## 1. IBRC Asset Valuation and Sales ## Source details **Canonical URL:** [1. IBRC Asset Valuation and Sales](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13305.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13305.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13305.pdf.json) --- ### Overview and program context - Eleventh review: policy implementation on track but near-term growth weaker; significant fiscal, financial sector and unemployment challenges remain. - Key program metrics and near-term outlook: - General government deficit (excluding one-off guarantee payments) tracking toward 6.8 percent of GDP in 2013. - Gross public debt projected to peak at 123 percent of GDP at year end. - Nonperforming loan (NPL) ratio climbing through 26 percent. - Unemployment rate eased to 13.7 percent from 15 percent in early 2012; long-term jobless constitute some 58 percent of all jobseekers. ### Recent macroeconomic developments (growth, labour, prices, and high-frequency indicators) - Growth and demand: - Real GDP fell 0.9 percent y/y in Q1 2013. - Domestic demand contributed -1.8 percentage points to Q1 growth. - Falling goods exports contributed -4.9 percentage points to Q1 growth. - Revisions to national accounts: - 2011 real GDP revised from 1.4 percent y/y to 2.2 percent y/y (difference 0.8). - 2012 real GDP revised from 0.9 percent y/y to 0.2 percent y/y (difference -0.7). - Nominal GDP (€ billion): 2011 original 159.0, new 162.6 (difference 2.3 percent); 2012 original 163.6, new 163.9 (difference 0.2 percent). - Exports and PMIs: - Goods export volumes rose 2.3 percent q/q in Q2 2013; merchandise exports down 7 percent y/y in H1 2013. - Export PMI on new export orders rose to 53 in July-August. - Labour market and wages: - Employment rose 1.8 percent y/y in Q2 2013. - Unemployment rate eased to 13.7 percent in Q2 2013. - Public sector employment fell 1.4 percent y/y. - Hourly wages edged up by ¼ percent y/y in H1 2013; average hours worked declined similarly, leaving weekly earnings flat. - Inflation and competitiveness: - HICP inflation 0 percent y/y in August 2013; euro area inflation 1.3 percent y/y in same period. - Ireland consumer prices eased to 115.2 percent of the EU average in 2012, from 129.8 percent in 2008. ### Financial markets, banking sector, and credit conditions - Sovereign and bank yields (selected): - 10 year Irish sovereign yield rose 56 basis points to 3.98 percent as of September 11. - Yield on BoI’s 3 year senior unsecured bond rose by 62 basis points to 3.37 percent since May 30 issuance. - Yields on BoI and AIB 3 year covered bonds edged up some 40 basis points as of September 11 from mid-May troughs. - Eurosystem funding and deposits: - ECB borrowing by domestic banks fell from €39.6 billion at end March to €33.4 billion at end August. - Credit and property markets: - Household credit shrinking by 4.4 percent y/y through end July. - Loans to nonfinancial corporations down 4.8 percent y/y. - SME loans (excluding financial intermediation and property related sectors) fell 4.9 percent y/y in Q2. - Mortgage loan approvals up 9.4 percent y/y in July. - Residential property prices rose 2.3 percent y/y in July; Dublin +8 percent y/y; outside Dublin -1.5 percent y/y. - Residential rents rose 7.2 percent y/y in July. - SME financing: 57 percent of SMEs who applied for funding in Q3 were refused (Irish SME Association survey). ### Fiscal outturn, implementation, and consolidation - Exchequer through end August: - Cumulative primary expenditure (excluding guarantee payouts from promissory note transaction) 1 percent of GDP lower than first eight months of 2012. - Cumulative revenues (after adjusting for one-offs) were ½ percent of GDP higher than a year earlier. - Exchequer primary deficit at 2.3 percent of GDP, which was 1.5 percent of GDP smaller than same period in 2012. - Performance criterion for end June 2013 met by a margin. - Consolidation path and targets: - By end-2013, cumulative fiscal consolidation effort of €13.1 billion (8 percent of GDP) will have been implemented under the program, with just over 60 percent being expenditure measures. - Authorities committed to meeting the 5.1 percent of GDP ceiling on the deficit in 2014. - Planned cumulative consolidation in 2014–15 of €5.1 billion (2.9 percent of GDP) emphasized as important. - Authorities will publish Budget 2014 on October 15 with fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the EDP. ### Macroeconomic projections (IMF staff central projections, percentage change unless indicated) - Real GDP: 2009 -6.4; 2010 -1.1; 2011 2.2; 2012 0.2; 2013 0.6; 2014 1.8; 2015 2.5. - Final domestic demand: 2009 -9.7; 2010 -5.0; 2011 -3.0; 2012 -1.1; 2013 0.0; 2014 0.3; 2015 0.9. - Private consumption: 2009 -5.1; 2010 0.9; 2011 -1.6; 2012 -0.3; 2013 -0.3; 2014 0.5; 2015 1.0. - Fixed investment: 2009 -26.9; 2010 -22.6; 2011 -9.5; 2012 -1.0; 2013 2.0; 2014 4.0; 2015 5.0. - Nominal GDP (billions of euros): 2009 162.3; 2010 158.1; 2011 162.6; 2012 163.9; 2013 166.6; 2014 171.6; 2015 178.4. - Unemployment rate (percent): 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 13.7; 2014 13.3; 2015 12.8. ### Key macro-financial risk - Durable recovery hinges on reversing the tide of NPLs. Reducing NPLs and enhancing bank profitability is expected to gradually improve banks’ access to market funding and willingness to lend, unlocking housing market turnover and reducing household uncertainty. Resolution of SMEs with arrears expected to enable viable SMEs to invest and contribute to job creation. ### IBRC asset valuation, sales procedures, and potential fiscal effect (Box 1) - Background: - NAMA acquired a lien on IBRC’s loan portfolio at the time of IBRC’s liquidation in exchange for €12.9 billion of government guaranteed NAMA bonds. - CBI assigned rights under the Exceptional Liquidity Assistance (ELA) Facility Deed and a floating charge over IBRC to National Asset Resolution Limited (NARL) in exchange for the €12.9 billion. - Independent valuation instructions (to be completed by end November): - Discount rate of 4.5 percent for expected future cash flows (determined with reference to NAMA’s cost of funds). - Discount of 2.32 percent on the established value of each loan to allow for potential legal issues, including security and title issues. - Valuation cap equal to gross loan value outstanding. - Sales process rules and fiscal implications: - Liquidators may only sell assets to third parties at prices at or above those established by the independent valuation, with NARL as reserve buyer. - All sales to be complete by end 2013 or as soon as practicable thereafter. - Minister required to make up any shortfall between amounts due to NARL under the Facility Deed (currently €13.1 billion, including accrued interest) and the valuation placed on IBRC’s assets by independent valuers. - If value of assets sold greater than net outstanding secured borrowings (including the Facility Deed), remaining assets available for benefit of unsecured creditors, including amounts due to the Minister as a result of payments under guarantees (approximately €1.1 billion), unguaranteed bondholders, suppliers, and other creditors. ### Public debt projections and stress-test scenarios (selected numeric outcomes preserved) - Baseline projection: - Gross public debt projected to peak at 123.3 percent of GDP at end 2013. - Net debt projected at 106 percent of GDP at end 2013 owing to strong cash balances. - Gross public debt projected to decline to less than 110 percent by 2018 under baseline. - Growth shock scenario: - If projected real GDP growth lowered by 0.5 standard deviations for two years starting next year (implying annual growth about 2 percentage points lower at -0.3 percent y/y in 2014 and 0.5 percent in 2015), debt-to-GDP ratio peaks at 127 percent of GDP in 2015 before declining. - Macro-fiscal shock scenario: - If slower growth in 2014–15 is compounded by a temporary primary balance shock and by interest rates on newly contracted debt rising by 2 percentage points, the debt ratio rises to 136 percent of GDP in 2015 and only falls to 130 percent by 2018. - Contingent liability-growth combined shock: - A 10 percent of GDP contingent liability shock combined with the growth shock would push gross public debt to 135 percent of GDP in 2015 before declining to 128 percent by 2018. - Contingent liability sources identified: - Shortfalls in crystallized value of NAMA assets relative to the €12.9 billion paid initially by NAMA (including assets acquired in February 2013 from IBRC). - Any further bank capital needs identified in the 2014 stress test not sourced in the market or ESM direct recapitalization. - Costs related to ongoing restructuring of the credit union sector (net loans being only 2½ percent of GDP). ### Staff recommendation on ESM direct recapitalization backstop - Given fragility of public debt sustainability, staff considers it desirable that an ESM direct bank recapitalization backstop be available during next year’s stress test. - Operational feature: instrument could shoulder, bank by bank, up to 80 percent of a recapitalization need (or exceptionally more), assuming the stress test does not find core tier 1 capital of less than 4½ percent. - Rationale: having the instrument as part of the public backstop important to protect market confidence in debt sustainability and financial market stability. ### Financial sector priorities, mortgage resolution (MART), and BSA - Main banking priorities: - Resolving NPLs, improving profitability, and ensuring adequate provisioning and capital adequacy via the Balance Sheet Assessment (BSA). - Mortgage arrears and restructuring statistics: - PDH mortgages in arrears >90 days rose from 15.8 percent of total value at end 2012 to 17.0 percent at end June. - BTL mortgages in arrears >90 days rose from 26.9 percent to 28.5 percent over same period. - Loans in arrears for over 2 years now account for 32.5 percent of PDH loans in arrears over 90 days, and 38.0 percent for BTLs. - Share of restructured mortgages increased from 13.2 percent of total value at end 2012 to 13.6 percent at end June. - Mortgage Arrears Resolution Targets (MART): - Banks reported almost 35 thousand offers covering 33 percent of borrowers in arrears against an initial target to propose sustainable solutions to 20 percent of borrowers more than 90 days past due; CBI audits of sustainability expected to commence in September. - Over half of reported proposals were legal demand letters for repossession to prompt borrower reengagement. - CBI targets for concluded solutions: at least 15 percent of arrears cases by end 2013 (prior action) and 25 percent by end March 2014. - CBI target for offers of sustainable solutions: 70 percent of arrears cases by end March 2014. - Balance Sheet Assessment (BSA): - BSA focuses on AIB, BoI, and PTSB. - Preliminary results due by end October and final assessment by end November. - Execution involves independent third parties for loan file reviews and separate independent validator. - BSA methodology includes systematic stratified sampling of loan files, cohort definitions, and review of risk-weight calculations. ### Bank profitability, PTSB concerns, and measures to reduce funding costs - Profitability developments: - AIB, BoI, and PTSB generated €92 million of pre-provision net revenue (PPNR) in H1 2013 versus a PPNR loss of €678 million in H1 2012. - PTSB operating loss €449 million in H1 2013; PTSB not expected to regain profitability until 2017 per restructuring plan. - Staff-supported measures to reduce funding costs: - Analysis of operating profit through 2015 (to be completed by end September). - External review of bank fee regulation by end 2013. - Detailed technical proposal to reduce market funding costs for low-yielding assets by end September. - Box 3 concept: allow banks to “borrow” access to a high quality balance sheet (credit enhancement) to issue market liabilities at lower rates; staff estimate “negative carry” on tracker mortgages at 0.4 percent of average assets. Recent 3 year covered bond issues by Irish banks yield about 2.1 percent while 3 year bonds by a AAA rated institution trade at 0.3 percent. ### Policy implications, structural reforms, and labour market measures - Fiscal policy guidance: - Continue steady fiscal consolidation while acknowledging slower near-term growth; deliver planned cumulative consolidation of €5.1 billion in 2014–15. - Staff supports an expenditure-led consolidation (about 65 percent of cumulative effort thus far) with emphasis on better targeting social supports and subsidies. - Financial sector: - Complete BSA and advance MART framework; explore third-party support mechanisms to lower banks’ funding costs and enable internal capital generation to expand credit. - Maintain close CBI supervision and audits of banks’ adherence to guidelines on sustainable solutions. - Labour market and activation: - Prioritize improving employment services and training targeted at the long-term unemployed (58 percent of jobseekers are long-term jobless). - Redeploy 300 case officers by end-2013 and 200 more in 2014 to lower unemployed per case officer from current 788 toward around 200:1. - Initial activation targets: engage 15,000 long-term unemployed in group sessions and 10,000 through individual interviews each quarter starting Q4 2013. - SME measures: - Facilitate SME resolution to allow viable firms to invest and create jobs; review Credit Guarantee Scheme and accelerate SME examinership reforms. - NPRF SME funds to provide up to €900 million of equity finance and new lending in partnership with private sector. ### Monitoring, conditionality, and reporting (selected obligations) - Prior action: CBI to publish a target for concluded sustainable solutions of no less than 15 percent of mortgage loans in arrears for more than 90 days by end-2013. - Programme monitoring: end-June performance criteria observed; structural benchmarks and reporting timetables specified. - Reporting requirements include frequent reporting by Department of Finance, NTMA, and Central Bank of Ireland on Exchequer balances, debt, bank asset quality, and other indicators with specified lags (examples preserved in source). *Source: IMF staff report excerpt — "1. IBRC Asset Valuation and Sales" (content unit provided).