## _cr1393

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### Promissory note transaction — mechanics, effects, and market reaction
- IBRC holdings and collateral:
  - IBRC held about €16 billion in net loan assets and about €25 billion in promissory notes issued by the government in 2010.
  - These assets were used as collateral for about €40 billion in Emergency Liquidity Assistance (ELA) provided by the CBI.
- Promissory note terms:
  - Nontradable amortizing debts with an average coupon of 5.8 percent (or 8.2 percent on a cash flow basis after an interest holiday in 2011-12).
  - Debt service of about €3.1 billion (2 percent of GDP) fell due every March until 2023, and smaller payments until 2031; weighted average maturity of 7 to 8 years.
- Replacement bonds:
  - Replaced by a portfolio of new government bonds with identical face value, an average maturity of about 34 years, and a floating rate coupon equivalent to the Irish spread (on a weighted average basis) over 6-month Euribor (coupon currently below 3 percent).
  - Sales schedule (phased as financial stability permits): €½ billion by end 2014; annual sales of €½ billion in 2015–18; €1 billion in 2019–23; €2 billion thereafter.
- Effects and risks:
  - Lowers financing needs over the next decade by about 1⅓ percent of GDP annually.
  - Interest savings do not immediately improve debt sustainability because high interest had been paid to the government-owned IBRC; savings cumulate gradually from lower market funding.
  - Risk: benefits undermined if markets perceive CBI bond sales could be disruptively large.
- Market reaction:
  - Government bond yields declined 11 to 22 basis points within the first 24 hours after announcement.
  - NTMA syndicated a €2½ billion issue (noted in text).
  - ECB President Draghi stated the ECB Governing Council “unanimously took note” of the operation.

### Fiscal and debt impacts of the promissory note transaction
- Short- and medium-term fiscal effects:
  - Transaction largely deficit neutral in 2013 as lower interest costs offset ELG outlays.
  - Improves general government balance by 0.6 percent of GDP in 2014, rising to 0.7 percent of GDP in 2016, moderating to 0.4 percent of GDP by 2018.
  - Initial adverse impact on debt of 0.8 percent of GDP in 2013 due to lower upfront cash savings on interest.
- Debt dynamics and issuance effects:
  - Under the baseline, gross debt peaks at 123 percent of GDP in 2013 and declines to 106 percent by 2018—2½ percentage points lower than without the transaction.
  - Bonds replacing promissory notes significantly reduce debt service by €1¼ to €2¾ billion annually until 2023.
  - Net debt issuance reduced by up to about €24 billion cumulatively until 2023.
- Debt Sustainability Analysis (baseline and risks):
  - Bonds have long average maturity of 34–35 years versus promissory note 7–8 years, reducing rollover risks.
  - Baseline projects gross general government debt to fall to around 95 percent of GDP by 2021.
  - Growth risk: if real GDP growth stagnates at ½ percent per year, debt could reach 150 percent of GDP by 2021.
  - Contingent liabilities illustrative downside: an overall impact on the order of 10 percent of GDP appears reasonable in a downside scenario.
  - Contingent liabilities table (percent of projected 2013 GDP): Senior NAMA bonds 17.1; Other Bank Liabilities covered by Eligible Liability Scheme 11.4; Total 28.5.

### Market financing, yields, and recent issuance
- Yields and short-term issuance:
  - NTMA issued €0.5 billion of three month bills in January and February at yields of 0.2 and 0.24 percent respectively.
  - Yields on 2 and 8-year bonds fell by respectively 16 and 35 basis points in the week following the promissory note announcement.
  - Long-term yields at 3.65 percent are at their lowest level since December 2008; 2 year yields at 1.24 percent.
  - Recent issue yielded 3.32 percent and was substantially over subscribed with broad institutional demand.
- Benchmark issuance and targets:
  - January tap: €2.5 billion raised via reopening of a 2017 bond at a yield of 3.32 percent.
  - March issuance: new 10 year bond raised €5 billion at a yield of 4.15 percent (syndicated).
  - Authorities raised 2013 bond issuance target to €10 billion following placements.
  - NTMA plans to issue around €8 billion in long-term bonds during 2013 (with €2½ billion already raised on January 8).
- Funding strategy and buffers:
  - Maintain a prudent cash buffer aiming to end the programme with a buffer covering around one year of financing needs (12–15 months beyond the end of the program).

