a circular will specify operational details of ceilings, circumstances for revision, and correction mechanisms. - These steps largely complete the Medium Term Budgetary Framework in line with EU requirements. ### *Source: IMF staff report text provided.* --- ### Structural reforms ### Focus on growth and job creation - 2013 Action Plan for Jobs outlines seven broad-based reforms to support employment in areas of competitive advantage (data compilation and analysis, computer sciences, health and pharmaceutical sector). - First quarter 2013 performance: 96 percent of actions planned for that period were completed. - Authorities will conduct a thorough evaluation of employment impact of 2012 and 2013 plans before determining 2014 reforms. ### State assets and investment projects - State asset disposals proceeding as planned; part of proceeds expected this year from energy facilities. - Public-private investment projects planned (roads, schools, healthcare centers) with tender process expected to commence in the summer. ### *Source: IMF staff report text provided.* ### 31. Efforts to reduce unemployment, especially long-term, continue. The rollout of the new ### _cr13163 - 31. Efforts to reduce unemployment, especially long-term, continue. The rollout of the new ### Unemployment activation and one-stop shops - Rollout of the new one-stop-shop Intreo employment offices is proceeding as planned; authorities will ensure jobseekers seeking activation and training assistance are offered the same quality and speed of services across the country. - To improve capacity to activate the long-term unemployed: - Reassigning 300 new case officers by end-year. - Reviewing the engagement of private firms for the provision of employment services, with the decision expected by end-June. - All registered long-term unemployed should be profiled by end year. - A new and simplified JobsPlus scheme will be introduced in the second half of the year—replacing the existing Employer Job (PRSI) Incentive and Revenue Job Assist schemes—and will offer monthly payments for two years to firms that hire long-term unemployed job seekers. - Staff appraisal notes: - Activation resources remain low relative to the number of long-term unemployed; redeployment of case officers will only be completed by year end. - If private provision of employment services does not proceed, authorities will need to strengthen efforts to build adequate trained resources. ### Labor market institutions and wage implications - A recent Supreme Court ruling deeming Registered Employment Agreements (REA) unconstitutional may influence wages and employment conditions in affected sectors over time. - REAs were collective agreements; once registered with the Labor Court they became binding for all firms in the sector. - The minimum wage in the construction sector, which had risen substantially during the boom, was cut by only 7.5 percent in early 2011 despite a 60 percent fall in employment in the sector. - Most likely existing employees will retain current pay and work arrangements due to individual employment contracts; contracts for new workers will be governed by general labor laws, including the national minimum wage, which may allow more wage flexibility and employment in the medium term. ### SME support, financing, and restructuring - Policy actions to support job creation by SMEs aim to alleviate financial constraints, promote equity finance, and improve the business environment. - Authorities are rolling out new SME funds to provide up to €850 million of new financing to SMEs through equity finance and restructuring investment and credit. - Ensure Temporary Partial Credit Guarantee Scheme and Micro Enterprise Loan Fund are fully utilized subject to sufficient demand from SMEs. - SME State Bodies Group to coordinate and assess government initiatives in research, policy and information skills, partnerships with the European Investment Bank, access to finance, and CBI engagement with banks. - SME debt restructuring challenges and legal measures: - SME debts often entangled with owners’ property investment debt, complicating work-outs in multi-creditor cases. - Additional legislative amendments to further enhance the SME examinership legal framework will be considered by authorities by end-September. - Resolution targets for SME loans in arrears should soon be adopted to promote work outs for viable enterprises. ### Program modalities, fiscal performance, and targets - Program conditionality and structural benchmarks: - Program conditionality for end March was met. - The Exchequer primary deficit of €1.8 billion was well within the adjusted target of €3.2 billion, which reflected adjustments for the over performance of revenues, additional ELG payments related to the promissory note transaction, and proceeds from the sale of holdings of CoCos on BoI. - The indicative target on the stock of central government net debt was met with a margin. - A supplement to the report will provide staff‘s assessment of the end-May structural benchmark on updating, where necessary, of the 2011 Impairment Provisioning and Disclosure Guidelines. - Two additional structural benchmarks (MEFP Table 3): - Authorities will conduct a forward-looking analysis of operating profits of PCAR banks by end September 2013. - Authorities will complete a preliminary balance sheet assessment of PCAR banks by end October 2013. - Quantitative performance criteria were set for end September 2013; performance criteria for the exchequer primary balance was set with a test date at end September 2013, incorporating timing updates and higher contributions to the EU budget. - Financing and issuance: - Ireland has largely met its 2013 financing goal and aims to move to scheduled auctions later in the year. - Target at end 2013: a cash buffer sufficient to cover prospective financing needs for 12–15 months. - Given bond issuance of €7.5 billion to date, Ireland is well advanced towards meeting its full-year issuance goal of €10 billion. - NTMA plans to resume, subject to market conditions, regular bond auctions later in the year. - Medium-term rollover and debt profile: - Ireland‘s market financing needs are projected to increase to high levels by historical standards, at about €20-25 billion by the end of the decade (about 10 percent of 2020 GDP) before leveling off thereafter. - About one-third of the current stock of government bonds is held by the CBI and ECB; forthcoming issuance will significantly expand the free float of Irish government bonds. - Speculative grade rating from Moody‘s may hinder interest from ratings-sensitive investors. - European support and loan maturity extension: - Recently agreed extension of EFSF/EFSM loan maturities: maximum weighted average maturity extension of 7 years to help moderate significant repayment humps in 2016–20 and facilitate raising large volumes of market financing in this period. - To achieve this maturity extension, some existing loans will be rolled over into new obligations as they fall due. - Post-program options: - Discussions on potential post-program options continued, including a possible precautionary arrangement with the ESM to support durable return to market financing. - An ESM precautionary facility would cushion financing against post-program risks and meet one of the conditions for Ireland to qualify for Outright Monetary Transactions; under ESM guidelines authorities would also be expected to seek IMF support. ### Exceptional access criteria and risks - Exceptional access criteria continue to be met, although subject to significant risks: - Under the baseline macroeconomic framework, debt sustainability is expected to be maintained over the medium term, although subject to significant risks if growth does not strengthen or if further contingent liabilities materialize. - Program justification remains based on systemic international spillover risks given euro area fragility since debt sustainability is not assured with a high probability. - Ireland‘s strong program performance and commitments, recently regained market access, promissory note transaction, and agreed extension of EFSF/EFSM loan maturities provide adequate prospects to retain and expand access to private capital markets to secure repayment of Fund resources. - Risk: inadequate progress toward stronger European support would weaken assurances of adequate and durable market access given Ireland‘s public debt and financial sector vulnerabilities. ### Staff appraisal: macro-financial assessment and policy recommendations - Macro and market assessment: - Ireland’s strong policy implementation continues and market conditions have further improved. - Budget is on track, meeting fiscal targets for the first quarter. - Important efforts to durably address high level of NPLs are beginning under mortgage arrears resolution targets. - Ireland‘s 10 year benchmark bond issue in mid-March was a landmark step; extension of EFSF/EFSM maturities has reinforced progress. - Ireland recorded a second year of modest growth, with signs of domestic demand and employment beginning to stabilize. - Risks and constraints: - Uncertain medium-term outlook: recovery hinges on stronger growth in trading partners and continued favorable international financial market conditions. - Domestic drags: high private sector debts, continuing fiscal consolidation, and risks to domestic credit flow. - Persistently low growth would undermine debt sustainability; potential realization of financial sector contingencies is a threat. - Financial sector reform priorities: - Hold banks to achieving public targets for mortgage arrears resolution and closely monitor sustainability of resolution arrangements. - Timely removal of unintended barriers to repossession proceedings to protect debt service discipline and promote durable restructurings. - Progress in making the new personal insolvency regime effective and revision of the CCMA to facilitate constructive engagement between banks and borrowers. - Preparations for entry into banking union provide framework for diagnostics: align stress test timetable with SSM and conduct operating profit analysis and balance sheet assessment including a rigorous asset quality review. - A strong financial backstop will be needed, including an ESM equity backstop where private resources are inadequate and public debt sustainability is fragile. - Fiscal consolidation and structural reforms: - Steady fiscal adjustment is needed to support durable return to market financing. - Buffers relative to the 2013 fiscal targets appear small; important that remaining measures under Budget 2013 be implemented in full. - Government reaffirmed commitment to targets for pay and pension savings; legislative action may be necessary if negotiated agreement is not concluded. - After six contractionary budgets, development of structural reforms to deliver medium-term savings while protecting core public services and the vulnerable is critical. - Any reassessment of the medium-term consolidation path should await Budget 2014 and focus on safely achieving medium-term fiscal consolidation targets in a growth-friendly manner, while using interest savings from the promissory note transaction to help build buffers. - Steps to complete legal establishment of the 3-year expenditure ceilings and specify operational aspects should be completed in a timely manner. - Additional policy recommendations in staff appraisal: - Strengthen activation policies and SME supports to facilitate reduction in unemployment. - Ensure SME State Body Group coordinates and evaluates effectiveness of government initiatives in equity finance and related supports. - Advance state asset disposals and implement public-private investment projects expeditiously to support investment and reduce public debt. - Further European support to address bank profitability challenges and cushion potential capital needs would support recovery and protect debt sustainability, enhancing prospects for a durable return to market financing. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 47. Staff supports the authorities’ request for completion of the tenth review. ### _cr13163 - 47. Staff supports the authorities’ request for completion of the tenth review. ### Real sector and inflation - Net exports remained the main contributor to growth in 2012; the current account registered a large surplus in 2012 as strong net exports outweighed income outflows. - Industrial production recovered some patent-cliff-related losses but the new export orders indicator fell below 50 in March. - Inflation: - Harmonized index of consumer prices (HICP): "-1.7" (2010), "-1.6" (2011), "1.2" (2012), "1.9" (2013), "1.3" (2014). - Inflation started to abate in September on account of moderating energy and administered prices. - Contribution to annual HICP inflation: core inflation, energy and unprocessed food tracked monthly (Apr-09 to Apr-13) with core inflation around zero to small positives by Apr-13. - Labor market: - Unemployment eased modestly to just under "14 percent". - Over "60 percent" of unemployment is long-term. - Youth unemployment still close to "30 percent". - Key real sector figures (selected): - Real GDP: "-2.1" (2008), "-5.5" (2009), "-0.8" (2010), "1.4" (2011), "0.9" (2012), "1.1" (2013), "1.1" (2014) (Table 1). - Contributions to real GDP growth (2007–2012): net exports positive; domestic demand weak. ### Household finance and housing - Household savings remain elevated, with "three-quarters" of savings devoted to debt reduction since 2010. - Household balance sheets remain burdened with large debt, although interest payments are low. - Household debt and interest indicators: - Total household liabilities in percent of four-quarter gross disposable income presented in Table 1; effective interest rates and interest burdens shown (time series 2003–2012). - Mortgage arrears continue to increase, although the flow of new arrears is abating: - Mortgages in arrears: arrears over 180 days and arrears 91 to 180 days rising through 2012 (Central Bank of Ireland series). - Property prices and rental yields: - Residential property prices (2005M1=100): national and Dublin series show divergence; national series lower than Dublin. - Declining house prices drove rental yields to their highest level in ten years. - Loans for house purchases remain low (Irish Banking Federation/PWC data). - Lending: - Low volume of new mortgage lending restricts new buyers and impedes housing recovery. ### Credit developments and banking sector - Deposits and funding: - Level of private sector deposits has stabilized, with a recent rise reflecting liquidation of IBRC. - Bank deposits composition (resident private deposits, non-resident deposits) shown in time series 2009–2013. - Credit contraction: - Credit to households and corporations continues to contract as repayments exceed lending. - Loans outstanding to Irish residents (year-on-year percentage change): households and non-financial corporations series show negative growth through 2013. - Irish resident private sector credit adjusted growth: "8.8" (2008), "-1.5" (2009), "-3.4" (2010), "-2.9" (2011), "-4.0" (2012), "-4.1" (2013) (Table 1 / Table 4). - SME credit: - Outstanding SME credit (billions of euros) declined; gross new lending in thousands and outstanding amounts series shown. - Outstanding SME credit by sector declined across sectors; manufacturing and agriculture declined to a lesser extent. - Credit standards and demand: - Credit standards started to ease for mortgages and consumer loans (index: 2006Q1=100). - Credit demand started to show signs of life, with mortgage applications on the rise in April. - PCAR banks (aggregated) 2011–2012 (Table 10, aggregated summary): - Total average assets (TAA): "332.1" (2011), "317.0" (2012). - Gross loans: "240.8" (2011), "223.8" (2012). - Loan loss provisions: "23.5" (2011), "26.8" (2012). - Gross NPLs: "47.2" (2011), "55.6" (2012). - Core tier 1 capital (CT1): "27.4" (2011), "16.4" (2012). - Net income: "-4.0" (2011), "-1.2" (2012). ### Competitiveness and external sector - Competitiveness indicators: - Harmonized Competitiveness Indicator (1999Q1=100) and real HCI series show improvement earlier in the crisis but appreciation of the euro in recent months slowed improvement. - Real labor productivity continues to outpace the euro area. - Private wages rose in 2012, growth slower than in the euro area. - Export shares (percent of world non-oil imports) show exports of services and goods time series (1996–2012). - External accounts: - Current account (percent of GDP): "-5.7" (2008), "-2.3" (2009), "1.1" (2010), "1.1" (2011), "4.9" (2012), "3.2" (2013) (Table 1). - Balance of goods and services large surplus in 2012: "25.2" percent of GDP (2012). - Income and current transfers large negative: income balance "-20.6" (2012) percent of GDP. ### General government finances and fiscal adjustment - Fiscal consolidation: - Of an "11 percent of GDP" primary balance improvement (2010–2016), more than half is expected by 2013. - Fiscal consolidation is programmed to moderate over time and is expenditure-led. - Given weaker recovery in nominal domestic demand, tax measures will not raise revenues as a share of GDP. - Primary expenditures will fall by more than "10 percent of GDP", reflecting evenly spread durable savings. - Targets: - Overall deficit below "3 percent of GDP" targeted for "2015". - A primary surplus is to be regained in "2014". - Key fiscal numbers (Table 3 and Table 1): - General government balance (excl. bank support): "-11.4" (2009), "-10.7" (2010), "-9.1" (2011), "-7.6" (2012), "-7.5" (2013), "-4.5" (2014) (Table 1 / Table 2). - Primary balance (excl. bank support): "-9.3" (2009), "-7.5" (2010), "-5.7" (2011), "-3.9" (2012), "-2.5" (2013), "0.4" (2014). - General government gross debt: "64.8" (2009), "92.1" (2010), "106.4" (2011), "117.6" (2012), "123.6" (2013), "120.8" (2014). - Net general government debt: "23.0" (2009), "41.8" (2010), "74.5" (2011), "94.9" (2012), "102.8" (2013), "105.7" (2014). - Revenue and expenditure composition (Table 3): - Revenue (percent of GDP): "56.0" (2011), "55.1" (2012), "55.4" (2013), projected "56.6" (2014). - Taxes (percent of GDP): "35.9" (2011), "34.8" (2012), "37.6" (2013), "39.7" (2014). - Expenditure (excl. financial sector support) (percent of GDP): "74.4" (2011), "71.8" (2012), "69.9" (2013), "69.1" (2014). - Financial sector support costs peaked earlier and are projected to fall. ### Macroeconomic projections and medium-term scenario (2009–18) - Real GDP projections (Table 2): - 2009: "-5.5"; 2010: "-0.8"; 2011: "1.4"; 2012: "0.9"; 2013: "1.1"; 2014: "1.1"; 2015: "2.2"; 2016: "2.7"; 2017: "2.7"; 2018: "2.7". - Output gap and potential: - Output gap (percent of potential GDP): "-2.6" (2009), "-3.4" (2010), "-2.2" (2011), "-1.8" (2012), "-1.8" (2013), "-1.7" (2014), "-1.0" (2015), "-0.2" (2016). - Prices and wages: - HICP: "-1.7" (2010), "-1.6" (2011), "1.2" (2012), "1.9" (2013), "1.3" (2014). - Average wage, whole economy: "0.0" (2010), "-1.9" (2011), "-0.5" (2012), "0.6" (2013), "0.9" (2014). - Labor market projections: - Employment growth projected from "-0.7" (2008) to positive growth "0.9" (2014) and further gains thereafter. - Unemployment rate projections: "14.6" (2012), "14.7" (2013), "14.1" (2014), "13.7" (2015), "12.9" (2016), "12.4" (2017), "11.0" (2018), "10.3" (2019) in Table 2 series. ### External and financial vulnerability indicators - Balance of payments (Table 5): - Current account (in percent of GDP): "-2.3" (2009), "1.1" (2010), "1.1" (2011), "4.9" (2012), "3.2" (2013). - Capital and financial account balance: "-1.4" (2009), "4.2" (2010), "-18.0" (2011), "-12.8" (2012), "-10.2" (2013). - Financial market indicators (Table 4): - Government bond yield (10-year, end-period): "4.9" (2009), "9.2" (2010), "8.5" (2011), "4.5" (2012), "3.6" (2013). - Spread with Germany (end-period): "1.3" (2009), "6.0" (2010), "6.5" (2011), "3.2" (2012), "2.3" (2013). - Real government bond yield (10-year, period average, based on HICP): "6.9" (2009), "7.6" (2010), "8.4" (2011), "4.1" (2012), "2.4" (2013). - Financial sector risk indicators (Table 4): - Annual credit growth rates to Irish resident private sector (adjusted): "-1.5" (2009), "-3.4" (2010), "-2.9" (2011), "-4.0" (2012), "-4.1" (2013). - Non-performing loans (in percent of total loans): "9.0" (2009), "8.6" (2010), "9.1" (2011), "11.3" (2012). - Total provisions for loan losses (in percent of total loans): "4.0" (2009), "4.2" (2010), "4.8" (2011), "5.3" (2012). - Regulatory capital to risk-weighted assets of domestic banks (percent): "10.9" (2009), "10.4" (2010), "17.7" (2011), "16.7" (2012). ### General government financing and Fund program milestones - General government financing (Table 7): - Gross borrowing need (billions of euros) and exchequer cash deficits presented for 2008–2013; gross financing sources include market financing and program financing items. - General government debt (in percent of GDP): "44.5" (2008), "64.8" (2009), "92.1" (2010), "106.4" (2011), "117.6" (2012), "123.6" (2013). - IMF program schedule and purchases (Table 8 and Table 9): - Board approval of arrangement: December 16, 2010: purchase "5,012,425,200" SDRs, "399" percent of quota. - Sequence of reviews and purchases through the Tenth Review (June 15, 2013): Tenth Review purchase "831,000,000" SDRs, "66" percent of quota. - Total purchases to date: "19,465,800,000" SDRs, "1,548" percent of quota (Table 8). - Indicators of Fund credit (Table 9): stock and disbursement time series in millions of SDR for 2010–23 with percent of quota and percent of GDP metrics. *Source: IMF staff estimates.* ### Annex I. Debt Sustainability Analysis ### Annex I. Debt Sustainability Analysis ### General Government Debt — Baseline findings - Planned fiscal adjustment places Ireland’s debt ratio on a declining path from 2014. - Ireland‘s primary surplus is projected to increase above its debt stabilizing threshold in 2014. - Automatic debt dynamics from the interest rate-growth differential: - Add some 1½ percentage points per year to the debt ratio in 2013–14. - Become negligible subsequently as stronger growth takes hold from 2015, with debt reductions driven by the primary surplus. - Gross general government debt projection: - Gross general government debt is projected to fall to around 96 percent of GDP by 2021. ### General Government Debt — Risks and stress scenarios - Lower economic growth risk: - If real GDP growth stagnates at 1 percent per year in the medium term, automatic debt dynamics would add around 2¼ percentage points of GDP each year on average over 2013–16. - Under that stagnation scenario, debt would reach 136 percent of GDP by 2021. - Stagnant growth could also add to debt from further bank restructuring costs. - Interest-rate risk: - Interest rate shocks are a less powerful risk given high share of fixed rate and official borrowing. - Baseline uses unchanged interest rate projections and does not fully incorporate recent declines in spreads (providing a safety margin). - Swapping of fixed coupon promissory note against €25 billion of floating rate long term bonds reduces fixed-rate share, but the government can exchange a portion for fixed rate bonds when CBI sells them. - Asset-sale upside: - Current assumptions do not include proceeds from state asset disposals of up to €3 billion (around 1¾ percent of GDP); at least half are to be used for debt reduction. - No allowance made for further transactions reducing banking support costs beyond recent sales of interests in BoI and Irish Life. ### Contingent liabilities — Scale and treatment - Key developments increasing contingent-liability exposure: - Banks issued additional Own Use Bank Bonds (around €12.5 in total as at end-March 2013) for collateral ahead of ELG expiration in March. - Liquidation of IBRC in February removed need for guarantees of ELA but was offset by issuance of an additional €12.9 billion in NAMA senior bonds (government guaranteed). - Potential realization risk when IBRC‘s remaining assets are sold and any remaining shortfall for NAMA (relative to the value of NAMA bonds issued) will be paid by the Exchequer. - Government exposure to losses in excess of its capital on NAMA‘s existing portfolio and to larger loan losses in the financial system if bank capital buffers are exhausted. - Quantified contingent liabilities (in percent of projected 2013 GDP): - Senior NAMA bonds: 24.1 - Other Bank Liabilities covered by Eligible Liability Guarantee scheme: 13.0 - Total: 37.1 - Stress representation: - Given limited information on realization risks, a standard 10 percent of GDP shock is used to represent possible realization of contingent liabilities. ### External Debt — Recent developments and baseline outlook - Non-IFSC sector external debt: - At end-Q4 2012, total external non-IFSC debt stood at around 287 percent of GDP, down by over 35 percentage points of GDP from end-2011. - Decline driven by lower external debt of the Central Bank, MFIs, and the non-MFI sector (Central Bank reduced Target 2 liabilities; financial institutions reduced ECB funding reliance). - Government external debt rose as authorities continued to draw funds under the EU-IMF program. - Total external debt including IFSC: - Remained very high at end-2012, at around 1,002 percent of GDP. - Since end-2012, total external debt has fallen by almost 74 percentage points of GDP, with a significant decline in the last quarter; IFSC gross external debt fell by around 17 percentage points of GDP. - Baseline projection: - By 2018, external debt is expected to fall to around 200 percent of GDP. ### External Debt — Risks and stress scenarios - Growth shock scenarios: - Scenario with economy developing at historical averages would fail to stabilize external non-IFSC debt, which would reach 286 percent of GDP by 2018. - A permanent ½ standard deviation shock to growth (growth in 2014 almost 2 percentage points lower than baseline; average growth around 0.8 percent thereafter) would raise external non-IFSC debt to 220 percent of GDP in the medium term, around 20 percentage points above baseline. - Current-account shock: - A permanent ½ standard deviation shock to the non-IFSC current account (excluding interest payments) would yield a similar outcome (debt around 20 percentage points above baseline). - Combined shocks: - A combined shock of ¼ standard deviation to the current account, interest rates, and the GDP growth rate would increase medium-term external debt to 228 percent of GDP. - One-time real depreciation: - A 30 percent one-time real depreciation (illustrative shock in 2010) produces a markedly higher external debt path (Annex I Figure 2 scenarios). ### Projections, identified debt-creating flows, and key fiscal/external ratios (selected figures from tables and figures) - Public sector projections (Annex I Table 1, selected figures): - General government gross debt actual and projections: 2007: 25.1; 2008: 44.5; 2009: 64.8; 2010: 92.1; 2011: 106.4; 2012: 117.6; 2013: 123.6; 2014: 120.8; 2015: 117.2; 2016: 114.0; 2017: 110.2; 2018: 106.4; 2019: 102.5; 2020: 99.0; 2021: 95.5 (percent of GDP). - Change in general government debt (selected): 2012: 11.2; 2013: 6.0; 2014: -2.8; 2015: -3.6; 2016: -3.2; 2017: -3.8; 2018: -3.8; 2019: -3.8; 2020: -3.6; 2021: -3.4 (percent of GDP). - Primary deficit (percent of GDP): 2007: -0.7; 2008: 6.5; 2009: 10.3; 2010: 8.7; 2011: 6.2; 2012: 4.5; 2013: 3.5; 2014: 0.0; 2015: -2.2; 2016: -2.5; 2017: -2.9; 2018: -3.4; 2019: -3.9; 2020: -3.7; 2021: -3.6. - Revenue and grants (percent of GDP): 36.5, 35.2, 33.8, 34.0, 34.4, 33.9, 34.1, 34.6, 34.7, 34.5, 34.3, 34.3, 34.3, 34.3, 34.3 (2007–2021 sequence in table). - Average nominal interest rate on public debt (percent): 2007: 4.5; 2008: 5.1; 2009: 4.1; 2010: 4.8; 2011: 3.7; 2012: 3.7; 2013: 4.3; 2014: 4.2; 2015: 4.3; 2016: 4.3; 2017: 4.3; 2018: 4.1; 2019: 4.3; 2020: 4.3; 2021: 4.3. - Real GDP growth (percent): 2007: 5.4; 2008: -2.1; 2009: -5.5; 2010: -0.8; 2011: 1.4; 2012: 0.9; 2013: 1.1; 2014: 2.2; 2015: 2.7; 2016: 2.7; 2017: 2.7; 2018: 2.7; 2019: 2.5; 2020: 2.5; 2021: 2.5. - External debt projections (Annex 1 Table 2, selected figures): - Total external debt (percent of GDP): 2008: 305.0; 2009: 325.6; 2010: 333.7; 2011: 322.1; 2012: 287.0; 2013: 274.0; 2014: 258.9; 2015: 242.5; 2016: 226.9; 2017: 212.1; 2018: 198.0. - Change in external debt (percent of GDP): 2012: -35.1; 2013: -13.0; 2014: -15.0; 2015: -16.4; 2016: -15.6; 2017: -14.8; 2018: -14.1. - Identified external debt-creating flows (percent of GDP): 2012: -12.5; 2013: -9.4; 2014: -11.5; 2015: -12.4; 2016: -11.7; 2017: -11.1; 2018: -10.6. - Current account deficit excluding interest payments (percent of GDP): 2008: -18.8; 2009: -16.0; 2010: -20.7; 2011: -33.5; 2012: -15.2; 2013: -13.1; 2014: -11.3; 2015: -10.4; 2016: -9.3; 2017: -9.8; 2018: -9.9. - Gross external financing need (in billions of euro): 2008: 57.3; 2009: 393.3; 2010: 354.7; 2011: 352.1; 2012: 267.0; 2013: 263.4; 2014: 262.1; 2015: 259.6; 2016: 258.0; 2017: 255.9; 2018: 253.9. - External debt-to-exports ratio (percent): 2008: 423.9; 2009: 417.2; 2010: 384.4; 2011: 354.1; 2012: 306.4; 2013: 294.3; 2014: 276.5; 2015: 257.4; 2016: 238.9; 2017: 221.1; 2018: 204.4. - Stress-test specifications (as described in figures): - Interest rate shock: permanent 200 basis point shock applied to short-term debt and new market lending. - Growth shock (public debt figure): stagnation of growth at 0.5 percent per annum (figure caption). - Primary balance shock: one-half standard deviation shock. - Combined shocks: permanent 1/4 standard deviation shocks applied to the growth rate, interest rate, and primary balance (public debt figure caption) and to the real interest rate, growth rate, and current account balance (external debt figure caption). - External debt individual shocks are permanent one-half standard deviation shocks. ### Key qualitative conclusions - Under the baseline and planned fiscal consolidation, debt dynamics turn favorable from 2014 with gross general government debt declining toward 96 percent of GDP by 2021, driven by primary surpluses. - Debt sustainability is sensitive to growth outcomes: lower/stagnant growth is the principal downside risk and could render debt paths unsustainable (e.g., 136 percent of GDP by 2021 under stagnation at 1 percent). - Contingent liabilities—especially related to NAMA, legacy bank support, and potential future bank losses—constitute a material risk; a 10 percent of GDP shock is used illustratively. - External debt remains elevated, particularly including the IFSC; while projected to fall to around 200 percent of GDP by 2018 under the baseline, multiple shock scenarios could leave external debt significantly above the baseline. *Source: IMF staff calculations and Irish authorities as presented in Annex I. Debt Sustainability Analysis.