* ### 1. IBRC Asset Valuation and Sales _______________________________________________________________ 12 ### 1. IBRC Asset Valuation and Sales ### Overview - The eleventh review of Ireland’s EU-IMF supported program found policy implementation remains on track yet near-term growth prospects are weaker and significant fiscal, financial sector and unemployment challenges remain. - Main discussion points: - Staying the course of steady fiscal consolidation: the general government deficit (excluding one-off guarantee payments) is tracking toward 6.8 percent of GDP in 2013 and gross public debt is projected to peak at 123 percent of GDP at year end. Further consolidation in 2014–15 was agreed at a diminished pace compared with 2011–13. - Pushing forward with loan resolution: the nonperforming loan (NPL) ratio is climbing through 26 percent. The review focused on the Mortgage Arrears Resolution Targets (MART) framework and the balance sheet assessment (BSA) to be completed in the Fall. Discussions included techniques to harness third-party support to lower banks’ funding costs and enhance banks’ ability to internally generate capital to expand credit. - Addressing long-term unemployment: the unemployment rate eased to 13.7 percent from 15 percent in early 2012, but the long-term jobless constitute some 58 percent of all jobseekers. ### Recent developments (growth, labour, and prices) - GDP and demand: - Real GDP fell 0.9 percent y/y in Q1 2013. - Domestic demand contributed -1.8 percentage points to Q1 growth. - Falling goods exports contributed -4.9 percentage points to growth in Q1 2013. - Revisions: - 2011 real GDP revised from 1.4 percent y/y to 2.2 percent y/y (difference 0.8). - 2012 real GDP revised from 0.9 percent y/y to 0.2 percent y/y (difference -0.7). - Final domestic demand 2011: original -4.3, new -3.0 (difference 1.3); 2012: original -1.2, new -1.1 (difference 0.1). - Net exports (% contribution to growth) 2011: original 5.4, new 5.7 (difference 0.3); 2012: original 2.8, new 1.6 (difference -1.2). - GDP deflator growth 2011: original 0.2, new 0.7 (difference 0.5); 2012: original 1.9, new 0.7 (difference -1.3). - Nominal GDP (€ billion) 2011: original 159.0, new 162.6 (difference 2.3 percent); 2012: original 163.6, new 163.9 (difference 0.2 percent). - Exports and PMIs: - Goods export volumes rose 2.3 percent q/q in Q2 2013; merchandise exports down 7 percent y/y in H1 2013. - Export PMI on new export orders rose to 53 in July-August. - Labour market and wages: - Employment rose 1.8 percent y/y in Q2 2013. - Unemployment rate eased to 13.7 percent in Q2 2013. - Public sector employment fell 1.4 percent y/y. - Hourly wages edged up by ¼ percent y/y in H1 2013; average hours worked declined similarly, leaving weekly earnings flat. - High-frequency indicators: - Consumer sentiment rose in June-July. - Core retail sales grew 1.3 percent y/y in June-July. - Manufacturing PMI crossed 50 in June and improved through August. - Planning permits for new houses rose in Q1 after five years of decline. - PMI for housing activity climbed above 50 in July. - Inflation and competitiveness: - HICP inflation was 0 percent y/y in August 2013; euro area inflation was 1.3 percent y/y in same period. - Ireland’s consumer prices eased to 115.2 percent of the EU average in 2012, from 129.8 percent in 2008. ### Financial markets and banking sector - Sovereign and bank yields: - 10 year Irish sovereign yield rose 56 basis points to 3.98 percent as of September 11. - No new sovereign bond issued since the €5 billion ten-year issue in mid March. - Regular monthly auction sold €0.5 billion of 3 month Treasury bills in July at a yield of 0.2 percent. - Yields on BoI and AIB 3 year covered bonds edged up some 40 basis points as of September 11 from mid-May troughs. - Yield on BoI’s 3 year senior unsecured bond rose by 62 basis points to 3.37 percent since May 30 issuance. - Eurosystem funding and deposits: - ECB borrowing by domestic banks fell from €39.6 billion at end March to €33.4 billion at end August. - Deposit rates continued to inch downward. - Credit and property markets: - Bank loans outstanding contracted through end July: - Household credit shrinking by 4.4 percent y/y. - Loans to nonfinancial corporations down 4.8 percent y/y. - SME loans (excluding financial intermediation and property related sectors) fell 4.9 percent y/y in Q2. - SME financing access: 57 percent of SMEs who applied for funding in Q3 were refused, per Irish Small and Medium Enterprises Association survey. - Mortgage loan approvals up 9.4 percent y/y in July, per Irish Banking Federation. - Residential property prices rose 2.3 percent y/y in July, led by an 8 percent rise in Dublin and a 1.5 percent y/y decline outside Dublin. - Residential rents rose 7.2 percent y/y in July. - Residential property turnover rose 8 percent y/y in first seven months of the year. - Commercial real estate: SCSI/IPD index indicates a 5.3 percent y/y price increase in Q2; reported rental yields of almost 9 percent in Dublin. ### Fiscal outturn - Exchequer through end August: - Cumulative primary expenditure (excluding guarantee payouts from promissory note transaction) was 1 percent of GDP lower than first eight months of 2012. - Cumulative revenues (after adjusting for one-offs) were ½ percent of GDP higher than a year earlier. - Robust corporate tax and local property tax receipts offset shortfalls in VAT, excise duties, and the deposit interest retention tax. - Total tax revenues kept just shy of profile. - Exchequer primary deficit at 2.3 percent of GDP, which was 1.5 percent of GDP smaller than same period in 2012. - The related performance criterion for end June 2013 was met by a margin. ### Macroeconomic projections and risks - Growth projections: - 2013 growth projection pared back by ½ percentage point to 0.6 percent y/y. - Export growth cut by 1½ percentage points in 2013 projections due to larger patent cliff impact and tepid recoveries in trading partners. - Domestic demand expected to be flat in 2013. - Private consumption expected to contract modestly in 2013. - Fixed investment expected to expand by some 2 percent in 2013. - 2014 growth penciled in at 1.8 percent. - Export and consumption growth expected to benefit from rise in trading partner growth and employment. - Household saving downward revision of 1½ percentage points in 2012 reduces room for lower savings in 2014. - Public consumption expected softer in 2014 due to Haddington Road Agreement effects. - 2015 growth projected at 2½ percent as external growth rises further and fiscal consolidation eases. - IMF staff macroeconomic projections, 2009–15 (percentage change unless indicated): - Real GDP: 2009 -6.4; 2010 -1.1; 2011 2.2; 2012 0.2; 2013 0.6; 2014 1.8; 2015 2.5. - Final domestic demand: 2009 -9.7; 2010 -5.0; 2011 -3.0; 2012 -1.1; 2013 0.0; 2014 0.3; 2015 0.9. - Private consumption: 2009 -5.1; 2010 0.9; 2011 -1.6; 2012 -0.3; 2013 -0.3; 2014 0.5; 2015 1.0. - Public consumption: 2009 -3.4; 2010 -6.9; 2011 -2.8; 2012 -3.7; 2013 -0.6; 2014 -2.8; 2015 -2.5. - Fixed investment: 2009 -26.9; 2010 -22.6; 2011 -9.5; 2012 -1.0; 2013 2.0; 2014 4.0; 2015 5.0. - Net exports (contributions to growth) 2009 4.6; 2010 3.0; 2011 5.7; 2012 1.6; 2013 0.6; 2014 1.5; 2015 1.8. - Exports: 2009 -3.8; 2010 6.4; 2011 5.4; 2012 1.6; 2013 1.1; 2014 2.9; 2015 4.0. - Imports: 2009 -9.8; 2010 3.6; 2011 -0.4; 2012 0.0; 2013 0.6; 2014 1.9; 2015 3.0. - Nominal GDP (billions of euros): 2009 162.3; 2010 158.1; 2011 162.6; 2012 163.9; 2013 166.6; 2014 171.6; 2015 178.4. - GDP deflator: 2009 -3.8; 2010 -1.5; 2011 0.7; 2012 0.7; 2013 1.0; 2014 1.2; 2015 1.4. - Current account (percent of GDP): 2009 -2.3; 2010 1.1; 2011 1.2; 2012 4.4; 2013 2.3; 2014 3.0; 2015 3.1. - Consumer Prices (HICP): 2009 -1.7; 2010 -1.6; 2011 1.2; 2012 1.9; 2013 1.0; 2014 1.2; 2015 1.4. - Unemployment rate (percent): 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 13.7; 2014 13.3; 2015 12.8. - Household savings rate (percent of disp. income): 2009 14.9; 2010 12.0; 2011 10.7; 2012 11.1; 2013 11.3; 2014 11.2; 2015 10.9. - Household debt (percent of disp. income): 2009 218; 2010 215; 2011 212; 2012 203; 2013 200; 2014 193; 2015 185. - Credit to households and NFCs (eop): 2009 -1.5; 2010 -3.4; 2011 -2.9; 2012 -4.0; 2013 -3.1; 2014 -1.2; 2015 0.6. - Key macro-financial risk highlighted: - Durable recovery hinges on reversing the tide of NPLs. Reducing NPLs and enhancing bank profitability is expected to gradually improve banks’ access to market funding and willingness to lend, unlocking housing market turnover and reducing household uncertainty. Resolution of SMEs with arrears expected to enable viable SMEs to invest and contribute to job creation. ### Policy implications and focus areas noted in the review - Fiscal policy: - Continue steady fiscal consolidation while acknowledging slower near-term growth; further consolidation in 2014–15 agreed. - Financial sector and NPL resolution: - Complete the balance sheet assessment (BSA) and advance the Mortgage Arrears Resolution Targets (MART) framework to reduce the NPL ratio (currently climbing through 26 percent). - Explore third-party support mechanisms to lower banks’ funding costs and enable internal capital generation to expand credit. - Labour market: - Prioritize improving employment services and training targeted at the long-term unemployed (long-term jobless are some 58 percent of all jobseekers). - Growth-supporting measures: - Facilitate SME resolution to allow viable firms to invest and create jobs. - Monitor developments in export sectors, notably pharmaceuticals, given patent cliff impacts. *Source: IMF staff report excerpt — "1. IBRC Asset Valuation and Sales" (content unit provided).* ### 9. This baseline is subject to a range of risks: ### _cr13305 - 9. This baseline is subject to a range of risks: ### Risks to the baseline - External demand - Slower than expected recovery in key trading partners would hurt exports and could retard improvements in consumer and business confidence, potentially spilling over to domestic demand. - Recent indicators in each of Ireland’s main trading partners are described as relatively positive, providing some scope for exports to outperform revised projections. - Domestic demand - Consumption prospects hinge on continuation of employment gains, supporting incomes and reducing uncertainties. - House prices appear to have found a floor in Dublin, but this is yet to be tested by a potential rise in disposals of repossessed properties. - Fiscal consolidation in 2014–15 could have more impact on growth than expected depending partly on the composition of measures. - Investment recovery is a potential upside given its low base at 11 percent of GDP compared with the euro area average of 20 percent. - Financial conditions - Revival in credit growth and investment needed to sustain recovery would be hindered if efforts to resolve NPLs and improve bank profitability fall short. - Recent international financial market volatility could, if it impacts the euro area periphery more strongly, raise banks’ market funding costs and constrain access and thus credit availability. ### Public debt projections and stress scenarios - Baseline projection - Ratio of gross public debt to GDP is projected to peak at 123.3 percent at end 2013. - Net debt projected at 106 percent of GDP at end 2013 owing to strong cash balances. - Gross public debt projected to decline to less than 110 percent by 2018 as recovery gains traction. - Growth shock scenario - If projected real GDP growth rates are lowered by 0.5 standard deviations for two years starting next year (implying annual growth about 2 percentage points lower at -0.3 percent y/y in 2014 and 0.5 percent in 2015), the debt-to-GDP ratio peaks at 127 percent of GDP in 2015 before declining. - Macro-fiscal shock scenario - If slower growth in 2014–15 is compounded by a temporary primary balance shock and by interest rates on newly contracted debt rising by 2 percentage points, the debt ratio rises to 136 percent of GDP in 2015 and only falls to 130 percent by 2018. - Contingent liability-growth combined shock - A scenario of a 10 percent of GDP contingent liability shock (used in lieu of specific estimates) combined with the growth shock would push gross public debt to 135 percent of GDP in 2015 before declining to 128 percent by 2018. ### Key contingent liability sources identified - Shortfalls in the crystallized value of National Asset Management Agency (NAMA) assets (including those acquired in February 2013 from the liquidated Irish Bank Resolution Corporation (IBRC)) relative to the €12.9 billion paid initially by NAMA, which would need to be covered by the government this year and next (see Box 1). - Any further bank capital needs identified in the 2014 stress test that could not be sourced in the market or through ESM direct recapitalization, which would likely need to be furnished under 2–3 year capital plans. - Costs related to ongoing restructuring of the credit union sector; these are described as contained by the size of the sector, with net loans being only 2½ percent of GDP. ### Staff recommendation on ESM direct recapitalization backstop - Given fragility of public debt sustainability, staff considers it desirable that an ESM direct bank recapitalization backstop be available during next year’s stress test. - Main features of the operational framework suggest the instrument could shoulder, bank by bank, up to 80 percent of a recapitalization need (or exceptionally more), assuming the stress test does not find core tier 1 capital of less than 4½ percent. - In practice there may be no capital need or it may be met from the private sector; nonetheless, having the instrument as part of the public backstop is important to protect market confidence in debt sustainability and financial market stability. ### Box 1 — IBRC asset valuation and sales (summary of procedures and potential fiscal effect) - NAMA acquired a lien on IBRC’s loan portfolio at the time of IBRC’s liquidation in exchange for €12.9 billion of government guaranteed NAMA bonds. - The CBI assigned rights under the Exceptional Liquidity Assistance (ELA) Facility Deed and a floating charge over IBRC to National Asset Resolution Limited (NARL), an SPV of NAMA, in exchange for the €12.9 billion. - Independent valuations of IBRC’s estate are to be completed by end November under instructions issued by the Finance Minister to the Liquidators in May, which include: - a discount rate of 4.5 percent for expected future cash flows (determined with reference to NAMA’s cost of funds); - a discount of 2.32 percent on the established value of each loan to allow for potential legal issues, including security and title issues; and - a valuation cap equal to gross loan value outstanding. - Sales process rules and fiscal implications: - The Liquidators may only sell assets to third parties at prices at or above those established by the independent valuation, with NARL as reserve buyer. - All sales are to be complete by end 2013 or as soon as practicable thereafter. - The Minister is required to make up any shortfall between the amounts due to NARL under the Facility Deed (currently €13.1 billion, including accrued interest) and the valuation placed on IBRC’s assets by the independent valuers. - If the value of assets sold is greater than net outstanding secured borrowings (including the Facility Deed), any remaining assets will be available for the benefit of the pool of unsecured creditors, including amounts due to the Minister as a result of payments under guarantees (approximately €1.1 billion), unguaranteed bondholders, suppliers, and other creditors. ### Fiscal policy findings and guidance - Budget 2013 implementation - Firm implementation of Budget 2013 remains critical to achieve the 2013 fiscal targets (MEFP ¶3). - Local property tax filings indicate a compliance rate of close to 90 percent and the estimated yield of €250 million is expected to be reached. - Public service pay and pension bill savings of €0.3 billion in 2013 and €1 billion by 2015 are expected following acceptance of the Haddington Road Agreement. - Margin between projected outturns and budget targets—both for the end September performance criterion and the end 2013 ceiling under the Excessive Deficit Procedure—is narrow. - Authorities should press ahead with budgeted non-wage savings facilitated by the original Croke Park Agreement while closely monitoring health spending. - Given the fragile recovery, consolidation measures over and above those in Budget 2013 should not be implemented to make up for revenue shortfalls should growth disappoint this year. - One-off shocks that could affect the 2013 fiscal deficit out-turn - Potential compensation to NAMA in relation to the IBRC loan portfolio (pending valuation and bidding processes). - Payment of AIB‘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 in 2012. - Uncertainty over possible costs arising from the European Court of Justice ruling on the EU Insolvency Directive (Waterford Crystal case). - Upside potential from additional proceeds from sale of state assets in the pipeline. - Consolidation path and targets - By end-2013, cumulative fiscal consolidation effort of €13.1 billion (8 percent of GDP) will have been implemented under the program, with just over 60 percent being expenditure measures. - Authorities are committed to meeting the 5.1 percent of GDP ceiling on the deficit in 2014. - Planned cumulative consolidation in 2014–15 of €5.1 billion (2.9 percent of GDP) is emphasized as important; staff stressed the importance of delivering this planned cumulative consolidation. - Under revised macro projections, this cumulative consolidation is consistent with reaching a deficit within the EDP target of less than 3 percent of GDP by 2015. - Authorities will publish Budget 2014 on October 15 with fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the EDP, including required fiscal consolidation effort until 2015, and national fiscal rules (proposed structural benchmark, MEFP ¶4). - Design of consolidation measures - Authorities are analyzing strategic reform options to ensure consolidation is equitable, durable, and growth friendly. - Part of the 2014 consolidation will be met through carryover effects of previous measures, estimated at about €1¼ billion (¾ percent of GDP). - Staff supports an expenditure-led consolidation—about 65 percent of the cumulative effort thus far—which generally has smaller long-term multipliers. - Spending-side measures include better targeting social supports and subsidies, reforming key public services to generate savings while preserving outcomes, and continuing targeted capital investment. - Revenue-side measures focus on further broadening the tax base (MEFP ¶5). - Institutional strengthening and transparency - Legislation enacted in late July to make legally binding the three-year ceilings on aggregate and departmental expenditure, with operational details specified in a circular issued before end September. - Irish Fiscal Advisory Council (IFAC) assigned role of independently endorsing macro forecasts on which the budget and stability program are based; a Memorandum of Understanding between IFAC and Department of Finance outlines modalities. - Authorities published an action plan on enhancing fiscal transparency guided by the Fund’s fiscal transparency assessment. ### Financial sector policy — main banking priorities - Three main banking issues emphasized in the eleventh review: - Resolving NPLs: arresting rise in arrears on residential mortgages and SME loans remains the most pressing priority; MART targets further articulated and supervisory approach to SME arrears followed up. - Profitability: AIB and BoI progressing toward break even, but PTSB faces prolonged losses; improving profitability to allow retained earnings to generate new capital is critical. - Provisioning and capital adequacy: a BSA, with reviews of loan classification, provisions, and regulatory risk weights, is underway; preliminary results due by end October and final assessment by end November. Separate independent third parties engaged for execution and validation. - Resolving NPLs — key arrears statistics and observations - Mortgages on primary dwelling homes (PDHs) in arrears for more than 90 days rose from 15.8 percent of total value at end 2012 to 17.0 percent at end June. - Buy-to-let (BTL) mortgages in arrears for more than 90 days rose from 26.9 percent to 28.5 percent over the same period. - Early arrears cases (arrears of 90 days or less) have declined by 10 percent from their peak in September 2012. - Share of loans with long-dated arrears has risen: loans in arrears for over 2 years now account for 32.5 percent of PDH loans in arrears over 90 days, and 38.0 percent for BTLs. - Share of restructured mortgages increased slightly from 13.2 percent of total value at end 2012 to 13.6 percent at end June. - Composition of restructurings shows a beginning shift toward long-term solutions, with a drop in interest-only arrangements and rise in split mortgages. - Mortgage Arrears Resolution Targets (MART) - CBI developed the MART framework in late 2012; first set of targets announced in March. - Table of targets (as of March 2013) indicates targets apply to ACC Bank, AIB, BoI, KBC Bank Ireland, PTSB, and Ulster Bank; specific numeric targets for 2013–2014 were set or to be announced on a rolling quarterly basis (referenced targets include a terms-being-met target of 75 percent for arrangements concluded). - Factors behind prolonged forbearance and needed reforms - Contributing factors to overly prolonged forbearance: banks’ hopes for improvement in economic and property market conditions; application of IFRS incurred loss model; banks’ inadequate operational capacity to deal with distressed assets; difficulties engaging with some customers reflecting protections under the Code of Conduct on Mortgage Arrears (CCMA) and unintended impediments to initiating repossession proceedings; and a personal insolvency regime needing reform. - Authorities summarized reports, legislative reforms, and supervisory efforts since the start of the crisis—meeting the end June structural benchmark—though effectiveness of banks’ mortgage resolution actions was not assessed due to limited experience at the time. *Source: IMF staff estimates and the IMF staff report text provided.* ### 21. Banks report that they have met the initial targets for proposals to resolve mortgage ### 21. Banks report that they have met the initial targets for proposals to resolve mortgage loans ### Progress on mortgage resolution proposals and targets - Each of the six banks subject to the MART regime faced an initial target to propose sustainable solutions to 20 percent of mortgage borrowers more than 90 days past due. - Banks report they made almost 35 thousand offers covering 33 percent of borrowers in arrears, though final figures may be lower following CBI audits of the sustainability of these proposals, which are expected to commence in September. - Over half of reported proposals were in the form of legal demand letters for repossession sent to borrowers in prolonged arrears to prompt borrower reengagement. - CBI announced targets for concluded solutions: - at least 15 percent of arrears cases by end 2013 (prior action, MEFP ¶8); - 25 percent by end March 2014. - CBI also announced an end March 2014 target for offers of sustainable solutions at 70 percent of arrears cases. - Bank-by-bank targets account for initial prioritization of lengthy arrears cases and endorsement by CBI of six month trial periods of servicing debts before signing off on loan modifications. - Staff view: would have favored a higher target for concluding resolutions by end 2013 to more quickly reduce arrears and NPLs, but allowance for trial periods appears reasonable to contain redefault risks. ### Supervision, institutional and legal reforms supporting resolution - Close supervision by the CBI is needed to ensure consistent progress toward substantially resolving residential mortgage arrears by end 2014 (MEFP ¶8). - Recent steps expected to facilitate resolution include: - establishment of the Insolvency Service; - removal of the unintended legal hurdle to summary repossession proceedings by enacting the Land and Conveyancing Law Reform Act 2013; - appointment of specialist judges for personal insolvency (MEFP ¶7). - Modification of the Code of Conduct on Mortgage Arrears (CCMA) should facilitate more effective engagement between borrowers and lenders, while increasing banks’ compliance requirements (Box 2). - The effects of these reforms remain to be tested in practice; authorities must keep the mortgage resolution framework under review. - CBI will continue close monitoring, including audits of banks’ consistency with the CBI’s internal guidelines on sustainable solutions. ### Box 2 — Evolution of the Code of Conduct for Mortgage Arrears (CCMA): key modifications and context - Purpose: regulate interaction between lenders and households with mortgages on primary residences in financial difficulties; sets out a Mortgage Arrears Resolution Process (MARP) and protects borrowers from inappropriate collection practices, including a moratorium on repossession while MARP is ongoing. - CCMA history: - February 2009: first principles-based CCMA introduced, including a six month moratorium on repossession (extended to 12 months in late 2010). - January 2011: new Code prescribing MARP and including an Appeals Process following the Cooney Report. - As a program commitment, CBI conducted a comprehensive review of the CCMA in the first half of 2013, resulting in key modifications: - Contact between lender and borrower: - prior limit on unsolicited contacts to three per month found to unduly constrain banks; - revised CCMA provides more qualitative guidance, requires banks to develop a contacts policy and record all calls. - Cooperation and engagement: - modified CCMA requires meaningful engagement by borrower, especially in providing required information; - lenders must provide advance notification before declaring a borrower non-cooperating and offer opportunity to appeal. - Tracker mortgages: - new provisions allow switching to another rate setting mechanism where the lender concludes none of the options allowing retention of the tracker rate is appropriate and sustainable for borrower’s circumstances. - Moratorium on repossession: - personal insolvency framework requires MARP engagement for at least six months before a Personal Insolvency Arrangement (PIA) may be considered; - modified CCMA requires lenders not to commence legal proceedings against cooperating borrowers until at least eight months have elapsed since arrears first arose; - a new two month moratorium included in the Land and Conveyancing Law Reform Act 2013 mainly provides time for eligible borrowers to apply for a protective certificate under the PIA where legal proceedings for repossession have commenced. ### Strengthening repossession framework and judicial process - Restoration of summary repossession proceedings for mortgages created prior to December 2009 noted as important. - Court proceedings and enforcement can be lengthy, increasing resolution costs and undermining borrower incentives. - Authorities examining: - introduction of tight deadlines on plenary repossession proceedings for non-principal private residences; - options to expand judicial resources for repossession cases as needed, with recently appointed specialist judges contributing. - An internal expert group will review length, predictability, and cost of proceedings and propose remedies by end 2013 (terms of reference agreed with EC, ECB, and IMF staff). ### SME loan restructuring - Authorities strengthening resolution of SME loans in arrears (MEFP ¶10). - In June, the CBI set SME loan restructuring targets for the two banks that dominate SME credit. - Targets are supported by a comprehensive monitoring framework, including Key Performance Indicator reports introduced in January 2013. - Quality of workout effort will be assessed through onsite reviews focused on sustainability of restructurings and improving banks’ operational capacity and strategies. ### Bank profitability: recent developments and challenges - Banks report a recovery of operating profits is underway despite headwinds. - AIB, BoI, and Permanent tsb (PTSB) together generated €92 million of pre-provision net revenue (PPNR) in the first half of 2013 (Table 10). - This contrasts with a PPNR loss of €678 million in the corresponding period of 2012. - Recovery drivers: operating cost reductions from second half of 2012, phasing out of guarantee fees starting this year, some progress on raising net interest margins as rates on new deposits have fallen below the 1 percent mark for households and corporations, and some increases in variable-rate mortgages. - Near completion of balance sheet deleveraging should alleviate profit pressures related to asset disposals, though banks’ determination to reduce dependence on ECB funding may increase funding costs due to higher wholesale funding costs. ### PTSB specific concerns - PTSB’s return to profitability is unduly prolonged; operating loss of €449 million in the first half of 2013 was little improved from corresponding period in 2012. - As required under EU state aid provisions, an updated restructuring plan for PTSB was submitted to the European Commission in August. - PTSB as a whole not expected to regain profitability until 2017; plan envisages separation into core and noncore legal entities, with noncore entity for runoff. - Implementation impeded by lack of low cost funding for runoff entity. - Authorities will follow up with further analysis of PTSB’s profitability prospects and funding options (MEFP ¶13); a lasting solution for PTSB is necessary. ### Authorities’ initiatives to strengthen profitability (MEFP ¶12) - Preparations include: - (i) an analysis of operating profit through 2015, including operating expenses, funding cost sensitivities, and recording of income from impaired or modified loans, by end September; - (ii) an external review of bank fee regulation, by end 2013; - (iii) a detailed technical proposal to reduce market funding costs for low-yielding assets, by end September. ### Box 3 — Potential approach to reducing bank funding costs - Staff estimate the “negative carry” on tracker mortgages at 0.4 percent of average assets. - Recent 3 year covered bond issues by Irish banks yield about 2.1 percent while 3 year bonds issued by a AAA rated institution trade at 0.3 percent. - Concept: allow banks to “borrow” access to a high quality balance sheet (credit enhancement) to issue market liabilities at lower rates, reducing funding costs for low-yielding assets while keeping assets on bank balance sheets. - Benefits: enhance capacity to generate capital to sustain lending and positively affect SSM stress tests; temporary scheme while ECB refinancing rates remain low, markets fragmented, and banks under restructuring. ### Balance Sheet Assessment (BSA) and related supervisory measures - BSA focuses on AIB, BoI, and PTSB—the three banks covered by the Prudential Capital Adequacy Review of 2011 and to be stress tested again in 2014. - BSA combines reviews of loan classification, provisioning, and risk weights to provide a “point-in-time” capital assessment. - Preliminary outputs due by end October and finalized results by end November; results will inform banks’ preparation of end 2013 financial statements. - Preparations completed: engagement of third parties independent of the banks to execute loan file reviews and a separate independent third party to validate the exercise; execution phase underway. - BSA methodology main work streams: - Review of asset quality: - systematic stratified sampling of loan files, review and extrapolation to portfolios; - portfolio selection seeks to maximize coverage with almost all loans and receivables of participating banks within scope; - cohort definition based on CBI supervisory knowledge; - sampling includes large exposures plus a random sample in a two-phase approach. - Review of risk weights: - review appropriateness of banks’ risk weighted asset (RWA) calculations for regulatory capital purposes, including key model inputs and assumptions; - take into account results of asset quality review and evaluate sensitivity of RWAs to alternative inputs and assumptions. ### Other financial sector measures and legislative initiatives - Central Bank (Supervision and Enforcement) Act 2013: - Signed into law in mid July; - Strengthens CBI regulatory authority: powers to require auditors’ written reports on regulatory compliance, direct firms to undergo targeted third-party reviews, issue directions, enter premises, inspect, copy and seize documents, order restitution through the High Court, and increase range of financial penalties. - These powers will be independently reviewed under assessments of Ireland’s observance of Basel Committee Core Principles and IOSCO Objectives and Principles, to be completed by end 2013. - Credit Reporting Bill 2012: - Expected to be enacted by November; - Provides for a statutory Central Credit Register system owned and operated by the CBI, giving lenders access to borrower information including personal identifiers to track credit exposure and payment history. - CBI preparing to initiate tendering for design and implementation to ensure earliest operational availability (MEFP ¶15). *Source: IMF staff report excerpt titled "21. Banks report that they have met the initial targets for proposals to resolve mortgage loans" (Ireland).