### Recent economic and financial developments (to Q4 2012 / early 2013)
- Growth and demand:
  - Real GDP grew 0.8 percent y/y in Q3 2012; staff revised annual growth estimate to 0.7 percent (from 0.4 percent).
  - Domestic demand made a positive contribution to growth in Q3 2012 for the first time since early 2008.
  - Private consumption contracted less than expected; investment rose by over 7 percent in early 2012; exports buoyed by services.
- External sector and investment:
  - Current account surplus rose to 4.2 percent of GDP in Q1–Q3 2012.
  - Net FDI exceeded 2011 level; employment in FDI-related firms rose by 4½ percent.
- Labor market and high-frequency indicators:
  - Unemployment fell to 14.2 percent in Q4 2012 (from 15 percent in Q1 2012).
  - Employment recorded an annual increase of 0.1 percent in H2 2012.
  - Core retail sales rose 1.4 percent y/y in the three months to January 2013.
  - PMIs remained above 50 with strong service export PMIs.
- Housing and household finance:
  - House prices halved from peak to June 2012, then edged up by 1 percent; annual average house price fall about 12.8 percent in 2012.
  - Household savings rate rose to about 12 percent of gross disposable income (from below 8 percent pre-crisis); about three-quarters of saving used for debt reduction during 2010-12.
  - Mortgage arrears over 90 days: 15.8 percent of mortgages on principal dwellings and 26.9 percent of buy-to-let mortgages by end-2012.
  - Mortgage drawdowns increased almost 56 percent y/y in Q4 2012; new lending base about €4.2 billion (2½ percent of GDP) in the year to September 2012.

### Banking sector position, performance, and vulnerabilities
- PCAR banks and capital:
  - Pre-provision net revenue (PPNR) loss of 0.3 percent of average assets in 2012.
  - Reported core tier 1 capital ratio: 15.4 percent (regulatory minimum of 10½ percent); buffer declined by 1 percentage point in 2012.
  - NPLs reported at 24.8 percent of loans (alternate figures cite about 25 percent).
  - PCAR banks aggregated summary (selected 2011 vs 2012):
    - Total assets: 2011 EUR 326.4 bn; 2012 EUR 301.2 bn.
    - Net loans: 2011 EUR 220.1 bn; 2012 EUR 197.6 bn.
    - Deposits: 2011 EUR 148.9 bn; 2012 EUR 158.8 bn.
    - Gross NPLs: 2011 EUR 47.2 bn; 2012 EUR 55.6 bn.
    - Provisions to gross loans: 2011 4.9%; 2012 2.0%.
    - Net income: 2011 -4.0 bn; 2012 -1.2 bn.
- Funding and deleveraging:
  - Total deleveraging of €57 billion in 2011–12 through asset disposals, net amortization and write offs reduced reliance on ECB credit to half its peak level.
  - Promissory note transaction eliminated ELA.
  - Yields on recent covered bonds by BoI and AIB about 2.30 percent—about 80 basis points below their issue rates.
  - Rates on new deposits down by about 1.2 percent from a year earlier.

### Policy priorities and agreed measures
- Three policy planks: Financial sector, Fiscal, Structural.
- Financial sector priorities:
  - Framework to promote resolution of NPLs and targets for durable loan modifications.
  - CBI to establish by end-March a target requiring banks to offer a substantial share of restructuring arrangements during 2013; completion targets to be set prior to the 11th review.
  - CBI to modify the CCMA by end-June to facilitate effective engagement with mortgage borrowers.
  - Update Impairment Provisioning and Disclosure Guidelines by end-May (proposed structural benchmark).
  - Bank-by-bank SME restructuring targets to be established by end-June; on-site supervisory reviews during 2013.
  - PCAR 2013: rigorous stress test with external validation; align with EBA exercise in September.
  - Role for ESM direct bank recapitalization instrument as a potential tool to address remaining capital needs (noted as favorable for PTSB).
- Mortgage resolution specifics:
  - Number of mortgage accounts in arrears over 90 days: 123,000 including buy-to-let mortgages.
  - Share of mortgages on principal dwellings by value not in arrears: 84 percent.
  - Number of restructurings made (about): 80,000 mortgages on principal residences.
  - Share of restructurings by value that are temporary forbearance: 78 percent.
  - CBI comprehensive framework (announced March 13): aggregate target rising quarterly to reach 50 percent sustainable solutions for loans over 90 days in arrears by end 2013; benchmark of 75 percent meeting terms from 2014.
- SME and insolvency measures:
  - Personal Insolvency Act enacted December 26, 2012; Insolvency Service to appoint specialist judges, publish regulations, and begin issuing licenses by end-March; accept insolvency applications in the second quarter.
  - SME support: €175 million Seed and Venture Capital program; €125 million Innovation Fund Ireland; NPRF up to €500 million in three funds to make €850 million available.
  - Reforms to examinership framework and Company Law amendments to reduce costs for SMEs by end-September.