* ### Appendix I. Ireland: Letter of Intent ### Appendix I. Ireland: Letter of Intent ### Overview and Recent Developments - Government objective: leave the crisis behind, ensure the emerging recovery gathers pace, and meaningfully reduce high unemployment. - Positive developments cited: - Successful launch of a new 10 year benchmark bond in March, which raised some €5 billion at very attractive rates. - Replacement of the promissory notes with longer-duration, lower-yield government bonds following the liquidation of IBRC. - Agreement by EU Finance Ministers to extend the maturities on EFSF and EFSM loans by an average of 7 years. - Fiscal outturn for 2012: General Government Deficit at 7.6% of GDP (confirmed in EDP return in April), within the ceiling of 8.6%. - Benefits of the ECB‘s announcement of Outright Monetary Transactions noted. - Once the implementation of the 2010 quota reforms is agreed, effective interest rate on IMF borrowings will be significantly reduced. - Macroeconomic revisions and outlook statements: - Revised forecast (Stability Programme Update): 1.3% for 2013 and 2.4% in 2014. - From the MEFP Attachment (A): Real GDP increased by 0.9 percent in 2012. - Current account surplus rose to 4.9 percent of GDP. - Real GNP grew by 3.4 percent. - Inflation: 1.1 percent y/y in the first quarter of 2013. - Unemployment rate eased to 14 percent. - Alternative expression of near-term outlook in MEFP: expect real GDP growth of approximately 1¼ percent in 2013 and around 2½ percent in 2014 (conditional on trading partner growth and financial sector repair). ### Market Access, Financing, and Cash Management - Market re-entry actions and results: - January 2013: issue of an existing 5-year bond amount €2.5 billion at a yield of 3.32%. - March 2013: issue of a new 10-year bond at yield of 4.15%. - NTMA engaged with market on return to regular bond auctions during 2013, specific details to be announced later. - Continued Treasury Bill auctions recommencing in July. - Funding and cash buffer proposal: - Request that the tenth purchase equivalent to SDR 831 million becomes available at completion of the review. - Propose to leave the phasing of purchases unchanged, with a total purchase amount of SDR 2,091.3748 million over the remainder of 2013. - Aim for an end-year cash buffer sufficient to cover 12-15 months financing needs. ### Programme Implementation, Performance, and Requests - Programme compliance: - For the tenth review, commitments under the EU/IMF supported programme met in terms of policy reforms and quantitative targets. - Over 200 actions completed. - Performance criterion for end-March 2013 on the cumulative Exchequer primary balance was met with a margin. - Indicative target on the stock of Central Government net debt met. - Continuous performance criterion on non-accumulation of external payment arrears met. - Request to IMF: - Completion of the tenth review under the Extended Arrangement. - Release of the tenth purchase in an amount equivalent to SDR 831 million at the time of completion. ### Monitoring, Targets, and Structural Benchmarks - Monitoring framework: - Implementation to be monitored through quarterly and continuous performance criteria, indicative targets, structural benchmarks, and quarterly programme reviews. - Propose quantitative performance criteria under the arrangement for end-September 2013 (as set out in MEFP Table 2). - Continuous performance criterion on the non-accumulation of external payment arrears. - Proposed structural benchmarks (as detailed in MEFP): - Complete a preliminary balance sheet assessment in consultation with EC, ECB, and IMF by end-October 2013 (proposed structural benchmark). - Conduct a forward-looking analysis of operating profits by end-September 2013 (proposed structural benchmark). - Technical Memorandum of Understanding (TMU): - Defines the quantitative performance criteria and indicative targets under the programme and explains measurement. ### Financial Sector Policies and Bank Repair - Objectives: - Ensure banks achieve sufficient profitability to enhance capital base and sustain new lending. - Advance resolution of impaired assets. - Mortgage and arrears measures: - Maintain Mortgage Arrears Resolution Targets (MART) framework; issue guidance to credit institutions on definition of sustainable restructuring arrangements by end June. - Set targets for completion of sustainable solutions as specified in the MEFP for the 9th review. - Impose specific provisioning treatment on unresolved impaired mortgages by January 1 2014, for end-2014 annual statements (minded to impose). - Prepare a comprehensive review by end June assessing effectiveness of mortgage restructuring and resolution actions. - Modify the Code of Conduct on Mortgage Arrears by end June with amendments including: - Replacing current restrictions on number of unsolicited contacts with lender contact policies approved by boards. - Amending definition of a non-cooperative borrower so protections extend only to borrowers who engage constructively within a specified time period. - Considering amendments permitting modifications of the interest rate setting mechanism where lender offers an alternative arrangement advantageous to borrower long term. - Repossession and legal framework: - Published Land and Conveyancing Law Reform Bill 2013 to remove unintended constraints on repossessions for mortgages created prior to December 2009; seeking passage before Oireachtas summer recess. - Will keep under review capacity of Court system in relation to repossession cases and effectiveness of statutory repossession arrangements. - Personal insolvency framework: - Preparations to make the new personal insolvency framework operational by end June: Insolvency Service has disseminated information; regulations for licensing personal insolvency practitioners about to be finalised; appointment of specialist judges expected by June. - SME debt restructuring: - Central Bank of Ireland (CBI) reviewing resolution progress through KPI reports on banks‘ SME portfolios. - Targets for SME debt restructuring under development, to be communicated to PCAR banks by end June. - On-site supervisory activities in H2 2013: individual loan file reviews and operational reviews of banks‘ SME distressed portfolio strategies. - Impairment provisioning and disclosure: - By end May, CBI will update the 2011 Impairment Provisioning and Disclosure Guidelines as necessary (as specified in MEFP for 9th review). Update will specify criteria for exposures returning from nonperforming to performing restructured status, acceptable methods for provisioning loans under temporary forbearance, and how to calculate cure rates for collective provisioning. - Preparations for banking union and stress testing: - Aim for smooth entry into the Single Supervisory Mechanism (SSM) in 2014. - Conduct a stress test in accordance with new EU methodology, ahead of and in close proximity to the upcoming SSM exercise; consult with EC, ECB, and IMF staff. - Loan loss forecasting models underpinning the stress test subject to external validation. - Preliminary balance sheet assessment and related work streams: - Complete a preliminary balance sheet assessment of the PCAR banks by end October (incorporating: (i) assessment of quantitative impairment provisions and review of risk classification—asset quality review on an incurred loss basis; (ii) review of appropriateness of risk weights for regulatory capital). - Asset quality review based on CBI‘s Impairment Provisioning and Disclosure Guidelines as updated at end May. - Agree methodological aspects—sample size and selection and third party involvement—by end-July 2013. - Test parameters for benchmarking provisioning by end-September 2013. - Finalise balance sheet assessment by end-November 2013. - Conduct forward-looking analysis of operating profits for each PCAR bank to end 2015, including sensitivity analysis to funding costs, by end September (proposed structural benchmark). - Report in June and September 2013 on exploration of options to lower funding cost of banks‘ tracker mortgage portfolios, assess banks‘ fee income relative to peers, with a view to completing an external review of regulation of bank fees by end December. - Analyze current eligible regulatory capital under Basel III/CRD IV by end October. - Report progress with implementation of specific mitigating actions to EC, ECB, and IMF staff. ### Fiscal Policies and Consolidation - 2013 deficit target and implementation: - Committed to achieve the 7.5 percent of GDP deficit target for 2013. - Finance and social welfare bills implementing many Budget 2013 measures have been enacted. - Property tax notifications issued; filings due by end-May. - New bill published to promote competition to lower drug costs; preparing legislation to charge private patients in public hospital beds. - Budget implementation on track in Q1; maintain careful and proactive budget management to contain spending within allocations. - Public service pay and pension savings: - Reaffirm commitment to durable reduction in public service pay and pensions, including additional saving measures of €300 million in 2013 and €1 billion by 2015, if possible on a negotiated basis. - Medium-term consolidation and reforms: - Preparing a fully specified and equitable package of measures to underpin medium-term fiscal consolidation. - For Budget 2014, key departments will present health, education, and social protection reform options to government. - Will develop an eHealth Strategy as specified in the MOU. *Source: Appendix I. Ireland: Letter of Intent (Dublin, 3 June 2013) and Attachment I. Memorandum of Economic and Financial Policies as provided in the source content.* ### 14. We continue to strengthen our institutional framework consistent with the EU ### 14. We continue to strengthen our institutional framework consistent with the EU ### Fiscal governance and Medium Term Budgetary Framework - Budget 2014 will be published by October 15. - Amend IFAC mandate to include an ex ante endorsement of the macroeconomic forecasts on which future budgets and stability programmes will be based; supported by a memorandum of understanding between the Department of Finance and IFAC. - Progress, and if necessary amend, the Ministers and Secretaries (Amendment) legislation to make the already operational ceilings on aggregate and departmental expenditure legally binding and consistent with the expenditure benchmark under the Stability and Growth Pact of the European Union. - Finalize and publish (within a month of enactment) a circular specifying operational details of the ceilings, including circumstances for revision and correction mechanisms. - These steps will largely complete the Medium Term Budgetary Framework in line with EU requirements. ### Fiscal transparency - The 2013 Revised Estimates for the Public Service was published in April, supplemented by key performance information on programme outputs and impacts. - The CSO published a new Government Finance Statistics Report with annual and quarterly general government data, including on net debt and net worth. ### Structural reforms to support job creation and growth - Implement measures under the 2013 Action Plan for Jobs and new capital projects focused on sectors where Ireland has a competitive advantage (data processing, ICT, healthcare technologies and products). - Create a single licensing application system for the retail sector to reduce administrative burdens; encourage more SMEs trading on-line; improve energy efficiency. - Evaluate employment impact of the 2012 and 2013 Action Plan for Jobs to inform the 2014 Action Plan. - Advance capital projects in roads and schools. - Advance implementation of state asset disposal plans for the energy sector with proceeds expected this year; use at least half of resulting proceeds to reduce public debt in due course, with details on timing and implementation to be agreed; remaining proceeds to be invested in job-rich projects of a commercial nature, consistent with fiscal targets. ### Reducing unemployment — priorities and measures - Engagement with the unemployed: - Roll out Intreo offices: 11 opened in 2012; up to 33 are planned for 2013; full roll-out to be completed by end-2014. - Ensure uniform quality of activation and training services nationwide. - Profile all unemployed persons on the Live Register by end 2013. - Set new targets for exits from long-term unemployment and boost referrals of long-term unemployed to education and training programmes. - Publish quartery reports (starting in quarter 2 in 2013) on progress in meeting targets under pathways to work and on overall progress in activating the long term unemployed. - Case workers: - Redeploy 300 staff as case officers by the end of 2013 and ensure their adequate training. - Actively consider private sector involvement in providing employment services to the long-term unemployed with a view to a decision by end June 2013. - JobsPlus: - New simplified JobsPlus scheme will provide monthly payments for two years to enterprises hiring the long-term unemployed. ### Support for SME job creation and financing - Governance: - SME State Bodies Group to coordinate and assess government initiatives in research, policy and information skills, partnerships with the European Investment Bank, access to finance, and CBI engagement with banks; monitor the credit environment for SMEs; optimize public funds utilization; assess effectiveness of 2012 policy actions. - Lending and equity finance: - Credit Review Office (resources increased) will monitor enforcement of the €4 billion lending targets assigned to Bank of Ireland and AIB in 2013. - Roll-out three new SME funds to provide up to €850 million of new financing to SMEs through equity finance and restructuring investment and credit, including through private participation. - Ensure full utilization of the Temporary Partial Credit Guarantee Scheme and the Micro Enterprise Loan Fund, subject to sufficient demand from SMEs. ### Programme financing, market access and cash buffer - Successful issue of a new 10-year benchmark bond; total long-term issuance for the year to date around three quarters of the working plan of €10 billion. - Remaining issuance could be fulfilled through bond auctions subject to market conditions. - Incorporate the 7 year extension in EFSM/EFSF maximum average maturities agreed on April 12 into medium-term financing plan to smooth financing peaks. - Expect to conclude 2013 with a cash buffer covering 12–15 months of future funding needs. ### Programme monitoring — key quantitative figures and targets - Cumulative exchequer primary balance (performance criteria — Target / Outcome series as presented): - -22.3 -21.0 -6.9 -5.7 -9.6 -8.7 -11.4 - 10.1 -13.2 -12.3 -3.2 -1.8 -4.2 -4.8 - Ceiling on the stock of central government net debt (Indicative Target series as presented): - 117.2 115.7 125.0 123.0 130.1 128.2 132.5 130.0 135.8 133.7 167.9 161.8 171.1 172.3 - Other monitoring: Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government — 0 (series of zeros reported for test dates). ### Structural benchmarks (selected) - Publish update of the 2011 Impairment Provisioning and Disclosure Guidelines by end-May 2013 (Structural benchmark). - Undertake a review of progress in addressing mortgage arrears by End-June 2013 (Structural benchmark). - Conduct a forward looking analysis of PCAR banks’ operating profits by End-September 2013 (Proposed structural benchmark). - Complete a preliminary balance sheet assessment of PCAR banks by End-October 2013 (Proposed structural benchmark). ### Technical Memorandum of Understanding (TMU) — key definitions and adjustments - Programme exchange rates (prevailing on December 30, 2011): €1 = 1.2939 U.S. dollar and €1 = 0.842786 SDR. - Exchequer primary balance: - Defined as the 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. - Adjustors to the floor on the Exchequer primary balance include: - (i) downward: payments for bank restructuring under the programme’s banking sector support and restructuring strategy; - (ii) upward: proceeds from sales of bank equity held by the government or NPRF treated as Exchequer receipts; - (iii) upward: receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012; - (iv) downward: 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: Exchequer contributions to the Resolution Fund for resolution of credit institutions, and upward for any Exchequer recoupment from the Resolution Fund; - (vi) upward: any recoupment of Exchequer contributions from the Credit Union Fund. - Measurement and reporting: - The floor on the Exchequer primary balance is measured cumulatively from the start of the calendar year. - Cumulative Exchequer primary balance (From January 1, 2013): End-June 2013 (performance criterion) -4.2; End-September 2013 (performance criterion) -4.8. - The performance criterion is adjusted for over-performance/under-performance in Exchequer tax revenues, PRSI and national training fund contributions against the current projection. - Cumulative Exchequer tax revenue & other receipts (projection from January 1, 2013): End-June 2013 (projection) 21.1; End-September 2013 (projection) 32.7. - Ceiling on the stock of central government net debt: - Defined as the National Debt less liquid assets of the National Pensions Reserve Fund (NPRF); National Debt is total outstanding principal borrowed by central government less liquid assets available for redemption at test date. - NPRF liquid assets include Exchequer cash balances, Exchequer deposits with commercial banks and other institutions, investments in investment grade sovereign bills, and 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 NPRF liquid assets. *Source: _cr13163 - 14. We continue to strengthen our institutional framework consistent with the EU* ### 10. For the purposes of the programme, the ceiling on the central government net debt ### _cr13163 - 10. For the purposes of the programme, the ceiling on the central government net debt ### Adjustments to the ceiling on central government net debt (indicative target) - The ceiling will be adjusted upward by debt arising from payments for bank restructuring carried out under the programme‘s banking sector support and restructuring strategy. These payments may include, inter alia, loans to banks; investments in their equity (requited recapitalisation); unrequited recapitalisation; and purchases of troubled assets, which are carried out in line with programme objectives. - This includes the exchange of the outstanding IBRC promissory notes, which were not part of the national debt, with government bonds, which are part of the national debt. An according revision is carried out for indicative targets for central government net debt from March 2013 onwards. - The ceiling will be adjusted downward by the amount of proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer or NPRF receipts. - The ceiling will be adjusted downward by the amount of receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012. - The ceiling will be adjusted 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. - The ceiling will be adjusted upward for Exchequer contributions to the Resolution Fund for the resolution of credit institutions, and downward for any Exchequer recoupment, from the Resolution Fund, of such outlays. - The ceiling will be adjusted downward for any recoupment of Exchequer contributions from the Credit Union Fund. - The ceiling will be adjusted downward by the amount liquidated from the NPRF non-liquid discretionary portfolio. - The ceiling will be adjusted downward (upward) by valuation gains (losses) in the NPRF liquid portfolio. The programme exchange rates will apply to all non-euro denominated debt. - The ceiling will be adjusted upward by the amount of cumulative drawings on NPRF‘s SME focused funds up to €500 million. - The ceiling on the outstanding stock of central government net debt will be adjusted upward (downward) by the amount of any final upward (downward) revision to the stock of end December 2012 central government net debt. ### Central government net debt outstanding stock (In billions of euros) - End-March 2013 (provisional) 161.8 - End-June 2013 (indicative target) 171.1 - End-September 2013 (indicative target) 172.3 ### Non-accumulation of external payments arrears by central government - Performance criterion: the central government will accumulate no external payments arrears during the programme period. - Definition: an external payment arrear is a payment by the central government on its contracted or guaranteed external debt that has not been made within five business days after falling due, excluding any contractual grace period. - The performance criterion will apply on a continuous basis. - The stock of external payments arrears will be calculated based on the schedule of external payments obligations reported by the National Treasury Management Agency. ### Reporting requirements and monitoring - Data to monitor performance will be supplied to EC, IMF, and ECB staffs; Irish authorities will transmit promptly any data revisions. - Department of Finance reporting (lag no more than seven days after the test date): - Exchequer primary balance - Exchequer tax revenues - Payments for bank restructuring carried out under the programme‘s banking sector support and restructuring strategy - Proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts - 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 of such outlays by the Exchequer from the Resolution Fund and the Restructuring and Stabilisation Fund - National Treasury Management Agency (NTMA) reporting: - Provisional figures on the outstanding stock of net government debt, including an unaudited analysis of NPRF holdings (lag no more than seven days after the test date) - Revised figures within three months of the test date - Final stock of central government system external payments arrears to EC, IMF and ECB staffs (lag no more than seven days after the arrears arise) - Central Bank of Ireland reporting: - Quarterly, 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) ### Letter of Intent highlights (Dublin, 3 June 2013) - Policy intent: - Determination to leave the crisis behind, ensure emerging recovery gathers pace, and meaningfully reduce high unemployment. - Continue to underpin durable and sustainable return to market-based funding essential post programme. - Recent performance and developments: - Unemployment has fallen by a percentage point over the past year. - Domestic demand grew in the second half of last year. - Yields on Irish government bonds have declined and are now well below pre-programme levels. - Contributing factors: ECB outright monetary transactions announcement; replacement of promissory notes with longer-duration, lower-yield government bonds following the liquidation of IBRC; extension by 7 years of the average duration of the EU loans. - Fiscal 2012 outturn for the general government balance: 7.6% of GDP (substantially better than the programme ceiling 8.6% of GDP). - Budget 2013 is consistent with the programme deficit ceiling (7.5% of GDP) for 2013; budget execution in the first four months is in line with forecast profile. - Met all other programme reform milestones set for Q4 2012 and Q1 2013 except a comparative study on medicine costs (outsourced and expected shortly). - Market re-access steps and bond issues: - Regular Treasury Bill auctions recommenced July 2012. - January 2013: issue of an existing 5-year bond amount €2.5 billion at a yield of 3.32%. - March 2013: issue of a new 10-year bond at yield of 4.15%. - NTMA engaged on a return to regular bond auctions during 2013 subject to market conditions. - Request: - Completion of the tenth review and release of the tenth disbursement of EUR 1 billion from the EFSF. ### Memorandum of Understanding on Specific Economic Policy Conditionality (Ninth Update, 3 June 2013) — key commitments - Conditionality and monitoring: - Quarterly disbursement of EFSM assistance subject to quarterly reviews; release based on observance of quantitative performance criteria, respect for EDP-related EU Council Decisions and Recommendations, and positive evaluation of progress on MEFP and MoU policy criteria. - If targets are expected to be missed, additional action will be taken. - Core commitments by authorities: - Rigorously implement fiscal policy consistent with the requirements of the excessive deficit procedure; ensure effective tax collection and tight supervision of expenditure commitments to achieve the primary deficit target in cash (see Table 1 of MEFP and the Technical Memorandum of Understanding, TMU) and the general government nominal budget deficit on ESA95 basis as set out in the EU Council Recommendation on excessive deficit procedures. - Any additional unplanned revenues must be allocated to debt reduction. - The nominal value of Social Welfare pensions will not be increased. - Continue to strengthen the fiscal framework and reporting in line with EU requirements. - Use at least half of the proceeds from state asset sales for eventual debt reduction; reinvest the remainder in commercially oriented projects that meet ex-ante cost benefit criteria, enhance employment and preserve long term fiscal sustainability, including Programme and EDP fiscal targets. - Continuously monitor financial markets to exploit opportunities to return to commercial funding as soon as possible and sustainably. - Ensure activation services are enhanced to tackle high and persistent long-term unemployment; improve ratio of vacancies filled off the live register; focus on re-training the unemployed; ensure appropriate incentives and sanctions; advance plans to introduce new activation measures building on Pathways to Work. - Ensure no further exemptions to the competition law framework unless entirely consistent with EU/IMF Programme goals and economic needs. - Ensure NAMA maintains high governance, reduces operational costs, 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. - Ensure restructuring of credit unions via the Credit Union Restructuring Board to underpin financial stability; minimise Exchequer funding and ensure recoupment from the sector over time; Central Bank to continue inspections and employ resolution powers drawing on Resolution Fund resources if required. - Report quarterly on progress in implementing the strategy for reorganisation of Irish credit institutions and discuss with EC, IMF, and ECB staff. - Ensure continued compliance with the minimum Core Tier 1 Capital ratio of 10.5% for all PCAR banks (AIB, BOI, and PTSB). - Prepare for the Single Supervisory Mechanism (SSM) by conducting a stress test in accordance with the new EU methodology, ahead of and in close proximity to the upcoming SSM exercise; advance preparatory work including loan loss forecasting models subject to external validation. - Consult ex-ante with EC, ECB, and IMF on adoption of policies not included in the Memorandum that could have a material impact on programme objectives. - Reporting and information provision: - Provide all information required to monitor progress and track economic and financial situation. - Provide a compliance report on fulfilment of conditionality prior to release of instalments. - Ensure reliable and regular availability of budgetary and other data as detailed in Annex 1. ### Actions for the eleventh review (to be completed by end Q2-2013) — Financial sector reforms - Capital assessment: - Authorities will report by end of May 2013 on the evolution of regulatory capital within the PCAR banks up to the end of December 2012, and will present and discuss findings with EC, IMF, and ECB staff. - Deleveraging: - Authorities, in consultation with EC, 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 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. *Source: _cr13163 - 10. For the purposes of the programme, the ceiling on the central government net debt (IMF content unit).* ### 7. The authorities will provide staff of the European Commission, the IMF, and the ECB ### _cr13163 - 7. The authorities will provide staff of the European Commission, the IMF, and the ECB ### Asset quality - By end-May 2013 the authorities will update the 2011 Impairment Provisioning and Disclosure Guidelines specifying: - criteria to observe for exposures returning from nonperforming to performing restructured status; - acceptable methods for provisioning loans under temporary forbearance; - methods to calculate cure rates used for collective provisioning purposes. - The review will take account of the assessment of the application of the current guidelines and existing provisioning methodologies and assumptions employed by the banks. - The authorities will provide the EC, IMF, and ECB with their assessment of banks' performance in working out nonperforming mortgage and SME portfolios in accordance with agreed key performance indicators. - The authorities will monitor each PCAR bank‘s performance relative to already-defined key performance indicators and against bank specific targets for reviewing new and existing individual arrears cases. - The authorities will publish banks‘ reported data on mortgage loan modifications, including re-defaults of modified loans, to permit analysis of effectiveness of alternative resolution approaches in improving debt service performance. - The authorities will propose a public target requiring the principal mortgage banks to complete durable restructuring arrangements on a substantial share of problem mortgage loans during 2013. - The authorities will issue guidance to credit institutions on the definition of a sustainable restructuring arrangement by end-June. - The authorities will establish individual bank targets requiring completion of a substantial share of durable restructuring arrangements for SME loans in arrears in 2013. - The authorities will prepare a comprehensive review by end-June as a stock-taking of progress in addressing mortgage arrears to assess effectiveness of banks' mortgage restructuring and resolution actions and consider any necessary adjustments. - Amendments to the Code of Conduct on Mortgage Arrears (CCMA) will be prepared to: - replace current restrictions on the number of unsolicited contacts with contact policies set out by lenders and approved by boards; - amend the definition of a non-cooperative borrower so key protections extend only to borrowers that engage constructively with lenders within a specified time period consistent with addressing their arrears; - consider permitting modifications of the interest rate setting mechanism where the lender has offered an alternative arrangement advantageous to the borrower in the long term. - The authorities will keep under review effectiveness of statutory repossession arrangements based on ongoing experience (issues to include length, predictability and cost of proceedings, systems for dealing with non-cooperative borrowers and investment property debts) and bring forward appropriate measures where necessary. ### Profitability - The authorities will report on exploration of options to lower the funding cost of banks‘ tracker mortgage portfolios. - The authorities will conduct a forward looking analysis of operating profit for each of the PCAR banks, including sensitivity analysis to funding costs, to end 2015. - The authorities will advise the banks of the outcome to inform banks' business and financial planning going forward. ### 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 staff of the EC, IMF, and ECB. - The authorities will report on banks' progress with implementation of strategies to address loan arrears and unsustainable debts in mortgage and SME portfolios. - The authorities will review 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 recovery and resolution of credit institutions and investment firms, the authorities will review the Resolution fund levy regulation. - The authorities will ensure, subject to enactment of the Credit Reporting Bill and completion of project due diligence, that the Central Credit Register is at an advanced stage of development and will present a final comprehensive report on progress. - The authorities will assess banks‘ fee income relative to peers in selected other jurisdictions and complete an external review of the regulation of bank fees. ### Capital assessment and deleveraging - Taking into account progress in developing SSM methodology, the authorities will agree with EC, IMF, and ECB staff other methodological aspects of the asset quality review (on an incurred loss basis) by end July, and test parameters for benchmarking provisioning by end-September. - The authorities will report on evolution of regulatory capital up to end-June 2013 within banks covered by the PCAR and discuss findings with EC, IMF, and ECB staff. - The authorities, in consultation with EC, 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 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. - By end-October 2013 the authorities will complete a preliminary balance sheet assessment incorporating: - (i) an assessment of quantitative impairment provisions and a review of risk classification (asset quality review on an incurred loss basis); - (ii) a review of the appropriateness of risk weighted assets calculations under alternative assumptions. - The asset quality review will be based on the Central Bank of Ireland‘s Impairment Provisioning and Disclosure Guidelines updated at end May 2013. - The balance sheet assessment will be finalised by end-November 2013 and results communicated to PCAR Banks. - The authorities will produce a final report of banks' implementation of deleveraging plans under PLAR 2011 and discuss compliance with asset disposal and run-off targets in nominal value terms. - The authorities will produce a final report on progress towards compliance with Basel III liquidity and funding requirements by the relevant dates. ### Funding and Basel III monitoring - The authorities will provide EC, IMF, and ECB staff with a detailed assessment of banks' progress towards the relevant Basel III requirements using the advanced monitoring framework (repeated action across review cycles). - This work will be complemented with an analysis of current eligible regulatory capital under Basel III/CRD IV by end October. ### Structural reforms — expenditure, state assets, and access to finance - The authorities will progress, and if necessary amend, the Ministers and Secretaries (Amendment) legislation to make operational ceilings on aggregate and departmental expenditure legally binding and consistent with the Stability and Growth Pact. - A circular specifying operational details of the ceilings (including circumstances for revision and correction mechanisms) will be finalized and published within a month of enactment. - The authorities will report on the quantum of proceeds of any realised asset sales to date and on progress and remaining steps for assets yet to be disposed. - Based on experience of the Insolvency Service in personal insolvency reform, the authorities will consider further enhancements to the company law framework to facilitate restructuring, especially in multi-creditor cases, reduce costs and achieve efficiency gains, including potential for an administrative body to facilitate SME restructuring. ### Labour market and activation reforms - The authorities will report to EC, IMF, and ECB staff on the impact on the labour market of reforms to sectoral wage-setting mechanisms undertaken under the programme. - By end-April 2013 the authorities will prepare an action plan to increase effectiveness of training and activation supports, building on DSP Review of Employment Support Schemes and evaluation of JobBridge. - The authorities will review progress in rolling out Intreo offices and define measures to address potential shortcomings; private sector involvement in providing employment services to the long-term unemployed is being considered with a view to a decision by end-June 2013. - The authorities will redeploy and train staff from within the Department of Social Protection to significantly increase Intreo case managers and substantially increase group and one-to-one engagements with the long-term unemployed. - The authorities will report on progress in achieving DSP objective of doubling case managers by end-2013 and will assess skills adequacy and report on training needs and plans. - The authorities will conduct an evaluation of the employment impact of the 2012 and 2013 Action Plan for Jobs to inform 2014 policy choices. - The authorities will report on compliance with the action plan to double the number and ensure adequate training of Intreo case managers. ### Further education, training, and water services - By September 2013 the authorities will conduct a strategic review of training and education provision offered by Education and Training Boards (ETBs) to guide SOLAS and FET provision by ETBs; the review will assess relevance for labour activation and prospective skills needs and provide recommendations. - The Government will publish the General Scheme of a Water Services Bill with aim of defining regulatory framework for the water sector under a national public utility and providing for establishment of Irish Water in final form, with prior engagement with the European Commission as appropriate. - The Government will publish, as early as possible in Q3 2013, a Water Services Bill with the aim of defining regulatory framework for the water sector and establishing Irish Water in its final form. - The authorities will communicate the funding model for Irish Water, including an outline of expected levels of State support until it is substantially self-funded. - The authorities will announce a definitive time-plan for introduction of domestic water charges in the fourth quarter of 2014; consultations will determine framework for water charges. ### Health, eHealth, and hospital payment reform - The authorities will publish a study comparing cost of drugs, prescription practices and usage of generics in Ireland with comparable EU jurisdictions. - The authorities will develop an eHealth Strategy in conjunction with the HSE by end Q2 2013 as a time-bound action plan for implementation of eHealth systems, including comprehensive ePrescription using a unique patient identifier such as the PPSN. - The authorities will set high level annual targets for increasing share of generic drug usage in the medium-term. - Enabling measures – such as compulsory prescription by International non-propriety name (INN) by end-October 2013, where appropriate – required for achievement of these targets will be put in place and kept under further review. - In line with the eHealth Strategy, the authorities will publish by end-October legislation in conformity with data protection law to enable introduction of universal and unique health identifiers for patients and service providers and facilitate full ePrescription. - The authorities will adopt a framework by end-October to streamline and consolidate multiple and fragmented financial management and accounting systems and processes. - The authorities are committed to introduction of a prospective case-based payment system for public hospitals, implemented on a phased basis beginning with a shadow phase by end-October 2013, in line with principle of case based cost recovery for use of public hospitals by public and private patients. ### Legal and regulatory implementation - Once relevant legislation has been enacted, the authorities will take appropriate measures to establish the Legal Services Regulatory Authority in an expedited fashion. - The authorities will review the Resolution fund levy regulation upon publication of the EU directive on recovery and resolution. - The authorities will complete an external review of regulation of bank fees following assessment of banks‘ fee income relative to peers. *Source: _cr13163 - 7. The authorities will provide staff of the European Commission, the IMF, and the ECB (PDF).* ### Annex 1. Provision of data ### Annex 1. Provision of data ### Data provision requirements (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, 105 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 - F.11 Report on implementation of budgetary measures in the health sector, covering inter alia assessment of timeliness and effects vis-à-vis 2013 Budget plans and explanation for any delay/shortfall, as well as update on status of any remaining actions required for effective implementation. — Monthly, 30 working days after the end of each month - F.12 Report comparing, against the monthly targets: (i) health expenditure by mains service areas, (ii) pay and non-pay element of current expenditure, (iii) capital expenditure and (iv) income collected. — Monthly, 7 working days after the end of each month - F.13 Report on pharmaceutical prescriptions and expenditure, including information on value and volume of drugs and the extent of the use of generics and off-patent drugs. — Quarterly, 30 working days after the end of each quarter - F.14 Report on prescribing and dispensing practices by doctors and pharmacies. — Quarterly, 30 working days after the end of each quarter - F.15 Report on the quantum of pre-installation surveys completed and water meters installed by geographical area. — Monthly, 15 working days after the end of each month ### Data provision requirements (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 ### Data provision requirements (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 ### Key developments, findings, and policy-relevant analysis (supplement to staff report) - Conditionality and compliance - The Central Bank of Ireland (CBI) updated its loan loss provisioning guidelines, observing a structural benchmark for end May, which completes the conditionality for the 10th review. - Banking data for Q1 2013 were transmitted to staff; NAMA published its 2012 Annual Report; Exchequer outturns for May 2013 were released. - CBI Impairment Provisioning and Disclosure Guidelines (summary of main elements) - Obligations for bank management include: (i) deploy information systems to tag, track, and report a broader set of credit metrics; (ii) determine and validate re-default rates for forborne and modified credit exposures; and (iii) disclose key judgments, estimates, and assumptions employed for provisioning, as well as sensitivity analysis around assumptions on house prices, economic activity, and unemployment rates. - Loan classification: a definition of a nonperforming loan (NPL) is inserted; clarifications on reclassification to cured and performing; requirement that cure rates be evidence-based and distill out the impact of forbearance; new requirements for back-testing of inputs and loss estimates for collective provisioning, including documentation for CBI review; calculation of probabilities of default for forborne loans requires adequate segmentation by loan pool with conservative treatment of interest-only forborne loans. - Restructurings: renewal, refinancing, renegotiation, restructuring, or novation of a credit facility will not interrupt the aging of arrears unless the borrower pays all interest without new financing; principle extended to overdrafts, requiring sufficient turnover to pay for interest debited into the account. - Collateral valuation: enhanced appraisal requirements for residential mortgages; independent valuation required where loan balance outstanding exceeds an initial threshold of €750,000, falling to €500,000 from 2014 onward. - Banking sector performance (Q1 2013) - First quarter results for the three PCAR banks—Allied Irish, Bank of Ireland, and Permanent tsb—are consistent with a slow progression toward break-even. - Drivers noted: pre-provision losses eased from Q4 due to lower ELG fees, reduced nonrecurrent losses on financial instruments, and a drop in operating expenses. - Operational adjustments: aggregate number of branches declined by about one-fifth and full time employees by about one-tenth over the 12 months through Q1. - NPL developments: NPL ratio continued to tick up and NPLs net of provisions remain high relative to equity. - Capital: aggregate core tier 1 risk-based capital ratio slipped slightly over the quarter, reflecting ongoing losses and some one-off regulatory capital deductions. - NAMA progress and operational issues - Receipts from asset disposals totaled €2.8 billion in 2012, resulting in a net profit of €228 million despite cumulative impairment provisions rising to €3.3 billion (12½ percent of gross loans and receivables). - From inception until end 2012, NAMA generated gross cash flows of €10.6 billion, including asset disposal receipts of €6.8 billion. - Cumulative senior NAMA bond redemptions of €6¼ billion by June 2013; redemptions are on track for the end 2013 goal of €7½ billion. - NAMA preparations: to acquire loans of the liquidated Irish Bank Resolution Corporation (IBRC) for which no sale to third parties is agreed or completed before end 2013, or as soon as practicable thereafter; migration of loan servicing previously conducted by IBRC on debt with total principal amount of €41 billion to a servicing company. - Integration of IT systems and staff from IBRC will require considerable management attention. - Exchequer and fiscal outturns (end May 2013) - Cumulative primary expenditure (excluding the ELG payout related to the IBRC liquidation) was about ½ percent of GDP lower than a year earlier. - Cumulative revenues (after adjusting for one-offs) were about ½ percent of GDP higher than a year earlier. - Robust corporate tax and early local property tax receipts kept tax revenues ahead of profile, offsetting shortfalls in VAT on imports and the deposit interest retention tax. - End May primary deficit was about 1 percent of GDP lower than in 2012, and well within profile. - On June 5 the authorities enacted legislation to implement by July 1 the public service pay cuts negotiated under the “Haddington Road” agreement, with an estimated impact on wages of 6½ percent on average. Balloting by public service unions on this agreement is still in progress. - Other macro developments (as of Q1–May 2013) - Registered unemployment stayed at 13.7 percent in April and May, unchanged from Q1 levels. - Number of benefit claimants fell in May to the lowest level since August 2009; net outward migration and low labor force participation likely contributed. - Inflation fell to 0.5 percent y/y in April. - Residential property prices fell 1.2 percent y/y in April, the slowest rate of decline since early 2008. - Bond market and program context - Yield on Ireland’s new 10-year benchmark bond rose 6 basis points to 3.94 percent since the issuance of the staff report. - Press Release No. 13/218 (June 17, 2013): IMF completed the tenth review under the Extended Fund Facility for Ireland and approved a €0.95 Billion disbursement. - Arrangement equivalent to SDR 19.4658 billion (about €22.28 billion or about US$29.71 billion), equivalent to 1,548 percent of Ireland’s IMF quota. - Completion of the review enables disbursement equivalent to SDR 0.831 billion (about €0.95 billion or about US$1.27 billion), bringing total disbursements under the EFF to SDR 18.21 billion (about €20.83 billion or about US$27.79 billion). - IMF summary points emphasized: - Economic recovery not well established and risks to debt sustainability remain. - Need for strong policy implementation and timely delivery on European pledges to enhance program sustainability. - Preparations for the Single Supervisory Mechanism and alignment of Ireland’s banking sector stress test with the broader European exercise; interim preparations to include a comprehensive asset quality review and an operating profit analysis. - Importance of monitoring banks’ performance against targets for resolving mortgages in arrears and ensuring durability of loan resolutions; need for work outs of small and medium enterprise loans in arrears to support growth and jobs. - Fiscal policy on track to achieve 2013 targets; any reassessment of fiscal consolidation path should await Budget 2014 and focus on safely reaching medium-term targets in a growth-friendly manner, with savings from the promissory note transaction providing an opportunity to help build buffers against shocks. - Structural reforms in key spending areas are needed to deliver future savings while protecting core public services and the vulnerable. - Effective implementation of reforms to strengthen employment services is important to address long-term unemployment. *Prepared by European Department; Annex 1: Provision of data (excerpt).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13163.pdf_