* ### 33. The authorities remain committed to promoting growth and fostering job creation ### 33. The authorities remain committed to promoting growth and fostering job creation ### Medium-term economic strategy, state assets, and investment projects - The authorities are preparing an economic strategy for the 2014–20 period by year end to focus on policy actions for achieving sustainable economic and employment growth and outline how requirements under the Stability and Growth Pact and fiscal compact will be met. - State assets: - Sale of energy assets (Bord Gáis Energy and ESB) is continuing as planned, with proceeds expected to be the major contributor to the total projected disposal receipts of up to €3 billion. - Planned sale of forest harvesting rights currently managed by a state-owned company (Collite) has been suspended; authorities intend to prepare a restructuring plan within the next six months, planning to implement it by end 2014. - Sale of AerLingus remains on hold, pending the outcome of the European Commission antitrust investigation regarding Ryanair’s stake (the UK Competition Commission recently instructed Ryanair to cut its stake from 29.8 percent to 5 percent). - Investment projects: - Planned €1.4 billion of public-private partnerships are being progressively put into the pipeline. - An additional €150 million in investment projects will be directly funded from the budget. - A pilot project will test the use of social clauses in public work programs requiring some publicly funded projects to employ a certain share of long-term unemployed job seekers. ### Continued reforms of activation and training to limit structural unemployment - Pathways to Work 2013 aims to refocus efforts on: - the long-term unemployed; - jobless households, where the ratio increased from 15 percent in 2007 to 22 percent in 2012 (double the European average); - incentives to work. - Operational measures under Pathways to Work 2013: - Rollout of the Intreo offices, with a target of 43 to be completed by end year and the remainder in 2014. - Implementation of the Intreo engagement model in all offices by end year. - Targets for group and individual engagement with the unemployed; profiling of all clients on Live Register of unemployment; increasing the number of work places available to the unemployed. - Case officers and staffing: - Authorities are redeploying 300 case officers by end 2013, with 200 more to be redeployed next year. - Doubling resources aims to lower the ratio of unemployed per case officer from the current 788 closer to the goal of around 200:1. - With the new resources, authorities intend to activate around 15,000 of the long-term unemployed through group engagement and around 10,000 through individual interviews each quarter. - Staff considers these goals should be raised over time to provide adequate engagement. - International comparisons of unemployed per case worker: - Netherlands 60:1 - Sweden 80:1 to 125:1 - UK 80:1 - Australia 97:1 - Germany 90:1 to 158:1, best results at 40:1 - Outsourcing of employment services: - Authorities commissioned a report with an independent consultant reviewing international best practice and are preparing a request for tender to be issued by end November. - Incentives to work: - Move toward mutual obligation where income support is provided in exchange for active engagement with employment services. - Review of sanctions and appeals to ensure appropriate incentives. - Review of training allowances received by certain participants of FÁS courses and review of wage costs and other factors affecting youth unemployment. ### Efforts to unleash SME job-creating potential - SME importance and recent credit trends: - SMEs make up 99.5 percent of all Irish enterprises, employ 72 percent of the Irish workforce, and account for 52 percent of the gross value added of the economy. - After remaining flat in 2011 and early 2012, the stock of bank credit to SMEs (excluding financial intermediation and the property sector) has declined at annual rates of 5 to 6 percent y/y in recent quarters, with a fall of €1.5 billion (0.8 percent of GDP) in the year to June 2013. - Policy measures and legal changes: - The Credit Guarantee Scheme will be reviewed to address limited uptake. - Authorities will seek to accelerate adoption of provisions giving Circuit Courts jurisdiction for SME examinership by year end. - Authorities will consider by end 2013 the appropriateness of additional legislative amendments to the SME examinership legal framework to reduce costs and achieve efficiency gains. - Research findings on SME financing constraints: - Some analyses suggest lending weakness is mostly demand-driven; other contributions identify intertwining of credit supply with macroeconomic conditions and bank deleveraging effects. - Evidence points to credit-constrained SMEs being mostly young, small firms with a domestic customer base and a debt overhang. ### Program modalities, financing, and conditionality - Program conditionality for the eleventh review has been met—subject to a prior action on announcing targets for mortgage resolution—and conditionality for the remainder of the program established. - Conditionality highlights: - Conditionality for end June was met: the January–June exchequer primary deficit of €2.2 billion was well within the adjusted target of €4.0 billion. - The indicative target on the stock of central government net debt was met with a margin. - End June benchmark on preparing a review of progress in addressing mortgage arrears was observed. - Prior action: - The CBI will publish a target for the conclusion by end 2013 of sustainable solutions of no less than 15 percent of mortgage loans in arrears for more than 90 days. - Structural benchmark: - Authorities will publish Budget 2014 by October 15 with fiscal targets through 2016 fully in line with the 2010 European Council Recommendation under the Excessive Deficit Procedure, including required fiscal consolidation effort until 2015, and national fiscal rules. ### Financing position and market access considerations - Funding and issuance in 2013: - Syndicated bond sales in January and March totaled €7.5 billion to date in 2013. - Authorities continue to target an end 2013 cash buffer covering 12–15 months of prospective financing needs. - The full-year issuance goal of €10 billion is considered well within reach under current conditions. - 2014 funding outlook: - Staff estimates a 2014 Exchequer funding need of about €9 billion. - Long term bond issuance could be similar assuming short term debt is mostly rolled over and a drawdown in the cash buffer covers the €6.8 billion bond redemption in January 2014. - Post-program support options: - Final agreement on extension of EFSF/EFSM loan maturities by an average of seven years will ease financing needs from 2015 on. - Authorities are considering a financing backstop once the current program ends, including possible precautionary arrangements with the ESM and the IMF to support durable return to market financing. - Discussions on such arrangements will continue at the twelfth review. ### Exceptional access criteria and risks - Exceptional access rationale: - Debt sustainability: Under the baseline macro framework, debt sustainability is expected to be maintained over the medium term but is subject to significant risks if growth does not strengthen or if further contingent liabilities materialize. - Systemic risk exception: Program continues to be justified on the basis of systemic international spillover risks posed by Ireland given continued euro area fragility. - Adequate prospects to retain and expand market access: In view of Ireland’s strong program performance and regained market access, there are adequate prospects to retain and expand access to private capital markets within the timeframe over which Fund resources will remain outstanding, subject to European support for remaining financial sector challenges. - Sound policies: Ireland’s policy program is sound and adjustment is being delivered, providing reasonable prospects for program success. ### Staff appraisal: findings, risks, and policy recommendations - Assessment of recent developments: - Recovery prospects are fragile: national accounts show declining economic activity in early 2013 while employment and other indicators are more positive. - Mortgage arrears have continued to rise despite mortgage resolution process now underway. - Irish sovereign bonds have weathered global risk appetite shifts and bank funding conditions have been manageable. - Key risks to the outlook: - Growth projections for 2013 and 2014 have been lowered due to declines in exports and slower consumption recovery. - Shortfalls in trading partner growth would threaten recovery. - Slow progress in resolving non-performing loans and improving bank profitability jeopardizes revival in lending. - Fiscal policy guidance: - Continued firm implementation of Budget 2013 is needed; Budget 2014 should maintain steady fiscal consolidation to protect favorable market access. - Budget 2014 should set out adjustment in 2014–15 consistent with the €5.1 billion cumulative consolidation set out in the 2011 and 2012 Medium Term Fiscal Statements, while allowing full operation of the automatic stabilizers. - An expenditure-led consolidation is appropriate, including improved targeting of social supports and subsidies while protecting core public services and the most vulnerable. - Mortgage resolution: - Accelerated progress in mortgage resolution is essential for durable recovery and job creation. - Banks are beginning to work with borrowers toward sustainable solutions; recent reforms of repossession procedures and Insolvency Service case experience should help convert proposals into concluded solutions. - Authorities need suitably ambitious resolution targets to reach the goal of substantially resolving mortgage arrears by end 2014. - The CBI must continue to supervise banks’ efforts closely to ensure sustainability of solutions. - Banking sector and assessment: - Revival of bank lending depends on stronger bank profitability and enhanced European support. - Recent progress has brought main banks near breakeven, but stronger profitability is needed to support lending capacity. - A credit enhancement facility to reduce banks’ costs of market funding could bolster profitability and enable banks to contribute to recovery. - The ongoing bank balance sheet assessment needs timely completion with robust results, including active independent third parties; an ESM direct recapitalization backstop for the 2014 stress tests would be desirable. - Labor market and SME measures: - Tackling long-term unemployment and supporting SME job creation remain essential priorities. - Resources assigned to activation should be augmented and focused on the long-term unemployed, including through private sector service provision. - Reforms to facilitate SME examinership are important to aid resolution of SMEs in arrears and bolster their potential to invest and create jobs. *International Monetary Fund staff summary of chapter 33.* ### 47. Staff supports the authorities’ request for completion of the eleventh review. ### _cr13305 - 47. Staff supports the authorities’ request for completion of the eleventh review. ### Real sector and inflation - Net exports: - Contributed less to growth in 2012 and became a drag on growth in Q1 2013. - Current account balance composition: current account surplus continued into Q1 2013 as net exports outweighed income outflows. - GDP and demand: - Real GDP contributions and components (selected): Real GDP growth series shown for 2007–2013Q1; net exports, inventories, consumption, investment contributions depicted. - Table 1 (selected annual changes): Real GDP: 2008 -2.2; 2009 -6.4; 2010 -1.1; 2011 2.2; 2012 0.2; 2013 0.6; 2014 1.8 (proj). - Final domestic demand: 2008 -2.2; 2009 -9.7; 2010 -5.0; 2011 -3.0; 2012 -1.1; 2013 0.0; 2014 0.3 (proj). - Inflation and prices: - HICP and contributions: Despite a recent uptick, inflation remained low due to moderating energy and administered prices. - Harmonized index of consumer prices (annual average): 2009 -1.7; 2010 -1.6; 2011 1.2; 2012 1.9; 2013 1.0; 2014 1.2 (proj). - Contribution to annual HICP inflation: core inflation and energy/unprocessed food series shown for Jul-09 to Jul-13. - Sentiment and activity indicators: - Consumer sentiment (1995Q4=100) and Retail trade volume ex auto (2005=100) improved in May–July 2013. - Manufacturing PMI and new export orders: new export orders exceeded 50 from June; industrial production recovered some patent-cliff-related losses. ### Labor market - Unemployment: - Unemployment eased modestly to just under 14 percent. - Composition: 58 percent long-term unemployment; youth unemployment around 27 percent. - Unemployment rate (annual average): 2008 6.4; 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 14.7; 2014 13.7; 2015 13.3; 2016 12.8 (Table 2 projections). ### Household finance and housing - Savings, debt, arrears: - Household savings remain elevated; three-quarters of savings devoted to debt reduction since 2010. - Household balance sheets still burdened with large debt; interest payments are low. - Mortgage arrears: arrears over 180 days and 91–180 days series increased; mortgages in arrears on primary dwellings shown (percent of total mortgage value). - Debt and interest burdens: - Household debt burden indicators (percent of disposable income): total household liabilities in percent of four-quarter gross disposable income series presented. - Effective interest rates and interest burden series shown. - Housing market: - Residential property prices (2005M1=100): National and Dublin indices show a recent rise driven by strong increases in Dublin while prices continue to decline slowly in the rest of the country. - House prices to disposable income per capita (ratio) and rental yields: declining house prices drove rental yields to their highest level in ten years. - New loans for house purchases and total mortgage approvals (Billions of euros): low volume of new mortgage lending restricts new buyers and impedes housing recovery. ### Credit developments and banking sector - Deposits and credit: - Level of private sector deposits has stabilized. - Credit to households and corporations continues to contract as repayments exceed lending. - Irish resident private sector credit (end-period) annual changes: 2009 8.8; 2010 -1.5; 2011 -3.4; 2012 -2.9; 2013 -4.0 (Table 1). - SME credit: - Total SME credit remains low and credit outstanding declined in the past year. - Outstanding SME credit (Billions of euros) and sectoral breakdown (2010Q1=100) show declines across sectors, less so in manufacturing and agriculture. - Interest rates and margins: - Median deposit rates, new business: NFC deposit rate and households deposit rate series (percent) declining since mid-2012. - Interest rate margins between loans and deposits improved but remain below pre-crisis levels on outstanding balances. - PCAR banks aggregated H1 2012–H1 2013 (Table 10): - Total assets: H1 2012 €320.9 bn; H1 2013 €281.8 bn; H1/H1 change -€39.1 bn (-12.2 percent). - Net loans: H1 2012 €208.2 bn; H1 2013 €186.0 bn; change -€22.2 bn (-10.6 percent). - Gross NPLs: H1 2012 €51.8 bn; H1 2013 €56.8 bn; change €5.0 bn (9.6 percent). - Gross NPLs to gross loans (%): 22.2 (H1 2012); 26.6 (H1 2013). - Core tier 1 capital (CT1) and CT1 to RWA (%): 25.7 (H1 2012); 16.3 (H1 2013). - Return on equity: -13.8 (H1 2012); -13.3 (H1 2013). - Monetary survey (Table 6): - Aggregate balance sheet of domestic market credit institutions (assets and liabilities) reported for Dec-08 to Jun-13. - Irish resident broad money (M3) series; Irish resident private sector credit (percent of GDP) series. ### Competitiveness and external sector - Competitiveness indicators: - Appreciation of the euro in recent months slowed improvement in competitiveness indicators. - Harmonized Competitiveness Indicators (1999Q1=100) and real effective exchange rates on a ULC basis presented (1996–2013). - Private wages broadly flat; labor productivity continues to outpace the euro area though gap has narrowed recently. - Export shares: exports of goods, services, and combined shares of world non-oil imports shown 1996–2012. - Balance of payments and external indicators (Tables 4 and 5): - Current account (percent of GDP), selected: 2009 -2.3; 2010 1.1; 2011 1.2; 2012 4.4; 2013 2.3; projections to 2018 shown in Table 2. - Balance of goods and services (percent of GDP): 2009 15.8; 2010 18.4; 2011 21.5; 2012 24.1; 2013 24.7. - Income balance (percent of GDP): 2009 -17.2; 2010 -16.4; 2011 -19.6; 2012 -19.0; 2013 -21.7. - Exports (annual percent change, value in euros): 2009 -2.5; 2010 8.0; 2011 6.1; 2012 5.8; 2013 2.5 (Table 5). - Inward portfolio and FDI flows: inward portfolio investment and inward FDI series highlighted for 2009–2013. ### Public finances and fiscal consolidation - Fiscal consolidation path and targets (Figures and Tables 2–4): - 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 projected to fall by 10 percent of GDP, reflecting evenly spread durable savings. - Targets: An overall deficit below 3 percent of GDP is targeted for 2015; a primary surplus is to be regained in 2014. - It will take time to unwind the increase in net debt, half of which arose from bank support costs. - Selected fiscal numeric highlights (Table 3 and Table 4 projections): - General government balance (excl. bank support, percent of GDP): 2009 -11.3; 2010 -10.6; 2011 -8.9; 2012 -7.6; 2013 -7.5; 2014 -7.5; 2015 -4.9; 2016 -2.9. - Primary balance (excl. bank support, percent of GDP): 2009 -9.3; 2010 -7.4; 2011 -5.6; 2012 -3.9; 2013 -2.6; 2014 0.1; 2015 3.7; 2016 4.7. - General government gross debt (percent of GDP): 2009 64.5; 2010 91.2; 2011 104.1; 2012 117.4; 2013 123.3; 2014 123.3; 2015 121.0; 2016 118.3 (Table 3). - Net general government debt (percent of GDP): 2009 41.6; 2010 73.8; 2011 92.8; 2012 102.1; 2013 105.5; 2014 105.5; 2015 107.9; 2016 107.0. - Revenue and spending composition (Figure 5 / Table 3): - Revenue (incl. capital receipts) and primary expenditure (excl. bank support) series, 2010–2016. - Revenue composition (percent of GDP) projections: corporation tax, VAT & Excise, pay-related social insurance, personal income tax, other (incl. capital receipts) series shown. - Expenditure composition (percent of GDP) projections: capital expenditure (excl. bank support), current transfers, compensation of employees, goods and services. ### Government financing and program financing - General government financing requirements and sources (Table 7): - Gross borrowing need (in billions of euros): 2008 15.9; 2009 63.4; 2010 71.4; 2011 45.3; 2012 29.8; 2013 proj 27.8. - Exchequer cash deficit: 2008 12.7; 2009 24.6; 2010 18.7; 2011 19.1; 2012 17.1; 2013 proj 11.2. - Market financing (incl. retail): 2008 34.9; 2009 53.3; 2010 23.2; 2011 1.4; 2012 10.1; 2013 proj 21.3. - Official creditors and IMF/EU program disbursements are shown in program financing lines for 2010–13. - Schedule of IMF reviews and purchases (Table 8): - Arrangement approved December 16, 2010: SDRs 5,012,425,200 (399 percent of quota). - Reviews and associated purchases through the Eleventh Review (September 15, 2013): Eleventh Review purchase SDRs 681,000,000 (54 percent of quota). - Cumulative total purchases listed: Total SDRs 19,465,800,000 (1,548 percent of quota). ### Indicators of Fund credit and program exposure - Indicators of Fund credit (Table 9): - Stock of Fund credit (end of period, in millions of SDR) and in percent of quota, percent of GDP, percent of exports of goods and services for 2010–23 projections. - Example: Stock in percent of quota: 2010 879; 2011 1,315; 2012 1,548; 2013 1,548 (end period). ### Financial sector risk and vulnerabilities - Financial sector risk indicators (Table 4): - Annual credit growth rates to Irish resident private sector (adjusted): 2009 -1.5; 2010 -3.4; 2011 -2.9; 2012 -4.0; 2013 -4.6. - Non-performing loans (in percent of total loans): 2009 9.0; 2010 8.6; 2011 9.1; 2012 11.3; 2013 11.5. - Total provisions for loan losses (in percent of total loans): 2009 4.0; 2010 4.2; 2011 4.8; 2012 5.4; 2013 4.5. - Regulatory capital to risk-weighted assets of domestic banks (percent): 2009 10.9; 2010 10.4; 2011 17.7; 2012 16.6; 2013 15.9. - Loan-to-deposit ratios (vis-à-vis Irish residents): 2009 2.1; 2010 2.1; 2011 2.1; 2012 1.9; 2013 1.7. - Banking sector aggregated summaries and liquidity: - Aggregate balance sheet of domestic market credit institutions and memorandum items (Table 6) present liabilities to Eurosystem, deposits, wholesale funding, and credit-to-deposit ratios through Jun-13. *Source: IMF staff report content as provided in the supplied PDF content unit.* ### Annex I. Debt Sustainability Analysis ### Annex I. Debt Sustainability Analysis ### Public Debt Sustainability Analysis — Baseline and near-term projection - Under the baseline scenario, public gross debt is projected to peak this year at 123.3 percent of GDP before declining to 109.8 percent in 2018 as the fiscal deficit narrows and economic recovery gains traction. - Gross financing needs are forecast to remain below 15 percent of GDP over the medium term. - Net public debt in 2013 amounts to 105.5 percent of GDP, and is projected to fall to just below 100 percent of GDP by 2018 when the cash buffer is assumed to shrink to about 7 percent of GDP. - Automatic debt dynamics arising from the interest rate-growth differential will on average add some 2 percentage points per year to the debt ratio in 2013–14 before stronger growth takes hold from 2015. - The estimated change in the cyclically adjusted primary balance is 4 percent over three years during the projection period. ### Public DSA — Risk assessment and vulnerabilities - Ireland faces high risks to debt sustainability: - The debt burden benchmark for advanced economies of 85 percent of GDP is already exceeded. - External financing requirements (excluding IFSC debts) and public debt held by non-residents exceed the upper risk-assessment benchmarks for those indicators. - The benchmark of 20 percent of GDP for gross financing needs is exceeded only under the contingent liability shock. - Fan charts (symmetric and asymmetric) indicate upside-skewed risks to the debt-to-GDP ratio; the asymmetric fan chart — which considers only negative shocks to the primary balance — is more relevant given the large planned fiscal adjustment. ### Public DSA — Scenario and stress-test outcomes (numeric results preserved) - Growth shock - A lowered real GDP growth scenario for 2014–15 by 0.5 standard deviations (implying annual growth about 2 percentage points lower at -0.3 percent y/y in 2014 and 0.5 percent in 2015) would raise the debt-to-GDP ratio to 127 percent in 2015 (compared with 118 percent under the baseline) before starting to decline. - Interest rate shock - A 200 basis point increase on new borrowing affects the debt trajectory only marginally. - Macro-fiscal shock - If slower growth in 2014–15 is compounded by a temporary primary balance shock and by an increase in interest rates on new borrowing by 2 percentage points, the debt ratio rises to 136 percent of GDP in 2015 and only falls to 130 percent by 2018. - In this scenario, gross financing needs increase to 15 percent of GDP in 2014–15, about 6 percentage points of GDP higher than in the baseline. - Contingent liability shock - Potential contingent liability sources include: shortfalls in crystallized NAMA asset values relative to the €12.9 billion paid initially by NAMA (including assets acquired in February 2013 from the liquidated IBRC); further bank capital needs identified in the 2014 stress test; and credit union sector restructuring costs (net loans only 2½ percent of GDP). - A scenario assuming a 10 percent of GDP contingent liability shock is used. Such a shock, if combined with the growth shock, would push gross public debt to 135 percent of GDP in 2015 before declining to 128 percent by 2018. - Upside from asset sales - Baseline assumptions do not include proceeds from state asset disposals of up to €3 billion (around 1¾ percent of GDP) in energy generation and aviation, at least half of which are to be used for debt reduction. - No allowance is made for further transactions reducing banking support costs beyond recent sales (BoI and Irish Life). ### Public debt and market/forecast context (selected indicators preserved) - The report notes no evidence of systematic projection bias in baseline assumptions for key macro variables; median forecast errors for real GDP growth and the primary balance during 2004–12 are below 1 percent. - The baseline projection table (as presented) lists nominal gross public debt and related indicators across years (sequence preserved as in source): - Nominal gross public debt: 41.0 104.1 117.4 123.3 121.0 118.3 116.2 113.6 109.8 - Public gross financing needs (selected years): ...19.0 15.0 13.1 10.4 7.3 11.2 9.2 13.1 - Net public debt: ...92.8 102.1 105.5 107.9 107.0 105.3 103.0 99.6 - Real GDP growth (percent): 0.6 1.8 2.5 2.5 2.5 2.5 2.5 - Inflation (GDP deflator, percent): 1.0 1.2 1.4 1.6 1.6 1.7 1.7 - Effective interest rate (percent): 4.2 4.2 4.2 4.3 4.4 4.4 4.5 - Cumulative change in gross public sector debt (projection): -3.7 -7.5 - Identified debt-creating flows (cumulative projection): -3.3 -3.4 - Primary deficit (selected years): 3.9 10.4 4.6 3.3 0.7 -1.4 -1.9 -2.4 -2.7 -4.4 - (All numeric values preserved exactly as presented in source tables and notes.) ### External Debt Sustainability Analysis — levels and projections - External debt (Q1 2013): - External debt excluding the IFSC sector stood at 288 percent of GDP at end-Q1 2013. - Total external debt (IFSC and non-IFSC) amounted to 1,006 percent of GDP at end-Q1 2013. - Compared with end-2012, the non-IFSC debt declined by 11 percentage points of GDP while total external debt increased by 6 percentage points of GDP. - Net international investment liabilities in Q1 2013 stood at 108 percent of GDP, mostly accounted for by the non-IFSC sector. - Composition and revisions - The non-IFSC debt is largely comprised of official external liabilities of the general government and the central bank (around 40 percent of the total). - Around 30 percent of the non-IFSC debt is accounted for by FDI-related liabilities; the remainder is foreign liabilities of domestic financial institutions and other sectors. - End-2012 data revisions: incorporation of new firm-level returns raised non-IFSC debt by around €21 billion (4.5 percent) mainly due to higher liabilities to foreign direct investors; IFSC debt lowered by €20.6 billion. - Projection to end-2018 - By end-2018, total external non-IFSC debt is expected to decline to 215 percent of GDP. - This projection is around 15 percentage points of GDP higher than at the 10th Review (consistent with the 9th Review), largely owing to higher end-2012 debt numbers. - External stress-test outcomes (preserved scenarios) - With growth at historical averages, in 2018 debt would be over 55 percentage points of GDP higher than under the baseline (but remain on a declining path). - A permanent ½ standard deviation shock to growth (implying a contraction of around ¼ percent in 2014 and slow growth of ½ percent annually thereafter) would raise the debt-to-GDP ratio to 241 percent in 2018, over 25 percentage points above the baseline. - A permanent ½ standard deviation shock to the non-IFSC current account (excluding interest payments) would raise debt by around 20 percentage points of GDP above the baseline. - A combined shock of ¼ of the standard deviation to the current account balance, real interest rate, and GDP growth rate would increase medium-term debt to 247 percent of GDP. *Source: IMF staff (Annex I. Debt Sustainability Analysis).* ### Annex I. Figure 4. Ireland Public DSA—Composition of Public Debt and Alternative Scenarios ### Annex I. Figure 4. Ireland Public DSA—Composition of Public Debt and Alternative Scenarios ### Composition of Public Debt - Net debt (in percent of GDP): chart range shown from 60 to 160 with years 2011–2018 (2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018). - Gross Nominal Public Debt (in percent of GDP): projection series plotted for 2011–2018; chart vertical scale 0 to 30 (0, 5, 10, 15, 20, 25, 30). - Public Gross Financing Needs (in percent of GDP): projection series plotted for 2011–2018; chart vertical scale 0 to 30 (0, 5, 10, 15, 20, 25, 30). - By Maturity (in percent of GDP): decomposition into "Medium and long-term 1/" and "Short-term" for 2002–2018 with projection for 2011–2018; chart vertical scale 0 to 140 (0, 20, 40, 60, 80, 100, 120, 140, 200, 220, 240). - By Currency (in percent of GDP): decomposition into "Local currency-denominated" and "Foreign currency-denominated" for 2013–2018. ### Alternative Scenarios (underlying scenario assumptions and scenario labels) - Baseline and scenario-specific projected variables (annual values listed for 2013–2018): - Real GDP growth (Baseline): 0.6 1.8 2.5 2.5 2.5 2.5 - Inflation (Baseline): 1.0 1.2 1.4 1.6 1.6 1.7 - Primary Balance (Baseline): -3.3 -5.6 -3.5 1.9 2.4 2.7 - Effective interest rate (Baseline): 4.2 4.2 4.4 4.5 4.6 4.6 - Primary Balance Shock scenario values: - Real GDP growth: 0.6 -0.3 0.5 2.5 2.5 2.5 - Inflation: 1.0 0.7 0.9 1.6 1.6 1.7 - Primary Balance: -3.3 -1.6 -0.3 1.9 2.4 2.7 - Effective interest rate: 4.2 4.2 4.3 4.3 4.4 4.5 - Real GDP Growth Shock scenario values: - (Same labels repeated as in figure headings; baseline and scenario values presented in figure.) - Real Interest Rate Shock scenario values: - Real GDP growth (scenario): 0.6 1.8 2.5 2.5 2.5 2.5 - Inflation (scenario): 1.0 1.2 1.4 1.6 1.6 1.7 - Primary Balance (scenario): -3.3 -0.7 1.4 1.9 2.4 2.7 - Effective interest rate (scenario): 4.2 4.2 4.4 4.5 4.8 4.9 - Real Exchange Rate Shock scenario values: - Effective interest rate (scenario): 4.2 4.3 4.3 4.3 4.4 4.4 - Combined Macro-Fiscal Shock scenario values: - Real GDP growth: 0.6 -0.3 0.5 2.5 2.5 2.5 - Inflation: 1.0 0.7 0.9 1.6 1.6 1.7 - Primary Balance: -3.3 -5.6 -3.5 1.9 2.4 2.7 - Effective interest rate: 4.2 4.3 4.4 4.6 4.9 5.1 - Contingent Liability Shock scenario values: - Primary Balance: -3.3 -10.7 1.4 1.9 2.4 2.7 - Effective interest rate: 4.2 4.3 4.6 4.6 4.7 4.7 ### Stress tests highlighted in Figure 5 (Macro-Fiscal Stress Tests) - Stress test categories shown: Baseline, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock. - Gross Nominal Public Debt (in percent of GDP) plotted for 2013–2018 with vertical scales showing 80–150 and higher ranges in percent-of-revenue terms (200–450). - Public Gross Financing Needs (in percent of GDP) plotted for 2013–2018 with scale 0–25 (0, 5, 10, 15, 20, 25). - Interest-rate shock example (i-rate shock) labels include values: i-rate shock 231, Baseline 215 with plotted series across 2008–2018; "Interest rate shock (in percent)" plotted 0–500. ### Additional Stress Tests and Figures (Figure 6: External Debt Sustainability: Bound Tests) - External debt (in percent of GDP) baseline and scenario comparisons plotted 2008–2018 with baseline value and scenario averages shown: - Historical: 271 (label in figure) - Baseline: 215 (label in figure) - CA shock: 236 (label in figure) - Combined shock: 247 (label in figure) - Real depreciation shock 30%: 313 (label in figure) - Growth shock: 241 (label in figure) - Gross financing need under baseline is shown on right scale in figure. - Boxed summary statistics in figure text (averages and ten-year historical averages) include values (examples given in figure text): - Baseline: 3.9; Scenario: 5.2; Historical: 8.3 - Baseline: 2.4; Scenario: 0.4; Historical: 1.7 - Baseline: 10.8; Scenario: 6.7; Historical: 20.3 - Notes: - Individual shocks are permanent one-half standard deviation shocks. - For historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead. - Combined shock uses permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. ### External Debt Sustainability Projections and Identified Flows (selected table highlights) - Baseline: External debt series (selected projection excerpts): - External debt-to-GDP path (Projections heading shows years 2008–2018): Baseline: External debt 302.7 323.6 334.0 314.9 299.2 289.3 275.8 260.0 244.5 229.6 215.3 -3.3 - Change in external debt: 45.1 20.8 10.4 -19.0 -15.7 -10.0 -13.4 -15.9 -15.4 -14.9 -14.3 - Identified external debt-creating flows (4+8+9): 15.1 31.9 11.6 -9.1 -5.0 -6.9 -9.9 -12.0 -11.5 -11.1 -10.5 - Components (selected): - Current account deficit, excluding interest payments: -26.6 -20.6 -22.9 -35.0 -16.1 -13.2 -11.4 -10.8 -10.0 -10.8 -11.0 - Deficit in balance of goods and services: -137.8 -143.9 -158.2 -161.4 -167.7 -165.5 -166.7 -167.4 -168.8 -170.6 -172.5 - Exports: 71.4 77.5 85.9 89.0 93.0 91.9 92.4 93.3 94.1 95.1 96.0 - Imports: -66.4 -66.4 -72.3 -72.3 -74.7 -73.6 -74.2 -74.1 -74.7 -75.5 -76.5 - Net non-debt creating capital inflows (negative): 0.4 -1.9 3.1 0.6 -1.6 -4.3 -4.2 -4.0 -4.0 -4.0 -4.0 - Automatic debt dynamics 1/: 41.2 54.4 31.3 25.3 12.6 10.5 5.7 2.8 2.5 3.8 4.5 - Contribution from nominal interest rate: 27.8 20.9 22.7 34.5 15.2 12.2 10.6 9.4 8.9 9.7 10.0 - Contribution from real GDP growth: 5.9 21.5 3.5 -7.0 -0.5 -1.7 -4.9 -6.6 -6.3 -5.9 -5.6 - Contribution from price and exchange rate changes 2/: 7.6 12.0 5.0 -2.2 -2.1 (projection line indicates further entries as "..........") - Residual, incl. change in gross foreign assets (2-3) 3/: 30.0 -11.1 -1.2 -9.9 -10.7 -3.0 -3.6 -3.9 -4.0 -3.9 -3.7 - External debt-to-exports ratio (in percent): 423.9 417.7 388.7 353.7 321.6 314.9 298.4 278.7 259.8 241.5 224.2 - Gross external financing need (in billions of euro) 4/: 43.0 385.8 354.3 339.3 271.4 267.3 265.8 262.8 261.2 259.1 257.3 - Gross external financing need (in percent of GDP): 23.9 237.7 224.1 208.7 165.5 10-Year 10-Year 160.5 154.9 147.3 140.6 133.9 127.6 (table displays mix of labels and numbers in source) ### Key Macroeconomic Assumptions Underlying Baseline (historical averages and projection path) - Real GDP growth (in percent) historical and projection sequence shown as: - Historical: -2.2 -6.4 -1.1 2.2 0.2 1.7 4.0 0.6 1.8 2.5 2.5 2.5 2.5 - GDP deflator (change in percent): -2.9 -3.8 -1.5 0.7 0.7 0.7 2.6 1.0 1.2 1.4 1.6 1.6 1.7 - Nominal external interest rate (in percent): 10.3 6.2 6.8 10.6 4.9 8.3 2.5 4.2 3.8 3.5 3.6 4.1 4.6 - Growth of exports (in percent): -1.2 -2.3 8.0 6.6 5.4 4.2 4.3 0.3 3.7 4.9 5.1 5.2 5.3 - Growth of imports (in percent): 0.0 -10.0 6.0 3.0 4.1 2.9 6.5 0.1 3.8 3.8 5.0 5.3 5.6 - Current account balance, excluding interest payments (in percent of GDP): 26.6 20.6 22.9 35.0 16.1 20.3 8.1 13.2 11.4 10.8 10.0 10.8 11.0 - Net non-debt creating capital inflows: -0.4 1.9 -3.1 -0.6 1.6 -0.4 2.1 4.3 4.2 4.0 4.0 4.0 4.0 ### Debt-stabilizing non-interest current account - The table notes a "Debt-stabilizing non-interest current account 6/" concept defined as the long-run, constant balance that stabilizes the debt ratio assuming key variables remain at their last projection year levels. *Source: IMF Staff.* ### 1. Recent data point to the recovery being more fragile than previously thought, yet ### 1. Recent data point to the recovery being more fragile than previously thought, yet ### Recent economic developments and outlook - Real GDP contracted by 0.9 percent y/y in Q1 as goods exports slumped owing to weak trading partner growth and the patent cliff in the pharmaceuticals industry. - Final domestic demand weakened in Q1 after beginning to stabilise in 2012, though recent high-frequency indicators have been more positive. - Employment rose 1.1 percent y/y in Q1, driven by rising part-time employment. - Registered unemployment eased to 13.7 percent from around 15 percent a year earlier. - Growth in 2013 and beyond depends upon recovery in Ireland’s main trading partners and sustained growth hinges on continued progress in financial sector repair. ### External and domestic financial conditions - Ireland’s access to international credit markets has withstood recent market volatility though domestic financial conditions remain mixed. - Fluctuations in Irish sovereign bond yields have been relatively moderate during international financial market volatility and yields remain low by historical standards. - Banks have accessed further market funding, including a senior unsecured bond issue by Bank of Ireland in late May, although wholesale funding conditions have tightened somewhat since then. - Deposit rates have continued to trend down and the deposit base remained stable despite the phasing out of the Eligible Liability Guarantee scheme from March. - Credit outstanding has further contracted, with new lending below expectations in Q1, though credit demand appears to have risen recently. ### Fiscal policies and commitments - Committed to the 7.5 percent of GDP deficit ceiling for 2013. - Budget implementation is on track in the first half of the year; the end-June performance criterion on the Exchequer primary balance and indicative target on net debt have safely been met. - Local property tax filings indicate a strong compliance rate and legislation has been published to charge private patients in public hospital beds. - Committed to careful and proactive budget management to contain spending within allocations and undertake corrective measures if necessary. - Implementing savings of €0.3 billion in 2013 and €1 billion per annum by 2015 following broad public sector union acceptance of the Haddington Road Agreement. - Preparing Budget 2014 with publication by October 15 and fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the Excessive Deficit Procedure, including the required fiscal consolidation effort until 2015 and with national fiscal rules (proposed structural benchmark). - Budget documents will specify the annual Ministerial expenditure ceilings through 2016. - Analysing a range of reform options to ensure equitable, durable and growth-friendly budget measures, including: - Better targeting social supports and subsidies. - Reforming key public services to generate savings while preserving outcomes. - Continuing targeted capital investment. - Further broadening the tax base. - Implementing health and water sector reforms as specified in the MoU. ### Financial sector policies and bank repair - Top immediate priority: arresting the rise in nonperforming loans. - Continuing steps to improve asset quality, review provisions, and enhance profits to improve banks’ ability and willingness to lend to households and SMEs. - Advancing frameworks for resolution of mortgages and SME loans in arrears. - Conducting analysis to improve net interest margins and hasten banks’ return to profitability. - Conducting thorough reviews of asset quality and risk weighted assets culminating in a comprehensive point-in-time assessment of PCAR bank balance sheets to inform follow-up actions and SSM preparation. - Insolvency and mortgage resolution measures: - Insolvency Service accepting applications for Debt Relief Notices or Protective Certificates under the new personal insolvency framework. - Appointed six Specialist Judges dedicated to personal insolvency cases. - Passage of the Land and Conveyancing Law Reform Act 2013 removed unintended constraints on summary repossession proceedings. - Modified the Code of Conduct on Mortgage Arrears (CCMA) by replacing the 12-month moratorium on repossession of primary dwellings and amending the definition of non-cooperating borrowers. - Central Bank of Ireland developed an internal guideline for assessing the sustainability of mortgage arrears solutions (temporary forbearance acceptable only for borrowers with temporary difficulties). - Completed a mid-year review of progress in addressing mortgage arrears and will keep the mortgage resolution framework under close review. - Mortgage arrears targets and monitoring: - All lenders subject to the Mortgage Arrears Resolution Targets framework reported fulfillment of the mid-year target for sustainable solutions proposed. - Will publish a target for the conclusion by end-2013 of sustainable solutions of no less than 15 percent of mortgage loans in arrears for more than 90 days, consistent with largely completing sustainable solutions by end-2014 (prior action). - Each quarter will announce future targets on a rolling basis, including, by mid-September, Q1 2014 targets for proposed solutions of 70 percent and for concluded solutions of no less than 25 percent. - Will monitor each bank’s progress, including through audits of performance against the resolution targets as set out in the MART framework, and assessing the sustainability of offered and concluded solutions. - Will report to staff of the EC, ECB, and IMF by [CM1]early-November on the number and nature of solutions proposed in Q3 with a preliminary assessment of sustainability issues, and in mid-November on the outcome of the audit of banks’ proposed solutions for Q2 (including an assessment of sustainability). - Will devise a system for lenders to report on legal proceedings and require lenders to have a strategy to address potential shortfall from repossession of the property. - Repossession procedures and safeguards: - Appropriate safeguards in place to keep distressed but cooperating mortgage borrowers in their homes with repossession of principal dwellings as last resort. - Will examine by end-October the merits of assigning additional functions to the Specialist Judges to enable them to deal with repossession cases as needed. - Will define, in consultation with EC, ECB, and IMF staff, terms of reference by mid-August for an expert group to review by end-2013 the length, predictability and cost of proceedings and propose measures where necessary. - Will examine the possibility of introducing tight deadlines on plenary repossession proceedings for non-principal private residences by end-October. - SME debt resolution and bank operational readiness: - Set restructuring targets in June for the two main banks involved in SME lending. - Will closely monitor progress through the restructuring stages using Key Performance Indicator reports and assess quality and sustainability of concluded arrangements via targeted on-site reviews. - Central Bank of Ireland on-site reviews will focus on operational restructuring capabilities, durability of solutions, and assess loan grading, provisioning coverage and collateral valuations. - PCAR bank balance sheet assessment: - Preparing a preliminary assessment of the balance sheets of the PCAR banks by end-October, to be finalised by end-November. - Review will incorporate: (i) an assessment of quantitative impairment provisions and a review of risk classification (asset quality review on an incurred loss basis), and (ii) a review of the appropriateness of risk weights for regulatory capital purposes. - Third parties independent of the banks will contribute, including on-site loan file reviews; a separate independent third party will validate the exercise. - Sampling and loan file reviews will follow best practice to ensure a high level of coverage and representativeness. - Test parameters for benchmarking provisioning will be agreed by end-September; outputs will include a sensitivity analysis for critical parameters. - Will engage with staff of the EC, ECB, and IMF on an ongoing basis on progress, methodology, inputs, outputs, and findings. - Measures to hasten banks’ profitability recovery: - Central Bank of Ireland to prepare an operating profit analysis by end-September assessing operating profit projections to 2015, including operating expenses, funding cost sensitivities, and recording of income from impaired or modified loans. - Preparing an external review of bank fee regulation by end-2013, including benchmarking against relevant comparator jurisdictions and proposals to Government on reforms. - Preparing a detailed technical proposal to reduce market funding costs for low-yielding assets in a low-risk manner. - Permanent tsb (PTSB) follow-up: - Following the updated restructuring plan for PTSB of July, will review: (i) PTSB’s financial forecasts in light of broader reviews including asset quality and risk weights; (ii) profitability prospects considering measures to reduce funding costs on low-yielding assets; (iii) funding options; and (iv) preparedness for the SSM balance sheet assessment planned for next year. - Credit unions and credit reporting: - Strengthening prudential requirements and oversight for credit unions; administrative sanctions procedure under the Credit Union and Co-operation with Overseas Regulators Act 2012 applies from 1 August. - Will review lending restrictions on credit unions and impose restrictions as necessary to protect members’ savings. - Will promptly commence the Credit Reporting Bill 2012 upon its enactment--expected by November--to create a centralised credit register utilising personal identifiers including the Personal Public Service Number. - Advancing preparations to enable the Central Bank of Ireland to tender for design and implementation of the register shortly after commencement of the Act. ### Structural reforms, investment and labour market measures - Capital investment and PPPs: - Normal Exchequer funded capital investment plan proceeding. - Two Public-Private Partnership (PPPs) projects in education and roads have entered the construction phase; several other projects will advance to construction over the next two years. - Projects funded through PPPs and to a limited extent through additional direct budget funding. - Piloting social procurement clauses to recruit a portion of workers from the long term unemployed and apprenticeship programmes. - Disposal of state assets advancing; sale of key energy sector assets to be completed by end-2013. - Will use at least half of resulting proceeds to reduce public debt in due course; remainder to be invested in job-rich commercial projects consistent with fiscal targets. - Labour activation and unemployment measures: - Redeploy 300 staff as case workers by end-2013; an additional 200 staff redeployed in 2014; will consider redeploying staff from outside the Department of Social Protection (DSP) and ensure adequate training. - Determine scope and structure of a contracting model of activation services to private providers and issue a request for tender by end-November. - Initial activation targets: engage fifteen thousand long-term unemployed people in group engagement sessions and integrate an additional ten thousand long-term unemployed people in the activation process of regular one-on-one interviews every quarter, starting in Q4 2013; targets to be reviewed as deployment progresses. - Training and education: - Ensure all new applications for the Back to Education payment are reviewed for employment relevance and, where appropriate, discussed with a case officer prior to approval. - By end-December develop a system of cooperation between Intreo offices and Education and Training Boards to monitor jobseekers’ participation after referral. - Seek SOLAS to submit its strategic plan by end-March 2014, with an update by end-December 2013. - Review by end-October whether certain FAS FET participants should retain all or part of their DSP welfare payments while on FET courses in addition to FAS training allowances. - Sanctions: review the system of sanctions by end-October to ensure strong incentives to participate in activation and training while operating fairly. - Youth unemployment: by end-2013 review wage costs and other factors which may affect employment of young people. - SME support and restructuring: - Promote awareness of Government initiatives to support SME financing; review the Credit Guarantee Scheme to address take-up and future performance issues. - NPRF SME funds (Restructuring Fund, Turnaround Fund and Credit Fund) will be operational within coming months and provide up to €900 million of equity finance and new lending to SMEs in partnership with private sector players. - Funds to facilitate workout of viable SMEs with loans in arrears; will continue efforts to deploy initiatives and study further options in the context of the EFC high-level expert group on long-term finance and SMEs. - Company Law amendments anticipated for 2014; will seek to accelerate adoption of provisions giving Circuit Courts jurisdiction for SME examinership by year-end. - By end-2013 consider legislative amendments to SME examinership legal framework to reduce costs and achieve efficiency gains. - By end-2013 consider the potential for an administrative body to facilitate SME restructuring, drawing on experience with the Insolvency Service and Company Law Review recommendations. *IMF/Irish authorities staff report excerpt contained in content unit _cr13305 - 1.* ### 19. To date in 2013, €7.5 billion has been raised by the NTMA from two syndicated ### _cr13305 - 19. To date in 2013, €7.5 billion has been raised by the NTMA from two syndicated ### Market financing, cash buffer, and debt management - To date in 2013, €7.5 billion has been raised by the NTMA from two syndicated bond sales in the first quarter of 2013. - Both syndicated bond sales attracted strong international interest and were heavily oversubscribed. - Authorities expect to end the year with a cash buffer covering 12-15 months of future financing needs. - Decisions on potential bond auctions will be taken later in the year in the light of prevailing market conditions. - The recent confirmation of the 7 year extension in EFSM/EFSF maximum average maturities reduces refinancing needs in coming years. - These developments support Ireland’s ability to access long-term market funding on sustainable terms and the authorities remain on course to consolidate a durable return to the debt markets in 2014. - The authorities are developing a Medium Term Economic Strategy until 2020 to underpin growth and debt sustainability prospects and to support access to market financing. ### Programme monitoring: performance criteria, targets, and status (summary) - Table 1 (Programme Monitoring) status highlights (selected): - Cumulative exchequer primary balance: End-June 2013 — Observed. - Ceiling on the stock of central government net debt: End-June 2013 — Observed. - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government (continuous): Observed. - Structural benchmarks: multiple measures dated from End-December 2010 through End-September 2013, with status entries including Observed and Not observed for specific items. ### Quantitative targets and key numbers (from Table 2 and TMU) - Cumulative exchequer primary balance (series from targets and outcomes reported): - -22.3 -21.0 -6.9 -5.7 -9.6 -8.7 -11.4 - 10.1 -13.2 -12.3 -3.2 -1.8 -4.0 -2.2 -4.8 - Ceiling on the accumulation of new external payments arrears (indicative/continuous): - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - Ceiling on the stock of central government net debt (series of targets/outcomes reported, in billions of euro): - 117.2 115.7 125.0 123.0 130.1 128.2 132.5 130.0 135.8 133.7 167.9 161.8 171.1 164.6 172.3 - Floor on the Exchequer primary balance (performance criterion) — cumulative from January 1, 2013: - End-September 2013 (performance criterion) -4.8 (In billions of euros) - Cumulative Exchequer tax revenue & other receipts (projection) — From January 1, 2013: - End-September 2013 (projection) 32.7 (In billions of euros) - Central government net debt (stock): - Outstanding stock: End-June 2013 (provisional) 164.6 (In billions of euros) - End-September 2013 (indicative target) 172.3 (In billions of euros) ### TMU definitions, adjustors, and measurement rules (selected) - Programme exchange rates (prevalent on December 30, 2011) for programme valuation of foreign currency-related items: - €1 = 1.2939 U.S. dollar - €1 = 0.842786 SDR - Exchequer balance definition and measurement: - Exchequer balance = total receipts into, minus total expenditure out of, the Exchequer Account (sum of current and capital balances). - Exchequer primary balance = Exchequer balance excluding net debt interest payments in the service of the National Debt. - From January 2013, all payments related to the IBRC promissory notes are excluded from the Exchequer primary balance measure used for programme monitoring purposes. - Adjustors to the floor on the Exchequer primary balance include (listed exactly as in TMU): - (i) downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy. - (ii) upward by the amount of proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts. - (iii) upward by the amount of receipts from disposals of state assets specified in the paragraph 21 of the MEFP dated 29 November 2012. - (iv) downward by the amount of these receipts spent on growth-enhancing projects not included in Budget 2013, up to no more than half of these receipts. - (v) downward for Exchequer contributions to the Resolution Fund for the resolution of credit institutions, and upward for any Exchequer recoupment from the Resolution Fund, of such outlays. - (vi) upward for any recoupment of Exchequer contributions from the Credit Union Fund. - Central government net debt definition and adjustors: - Net central government debt = National Debt less liquid assets of the National Pensions Reserve Fund (NPRF). - NPRF liquid assets include Exchequer cash balances, Exchequer deposits with commercial banks and other institutions, investments in investment grade sovereign bills, and marketable securities (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. - Adjustors to the ceiling on central government net debt include (listed exactly as in TMU): - (i) upward by debt arising from payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy. - (ii) 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. - (iii) downward by the amount of receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012. - (iv) upward by the amount of these receipts spent on growth-enhancing projects not included in Budget 2013, up to no more than half of these receipts. - (v) upward for Exchequer contributions to the Resolution Fund for the resolution of credit institutions, and downward for any Exchequer recoupment, from the Resolution Fund, of such outlays. - (vi) downward for any recoupment of Exchequer contributions from the Credit Union Fund. - (vii) downward by the amount liquidated from the NPRF non-liquid discretionary portfolio. - (viii) downward (upward) by valuation gains (losses) in the NPRF liquid portfolio. The programme exchange rates will apply to all non-euro denominated debt. - (ix) upward by the amount of cumulative drawings on NPRF’s SME focused funds up to €500 million. - The ceiling will be adjusted by any final upward (downward) revision to the stock of end June 2013 central government net debt. ### Non-accumulation of external payments arrears - The central government will accumulate no external payments arrears during the programme period. - Definition: an external payment arrear = a payment by the central government on its contracted or guaranteed external debt that has not been made within five business days after falling due, excluding any contractual grace period. - The performance criterion applies on a continuous basis. - The stock of external payments arrears will be calculated based on the schedule of external payments obligations reported by the National Treasury Management Agency. ### Reporting requirements (selected) - Department of Finance reporting to EC, IMF and ECB staff (lag no more than seven days after the test date) on: - Exchequer primary balance, Exchequer tax revenues, payments for bank restructuring under the programme, proceeds from sales of bank equity treated as Exchequer receipts, receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012 and associated outlays on growth-enhancing projects not included in Budget 2013, Exchequer outlays for resolution and restructuring of credit unions, any return of such outlays to the Exchequer and recoupment by the Exchequer from the Resolution Fund and the Restructuring and Stabilisation Fund. - National Treasury Management Agency reporting: - Provisional figures on the outstanding stock of net government debt, including an unaudited analysis of NPRF holdings, with a lag of no more than seven days after the test date; revised figures within three months of the test date. - Final stock of central government system external payments arrears to EC, IMF and ECB staffs, with a lag of not more than seven days after the arrears arise (per paragraph 11 definition). - Central Bank of Ireland reporting: - On a quarterly basis, bank by bank data on the assets of government guaranteed banks, including loans and provisioning by period overdue (90+ days and less than 90 days) and category of borrower, 40 working days after the end of each quarter. *Attachment: Letter of Intent and TMU, Ireland — September 11, 2013.* ### 1. We remain determined to leave the crisis behind, support the emerging economic recovery ### 1. We remain determined to leave the crisis behind, support the emerging economic recovery ### Programme status and government commitment - Government focus: continuing to underpin a durable and sustainable return to market based funding essential in a post programme setting. - Performance: Government’s commitment to the programme remains firm, illustrated by a continued strong record in implementing agreed policy frameworks and measures. - Coordination: Will continue to work with staff of the European Commission, the European Central Bank and the International Monetary Fund towards a successful completion of the adjustment programme with timely and effective implementation of policy conditions as set out in the updated MoU (attached). - Preparedness: Confident policies in Letters of Intent of 3 December 2010 and subsequent letters, and this letter, are adequate to achieve programme objectives; ready to take corrective actions if circumstances change, consulting the EC, ECB, and IMF in advance. ### Recent economic developments and indicators - Mixed data: First-quarter national accounts data disappointing with export growth slowing due to sector-specific developments and weak trading partner growth. - Encouraging high-frequency indicators: house prices returning to year-on-year growth; broad-based employment growth has resumed; unemployment is down. - Sovereign funding costs: yields on Irish government bonds remain low and are now well below levels seen before the programme. - Factors supporting bond yields: ECB announcement of outright monetary transactions programme; replacement of promissory notes with longer-duration government bonds following IBRC liquidation; Eurogroup and ECOFIN decision to extend by seven years the average duration of the EU loans. - Banking work: progress on the bank diagnostic exercise; commitment to completing assessment of banks' balance sheets by the end of November. - Mortgage arrears: advances with the target based approach to deal with mortgage arrears. ### Market access, financing strategy, and cash buffer - Market financing in 2013: continuation of regular Treasury bill auctions in 2013 at low yields and high bid-to-cover ratios; successful issuance of medium to long-term bonds means little market financing need left for the year. - Cash buffer objective: intend to maintain a strong cash buffer to support market confidence while deepening market access. - End-year cash buffer projection: currently planned market issuance combined with remaining programme funding should allow an end year cash buffer sufficient to cover about 12 to15 months’ financing needs, which should underpin confidence in 2014. - Issuance and auctions to deepen market access while preserving confidence through a substantial liquidity buffer. ### Request for review and disbursement - Request: completion of the eleventh review and the release of the eleventh disbursement of EUR 2.3 billion from the EFSF. ### Memoranda and conditionality updates - Documents attached: ninth update of the Memorandum of Understanding of Specific Economic Policy Conditionality (the MOU) and the Memorandum of Economic and Financial Policies (MEFP) set out plans to further advance programme objectives. - EFSM disbursement: quarterly disbursement of financial assistance from the EFSM will be subject to quarterly reviews; release based on observance of quantitative performance criteria, respect for EU Council Decisions and Recommendations in the context of the excessive deficit procedure (EDP), and positive evaluation of progress with MEFP and MoU policy criteria. - Commitment: during the programme authorities will take all necessary measures to ensure successful implementation while protecting the most vulnerable. ### Key fiscal and structural commitments (selected) - Fiscal discipline: - Rigorously implement fiscal policy consistent with EDP requirements; Departments of Finance and Public Expenditure and Reform to ensure effective tax collection and tight supervision of expenditure commitments to achieve primary deficit target in cash (see Table 1 of MEFP and TMU) and 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. - Nominal value of Social Welfare pensions will not be increased. - Asset sales: use at least half of proceeds from state asset sales for eventual debt reduction; reinvest remainder in projects of a commercial nature meeting ex-ante cost benefit criteria, enhancing employment and preserving long term fiscal sustainability, including Programme and EDP fiscal targets. - Market monitoring: continuously monitor financial markets to exploit opportunities to consolidate return to commercial funding on a sustainable basis. - Activation and employment: - Enhance activation services to tackle high and persistent long-term unemployment; Department of Social Protection to improve ratio of vacancies filled off the live register, focus on re-training, and ensure appropriate incentives through sanctions. - Advance plans to introduce new activation measures building on Pathways to Work. - Ensure activation needs are well served by Further Education and Training (FET) sector; avoid duplication of advice and guidance; optimally assign resources; provide streamlined activation service to jobseekers. - Competition: ensure no further exemptions to competition law framework unless entirely consistent with EU/IMF Programme goals and economy needs. - NAMA: ensure NAMA (i) maintains highest standards of governance with appropriate accountability and transparency; (ii) reduces costs of operations; (iii) contributes to restoration of Irish property market while meeting asset disposal targets including redemption of €7.5 billion worth of senior bonds by end 2013. - Credit unions: restructure via Credit Union Restructuring Board to underpin financial stability; restructuring completed in as short a timeframe as possible under clear plan and Central Bank approval; first call on funding should be credit unions or sector; Exchequer funding minimised and recouped over time; Central Bank to continue inspections and engage resolution powers drawing on Resolution Fund if required. - Lending restrictions: continue to review lending restrictions on credit unions and impose restrictions as necessary to protect members’ savings. - Reporting: quarterly reporting on progress implementing strategy for reorganisation of Irish credit institutions, including steps to strengthen credit union sector, and discussion with EC, IMF, and ECB staff. - Capital ratio: ensure continued compliance with minimum Core Tier 1 Capital ratio of 10.5% for all PCAR banks (AIB, BOI, and PTSB). - SSM and stress testing: - In preparation for the Single Supervisory Mechanism (SSM) authorities, in consultation with EC, ECB and IMF staff, will conduct 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 preparation of loan loss forecasting models underpinning forthcoming stress test; models subject to external validation. - Policy consultation: consult ex-ante with the European Commission, the ECB and the IMF on adoption of policies not included in the Memorandum that could materially impact programme objectives. ### Monitoring and reporting obligations - Provide EC, ECB and IMF with: - All information required to monitor progress and track economic and financial situation. - A compliance report on fulfilment of conditionality prior to release of instalments. - Reliable and regular availability of budgetary and other data as detailed in Annex 1. ### Actions for the twelfth review (to be completed by end Q3-2013) - Financial sector reforms — Capital assessment: - Agree with EC, IMF, and ECB staff by end July on engagement of independent third parties to (i) contribute to implementation including on-site loan file reviews, and (ii) validate the exercise. - Agree a detailed roadmap for completion of the balance sheet assessment specifying regular engagement on progress, methodology, inputs, outputs, and findings. - Test parameters for benchmarking provisioning as part of the asset quality review on an incurred loss basis; sampling and loan file reviews to follow best practice to ensure high coverage and representativeness. - Deleveraging: - Assess banks' deleveraging based on existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme. - Avoid fire sales of assets and excessive deleveraging of core portfolios so as not to impair credit flow to the domestic economy. - Funding and liquidity monitoring: provide a detailed assessment of banks' progress towards relevant Basel III requirements using the advanced monitoring framework. - Profitability: conduct a forward looking analysis of operating profit for each PCAR bank, including sensitivity analysis to funding costs, to end 2015; advise banks of outcomes to inform business and financial planning; report on exploration of options to lower funding cost of banks’ tracker mortgage portfolios. - Asset quality: - Keep under review effectiveness of statutory repossession arrangements based on ongoing experience; agree with EC, ECB and IMF by mid-August terms of reference for expert group to examine proceedings length, predictability, cost, systems for non-cooperative borrowers, merits of expedited proceedings for non-principal private residences, and propose measures if necessary. - Provide assessment of banks' performance in work-out of non-performing mortgage and SME portfolios in accordance with agreed key performance indicators; monitor PCAR banks’ performance relative to KPIs and bank-specific targets for reviewing new and existing individual arrears cases. - Publish banks’ reported data on mortgage loan modifications, including re-defaults of modified loans, to permit analysis of effectiveness of alternative resolution approaches. - Publish a target, following consultation with EC, ECB and IMF staff, for conclusion by end-2013 of sustainable solutions of no less than 15 percent of mortgage loans in arrears for more than 90 days, consistent with largely completing sustainable solutions for all mortgage loans in arrears for more than 90 days by end-2014. - Announce Q1 2014 targets for proposed solutions of 70 percent and concluded solutions of no less than 25 percent of mortgage loans in arrears for more than 90 days. - Financial supervision: - Issue new supervisory guidance to credit unions on requirements in the Credit Union and Co-operation with Overseas Regulators Act 2012 covering governance, internal audit, operational risk, outsourcing and strategic planning. - Present comprehensive report on progress implementing Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss with EC, IMF, and ECB staff. - Report on banks' progress implementing strategies to address loan arrears and unsustainable debts in mortgage and SME portfolios. - Mortgage reporting: agree with EC, ECB and IMF staff on format and timeliness of regular reports on case load and processing times for repossession cases on sufficiently granular basis (e.g., time lapse between civil bill filing and first court appearance). ### Structural reforms (selected) - Water services reform: - Publish, as early as possible in Q3 2013, a Water Services Bill to define regulatory framework and provide for establishment of Irish Water in its final form, with prior engagement with the European Commission as appropriate. - Communicate the funding model for Irish Water, including an outline of expected levels of State support until substantially self-funded. - Further education and training: - Conduct by September 2013 a strategic review of training and education provision offered by Education and Training Boards (ETBs) to guide SOLAS and FET provision by ETBs; evaluate FET provision relevance for labour activation, especially long-term unemployed, and prospective skills needs; provide assessment and recommendations to enhance relevance for activation. - Health: - Develop an eHealth Strategy in conjunction with the HSE by end September to implement eHealth systems including a comprehensive ePrescription system using a unique patient identifier such as the Personal Public Service Number (PPSN). - 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, will be put in place and kept under further review. *Source: Letter and attached Memorandum of Understanding (Tenth Update), 11 September 2013.* ### 23. Following the enactment of the Ministers and Secretaries (Amendment) Act 2013 on 23 July ### 23. Following the enactment of the Ministers and Secretaries (Amendment) Act 2013 on 23 July ### Publication of operational circular - The authorities will publish, by the end of August 2013, a circular specifying the operational details of the ceilings—including on the circumstances under which they can be revised and on the correction mechanisms. ### Actions for the thirteenth review (actions to be completed by end Q4-2013) — Financial sector reforms #### Capital Assessment - Complete a preliminary assessment of balance sheets of PCAR banks by end-October incorporating: - (i) an assessment of quantative impairment provisions and a review of risk classification i.e., an asset quality review on an incurred loss basis; and - (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. - Outputs will include a sensitivity analysis for critical parameters. - Finalise the assessment of balance sheets by end-November 2013 and communicate results to the PCAR Banks to inform their assessment of impairment provisions and financial plans going forward. - The authorities will analyse current eligible regulatory capital under Basel III/CRD IV by end October. #### Deleveraging - Produce a final report of banks' implementation of their deleveraging plans under the PLAR 2011. - Discuss banks' compliance with asset disposal and run-off targets in nominal value terms with staff of the European Commission, the IMF, and the ECB. #### Funding and liquidity monitoring - Provide staff of the European Commission, the IMF, and the ECB with a detailed assessment of banks' progress towards the relevant Basel III liquidity and funding requirements using the advanced monitoring framework. - Produce a final report on progress towards compliance with Basel III liquidity and funding requirements by the relevant dates. #### Asset quality - Provide staff of the European Commission, the IMF, and the ECB with assessments of banks' performance on work-out of non-performing mortgage and SME portfolios in accordance with agreed key performance indicators. - Monitor each PCAR bank’s performance relative to already-defined key performance indicators and bank-specific targets for reviewing new and existing individual arrears cases. - Monitor principal mortgage banks' progress on resolving mortgage arrears including through audits of performance against MART resolution targets and assessing sustainability of offered and concluded solutions. - Provide an update to staff of the EC, ECB, and IMF by early-November on the number and nature of solutions proposed in Q3 2013 with a preliminary assessment of sustainability issues. - By mid-November, report on the outcome of the audit of banks’ Q2 2013 proposed solutions for mortgage loans in arrears, including an assessment of the sustainability of banks’ solutions. - Devise a system for lenders to report on legal proceedings to ensure progress towards achieving sustainable solutions. - Require lenders to have in place a strategy to address any potential shortfall from the repossession of the property. - Publish banks’ reported data on mortgage loan modifications, including re-defaults of modified loans, to permit analysis of effectiveness of alternative resolution approaches. - Examine the possibility of introducing tight deadlines on plenary repossession proceedings for non-principal private residences by end-October (building on expedited proceedings in the Commercial Court). - Announce Q2 2014 targets for the principal mortgage banks to propose and conclude restructuring solutions for mortgage loans in arrears for more than 90 days. - Examine by end-October the merits of assigning additional functions to Specialist Judges for personal insolvency cases to enable them to deal with repossession cases as needed. - Discuss with staff of the EC, ECB and IMF the results and policy implications of the review of the effectiveness of statutory repossession arrangements as per paragraph 10. - Seek to accelerate adoption of relevant provisions of the Companies Bill 2012 that give optional jurisdiction to Circuit Courts for SME examinership. - Consider appropriateness of further enhancements to company law framework to facilitate restructuring in multi-creditor cases, reduce costs and achieve efficiency gains, including potential for an administrative body to facilitate SME restructuring. #### Financial Supervision - Present a final comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss it with the European Commission, the IMF, and the ECB. - Provide a final report on banks' progress with implementation of their strategies to address loan arrears and unsustainable debts in banks' mortgage and SME loan portfolios. - Promptly commence the Credit Reporting Bill 2012 upon its enactment—which is expected by November. - Utilising an array of personal identifiers including the Personal Public Service Number (PPSN), the centralised credit register will enable a more accurate borrower-by-borrower determination of credit exposures and payment histories. - The Central Bank of Ireland will tender for the design and implementation of the register shortly after the commencement of the Act to ensure the earliest operation. - Prepare a final comprehensive report on remaining steps towards full and timely implementation of the Central Credit Register to be discussed with staff of the European Commission, the IMF, and the ECB. - Assess banks’ fee income relative to peers in selected other jurisdictions and, based on this assessment, complete an external review of the regulation of bank fees. - Upon publication of the EU directive establishing a framework for recovery and resolution of credit institutions and investment firms, review the Resolution fund levy regulation. ### Structural reforms #### Labour market reform - Report on compliance with the action plan to double the number and ensure adequate training of Intreo case managers. - Seek ways to increase redeployments beyond existing targets by redeploying staff from outside of the Department of Social Protection (DSP). - Determine the scope and structure of a contracting model of activation services to private providers and issue a request for tender by end-November. #### Water services reform - Announce a definitive time-plan for the introduction of domestic water charges in the fourth quarter of 2014; consultations will be carried out to determine the framework for water charges. - Finalise and communicate a template service level agreement between Irish Water and local authorities, with the view to ensuring agreements are in place with all local authorities by the end of 2013. #### Health - Publish by end-October legislation in conformity with data protection law to enable the introduction of universal and unique health identifiers for patients and service providers and to facilitate full ePrescription (in line with the eHealth Strategy). - Adopt a framework by end-October to streamline and consolidate multiple and fragmented financial management and accounting systems and processes. - Introduce a prospective case-based payment system for public hospitals, in line with a principle of case based cost recovery for use of public hospitals by public and private patients; implement on a phased basis beginning with a shadow phase by end-October 2013. - Consistent with the "Health (Pricing and Supply of Medical Goods) Act 2013" and recommendations of the June 2013 ESRI report "Ireland: Pharmaceutical Prices, Prescribing Practices and Usage of Generics in a Comparative Context", provide by end-October 2013 an update on the exercise of these powers, including a plan for the mid-term review of the Oct 2012 agreement with IPHA and a comprehensive pricing re-alignment exercise, including in the hospital sector. - Complete by end October 2013 a comprehensive exercise to realign downwards the prices of off-patent listed items given significant discrepancy in generic pricing identified in various reports. #### Legal services reform - Once relevant legislation has been enacted, take appropriate measures to establish the Legal Services Regulatory Authority in an expedited fashion. *IMF staff report excerpt (Ireland).* ### Annex 1. Provision of data ### Annex 1. Provision of data ### Data reporting arrangements - During the programme, indicators and reports shall be made available to the staff of the European Commission, the IMF, and the ECB by the Irish authorities on a regular basis. - The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to the staff of the European Commission, the IMF, and the ECB. ### Reports 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. - F15 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. ### Reports 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 ### Reports 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. *Annex 1. Provision of data — IMF staff report content* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13305.pdf_