### Quantitative targets, TMU provisions, and program monitoring
- TMU date: March 12, 2013; programme exchange rates specified.
- Quantitative performance criteria (Exchequer primary balance floor) — cumulative targets (In billions of Euros; From January 1, 2013):
  - End-March 2013 (performance criterion): -3.7
  - End-June 2013 (performance criterion): -4.2
  - End-September 2013 (indicative target): -4.8
- Cumulative Exchequer tax revenue & other receipts projections (In billions of Euros; From January 1, 2013):
  - End-March 2013 (projection): 10.2
  - End-June 2013 (projection): 21.1
  - End-September 2013 (projection): 32.5
- Ceiling on central government net debt (indicative targets, In billions of Euros):
  - Outstanding stock: End-December 2012 (provisional): 133.7
  - End-March 2013 (indicative target): 168.1
  - End-June 2013 (indicative target): 171.3
  - End-September 2013 (indicative target): 172.5
- Reporting and frequency highlights:
  - Central Bank to provide quarterly bank-by-bank data on assets of government guaranteed banks, including loans and provisioning by period overdue (90+ days and less than 90 days), 40 working days after quarter end.
  - NTMA and Department of Finance reporting lines and lags specified for cash positions, national debt, and Exchequer data.

### Macroeconomic outlook, scenarios, and risks
- Near-term outlook:
  - Recent developments consistent with GDP growth of about 1 percent y/y in 2013.
  - Real domestic demand projected to weaken by about 1 percent in 2013.
  - Private consumption allowed to decline a further ½ percent in 2013; fixed investment projected to decline by 1½ percent in 2013.
  - Net exports continue to drive growth in 2013 but contribution allowed to be ½ percent smaller than estimated for 2012.
- Medium-term baseline:
  - Private consumption expected to grow around 1¾ percent annually from 2014 on; real consumption would take ten years to return to pre-crisis levels under the forecast.
  - Investment growth expected around 6 percent in the rebound phase.
  - Baseline external debt expected to fall to 224.5 percent of GDP by 2017 (selected table entry).
- Downside stress scenarios:
  - If growth stays at ½ percent, debt ratio would continue to rise reaching some 134 percent of GDP by 2018 (text summary).
  - Permanent ½ standard deviation growth shock would raise external debt-to-GDP to 251 percent in the medium term (figure labels).
  - Combined shocks (current account, interest rates, GDP) shown to raise external debt to 253 percent in illustrative scenarios.
- Main medium-term risks:
  - Trading partner recovery; fiscal drag; lagging loan restructuring; debt overhangs from households and SMEs; bank-sovereign feedback loop if weak growth increases NPLs.

### Personal Insolvency Act 2012 — procedural features and implementation
- Purpose and scope:
  - Introduces three procedures: Debt Relief Notice (up to €20,000 for persons with essentially no income/assets; supervision period three years), Debt Settlement Arrangement (no monetary limit; normally five years), Personal Insolvency Arrangement (secured debt up to €3 million and unsecured debt; normally six-to-seven years).
  - Bankruptcy reforms: automatic discharge after three years subject to conditions; court may order payments from income for up to five years.
- Voting and protections:
  - DSA approval threshold: 65 percent of creditors.
  - PIA approval thresholds: 65 percent overall, more than 50 percent of secured creditors, and 50 percent of unsecured creditors.
  - For voting, secured creditors vote to the extent claim is supported by collateral value; any deficiency votes in unsecured class.
  - Clawback provision: on family home sales, creditor clawback extends for 20 years if property subsequently sold at higher price.
- Implementation steps:
  - Insolvency Service to license practitioners; appoint specialist judges; publish guidelines for reasonable allowable household expenditures.
  - Expect Insolvency Service to begin accepting applications in the second quarter of 2013.

### Staff appraisal and exceptional access justification
- Staff view:
  - Strong policy implementation and positive indicators (fiscal outturn, legal reforms, market access improvements).
  - Growth expected to remain sluggish in 2013; continued weak growth could erode confidence and market access.
  - Exceptional access criteria continue to be met though subject to significant risks; program justified on systemic international spillover risks given euro area fragility.
- Recommended priorities:
  - Accelerate durable NPL resolution; ensure provisioning incentives and repossession are effective as last resort.
  - Deliver medium-term fiscal framework and three-year rolling expenditure ceilings; implement Budget 2013 measures fully.
  - Advance structural reforms to support job creation (SMEs, activation, further education) and consider European-level tools (ESM recapitalization) to break sovereign-bank loop.

*International Monetary Fund — Ireland: selected excerpts from IMF staff report and annexes (content unit _cr1393).*

### 1. The Promissory Note Transaction ________________________________________________________________5

### 1. The Promissory Note Transaction

### Promissory note transaction — mechanics and terms
- IBRC held about €16 billion in net loan assets and about €25 billion in promissory notes issued by the government in 2010.
- These assets were used as collateral for about €40 billion in Emergency Liquidity Assistance (ELA) provided by the CBI.
- The promissory notes were nontradable amortizing debts with an average coupon of 5.8 percent (or 8.2 percent on a cash flow basis after an interest holiday in 2011-12).
- