## _cr13366 ## Source details **Canonical URL:** [_cr13366](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13366.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13366.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13366.pdf.json) --- ### Overview and program status - Twelfth and final review of Ireland’s EU-IMF supported program found policy implementation remains on track but significant challenges remain. - Discussions focused on fiscal policy, bank diagnostics, and potential EU-IMF financing backstop; authorities decided not to request such arrangements from the ESM and IMF. - Authorities summarized their strategy in an attached Letter of Intent. ### Output, demand, and labor market developments - Real GDP and demand: - Real GDP: 2011 2.2; 2012 0.2; 2013 0.3 (revised from 0.6 at the eleventh review). - Real GDP growth in Q2: 0.4 percent q/q and -1.2 percent y/y. - Final domestic demand: contracted 0.3 percent q/q in Q2, down 1.1 percent y/y. - Fixed investment ex-aircraft grew 11.8 percent y/y in Q2. - Employment and unemployment: - Employment rose 3.2 percent y/y in Q3, the fastest increase in six years. - Unemployment: 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 13.3; Nov-2013 12.5 (reported elsewhere in the unit). - Long-term jobless constitute some 58.4 percent of all jobseekers; almost 60 percent of job seekers out of work for over a year (press release excerpt). - High-frequency indicators: - Goods exports rose 4.9 percent q/q in Q3. - Manufacturing PMI through October: 54.9. - Services PMI highest since March 2007; Construction PMI Oct: 59.4. - Consumer sentiment highest in 6 years in October. ### The “patent cliff” and external sector - Pharmaceutical sector impact: - Sector accounts for a quarter of total exports; nine of top ten pharmaceutical companies located in Ireland. - Pharmaceutical exports contracted 6.7 percent y/y in value in first nine months of 2012 following patent expiries. - Department of Finance illustrative simulations: - If pharmaceutical exports decline 4 percent annually through 2014, estimated cumulative GDP loss of 2 percent over 5 years. - If decline 8 percent annually, estimated cumulative GDP loss of 4 percent over 5 years. - Openness and vulnerability: - Exports around 110 percent of GDP; high external openness makes Ireland vulnerable to trading partner growth fluctuations. ### Fiscal outcomes, framework, and projections - Fiscal performance and measures: - Fiscal measures implemented under the program total over €13 billion or 8 percent of GDP, two-thirds on the expenditure side. - Ireland reduced the structural primary deficit by 5¼ percent of GDP in 2009–10 prior to the program. - Ireland expected to reduce structural primary deficit to ½ percent of GDP in 2013; cumulative decline of around 4½ percentage points since 2010 and of 10 percentage points since onset of crisis. - Exchequer outturn (January–October 2013): - Cumulative primary expenditure (excluding ELG payments) 0.7 percent of GDP lower than same period 2012. - Cumulative revenues (after adjusting for one-offs) 0.7 percent of GDP higher than a year earlier. - Exchequer primary deficit at end October: 3.2 percent of GDP, 1.3 percent of GDP smaller than corresponding period of 2012. - End September performance criterion met by margin of 0.8 percent of GDP. - Budget 2014 and targets: - Budget 2014 targets a primary balance in 2014 and overall deficit of 4.8 percent of GDP. - Authorities committed to fiscal deficit below 3 percent of GDP by 2015; 2015 target deficit of 2.9 percent of GDP implies a primary surplus of 2 percent of GDP based on staff’s forecast. - Cumulative fiscal consolidation effort in 2014–15: €5.1 billion (3 percent of GDP). - Pace of adjustment slower than in 2012–13 (4¾ percent of GDP). - Macroeconomic projections (selected series): - Real GDP: 2009 -6.4; 2010 -1.1; 2011 2.2; 2012 0.2; 2013 0.3; 2014 1.7; 2015 2.5. - Nominal GDP (billions of euros): 2009 162.3; 2010 158.1; 2011 162.6; 2012 163.9; 2013 165.4; 2014 169.5; 2015 175.4. - Unemployment rate (percent): 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 13.3; 2014 12.3; 2015 11.7. - Household debt (percent of disposable income): 2009 218; 2010 215; 2011 212; 2012 206; 2013 202; 2014 193; 2015 188. - Current account (percent of GDP): 2009 -2.3; 2010 1.1; 2011 1.2; 2012 4.4; 2013 4.2; 2014 4.6; 2015 4.7. ### Public debt and DSA scenarios - Baseline DSA: - Public debt-to-GDP ratio projected to peak at 124 percent at end 2013 and decline to 112 percent by 2018. - Alternative scenarios (selected): - Temporary growth shock (annual growth about 2 percentage points lower: -0.3 percent y/y in 2014 and 0.5 percent in 2015): debt-to-GDP ratio increases to 131 percent in 2015 before declining to 121 percent by 2018. - Combined macro-fiscal shock (growth shock + primary balance shock of 1½ percentage points of GDP on average in each year + interest rates on newly contracted debt rising by 2 percentage points): debt ratio increases to 133 percent of GDP in 2015 and falls to 126 percent by 2018. - Combined contingent liability-growth shock (including a 10 percent of GDP financial-sector shock combined with the growth shock): gross public debt pushed to 139 percent of GDP in 2015 before declining to 130 percent by 2018. - Public debt risk summary: - Gross financing needs forecast to remain below 15 percent of GDP over the medium term under baseline. - Downward trajectory fragile given vulnerability to lower growth and contingent liabilities from the financial sector. - Annex I selected baseline assumptions (percent): - Real GDP growth: 2013 = 0.3; 2014 = 1.7; 2015 = 2.5; 2016 = 2.5; 2017 = 2.5; 2018 = 2.5. - Primary Balance: 2013 = -3.3; 2014 = -0.8; 2015 = 1.5; 2016 = 2.3; 2017 = 2.9; 2018 = 3.4. - Effective interest rate: 2013 = 4.2; 2014 = 4.1; 2015 = 4.2; 2016 = 4.2; 2017 = 4.4; 2018 = 4.4. ### Financial sector repair, BSA findings, and NPLs - Banking recapitalization and costs: - A €24 billion (15 percent of GDP) top up of banks’ capital in 2011; gross bank support involved costs of €64.1 billion (40 percent of GDP). - PCAR banks reported aggregate core tier 1 risk based capital ratio of 14.1 percent as of mid 2013 (balance sheet assessment indicates a somewhat lower ratio). - PCAR bank reliance on Eurosystem support declined from over €90 billion to about €31 billion. - Nonperforming loans (PCAR banks and composition): - NPLs stand at 26½ percent of PCAR bank loans. - Breakdown by exposure: commercial real estate loans 41 percent; Irish residential mortgages 34 percent; business and SME loans 19 percent. - Arrears over 90 days: 12.9 percent of mortgages for principal dwellings; 21.2 percent for mortgages on buy-to-let properties. - Balance Sheet Assessment (BSA) — methodology and outcomes: - BSA conducted by CBI in second half of 2013, point-in-time assessment as of June 30, 2013; loan file reviews covered about 3,500 loan files in first phase and 850 additional loans in second phase. - BSA finds a significant increase in provisioning is appropriate; results do not imply an immediate capital need given reported average capital ratio of 14.1 percent as of June 2013 and a regulatory floor of 10.5 percent on a core tier 1 basis. - BSA results are on an incurred loss basis and do not exclude potential capital needs from forward-looking Comprehensive Assessment by the ECB in 2014. - Bank profitability and PTSB: - BoI and AIB show steady improvements in net operating income. - PTSB: projected to run persistent losses until 2017; not expected to achieve positive net operating income until 2014 and positive net income after provisioning until two years later (i.e., 2016 or 2017 depending on phrasing in source). - PTSB assets: €38 billion or 23 percent of GDP. - Staff guidance and supervisory actions: - Banks should use BSA results to reallocate risk buffers from capital to provisions and guide provisioning at year end. - CBI to issue risk mitigation actions for implementation by end December 2013 and to use BSA as benchmark in annual ex post provisioning review. - Staff recommends strengthening CBI powers if required and considers more directive supervisory guidance or outsourcing of workouts where banks fall materially behind targets. ### Mortgage arrears resolution and borrower engagement - Mortgage arrears levels and trends: - Mortgages on primary dwelling homes (PDH) in arrears for more than 90 days: rose from 15.8 percent at end 2012 to 17.4 percent at end September. - Q3 loan modification activity: 23,776 new restructuring arrangements agreed in Q3, representing 3.1 percent of mortgage contracts (primary dwelling). - Share of restructured loans on which payments meet terms: 78.9 percent. - Legal enforcement cases on PDH mortgages: 1,830 in Q3, up from 270 in Q2. - CBI Mortgage Arrears Resolution Targets (MART): - Target for proposed solutions: 75 percent of arrears cases over 90 days by end June 2014. - Target for concluded solutions: 35 percent of arrears cases by end June 2014. - Banks reported meeting end September target for proposing solutions to 30 percent of mortgages with arrears over 90 days. - Policy instruments and frameworks: - Personal Insolvency Act 2012 established three new nonjudicial procedures and shortened automatic bankruptcy discharge to three years. - Case-by-case framework: bilateral arrangements prioritized; Personal Insolvency Arrangement (PIA) available for secured debt up to €3 million; repossession remains last resort. - Staff recommendations on arrears: - Intensify efforts to largely complete sustainable solutions for mortgage arrears by end 2014. - Announce end June 2014 targets and adapt them to focus on completions. - Incentivize durable restructurings via rules-based accounting policies on provisioning, charge-offs, and interest accrual for unrestructured prolonged arrears by end 2014. - Strengthen borrower engagement through information and incentives; implement expert group measures on repossession; enhance mortgage-to-rent support where loss of ownership unavoidable. - Where banks fall behind, consider more directive supervisory guidance or outsourcing of workouts; staff supports strengthening CBI powers if required. ### SME finance, activation, and structural reforms - SME loan restructuring and examinership: - SME loan restructuring progressing; workout cases substantially exceed legal enforcement. - Credit Review Office limit increased from €0.5 million to €3 million for review of rejected applications. - Authorities to fast track Companies Bill amendments to permit small businesses to apply for examinership in Circuit Courts, aim to enact before end 2013. - Employment services and activation: - 43 Intreo offices to be opened by end 2013; target of 300 redeployed front-line case officers by year end. - Preparations for tender of private sector employment service providers expected in early December. - Legislation enacted July 2013 extended sanctions for noncooperative jobseekers; attendance at engagements increased though penalties applied remain small. - Further Education and Training review priorities include better local labor market intelligence, private sector involvement in training, and more flexible work placements. - Structural priorities: - Reforms targeted at legal and medical services, competition enforcement, activation and training, and labor market adjustment. - Health-sector measures: generic substitution and reference pricing; reference pricing expected to deliver at least €50 million savings in 2014. - Medium Term Economic Strategy (MTES) 2014–20 under preparation to align macro-fiscal, structural, and financing pillars. ### Housing market, household balance sheets, and NAMA - House prices and household balance sheets: - House prices rose 6.1 percent y/y in October, led by a 15 percent y/y gain in Dublin; elsewhere, house prices edged up 3.5 percent since March. - Household net worth remains some 34 percent below peak levels. - Around 6 percent of households are running arrears. - Household credit and mortgages: - Household credit outstanding shrank by 4.2 percent y/y in October. - Mortgage draw downs rose 12.5 percent y/y in Q3; mortgage approvals increased 22.2 percent y/y in October. - NAMA performance: - Year-through-mid-October cash receipts: €3.9 billion, of which €2.9 billion from asset disposals. - From inception, NAMA cash receipts ~€14.5 billion, €9.7 billion from disposals. - Cumulative redemptions of NAMA senior bonds: €7 billion to date out of €30 billion by 2020. - NAMA recorded a profit of €53 million in H1 2013; cumulative impairment provisions €3.6 billion (14½ percent of gross loans and receivables). - NAMA advanced €375 million in vendor financing and spent €500 million in capital investment to date. - Preparations to acquire IBRC loans up to €12.9 billion floating charge if Special Liquidator unable to sell IBRC assets. ### Market access, funding, and program completion - Market access: - Two government bond issues totaling €7½ billion in early 2013 heavily subscribed. - 10 year bond yield: fell from 4.15 percent (March) to about 3.5 percent recently, ~60 basis points below Italy and Spain. - Funding and NTMA: - NTMA suspended monthly Treasury bill auctions for final quarter 2013; deferred further medium/long-term bond issuance consideration until early 2014. - Authorities indicate long-term bond issuance in 2014 of €6–10 billion, exchequer funding need about €9½ billion. - End-year cash buffers projected at some €20 billion, covering more than 12 months of prospective financing needs. - Program completion and post-program monitoring: - Request for completion of twelfth review and drawdown of remaining programme funding equivalent to SDR 579.3748 million. - Completion enables disbursement equivalent to SDR 0.579 billion (about €0.65 billion, or about US$0.89 billion). - Total disbursements under the EFF: SDR 19.4658 billion (about €21.81 billion, or about US$29.94 billion). - Arrangement expiry: December 15, 2013; Post-Program Monitoring (PPM) to be initiated. - Decision on post-program financing backstop: - Authorities decided not to seek a financing backstop after expiry of current EU-IMF arrangements, citing strong cash buffer, reasonable market access terms, extended maturities, and Promissory Notes transaction. ### Key policy recommendations and priorities (staff appraisal) - Fiscal: - Continue fiscal consolidation to place public debt on declining trajectory while allowing room for recovery. - Medium-term consolidation should center on reforms of health, education, and social protection to realize durable savings and protect the most vulnerable; revenue increases should focus on broadening the tax base. - Firm implementation critical to achieve 2014 fiscal target; Finance and Social Welfare Bills to implement Budget 2014 measures expected to be adopted by year end. - Financial sector and banks: - Intensify NPL resolution and improve bank profitability to revive lending to households and SMEs. - Ensure banks increase provisioning in line with BSA findings; use BSA to guide provisioning, supervisory dialogue and year-end financial statements. - Consider strengthening CBI powers and more directive supervisory guidance where banks lag on resolution. - An ESM direct recapitalization backstop to the ECB’s Comprehensive Assessment would be desirable given debt sustainability fragility. - Mortgage arrears and borrower engagement: - Reach largely completed sustainable solutions for mortgage arrears by end 2014; adapt targets to emphasize completions and sustainability. - Introduce rules-based accounting policies for prolonged arrears by end 2014 to incentivize durable restructurings. - Strengthen repossession procedures, borrower information, incentives, and mortgage-to-rent supports for socially contained outcomes. - Labor market and SMEs: - Reduce long-term unemployment via strengthened employment services, activation, training and private sector provider involvement. - Promote credit to SMEs and consider streamlining courts’ role in examinership to facilitate SME restructuring. - Structural reform and MTES: - Implement MTES 2014–20 to provide policy consistency; focus on industry/innovation, labor markets, education and skills, competition and taxation to raise potential growth. *Source: IMF staff report excerpts and Letter of Intent material contained in content unit _cr13366.* ### 1. The Impact of the “Patent Cliff” Revisited _____________________________________________________ 29 ### 1. The Impact of the “Patent Cliff” Revisited ### Overview - The twelfth and final review of Ireland’s EU-IMF supported program found policy implementation remains on track but significant challenges remain ahead. - Discussions focused on fiscal policy and on the bank diagnostics. - Following further discussions on a potential EU-IMF financing backstop the authorities announced their decision not to request such arrangements from the ESM and IMF. - The authorities’ broader strategy to address remaining fiscal, financial sector and unemployment challenges and thereby ensure a durable return to market financing was summarized in their attached Letter of Intent. ### Progress and Remaining Challenges - Program context and progress: - The program began in December 2010 following an exceptionally deep banking crisis. - Growth has been slower than projected, although exceeding the euro area average. - After an export-led expansion of 2.2 percent in 2011, real GDP growth slowed to 0.2 percent in 2012 and turned negative in H1 2013 as exports were hit by the “patent cliff” in pharmaceuticals and by slow trading partner recovery (Box 1). - Expected cumulative growth in 2011–13 of about 2¾ percent falls short of the 5¼ percent originally projected. - Expected euro area growth of ½ percent in 2011–13 falls short of the October 2010 WEO projection of 5.2 percent to a greater extent. - Ireland’s cumulative growth in 2011–13 is expected to match the UK. - Phased consolidation significantly improved the fiscal position. - Ireland reduced the structural primary deficit by 5¼ percent of GDP in 2009–10 prior to the program. - Every fiscal target under the program has been met. - Ireland is expected to reduce its structural primary deficit to ½ percent of GDP in 2013, a cumulative decline of around 4½ percentage points since 2010 and of 10 percentage points since the onset of the crisis. - Fiscal measures implemented under the program total over €13 billion or 8 percent of GDP, two-thirds on the expenditure side. - Fiscal framework strengthened: - A general government budget balance rule and a general government debt rule were adopted as part of the Fiscal Responsibility Act 2012, consistent with the Stability and Growth Pact (SGP). - Budget 2012 introduced three-year aggregate and ministerial level expenditure ceilings, put on a statutory basis in the Ministers and Secretaries (Amendment) Bill 2013. - The Fiscal Responsibility Act provides for the independence and adequate funding of the Irish Fiscal Advisory Council (IFAC). - Authorities launched an action plan on fiscal reporting, forecasting and risk analysis and a quarterly Government Finance Statistics publication. - Financial stability supported by determined efforts: - A €24 billion (15 percent of GDP) top up of banks’ capital in 2011, coupled with significant restructuring of the system. - PCAR banks reported an aggregate core tier 1 risk based capital ratio of 14.1 percent as of mid 2013 (although the balance sheet assessment indicates a somewhat lower ratio, ¶29). - Provisions doubled between end 2010 and June 2013 to account for 90 percent of aggregate loan losses projected under the stress scenario of the 2011 stress test. - Loan-to-deposit ratio declined from 190 percent at end 2010 to 117 percent in June 2013. - PCAR bank reliance on Eurosystem support declined from over €90 billion to about €31 billion. - Bank support involved gross costs of €64.1 billion (40 percent of GDP). - Regulatory and supervisory developments: - In October 2011 a special resolution regime for banks and credit unions was enacted and in July 2013 the supervisory powers of the CBI were strengthened. - December 2012: the Personal Insolvency Act established three new essentially nonjudicial procedures for debt resolution and modernized the Bankruptcy Act 1988. - May 2013: CBI reinforced Impairment Provisioning and Disclosure Guidelines, including clauses on loan modification and evergreening practices. - Credit Reporting Bill expected to be enacted by December 2013 to provide a statutory Central Credit Register. - CBI increased resources and operationalized a new risk based supervisory approach. - Competitiveness and structural reform: - Competitiveness deteriorated during the boom but subsequent declines in the CPI and unit labor costs left Ireland with only a moderate degree of real effective exchange rate overvaluation, in the range of 5–10 percent. - Flat nominal wages and low inflation suggest further competitiveness improvements. - Structural reforms targeted legal and medical services, competition enforcement, activation and training of the unemployed, and labor market adjustment, though implementation of some reforms remains incomplete. - Market access regained: - Two government bond issues totaling €7½ billion in early 2013 were heavily subscribed. - Since issuance in March, the 10 year bond yield fell from 4.15 percent to about 3.5 percent recently, some 60 basis points below Italy and Spain. - Remaining challenges: - Heavy private sector debts weigh on domestic demand: - Households reduced nominal debts by 16 percent in the past 4½ years, but debt burdens remain high at 198.3 percent of disposable income in 2013 Q2. - Slow resolution of nonperforming loans (NPLs) and weak bank profitability: - NPLs stand at 26½ percent of PCAR bank loans. - Breakdown: commercial real estate loans 41 percent, Irish residential mortgages 34 percent, business and SME loans 19 percent. - Arrears over 90 days: 12.9 percent of mortgages for principal dwellings; 21.2 percent for mortgages on buy-to-let properties. - CBI established targets for resolution of residential mortgages and SME loans. - Bank profitability improved in H1 2013 but remains weak; PTSB not expected to break even after provisioning expenses until 2017. - Fiscal deficit and public debt: - Fiscal deficit remains high; a rising interest bill has kept the fiscal deficit at 6½ percent of GDP (excluding one-off guarantee payments related to the liquidation of IBRC). - Debt projected at 124 percent of GDP at end 2013; further consolidation needed while allowing room for recovery. - High long-term unemployment risks enduring damage: - Unemployment eased from 15.1 percent in early 2012 to 12.8 percent by Q3 2013. - Long-term jobless constitute some 58.4 percent of all jobseekers. ### Recent Developments - Output and demand: - Real GDP grew by 0.4 percent q/q in Q2 but still contracted 1.2 percent y/y. - Exports rebounded in Q2 to increase 1 percent y/y, led by services export growth of 3.6 percent. - Final domestic demand contracted 0.3 percent q/q in Q2, down 1.1 percent y/y; private consumption rose 0.7 percent q/q while weak investment and public consumption weighed on demand. - Fixed investment ex-aircraft grew 11.8 percent y/y, driven by equipment spending and construction. - Employment and labor market: - Employment rose 3.2 percent y/y in Q3, the fastest increase in six years. - Job growth recorded in 8 of 14 sectors, including construction; public sector employment fell. - Employer surveys and a further decline in unemployment in October suggest continued private sector job growth. - High-frequency indicators and sectoral signals: - Goods exports rose 4.9 percent q/q in Q3. - Manufacturing PMI rose through October to 54.9. - Services PMI reached its highest level since March 2007. - Construction PMI for October increased to 59.4, the highest observed since January 2006. - Consumer sentiment reached the highest level in 6 years in October. - Core retail sales were flat in October and up 0.3 percent y/y in the first ten months of 2013. - Inflation: - Harmonized index of consumer prices inflation was essentially flat y/y in October (-0.1) and below euro area inflation of 0.7 percent y/y during the same period. - Housing and credit: - Household credit outstanding shrank by 4.2 percent y/y in October. - Loans to nonfinancial corporations fell by 4.7 percent. - Mortgage draw downs rose 12.5 percent y/y in Q3. - Mortgage approvals increased 22.2 percent y/y in October. - Residential property prices rose (chart references in source). *Source: IMF staff report excerpts from “1. The Impact of the ‘Patent Cliff’ Revisited”* ### 6.1 percent y/y in October, led by a 15 percent y/y gain in Dublin while elsewhere house ### _cr13366 - 6.1 percent y/y in October, led by a 15 percent y/y gain in Dublin while elsewhere house ### Housing market and household balance sheets - House prices rose 6.1 percent y/y in October, led by a 15 percent y/y gain in Dublin. - Elsewhere, house prices have edged up by 3.5 percent since March. - Renewed house price increases and declining household indebtedness are contributing to a rebuilding of household net worth, although it remains some 34 percent below peak levels. - Currently some 6 percent of households are running arrears. ### Financial market conditions and bank funding - Financial market conditions continued to improve, benefitting from international developments: - Yields eased following the Federal Reserve’s postponement of the tapering, the German election outcome, and the recent ECB easing decision. - National Treasury Management Agency (NTMA) actions: - Decided to suspend its monthly Treasury bill auctions for the final quarter of 2013. - Deferred consideration of any further medium/long-term bond issuance until early 2014. - Bank funding developments: - Secondary market yields on three-year covered bonds from BoI and AIB have fallen by about 75 basis points since early September. - Domestic banks issued €3 billion in bonds since September, with high bid-to-cover ratios and geographically diversified demand. - BoI and AIB issued €1.5 and €0.5 billion of covered bonds, respectively. AIB also issued €0.5 billion of senior unsecured debt. PTSB issued €0.5 billion asset backed security (first of this type since 2007). - Bank deposit rates stabilized below 1 percent in recent months. - ECB borrowing by domestic banks fell from €39.6 billion at end March to €30.8 billion at end October. ### NAMA progress and integration of IBRC loans - In the year through mid-October NAMA generated cash receipts totaling €3.9 billion, of which €2.9 billion was from asset disposals. - From inception, NAMA has generated total cash receipts of about €14.5 billion, of which €9.7 billion was from asset disposals. - Cumulative redemptions of NAMA senior bonds amount to €7 billion to date out of a total of €30 billion by 2020. - NAMA recorded a profit of €53 million in the first half of 2013, notwithstanding cumulative impairment provisions of €3.6 billion (14½ percent of gross loans and receivables). - To support asset sales, NAMA has advanced €375 million in vendor financing and has spent €500 million in capital investment to date. - Preparations being made to acquire IBRC loans up to the value of the €12.9 billion floating charge acquired as part of the Promissory Notes transaction in the event the Special Liquidator is unable to sell IBRC’s assets to the market. - Loan servicing previously conducted by IBRC on behalf of NAMA on debt with a principal of €41 billion is being migrated to a loan servicing company; staff and IT systems from IBRC are being integrated. ### Exchequer outturn and public finances (January–October 2013) - Cumulative primary expenditure (excluding ELG payments linked to the Promissory Notes transaction) was 0.7 percent of GDP lower than in the same period of 2012 due to lower outlays in social protection, health, and education. - Cumulative revenues (after adjusting for one-offs) were 0.7 percent of GDP higher than a year earlier. - Exchequer primary deficit at end October was 3.2 percent of GDP, 1.3 percent of GDP smaller than in the corresponding period of 2012. - The end September performance criterion was met by a margin of 0.8 percent of GDP. - Notes on comparability and one-offs: - 2012 tax revenues do not include the €251 million corporation tax payment delayed from December 2011. - Outlays in respect of IrishLife (€1.3 billion) and credit unions (€250 million) are excluded from 2012 capital spending. - Proceeds from the sale of Bank of Ireland contingent capital notes (€1 billion) and Irish Life (€1.3 billion) are excluded from 2013 other receipts. - Eligible Liabilities Guarantee scheme payments linked to the promissory note transaction of €1 billion are excluded from 2013 current expenditure. - In consultation with Eurostat, the authorities are to record €0.7 billion from the telecom license sale that took place in 2012 in 2013 instead; €0.4 billion from the sale of the national lottery license that took place in 2013 will be recorded in 2014. ### Macroeconomic projections and outlook - GDP growth revisions and 2013 outlook: - GDP growth in 2013 is revised to 0.3 percent, down from 0.6 percent at the eleventh review. - Final domestic demand is forecast to contract 0.2 percent for the year, led by a 0.6 percent decline in private consumption. - Exports expected to grow 0.5 percent y/y; imports expected to grow 0.2 percent y/y. - 2014 outlook: - Higher trading partner growth projected to support recovery to 1.7 percent y/y growth in 2014. - Trading partner growth picked up from 0.4 percent y/y in 2013 to 1.6 percent in 2014 (WEO projections referenced). - Consumption expected to turn modestly positive in 2014 at 0.5 percent y/y. - Public consumption will contract at a faster pace than in 2013 owing to implementation of the agreement on public sector wages. - Medium-term projections: - Growth projected to firm to 2½ percent from 2015. - Domestic demand recovers slowly, growing just 1 percent by 2015. - Export growth projected to return to its long-term trend by 2015. - Demographic and productivity assumptions supporting 2½ percent medium-term growth: - Working age population growth around 1 percent over the next ten years. - Employment growth on the order of 1½ percent without igniting wage pressures. - Ireland’s productivity rises about 1 percent annually including from continuing FDI inflows. - Macroeconomic projections table highlights (selected): - Real GDP: 2009 -6.4; 2010 -1.1; 2011 2.2; 2012 0.2; 2013 0.3; 2014 1.7; 2015 2.5. - Nominal GDP (billions of euros): 2009 162.3; 2010 158.1; 2011 162.6; 2012 163.9; 2013 165.4; 2014 169.5; 2015 175.4. - Unemployment rate (percent): 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 13.3; 2014 12.3; 2015 11.7. - Household debt (percent of disp. income): 2009 218; 2010 215; 2011 212; 2012 206; 2013 202; 2014 193; 2015 188. - Current account (percent of GDP): 2009 -2.3; 2010 1.1; 2011 1.2; 2012 4.4; 2013 4.2; 2014 4.6; 2015 4.7. ### Risks to the outlook - Near-term risks: significant but broadly balanced; medium-term risks tilt to the downside. - Key risk categories: - External environment: - Ireland’s openness (exports around 110 percent of GDP) makes it vulnerable to trading partner growth fluctuations. - Weak external recovery could spill over to domestic demand via confidence channels. - Domestic demand: - Consumption prospects depend on continued employment gains. - Ongoing house price recovery is untested against potential rises in disposals of repossessed properties. - Investment recovery is a potential upside given a low base (around 11 percent of GDP). - Financial conditions: - Revival in credit growth and investment could be hindered if efforts to resolve NPLs and improve bank profitability fall short. - A later U.S. Federal Reserve tapering could adversely impact access to and costs of market funding for euro area periphery banks, affecting credit availability. - Public debt sustainability scenarios (Annex I summary): - Baseline: public debt-to-GDP ratio projected to peak at 124 percent at end 2013 and decline to 112 percent by 2018. - Temporary growth shock (annual growth about 2 percentage points lower: -0.3 percent y/y in 2014 and 0.5 percent in 2015): debt-to-GDP ratio increases to 131 percent in 2015 before declining to 121 percent by 2018. - Combined macro-fiscal shock (growth shock + primary balance shock of 1½ percentage points of GDP on average in each year + interest rates on newly contracted debt rising by 2 percentage points): debt ratio increases to 133 percent of GDP in 2015 and falls to 126 percent by 2018. - Combined contingent liability-growth shock (including a 10 percent of GDP financial-sector shock combined with the growth shock): gross public debt pushed to 139 percent of GDP in 2015 before declining to 130 percent by 2018. ### Policy discussions — Fiscal policy - 2013: - The deficit for 2013 is expected to remain within the 7.5 percent of GDP ceiling under the Excessive Deficit Procedure (EDP). - Revenues could fall short at end-2013 by some 0.2 percent of GDP if consumption-related tax receipts continue to disappoint. - Expenditure expected to remain within budget; modest health sector overruns (0.1 percent of GDP) expected to be offset by lower capital spending. - The deficit would be raised if AIB dividend payments are reclassified as capital transfers (0.2 percent of GDP). - Risks of exceeding the EDP deficit ceiling are limited due to lower than expected interest payments and later than expected recording of a telecom license sale. - Budget 2014 and 2014–15 targets: - Budget 2014 targets a primary balance in 2014 and the authorities committed to reaching a fiscal deficit below 3 percent of GDP by 2015. - For 2014, the budget targets a primary balance and an overall deficit of 4.8 percent of GDP, providing a buffer relative to the 5.1 percent of GDP ceiling under the EDP. - Staff projects a deficit equal to the ceiling as revenues are expected to be somewhat lower given more subdued domestic demand. - For 2015, authorities target a deficit of 2.9 percent of GDP to meet the EDP target below 3 percent of GDP; this would imply a primary surplus of 2 percent of GDP based on staff’s forecast, above the debt stabilizing primary surplus in 2015 of 1 percent of GDP. - Cumulative fiscal consolidation in 2014–15: - Fiscal consolidation effort in 2014 is estimated at €2.7 billion (1.6 percent of GDP), including carryovers and 0.1 percent of GDP in higher dividends from state owned companies. - For 2015, staff estimates €2.4 billion (1.4 percent of GDP) in fiscal measures would be needed to achieve the 2.9 percent of GDP target. - Cumulative fiscal consolidation effort in 2014–15 would be €5.1 billion (3 percent of GDP). - The pace of adjustment is slower than in 2012–13 (4¾ percent of GDP). - Fiscal effort projected for 2016: - Expenditure growth expected to be contained at 1 percent in nominal terms to satisfy the expenditure benchmark under the SGP. - This would result in a 0.5 percent of GDP improvement of the structural balance (authorities’ calculation), complying with the national fiscal rule. - Pace sufficient to raise the primary balance to almost 4 percent of GDP by 2018. - Implementation risks and contingencies: - Firm implementation critical to achieve the 2014 fiscal target; main risk is weaker than budgeted domestic demand. - Finance and Social Welfare Bills to implement Budget 2014 measures published and expected to be adopted by year end once approved by Parliament. - Some 2013 health overruns related to delayed implementation of measures (e.g., Haddington Road Agreement, charging private patients for use of public beds) which have been resolved; close monitoring will continue. - Authorities note possible upsides from reforms to broaden the tax base that could lead to larger elasticities and stronger revenue performance if activity is robust. *Italic: International Monetary Fund staff summary as extracted from the source content.* ### 18. Expenditure savings will be achieved through measures with a durable impact, ### 18. Expenditure savings will be achieved through measures with a durable impact, ### Expenditure measures and structural reform - Budget reduces or eliminates some untargeted social support schemes (see Box 3). - Reduction in the unemployment benefit rate for those 22 to 25 years of age intended to: - provide greater incentive for the transition to work through a reduction in the reservation wage; - encourage access to education and training where the benefit rate is significantly higher. - Measures to better target costly universal supports and subsidies (such as the child benefit, medical cards, and subsidies on college fees) were not part of the budget package. - Budget fails to address schemes likely to be subject to strong demographic pressures. - The budget does not develop structural measures to reform key public services. - Authorities’ position: - universal supports were reduced in past budgets and there was currently no political appetite for changing the principle of universality; - some of these issues would be taken up in the context of the Comprehensive Review of Expenditure and review of the Capital Investment Framework to be launched next year. ### Fiscal adjustment magnitude (staff note) - Staff’s estimate of a structural primary balance rise of 3¼ percent of GDP in 2014–15—an alternative measure of fiscal adjustment—is consistent with the calculated scale of the cumulative fiscal consolidation effort. - The authorities’ structural balance figures differ modestly from staff estimates due to differences in macroeconomic forecasts and the methodologies used, including for calculation of the output gap. ### Revenue measures and tax-base changes - Revenue measures both increase rates and broaden bases, but new collections would be partly offset by the extension of the reduced VAT rate in the tourism sector. - Base broadening measures included: - introduction of a bank levy; - reduction of some personal income tax exemptions. - Bank levy: - comparable to levies in place in several European countries such as France, Germany and the UK; - can help pay for the direct fiscal cost of any future government support to the sector; - impact on banks expected to be somewhat mitigated by the lifting of the restriction on the use of deferred tax assets for losses incurred when banks transferred loans to NAMA; - if retained beyond its initial 3-year period, it could be refined to reflect institutions’ riskiness and contributions to systemic risk. - Other revenue actions: - raises rates on the deposit interest retention tax (DIRT) and excise duties. - reduced VAT rate of 9 percent in the tourism industry will not be allowed to expire at end-2013, with an estimated negative impact of €0.3 billion. - Authorities’ rationale: considered the reduced VAT rate has had a significant positive impact in the sector and on employment, and did not want to cause a setback to the sector before it is on stronger footing. ### Distributional impact - ESRI tax-benefit model covers less than 20 percent of the total consolidation package in Budget 2014 because it is not equipped to deal with indirect taxes or taxes on wealth. - Taxation measures expected to have a broadly progressive impact: - reduction in tax relief for high valued pensions; - increase in DIRT; - restriction on tax relief for health insurance premia. - Regressive indicators: - ESRI’s SWITCH model indicates the full year impact of the indicative but not final version of the local property tax to be felt in 2014 would have likely been regressive. - reduction in unemployment payment rates for those aged 22 to 25 could have a more severe impact on individuals in low income households, though this will depend on the availability of suitable training which would provide a higher payment. ### Institutional reforms and expenditure control - Aggregate exchequer and ministerial level expenditure ceilings were set through to 2016, with spending growth to remain within the SGP expenditure benchmark. - Upward revision to the 2014 ceiling as compared to Budget 2013 by €0.4 billion; authorities indicated this was in compliance with the recently issued circular allowing changes if compensatory discretionary measures are introduced. - Budget announced the number of public service employees would not decline in 2014 as anticipated under the previous employment control framework target; authorities emphasized their commitment to the existing wage bill envelope. - Staff caution: need to keep employment numbers in check as spending pressures could mount once the freezes on automatic increments expire at end 2016. - Authorities’ view: moratorium on new hires since 2008 affecting provision of public services; need to recruit frontline staff; issue to be assessed as part of the next Comprehensive Review of Expenditure in 2014. - IFAC process: ex ante endorsement of the macroeconomic forecast went smoothly; slight revision to growth forecast after IFAC endorsement due to a change in the policy stance was within IFAC expectations. - Staff suggestion: consider a trigger beyond which a modification to the macroeconomic forecast would need to be consulted with IFAC. ### Financial sector policy — NPL resolution and mortgage arrears - Twelfth review focus: NPL resolution and bank diagnostics; reviewed arrears resolution on residential mortgages and SME loans; consulted on the Balance Sheet Assessment (BSA). - Mortgage arrears: - Mortgages on primary dwelling homes (PDH) in arrears for more than 90 days rose from 15.8 percent of the total value of PDH mortgages outstanding at end 2012 to 17.4 percent at end September. - Increase was slower than in recent years. - Stabilization of house prices and decline in unemployment likely contributed; banks’ improved collection efforts also appear to be containing early arrears cases. - Personal Insolvency and Debt Settlement: - A small initial number of Debt Settlement and Personal Insolvency Arrangements are being processed; Insolvency Service expects the case load to increase. - CBI Mortgage Arrears Resolution Targets (MART): - Banks reported they have met the end September target for proposing solutions to 30 percent of mortgages with arrears over 90 days. - Proposed solutions involving a loss in ownership for PDH became less prominent; portion of long-term loan modifications increased. - Third-party audit reviewed banks’ solutions proposed until June; audit identified instances where proposed solutions were not considered sustainable (e.g., short-term solution proposed without tangible evidence of improved debt servicing capacity). - CBI will follow up with lenders and develop further guidance for future targets, including for solutions concluded. - Staff recommends future audits also assess debt service sustainability. - Engagement and repossession: - Banks face targets to conclude solutions in 15 and 25 percent of mortgage arrears cases by end December 2013 and March 2014, respectively. - Roughly half of borrowers seeking loan modifications have no arrears or arrears of less than 90 days. - Large portion of borrowers with longer term arrears are not cooperating even where repossession has been threatened. - Initiative by one bank to provide free advice from an independent consumer advocate noted as a welcome step. - Creating a clear expectation that repossession is a consequence for lack of engagement remains important. - Repossession system review: - Authorities examining repossession system and procedures; instituted an expert group to review by year end the length, predictability, and cost of proceedings, and propose appropriate measures to be brought forward quickly where necessary. - Considering a new monitoring system for case load and processing times of repossession cases. - Two staff proposals assessed but not proceeded with at this time: - Assigning Specialist Judges to also deal with repossession cases — deemed untimely as case load still manageable. - Introducing tight deadlines on plenary proceedings for non-principal private residences — not deemed necessary unless court bottlenecks expected. ### Staff recommendations on mortgage arrears and borrower engagement - Intensify efforts to reach the goal of largely completing sustainable solutions for mortgage arrears by end 2014. - In late 2013, CBI expected to announce end June 2014 targets; targets may need adaptation to allow increased focus on completions. - Banks should be incentivized to offer durable restructurings by introducing rules-based policies on accounting for provisions, charge-offs, and interest accrual for unrestructured loans with prolonged arrears at end 2014. - Where a bank falls materially behind targets, more directive supervisory guidance on resolution or outsourcing of workouts may be needed; staff supports strengthening of CBI powers if required. - Strengthen borrowers’ engagement combining information and incentives. - Implementation of measures from the expert group on repossession is critical; lenders should have strategies to address potential shortfalls from voluntary surrenders of collateral. - For cases where loss of ownership is unavoidable, enhanced support for mortgage to rent solutions would help contain social costs. ### SME arrears and examinership - SME loan restructuring progressing with number of loan restructures substantially exceeding cases of legal enforcement. - Both banks that dominate SME lending met their end June and September workout targets set by CBI. - Authorities intend to fast track amendments to the Companies Bill to permit small businesses to apply for examinership in Circuit Courts with the aim to enact them before the end of 2013. - Further streamlining of the role of Courts in examinership could yield additional gains, drawing on experience with the Insolvency Service for households. ### Bank Diagnostics — Balance Sheet Assessment (BSA) - BSA implemented by authorities and independently validated; uncertainties remain including due to limited resolution experience in Ireland. - BSA focused on the three PCAR banks; analyzed adequacy of provisions on an IFRS incurred loss basis and appropriateness of internally generated Basel risk weights; produced a point-in-time assessment of capital as of June 2013. - CBI-led exercise engaged private sector contractors in project execution and a consulting firm for oversight and independent validation; EC/ECB/IMF staff consulted on methodology and implementation. - Preliminary BSA report provided at end October was not complete; analysis completed during November and independently validated as having followed an appropriate, conservative and robust process in line with its terms of reference. - Analysis subject to uncertainties given lack of experience with recovery of loan collateral and risks to durability of ongoing residential and SME loan modifications. - Authorities will undertake further analysis in close cooperation with the ECB as the ECB conducts its Comprehensive Assessment. ### BSA findings and capital implications - BSA finds a significant increase in provisioning is appropriate; this does not imply an immediate need for capital. - Higher provisioning levels primarily reflect issues with collateral valuation and lack of seasoning for restructured loans now more appropriately classed as impaired, consistent with the May 2013 update of the CBI’s Impairment Provisioning and Disclosure Guidelines. - Standardized probabilities of default and recovery values indicate somewhat higher risk weighted assets for some banks. - Given the higher reported average capital ratio of 14.1 percent as of June 2013, the BSA results do not imply a capital need, with the point-in-time assessment of capital adequacy estimated to remain above the regulatory floor of 10.5 percent on a core tier 1 basis. - BSA results are on an incurred loss basis and do not exclude the potential for a capital need to be identified in the forward looking part of the Comprehensive Assessment being conducted by the ECB in 2014. - Some buffer provided by the 8 percent common equity tier 1 capital floor announced for the AQR. ### Staff guidance on use of BSA results and profitability - Banks need to use BSA results to guide reallocation of risk buffers from capital to provisions, encouraging more timely loan resolution. - BSA will inform CBI’s continuing supervisory dialogue with each bank on adequate provisioning at year end. - Banks should consider BSA results carefully when preparing end 2013 financial statements; CBI will use BSA results as a benchmark in its annual ex post review of provisioning adequacy. - CBI to issue risk mitigation actions to banks as needed for implementation by end December 2013. - CBI will draw on qualitative findings of the BSA to guide its supervisory focus. - CBI completed review of bank operating profits at end September (structural benchmark). - BoI and AIB show steady improvements in net operating income. - PTSB not expected to achieve positive net operating income until 2014 and positive net income after provisioning expenses until two years later. - Profitability sensitivity: - Improvement in bank profitability sensitive to prospects for new business volume, repricing of loans, and funding costs. - Key weakness: banks’ data deficiencies — failure to assess revenue contributions from nonperforming, modified, and forborne loans, as banks continue to accrue and capitalize an unspecified amount of interest income that is not actually paid. *Source: IMF staff report excerpt contained in content unit _cr13366 - 18. Expenditure savings will be achieved through measures with a durable impact,* ### 33. The review of options to fund tracker mortgages at a lower cost identified ### 33. The review of options to fund tracker mortgages at a lower cost identified ### Funding costs and scale of tracker mortgages - PCAR banks hold €48 billion in tracker mortgages in Ireland and a further €21 billion in the UK. - Tracker mortgages carry an average margin of 100 basis points over the policy rates of the ECB and Bank of England respectively. - Declines in policy rates had outpaced reductions in bank funding costs, creating a significant cost of carry for tracker mortgages. - Profitability drag has eased somewhat with recent declines in deposit and market funding rates. ### Options analyzed to lower funding costs - Authorities explored pooling loans indexed to policy rates into government-guaranteed asset backed security structures for repurchase with various counterparties. - Analysis suggested that maximizing net income benefits would require the inclusion of all of these assets in the repurchase structure. - Attracting funding from private counterparties at sufficiently low rates will be challenging. ### PTSB: sustainability and restructuring needs - PTSB is projected to run persistent losses until 2017 owing to high NPLs and tracker mortgages exceeding half of total assets. - PTSB has assets of €38 billion or 23 percent of GDP. - A heavy market discount on its loan book implies resolution would have a large fiscal cost. - The restructuring plan (yet to be approved by the European Commission) envisages a split; the bank has been internally separated into: - a core retail banking and an asset workout unit, and - a non-core unit. - Executing planned legal separation requires an affordable funding solution for the workout operation. - European support could take the form of official funding or guarantees to facilitate low cost market funding—both of which would hasten the bank’s return to profitability and help attract private investor interest. ### Structural reforms to support labor market and SME financing - Employment services: - 43 Intreo offices providing integrated employment services will be opened by end 2013. - Target of doubling front-line case officers: all have been identified and about half have been reassigned, in line for reaching the target of 300 staff redeployed by year end. - Preparations continued for tender for private sector employment service providers expected in early December, with envisaged outcome-based payments for activation services for the long-term unemployed. - Initial targets for one-on-one engagement with job-seekers for Q3 were slightly missed; staff urged more ambitious targets for individual and group engagement. - Further Education and Training review priorities: - (i) better local labor market intelligence and data collection; - (ii) more systematic involvement of private sector parties in design and delivery of the training program; - (iii) more flexible provision of shorter duration work placements and on the job training involving private sector providers. - Need to strengthen strategic cooperation between SOLAS, local Education and Training Boards and local Intreo offices. - Sanctions for uncooperative jobseekers: - Legislation enacted in July 2013 extended sanctions and circumstances for their application, allowing social payments to be reduced incrementally for job seekers failing to engage with activation activities. - Following an increase in sanctions, attendance at group and individual engagements had increased, but the number of penalties applied overall remained small; staff encouraged more effective steps to maximize engagement. - SME financing measures: - National Pension Reserve Fund committed, in partnership with private sector players, up to €950 million in investments dedicated to providing equity financing and new lending to SMEs. - Credit Review Office can now review loan applications rejected by banks for amounts up to €3 million rather than €0.5 million. ### Asset disposals and investment uses - Preparations for disposal of up to €3 billion in state assets are proceeding; an initial transaction (Board Gáis Energy) did not conclude as bids were not at acceptable value given market conditions. - EBS sold its 50 percent stake in a UK-based company; sale of its stake in a Spanish company is expected in early 2014. - Growth enhancing projects to be funded with up to half of the resulting sales proceeds via public-private partnerships are under preparation, with 6 out of the 9 projects announced due to be tendered in the coming months. - The €150 million in budget resources assigned to these investments will be spent on road construction, school buildings and retrofitting of public buildings. ### Program modalities and financing performance - January–September exchequer primary deficit: €2.3 billion, within the adjusted target of €3.7 billion. - End-year cash buffers are projected at some €20 billion, covering more than 12 months of prospective financing needs. - Syndicated bond sales in January and March totaled €7.5 billion. - Disposal of Irish Life and BoI contingent capital notes generated €2.3 billion. - NTMA decision (October): suspend monthly Treasury bill auctions for remainder of 2013 and defer consideration of any further bond issuance until 2014. - Authorities indicate long-term bond issuance in 2014 of €6–10 billion, taking into account an exchequer funding need of about €9½ billion. - A €6.9 billion bond redemption is due in January 2014; the cash buffer could be partially drawn down to meet it. - The analysis does not reflect the Budget 2014 levy on banks—both domestic and foreign owned—which is expected to total some €150 million annually. ### Medium Term Economic Strategy (MTES) 2014–20 - MTES intended to provide a framework ensuring policy consistency to provide financial market stability and underpin consumer and business confidence for investment. - Focus on three pillars: macro-fiscal, structural, and financing. - Macro-fiscal pillar: analyze economic policy measures and conduct of fiscal policy under SGP requirements; consider how revenue and expenditure policies can promote economic growth. - Structural pillar: raise potential growth through policies on industry/innovation, labor markets including the long-term unemployed, education and skills, competition and taxation. - Sectoral element: address growth impediments and provide framework for existing sectoral strategies. - Broad consultation ongoing with a view to completing MTES before the end of 2013; MTES will be monitored and reported to the government over time. ### Decision on post-program financing backstop - After wide consultation, Irish authorities decided not to seek a financing backstop after expiry of current EU-IMF arrangements. - Authorities cited: strong cash buffer, reasonable terms for market access, reduced financing needs owing to extension of EFSF/EFSM loan maturities and the Promissory Notes transaction, and intention to signal commitment via MTES. - Authorities take comfort from evolution of European framework including the establishment of the ESM. ### Exceptional access criteria and market access prospects - Debt sustainability and systemic risk exception: - Under baseline macroeconomic framework, debt sustainability expected to be maintained over medium term but subject to significant risks if growth does not strengthen or if further contingent liabilities materialize. - Program justified on basis of systemic international spillover risks posed by Ireland given strong trade interlinkages with euro area and UK. - Adequate prospects to retain and expand market access: - Since mid 2012 Ireland issued Treasury bills and bonds at 5 year, 8 year, and 10 year maturities and sold longer-term amortizing bonds for domestic pensions industry. - 10 year benchmark issue on March 13, 2013 raised €5 billion on total bids of €13 billion from about 400 investors. - Ireland enjoys yields significantly below those of Italy and Spain. - Market access is expected to be retained in baseline of declining debt ratios, but risks remain from debt sustainability fragility and potential inadequate European support during ECB’s Comprehensive Assessment in 2014. - Sound policies: Ireland’s policy program is sound and adjustment is being delivered, but more effective policy action and delivery on commitments at the European level is needed. ### Staff appraisal: risks and policy priorities - Signs of nascent recovery are emerging alongside mixed signals in early 2013 (weak GDP partly related to “patent cliff” vs significant growth in private sector employment). - Significant risks remain to growth prospects and debt sustainability; revival of lending to households and SMEs is critical and depends on banks addressing high nonperforming loans and weak profitability. - High nonperforming loans imply contingent liabilities in the financial sector remain a risk to debt sustainability; these risks rise under weak growth. - Fiscal consolidation needs to continue; Budget 2014 sets out a path expected to put public debt on a declining trajectory, though subject to risks from growth and contingent liabilities. - Medium-term consolidation should center on reforms of health, education, and social protection spending to realize durable savings while protecting core services and the most vulnerable; revenue increases should focus on broadening the tax base. - Mortgage arrears: - Intensified efforts needed to reach largely completing sustainable solutions by end 2014. - Initiation of operations by the Insolvency Service is welcomed; banks report meeting CBI targets for proposing solutions but concerns exist about sustainability of a portion of these solutions. - Restarting engagement between banks and borrowers is difficult after prolonged forbearance; progress requires supervisory guidance, better borrower information and incentives, timely and predictable repossession procedures, and enhanced support to facilitate mortgage to rent and other socially contained solutions. - Bank Balance Sheet Assessment (BSA) implications: - BSA independently assessed loan classification, quantified incurred loan losses, and reviewed risk weights. - CBI should ensure banks increase provisioning for some portfolios in line with BSA findings to improve incentives for loan workout. - Uncertainties remain owing to limited experience with loan resolution in Ireland and potential findings of a forward-looking assessment of profitability and loan losses. - Given Ireland’s fragile debt sustainability, an ESM direct recapitalization backstop to the ECB’s Comprehensive Assessment would be desirable to protect market confidence and financial stability. *Source: _cr13366 - 33. The review of options to fund tracker mortgages at a lower cost identified* ### 48. Reviving lending in coming years remains important to sustain a recovery in ### Reviving lending in coming years remains important to sustain a recovery in ### Banking sector and lending recovery - Encouragingly, the two larger domestic banks appear to be returning to the profitability needed to support lending, although risks remain to their profitability prospects. - PTSB is not expected to break even after provisioning expenses until 2017 given its heavy exposure to tracker mortgages, limiting its potential to rebuild its market position and attract private investment. - With other banking systems in the euro area also facing challenges that hinder credit expansion, a European solution to better align bank funding costs with official interest rates would facilitate recovery in the euro area as well as Ireland. ### Unemployment, SMEs, and labor market policies - Reducing high unemployment is identified as an overarching policy priority. - Initiatives to promote credit to SMEs, with the support of European partners, are positive for investment and job creation. - Ensuring SMEs are creditworthy requires: - Banks completing resolution of SME loans in arrears. - Facilitating SME restructuring where needed, including by considering further streamlining the role of courts in SME examinership. - Strengthening employment services for jobseekers should continue to achieve adequate engagement, with: - Further redeployment of staff needed. - Bringing in private sector providers. - Timely initiatives to achieve the strategic priorities set out in the review of Further Education and Training are critical to better align training with the needs of the economy and especially to ensure the long-term unemployed gain skills enabling them to return to work. ### Program review, consultation cycle, and post-program monitoring - On the basis of the progress made under Ireland’s program, staff supports the authorities’ request for completion of the twelfth review. - Staff recommends that Ireland be brought back to the standard 12-month consultation cycle for Article IV consultations upon expiration of the Extended Arrangement. - In accordance with Executive Board Decision No. 14747(10/96), Ireland shall be placed on a 12-month consultation cycle because it currently has an outstanding Fund credit exceeding 200 percent of quota. - Given the amount of the outstanding credit, and the authorities’ decision not to request a successor arrangement from the Fund, the Managing Director also recommends the initiation of post-program monitoring. ### The “patent cliff” in pharmaceuticals (Box 1: impact and outlook) - Ireland is a leading exporter of pharmaceutical products; the sector accounts for a quarter of total exports. - Nine out of the top ten pharmaceutical companies are located in Ireland, and seven of ten blockbusters were produced in Ireland in 2011. - Accenture evaluated global lost sales from patent expiry at US$38 billion in 2012 compared with around US$20 billion per annum thereafter, highlighting 2012 as exceptional relative to a yearly run-off in the US$10-20 billion range. - Ireland’s pharmaceutical exports registered a 6.7 percent y/y contraction in value over the first nine months of 2012 following the local expiry of several blockbuster drug patents; some slowdown in contraction was visible in H1 2013, but the year-on-year decline resumed in value terms in Q3 2013. - Department of Finance illustrative simulations of remaining patent-expiry impacts: - If pharmaceutical exports decline 4 percent annually through 2014, estimated cumulative GDP loss of 2 percent over 5 years. - If the pace of decline is 8 percent annually, estimated cumulative GDP loss of 4 percent over 5 years. - National accounts impacts depend on firms’ accounting models: - If patent expiry reduces royalty payments (profits booked to parent), offsetting changes in exports and imports yield little net effect on GDP. - If profits are booked locally, patent expiry reduces exports, net trade, and GDP, while the fall in profit outflows dampens the impact on GNP and the current account. - Irrespective of accounting treatment, patent expiries are unlikely to have a large effect on GNP, as the sector is dominated by foreign-owned companies. - Investment plans signal opportunities: investments total €2 billion over the next three years after €1 billion over the last three years; Irish subsidiaries are refocusing toward higher-value “niche” products like biopharmaceuticals (Ireland already has 10 large scale biopharmaceutical facilities), with expectations that “nichebusters” (global sales between US$½-1 billion) will help diversify revenues. ### Mortgage arrears resolution and consumption (Box 2: key effects and estimates) - Distinction emphasized between effects of high household debt and effects of arrears on aggregate consumption. - Resolution efforts affect about 6 percent of households in arrears and possibly some other households in distress not yet in arrears; these are not expected to be substantial relative to the stock already in arrears. - Net direct impact of mortgage restructuring depends on household status, especially whether households are already receiving forbearance: - Relief of debt overhang: CBI analysis suggests households with debt problems spend 18 percent less on consumption controlling for other characteristics. - Unwinding of forbearance: converting households back to paying borrowers according to sustainable debt service schedules could reduce income available to consume even where total debt being serviced is cut significantly. - Estimates of aggregate near-term direct impact: - Rough estimate of the impact of the flow of arrears plus debt service savings provided by temporary restructures is €1.2 billion (1½ percent of consumption). - If the portion of forbearance expected to be paid under sustainable loan terms is as high as one-third or one-half, the drag on consumption would not be large and would be counterbalanced to some extent by other households in distress receiving some debt relief. - Medium-term second-round benefits from loan resolution: - Resolving household NPLs could improve confidence in banks’ balance sheets; one third of defaulted loans have not been serviced for two years or longer. - Improving loan books could reduce market funding cost and support a restart of bank lending. - Reducing non performing mortgage loans could support housing demand by reducing concerns about a large “shadow inventory” from underwater mortgages; three-quarters of Irish households own their homes, so reduced uncertainty could support consumption by reducing precautionary saving. - CBI reports that for distressed borrowers, available income after living expenditures is sufficient to meet all debt service in 17 percent of distressed households. ### Fiscal measures in Budget 2014 (Box 3: consolidation and components) - Achieving the 2014 deficit target entails implementation of €2.7 billion in total consolidation, composed of: - €1.2 billion in new measures. - €1.3 billion in carryovers from policies implemented in previous years (notably additional yield in 2014 from the local property tax and reduction in the standard fund threshold for pensions, together with additional savings from the Haddington Road Agreement). - €0.2 billion in the form of higher dividends from state-owned enterprises. - Two-thirds of the total consolidation effort will fall on spending. - Revenue measures include base broadening and rate increases; retention of the reduced VAT rate in labor intensive services mainly in tourism of 9 percent will offset some proceeds (0.2 percent of GDP). - Package includes measures to stimulate the economy through tax relief targeted at tourism, agri-food, construction and property sectors and startups; expected cost modest with impact mostly in 2015. - Base broadening steps include: - Introduction of a levy on financial institutions, while removing the restriction on the use of deferred tax assets for losses on assets transferred to NAMA. - Making the tax credit for single parents available only to the principal carer of the child. - Restricting the tax relief for medical insurance. - Rate increases include: - Introduction of an additional pension fund levy of 0.15 percent for 2014 and 2015. - Raising rates on the deposit income retention tax to 41 percent. - Increasing excise duties on tobacco and alcohol. - Current expenditure savings focus on health and social protection: - Health savings of €0.4 billion excluding pay-related savings via reduction in drug costs, enforcement of medical card eligibility, increase in prescription charges, among others. - Social protection savings of €0.3 billion through elimination of certain schemes (telephone allowance, bereavement grant, and mortgage interest supplement for new applicants) and reduction of some benefits (maternity benefits maximum rate, jobseeker’s allowance for certain recipients aged 22-25, and illness benefit). - Additional staffing will be recruited for schools, hospitals and front-line services, with the wage bill expected to remain within its envelope. - New international tax strategy to remain active and supportive of EU and OECD work; changes to ensure Irish registered companies cannot be “stateless” in terms of tax residency, with authorities estimating a limited number of companies have used this loophole and no direct budget impact expected. - Table of selected savings from new revenue measures (figures in € million) reported in the source: - Income tax: 216 - One-parent family tax credit: 18 - Medical Insurance tax relief: 94 - Deposit income retention tax: 105 - Stamp duties: 285 - Bank levy: 150 - Pension levy: 135 - VAT-: 313 - Retention of 9 percent reduced VAT rate-: 290 - Other-: 23 - Excise duties: 132 - Air travel tax-: 28 - Alcohol and tobacco: 161 - Other: 29 - Total: 350 - (Label in source: "Savings from New Revenue Measures in Budget 2014") ### Case-by-case mortgage restructuring framework (Box 4: process and protections) - Two-step approach guides resolving distressed mortgage debts to facilitate case-by-case loan modifications before banks can pursue a change in ownership. - Borrowers in mortgage distress on personal dwelling homes are protected by the CBI’s Code of Conduct on Mortgage Arrears (CCMA), which sets out a clear process toward a bilateral arrangement between borrower and lender. - If bilateral approach fails, borrowers can apply for a Personal Insolvency Arrangement (PIA) to settle secured debt of up to €3 million. - If neither bilateral arrangement nor PIA leads to an acceptable solution or the borrower is uncooperative, lenders can pursue a change in ownership, including repossession. - For buy-to-let mortgages, lenders can appoint rent receivers to redirect rental payments to lenders or pursue repossession. - Terms of restructurings are determined by households’ current debt servicing capacity after applying ceilings on common expenditure categories; Insolvency Service Ireland (ISI) has issued detailed guidelines for reasonable household expenditures during the five-to-six year duration of the Arrangement. - Repossession or voluntary change in ownership remain last resorts; full recourse nature of mortgage loans means banks can collect any shortfall between outstanding loan amount and collateral value. - Borrowers subject to full recourse can apply for debt settlement for unsecured debt under the new personal insolvency framework, or avail of personal bankruptcy with a charge off period of three years. *Source: _cr13366 - 48. Reviving lending in coming years remains important to sustain a recovery in* ### Box 5. Balance Sheet Assessment Methodology ### Box 5. Balance Sheet Assessment Methodology ### Overview - Timing and purpose: - Conducted in the second half of 2013 by the Central Bank of Ireland (CBI). - Assessed the capital adequacy of the three PCAR banks as of June 30, 2013 on a point-in-time basis. - Prepared for the Comprehensive Assessment for the SSM in 2014. - Core activities: - Analysis of banks’ loan classification, provisioning, and risk weighted assets (RWA). - Calculation of new point-in-time capital ratios. - External support: - Independent consultants contracted for loan file reviews and provisioning analysis. - A separate independent third party guided the project and validated the exercise as a whole. ### Loan file reviews - Approach: - Two-phased testing of loan files combined with tests of data integrity. - Aim: assess correct loan classification by risk characteristics and consistency of provisions with IFRS and the CBI’s Impairment Provisioning and Disclosure Guidelines as amended at end May 2013. - Scope and samples: - First phase covered about 3,500 loan files, including: - 1,800 residential mortgages - 1,650 commercial connections (commercial real estate, corporate, and SME loans) - Issues identified in the first phase guided a second phase of examining 850 additional loans. - Both Irish and UK loans were included. - The biggest loans within cohorts were examined separately. - On average, 93 percent of total loans and receivables are within the scope of the exercise through extrapolation, with only small and highly provisioned portfolios excluded. ### Provision estimation - Overall methodology: - Performed using cohorts identified for the loan file review purposes. - Two-part process to estimate any point-in-time provisioning shortfall: (i) review of models that determine provisions for collectively assessed loans; and (ii) sample and extrapolation of reassessed provisioning for individually assessed loans. - Collectively assessed loans: - Independent consultants reviewed banks’ collective provisioning models and developed independent benchmarking frameworks. - Benchmarking used a range of parameter sets including: - (i) the parameters in the banks models; - (ii) common parameters set across banks (emergence period, house price index and peak-to-trough fall, fire-sale discounts, time to work-out, total work-out costs, cure rates) while keeping default probabilities bank-specific. - Comparisons were made with banks’ own provisioning estimates, accounting for any revisions due to misclassifications and the transition process to full compliance with the CBI provisioning and disclosure guidelines (due at end December). - Sensitivity analysis was performed to determine impact of changes in model parameters. - Individually assessed loans: - Independent consultants determined differences between their assessment of provisioning and those of the bank for each loan in a sample of individually reviewed loans. - After taking into account outliers, sample results were extrapolated to the rest of each cohort. ### Review of risk weights and risk weighted assets (RWA) - Scope: - CBI reviewed the appropriateness of banks’ RWA calculations based on the Internal Risk Based models for regulatory capital purposes. - Review included key model inputs such as Probability of Default and Loss Given Default and other assumptions. - Objective: - Extrapolate changes in risk classification from the asset quality review to estimate the overall impact on RWAs. - Conduct sensitivity analysis with respect to main parameters. ### Combining results and outputs - Integration: - Results from the review of loan file classification, provisioning, and risk weighted assets were combined to produce a point-in-time capital assessment of each of the three PCAR banks. - Deliverable: - A calculated point-in-time capital ratio for each bank as of June 30, 2013 based on the combined assessments. *Source: IMF staff summary of Box 5. Balance Sheet Assessment Methodology (CBI PCAR exercise, second half of 2013).* ### 1. Cumulative ### 1. Cumulative ### Exchequer primary balance and fiscal targets - Exchequer primary balance (measured by the exchequer balance excluding interest payments; cumulative from the start of the relevant calendar year) series 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, -3.7, -2.3. - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government (applies on a continuous basis): 0, 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: 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, 171.0, 165.4. - Note: Adjusted. For details on the adjustments, see Annex II in Ireland—Eleventh Review Under the Extended Arrangement. ### Public debt sustainability — summary findings - Under the baseline scenario, public debt is projected to peak this year at 124 percent of GDP before declining to 112 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. - The downward trajectory of public debt is fragile given vulnerability to lower growth and contingent liabilities, mainly from the financial sector. - Debt burden benchmark for advanced economies of 85 percent of GDP is already exceeded. - Gross financing needs benchmark of 20 percent of GDP is only exceeded under the contingent liability stress test. - External financing requirements (excluding debts of the IFSC) and public debt held by non-residents exceed the upper risk assessment benchmarks for their indicators. ### Forecast track record and fiscal adjustment - No evidence of systematic projection bias in baseline assumptions for key macroeconomic variables; median forecast errors for real GDP growth and primary balance during 2004–12 are below 1 percent. - Estimated change in the cyclically adjusted primary balance of 4½ percent of GDP over three years during the projection period — in the top quartile of observed fiscal adjustments for countries with debt greater than 60 percent of GDP. - Ireland’s primary surplus is projected to rise above its debt-stabilizing threshold in 2015. - Automatic debt dynamics (interest rate-growth differential) are projected to on average add 3 percentage points per year to the debt-to-GDP ratio in 2013–14 before stronger growth from 2015. ### Public debt risk scenarios and quantified impacts - Growth shock: If projected real GDP growth rates for 2014–15 are lowered by 0.5 standard deviation (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 131 percent in 2015 (compared with 122 percent under the baseline) before declining. - 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 were compounded by a primary balance shock and by an increase in interest rates on new borrowing by 2 percentage points, the debt ratio rises to 133 percent of GDP in 2015 and falls to 126 percent by 2018. In this scenario, gross financing needs increase by about 2½ percentage points of GDP on average over the medium term compared with the baseline. - Contingent liability shock: A scenario assuming a 10 percent of GDP shock (used as illustrative given absence of precise estimates) combined with the growth shock would push gross public debt to 135 percent of GDP and 139 percent in 2014 and 2015, respectively, before declining to 130 percent by 2018. ### Upside factors - Baseline does not incorporate 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. - Baseline does not allow for further transactions reducing banking-system support costs beyond sales of interests in BoI and Irish Life earlier this year. ### External debt sustainability — key figures and composition - External debt excluding the IFSC sector stood at 282 percent of GDP at the end of Q2 2013; total external debt (IFSC and non-IFSC) amounted to 990 percent of GDP. - Compared with end 2012: non-IFSC debt declined by 17 percentage points of GDP while total external debt increased by 6 percentage points of GDP. - Net international investment liabilities in Q2 2013: -108 percent of GDP (net IIP negative 108 percent). - Non-IFSC debt composition: around 40 percent official external liabilities of the general government and the central bank; around 28 percent accounted for by FDI-related liabilities; remainder split between foreign liabilities of domestic financial institutions and other sectors. ### External debt projections and stress tests - By end 2018, total external non-IFSC debt is expected to decline to 219 percent of GDP. - Projection is around 3.5 percentage points of GDP higher than at the Eleventh Review. - Permanent ½ standard deviation shock to growth (implying contraction of around ¼ percent in 2014 and slow growth of ½ percent annually thereafter) would raise debt-to-GDP ratio to 245 percent in 2018, 26 percentage points above the baseline. - Permanent ½ standard deviation shock to the non-IFSC current account (excluding interest payments) would raise debt by around 21 percentage points of GDP above the baseline. - 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 251 percent of GDP. ### Debt, economic and market indicators (selected reported data and projections) - As of November 27, 2013 table highlights (selected entries): - Nominal gross public debt: 2011 = 41.0, 2012 = 104.1, 2013 = 117.4, 2014 = 123.9, 2015 = 121.7, 2016 = 121.9, 2017 = 118.8, 2018 = 115.8, 112.2. - Spread (bp): 180. - Public gross financing needs (percent of GDP): 2011 = 19.0, 2012 = 15.7, 2013 = 13.5, 2014 = 10.6, 2015 = 6.8, 2016 = 11.6, 2017 = 9.0, 2018 = 12.3. - Real GDP growth (percent): 2011 = 2.3, 2012 = 2.2, 2013 = 0.2, 2014 = 0.3, 2015 = 1.7, 2016 = 2.5, 2017 = 2.5, 2018 = 2.5, 2.5. - Inflation (GDP deflator, percent): 2011 = 1.2, 2012 = 0.7, 2013 = 0.7, 2014 = 0.6, 2015 = 0.7, 2016 = 1.0, 2017 = 1.0, 2018 = 1.6, 1.6. - Effective interest rate (percent): 4.4, 3.7, 3.6, 4.2, 4.1, 4.2, 4.2, 4.4, 4.4. - Cumulative change in gross public sector debt (percent of GDP): 2011 = 6.3, 2012 = 12.9, 2013 = 13.3, 2014 = 6.5, 2015 = -2.2, 2016 = 0.2, 2017 = -3.1, 2018 = -2.9, -3.7, -5.2. - Identified debt-creating flows (percent of GDP): 4.8, 10.4, 11.8, 7.2, -1.7, 0.6, -2.7, -2.6, -3.4, -2.6. - Primary deficit (percent of GDP): 3.9, 10.4, 5.2, 3.3, 0.8, -1.5, -2.3, -2.9, -3.4, -5.9. - Revenue and grants (percent of GDP): 34.8, 33.5, 33.7, 34.8, 35.1, 35.2, 35.0, 34.8, 34.6, 209.5 (cumulative). - Primary (noninterest) expenditure (percent of GDP): 38.7, 43.9, 39.0, 38.1, 35.9, 33.7, 32.7, 31.9, 31.2, 203.5 (cumulative). - Automatic debt dynamics contribution (percent of GDP): 0.8, 0.5, 2.9, 3.6, 1.8, 0.7, 0.6, 0.1, 0.2, 7.2 (cumulative). - Real interest rate contribution (percent): 1.3, 2.5, 3.1, 4.2, 4.1, 3.8, 3.7, 3.1, 3.1, 22.0 (cumulative). - Real GDP growth contribution (percent): -0.4, -1.9, -0.2, -0.4, -2.1, -2.9, -3.0, -2.9, -2.8, -14.1 (cumulative). - Other identified debt-creating flows (percent of GDP): 0.0, -0.5, 3.7, 0.2, -4.3, 1.4, -1.1, 0.1, -0.2, -3.9 (cumulative). - Drawdown of deposits (negative) (percent of GDP): 0.0, -5.7, 3.2, 0.5, -4.3, -0.2, -0.5, 0.0, 0.0, -4.5 (cumulative). - Residual, incl. interest revenue (percent of GDP): 1.5, 2.5, 1.5, -0.8, -0.7, -0.6, -0.5, -0.4, -0.4, -3.4 (cumulative). ### Underlying baseline assumptions (selected) - Baseline scenario projections (percent): - Real GDP growth: 2013 = 0.3, 2014 = 1.7, 2015 = 2.5, 2016 = 2.5, 2017 = 2.5, 2018 = 2.5. - Inflation: 2013 = 0.6, 2014 = 0.7, 2015 = 1.0, 2016 = 1.0, 2017 = 1.6, 2018 = 1.6. - Primary Balance: 2013 = -3.3, 2014 = -0.8, 2015 = 1.5, 2016 = 2.3, 2017 = 2.9, 2018 = 3.4. - Effective interest rate: 2013 = 4.2, 2014 = 4.1, 2015 = 4.2, 2016 = 4.2, 2017 = 4.4, 2018 = 4.4. *Source: IMF staff (Annex I. Debt Sustainability Analysis, Ireland).* ### 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 — projections and components - Gross Nominal Public Debt (in percent of GDP): projection series shown for 2011–2018 (chart). - Public Gross Financing Needs (in percent of GDP): projection series shown for 2011–2018 (chart). - By Maturity (in percent of GDP): medium and long-term and short-term composition, projection series shown for 2002–2018 (chart). - By Currency (in percent of GDP): local currency-denominated vs. foreign currency-denominated composition, projection series shown for 2002–2018 (chart). ### Alternative scenario parameter values (selected series for 2013–2018) - Baseline macro-fiscal and shock parameter values (presented by scenario): - Real GDP growth: 0.3 1.7 2.5 2.5 2.5 2.5 - Inflation: 0.6 0.7 1.0 1.0 1.6 1.6 - Primary Balance: -3.3 -2.1 0.4 1.9 2.6 3.2 - Effective interest rate: 4.2 4.1 4.2 4.3 4.4 4.5 - Primary Balance Shock parameters: - Real GDP growth: 0.3 -0.3 0.5 2.5 2.5 2.5 - Inflation: 0.6 0.2 0.5 1.0 1.6 1.6 - Primary Balance: -3.3 -1.7 -0.2 2.3 2.9 3.4 - Effective interest rate: 4.2 4.1 4.2 4.3 4.4 4.5 - Real Interest Rate Shock parameters: - Real GDP growth: 0.3 1.7 2.5 2.5 2.5 2.5 - Inflation: 0.6 0.7 1.0 1.0 1.6 1.6 - Primary Balance: -3.3 -0.8 1.5 2.3 2.9 3.4 - Effective interest rate: 4.2 4.1 4.3 4.5 4.7 4.9 - Real Exchange Rate Shock parameters: - Real GDP growth: 0.3 1.7 2.5 2.5 2.5 2.5 - Inflation: 0.6 1.1 1.0 1.0 1.6 1.6 - Primary Balance: -3.3 -0.8 1.5 2.3 2.9 3.4 - Effective interest rate: 4.2 4.2 4.2 4.3 4.4 4.4 - Combined Macro-Fiscal Shock parameters: - Real GDP growth: 0.3 -0.3 0.5 2.5 2.5 2.5 - Inflation: 0.6 0.2 0.5 1.0 1.6 1.6 - Primary Balance: -3.3 -2.1 -0.2 1.9 2.6 3.2 - Effective interest rate: 4.2 4.2 4.4 4.5 4.8 5.0 - Contingent Liability Shock parameters: - Real GDP growth: 0.3 -0.3 0.5 2.5 2.5 2.5 - Inflation: 0.6 0.2 0.5 1.0 1.6 1.6 - Primary Balance: -3.3 -10.8 1.5 2.3 2.9 3.4 - Effective interest rate: 4.2 4.2 4.5 4.5 4.6 4.7 *Source: IMF Staff.* --- ### Annex I. Figure 5. Ireland Public DSA—Stress Tests ### Macro-fiscal stress tests — overview - Stress test types illustrated (charts for 2013–2018): - Baseline - Primary Balance Shock - Real GDP Growth Shock - Real Interest Rate Shock - Real Exchange Rate Shock - Combined Macro-Fiscal Shock - Additional stress tests: - Baseline underlying assumptions (chart) - Contingent Liability Shock (chart) ### Stress test metrics (charts) - Gross Nominal Public Debt (in percent of GDP), series for 2013–2018 under baseline and scenarios. - Gross Nominal Public Debt (in percent of Revenue), series for 2013–2018 under baseline and scenarios. - Public Gross Financing Needs (in percent of GDP), series for 2013–2018 under baseline and scenarios. ### Interest-rate shock indicator (historical series) - i-rate shock (in percent) — illustrative values shown with baseline at 219 and shock at 236 (chart covering 2008–2018). *Source: IMF Staff.* --- ### Annex I. Figure 6. Ireland: External Debt Sustainability—Bound Tests ### Bound tests — scenarios and shocks - External debt (in percent of GDP) bound tests shown for 2008–2018 under: - Historical scenario (shaded actual data) - Baseline scenario (baseline average shown as 219) - CA shock (current account shock) — baseline 219, scenario peak 241 (chart) - Combined shock (permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance) — baseline 219, scenario peak 252 (chart) - Real depreciation shock (one-time real depreciation of 30 percent occurs in 2014) — baseline 219, scenario peak 317 (chart) - Notes: - Individual shocks are permanent one-half standard deviation shocks (figure note). - For historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead. ### Selected scenario box averages (explicitly shown) - Baseline: 219 (average projection displayed in figure boxes). - Historical: 273 (historical average displayed). - Growth shock scenario average: 246 (box value). - CA shock scenario average: 241 (box value). - Combined shock scenario average: 252 (box value). - Real depreciation (30% depreciation) scenario average: 317 (box value). *Source: International Monetary Fund, Country desk data, and staff estimates.* --- ### External Debt Sustainability: Projections and Key Flows (2008–2018 extract) ### Selected projection highlights (Annual series and contributions) - Baseline: External debt (selected years) — 2008: 302.7, 2009: 323.6, 2010: 334.0, 2011: 322.7, 2012: 299.2, 2013: 291.1, 2014: 278.7, 2015: 263.2, 2016: 248.2, 2017: 233.1, 2018: 218.9 - Change in external debt: 45.1, 20.8, 10.4, -11.3, -23.5, -8.2, -12.4, -15.4, -15.0, -15.1, -14.2 - Identified external debt-creating flows (4+8+9): 15.1, 31.9, 11.6, -9.1, -5.1, -6.6, -10.1, -12.4, -11.9, -11.2, -10.5 - Current account deficit, excluding interest payments: -26.6, -20.6, -22.9, -35.8, -16.1, -13.6, -12.2, -12.0, -11.4, -11.9, -11.8 - Deficit in balance of goods and services: -137.8, -143.9, -158.2, -161.4, -167.7, -165.7, -166.8, -167.6, -169.6, -171.5, -173.5 - Exports: 71.4, 77.5, 85.9, 89.0, 93.0, 91.8, 92.3, 93.2, 94.4, 95.4, 96.4 - Imports: -66.4, -66.4, -72.3, -72.3, -74.7, -73.9, -74.5, -74.4, -75.2, -76.1, -77.1 - Net non-debt creating capital inflows (negative): 0.4, -1.9, 3.1, 0.6, -1.6, -4.3, -4.3, -4.2, -4.2, -4.2, -4.1 - Automatic debt dynamics (contribution): 41.2, 54.4, 31.3, 26.1, 12.5, 11.3, 6.4, 3.8, 3.7, 4.9, 5.4 - Contribution from nominal interest rate: 27.8, 20.9, 22.7, 35.4, 15.2, 12.3, 11.3, 10.4, 10.2, 10.9, 11.0 - Contribution from real GDP growth: 5.9, 21.5, 3.5, -7.0, -0.5, -1.0, -4.9, -6.7, -6.4, -6.0, -5.7 - Contribution from price and exchange rate changes: 7.6, 12.0, 5.0, -2.2, -2.1, .......... - Residual, incl. change in gross foreign assets (2-3): 30.0, -11.1, -1.2, -2.2, -18.4, -1.6, -2.3, -3.0, -3.2, -3.9, -3.7 - External debt-to-exports ratio (in percent): 423.9, 417.7, 388.7, 362.4, 321.6, 317.0, 301.9, 282.3, 262.9, 244.4, 227.1 - Gross external financing need (in billions of euro): 44.4, 385.8, 354.3, 342.8, 266.2, 266.7, 265.3, 262.1, 260.6, 259.0, 257.6 - in percent of GDP (series partly shown): 24.7, 237.7, 224.1, 210.8, 162.4, ... - Scenario with key variables at their historical averages: 291.1, 287.8, 284.4, 280.8, 277.0, 273.0, 16.1 (partial series shown) ### Key macroeconomic assumptions underlying baseline (selected series) - Real GDP growth (in percent): -2.2, -6.4, -1.1, 2.2, 0.2, 1.7, 4.0, 0.3, 1.7, 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, 0.5, 0.8, 1.1, 1.2, 1.6, 1.6 - Nominal external interest rate (in percent): 10.3, 6.2, 6.8, 10.9, 4.7, 8.3, 2.6, 4.2, 4.0, 3.9, 4.0, 4.6, 4.9 - Growth of exports (in percent): -1.2, -2.3, 8.0, 6.6, 5.4, 4.2, 4.3, -0.5, 3.1, 4.6, 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, -0.3, 3.4, 3.4, 5.0, 5.3, 5.6 - Current account balance, excluding interest payments: 26.6, 20.6, 22.9, 35.8, 16.1, 20.4, 8.4, 13.6, 12.2, 12.0, 11.4, 11.9, 11.8 - Net non-debt creating capital inflows: -0.4, 1.9, -3.1, -0.6, 1.6, -0.4, 2.1, 4.3, 4.3, 4.2, 4.2, 4.2, 4.1 ### Debt-stabilizing non-interest current account (long-run constant balance) - Baseline: series includes value -2.6 (last projection year) shown in table context. *Source: IMF staff calculations and projections as presented in the figure/table.* --- ### Annex II. Fund Relations — Selected facts (as of October 31, 2013) - Membership Status: Joined August 8, 1957; Article VIII. - General Resources Account: - Quota: 1,257.60 (SDR Million) — 100.00 (Percent of Quota) - Fund holdings of currency: 19,885.41 (SDR Million) — 1,581.22 (Percent of Quota) - Reserve position in Fund: 258.66 (SDR Million) — 20.57 (Percent of Quota) - SDR Department: - Net cumulative allocation: 775.42 (SDR Million) — 100.00 (Percent of Allocation) - Holdings: 647.56 (SDR Million) — 83.51 (Percent of Allocation) - Outstanding Purchases and Loans: - Extended Arrangements: 18,886.43 (SDR Million) — 1,501.78 (Percent of Quota) - Financial Arrangements: - EFF Approval Date: 12/16/10; Expiration Date: 12/15/13; Amount Approved: 19,465.80 (SDR million); Amount Drawn: 18,205.43 (SDR million) - Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs): - 2013 Principal: 535.20; Charges/Interest 124.11; Total 124.11 - 2014 Principal: 2,173.15; Charges/Interest 627.09; Total 627.09 - 2015 Principal: 2,895.74; Charges/Interest 654.38; Total 1,189.58 - 2016 Charges/Interest: 607.96; Total 2,781.11 - 2017 Charges/Interest: 509.42; Total 3,405.16 - Exchange Rate Arrangement: Ireland’s currency is the euro, which floats freely and independently. - Safeguards Assessment (Central Bank of Ireland, finalized March 2011): relatively strong safeguards framework; financial statements audited and published; recommendations made and progress reported on governance, transparency, and de-jure autonomy. *Source: IMF staff.* --- ### Appendix I — Letter of Intent: Key policy commitments and outlook (Dublin, 29 November 2013) ### Macroeconomic outlook (high-level findings and projections) - Real GDP forecast: - 2013: forecast to grow by 0.2 percent. - 2014: GDP is forecast to grow by about 2 percent. - 2015–2016: GDP growth set to average 2½ percent. - Observations: - The patent cliff is weighing on pharma-chem activity. - Domestic indicators improving: employment returned to year-on-year growth of nearly 2 percent in Q2; unemployment continuing to fall; PMIs at multi-annual highs; tourism up; house prices consistently growing. - Net exports expected to contribute positively as fast-growing services exports offset pharma-chem drag. - Strong inflows of foreign direct investment supportive. ### Fiscal policy — achievements and commitments - Consolidation achieved: - Budget 2011 to Budget 2014: consolidation of over €16.4 billion — equivalent to 9.6 percent of the forecast GDP for 2013, and approximately 90 percent of required consolidation for 2011–2015. - 2013 and 2014 fiscal targets: - 2013 fiscal deficit target: 7.5 percent of GDP (on track to be met). - Budget 2014 aims to reduce the deficit to 4.8 percent of GDP (below the 5.1 percent of GDP EDP requirement) and to achieve a primary balance or a small surplus in 2014. - Policy measures emphasized: - Broadening the revenue base. - Reforming the health sector. - Targeting social supports to the most vulnerable. - Medium-term commitment: - Clear focus on reducing the deficit below 3 percent of GDP in 2015; Government committed to meet this target and to continued fiscal prudence under the stability and growth pact beyond 2015. - Institutional reforms implemented: - Fiscal Responsibility Act 2012 enacted. - Irish Fiscal Advisory Council established on a statutory basis. - Regular wide-scale reviews of public spending; next Comprehensive Review of Expenditure to take place in advance of Budget 2015. - Implementation of multi-annual expenditure budgeting and Ministerial expenditure ceilings. ### Financial sector — status and policy actions - Banking system developments: - Reliance on Eurosystem funding substantially reduced. - 2011 Financial Measures Programme: banks recapitalised to meet a capital requirement identified at €24 billion sourced from private market, subordinated bondholder burden sharing, and the State. - Restructuring and deleveraging undertaken; Allied Irish Banks merged with EBS; IBRC liquidated and ELA removed from system. - NAMA generating cash and on track to redeem €7.5 billion of bonds by end of year. - Private capital introduced: sale of equity (2011) and contingent capital notes (2013) in Bank of Ireland; sale of Irish Life (2013). - Ongoing and planned actions: - Preliminary assessment and rigorous review of PCAR banks’ balance sheets, including impairment provisions and risk-weight appropriateness. - Independent loan-file sampling and engagement with EC, ECB, and IMF on review methodology and findings. - Review to inform supervisory dialogue and provisioning at year end per Central Bank guidelines. - Agree restructuring plans for AIB and PTSB with the European Commission; implement these along with the plan for Bank of Ireland. - Run-down of legacy NAMA assets and assets transferred from IBRC. - Continue exiting banking investments to maximise proceeds for taxpayers. - Main Irish banks to undergo a comprehensive risk assessment, including a 2014 stress test as part of the euro area-wide exercise prior to SSM establishment. *Source: Letter of Intent, Dublin, 29 November 2013; IMF staff.* ### 8. Building on the recommendations of the 2011 Inter-Departmental Mortgage ### 8. Building on the recommendations of the 2011 Inter-Departmental Mortgage Arrears Working Group ### Mortgage-arrears measures, targets, and recent outcomes - Broad suite of measures implemented to maintain credit discipline while providing relief to borrowers experiencing genuine repayment difficulty. - Process requiring mortgage lenders to resolve, on a sustainable basis, cases of mortgage arrears; performance targets set for six credit institutions to propose and conclude sustainable mortgage solutions for mortgages more than 90 days in arrears. - Mortgage Arrears Resolution Targets (MART) published by the CBI on December 5: - Target for proposed solutions: 75 percent of arrears cases over 90 days by end June 2014. - Target for concluded solutions: 35 percent of arrears cases by end June 2014. - CBI intends to shift supervisory focus to conclusions of solutions and their durability. - Recent mortgage-arrears statistics (Q3): - Value of mortgages in arrears on primary dwellings remained stable at about 23.6 percent of the total in Q3. - Mortgages in arrears of less than 90 days past due declined 6.5 percent by value in Q3. - Mortgages in arrears of 90 days or more rose by 1.8 percent in Q3, driven entirely by rising arrears of over 720 days. - Buy-to-let mortgages: share in arrears by value edged up from 35.7 percent at end June to 36.2 percent at end September. - Loan modification activity in Q3: - 23,776 new restructuring arrangements agreed in Q3, representing 3.1 percent of mortgage contracts (primary dwelling). - Share of short-term forbearance modifications on primary dwelling mortgages declined from 37 percent of total restructurings at end June to 30 percent at end September. - Share of restructured loans on which payments are meeting terms of the arrangement: 78.9 percent. - Legal proceedings to enforce collateral on primary dwelling mortgages: 1,830 cases in Q3, up from 270 in Q2. ### Insolvency, bankruptcy, and SME resolution - Personal Insolvency Act 2012: - Introduced new insolvency resolution frameworks and modernised the judicial bankruptcy system. - Reform of personal bankruptcy shortened the automatic discharge period from 12 years to 3 years. - Borrowers must attest to having been unable to agree other insolvency solutions before pursuing bankruptcy. - Courts may require bankrupt debtors to enter payment plans for up to five years under which income in excess of reasonable living expenses is distributed to creditors. - Land and Conveyancing Law Reform Act 2013 removed an uncertainty regarding the rights of some secured creditors. - Insolvency Service of Ireland is fully operational and will process insolvency applications fairly and efficiently; Insolvency Service increased staff resources and published detailed guidance. - SME distressed portfolios: - Targets require banks to implement sustainable long-term debt resolution strategies for all distressed SME loans. - Ensuring an adequate flow of credit for SMEs remains a priority; active consideration being given to alternative provision of non-bank financing for the enterprise sector. - SME survey (Q2–Q3): - 34 percent of SMEs experienced an increase in turnover, up from 25 percent in the previous six months. - SME credit approval rates: 80 percent of applications approved in full or partially (excluding pending applications), an improvement of 4 percentage points. ### Structural reform progress - Competition (Amendment) Act (2012) enacted to support the Competition Authority in investigation and prosecution of anti-competitive practices. - Sectoral Wage Reforms implemented. - European Commission estimate: 22 per cent improvement in unit labour costs in Ireland vis-à-vis the euro area over the period 2008-2014. - Medium Term Economic Strategy 2014-2020 being prepared to direct economic path. - Health-sector reforms: - Implementation of generic substitution and reference pricing prioritised. - Reference pricing expected to deliver at least €50 million savings in 2014. - Health (Pricing and Supply of Medical Goods) Act 2013 requires HSE to review each medicinal product on the Reimbursement List within three years of commencement to determine price and inclusion. - Labour market activation priorities: reduce and prevent long-term unemployment, combat youth unemployment, reduce number of jobless households; Strategic Implementation Plan for Further Education and Training to be delivered. - Legal services reform: Legal Services Regulation Bill completed Second Stage and commenced Committee Stage in July 2013; resumption expected in early 2014. - Water sector reforms: Water Services Bill progressing and expected to be published shortly. ### Financial-sector repair, diagnostics, and asset management - Ongoing financial sector repair aimed to resolve mortgage and SME difficulties in 2014; MART process to address most mortgages in arrears by end-2014. - Balance sheet assessment (BSA) finalized by CBI in late November; limited impact on financial markets. BoI’s share price declined about 3 percent on announcement day. - Bank of Ireland transactions recouping government investment (post-2009): - BoI placed €580 million of new ordinary shares, repaying the state €537 million (at par) after expenses. - Government sold remaining €1.3 billion of preference shares to private investors. - Transaction reduced government’s stake in BoI by about one percentage point to 14 percent. - Authorities recouped around €2.05 billion: €1.837 billion in principal value, a profit of €62 million, and accumulated interest of €151 million. - CBI confirmed BoI may include €1.3 billion of preference shares sold to private investors in common equity tier 1 calculations under Basel III grandfathering rules until end 2017; not intended to retain as regulatory common equity tier 1 after July 2016 provided buffer remains adequate. - NAMA progress: - Met target to redeem a quarter of outstanding senior bonds by end 2013. - On December 4, NAMA announced redemption of €500 million in senior bonds, reaching €7.5 billion redeemed in total, and held a cash balance of €3 billion. - NAMA target: redeem another €7.5 billion in senior bonds by end 2016 and expects to redeem all €30.2 billion by 2020. - NAMA redeemed €200 million in senior bonds issued following purchase of the IBRC floating charge, bringing total redemption of these bonds to €500 million. ### Fiscal performance, funding outlook, and program completion request - Exchequer and fiscal indicators (through end November 2013): - Ireland on course to end the year with a cash buffer sufficient to cover more than 12 months of Exchequer financing needs. - NTMA guiding for €6 billion to €10 billion of market issuance in 2014 by way of pre-funding for 2015. - Cumulative exchequer primary deficit through end November: 1.9 percent of GDP, 0.5 percent of GDP below authorities’ profile. - Cumulative primary expenditure (excluding ELG payments stemming from liquidation of IBRC) was 0.4 percent of GDP below authorities’ profile. - Overall, figures suggest a general government deficit closer to 7 percent of GDP in 2013, somewhat below staff report estimate of 7.3 percent of GDP, and a larger buffer relative to the target of 7.5 percent of GDP for 2013. - Selected exchequer figures (percent of GDP): - Revenue: 29.7 (Out-turn Nov-13), 29.6 (Authorities' Profile Nov-13), 28.9 (Nov-12) - Tax revenue: 27.4, 27.1, 26.3 - Other revenue: 2.4, 2.5, 2.6 - Expenditure: 35.7, 36.1, 36.0 - Current primary: 29.6, 29.7, 30.4 - Interest payments: 4.1, 4.1, 3.5 - Capital: 2.0, 2.3, 2.1 - Overall balance: -6.0, -6.5, -7.1 - Primary balance: -1.9, -2.4, -3.7 - Request in Letter of Intent: - Request completion of the twelfth review under the Extended Arrangement to complete disbursements of international assistance. - Request drawdown of remaining programme funding in an amount equivalent to SDR 579.3748 million at the time of completion of the review. - IMF Press Release No. 13/507 (December 13, 2013) key disbursement figures: - Completion of twelfth and final review enables disbursement equivalent to SDR 0.579 billion (about €0.65 billion, or about US$0.89 billion). - Total disbursements under the EFF: equivalent of SDR 19.4658 billion (about €21.81 billion, or about US$29.94 billion) or the equivalent of 1,548 percent of Ireland’s IMF quota. - Arrangement approved on December 16, 2010, as part of a financing package amounting to €85 billion. - EFF arrangement expiry on December 15; Post-Program Monitoring (PPM) to be initiated. ### Recent high-frequency indicators and labor market - High-frequency indicators signal stronger economic growth in H2 2013. - Unemployment: eased to 12.5 percent in November, lowest reading since June 2009; almost 60 percent of job seekers out of work for over a year (per IMF press release). - PMIs for manufacturing, services, and construction remained significantly above 50 in November (expansion) despite easing. - HICP inflation edged up to 0.3 percent y/y in November. - SME survey and credit conditions improvements noted above. - Policy emphasis: reduce unemployment through improved employment services and training, promote credit to SMEs, and intensify efforts to resolve mortgages in arrears. *Source: Excerpts from the Letter of Intent, Supplementary Information, and IMF Press Release No. 13/507 as provided in the content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13366.pdf_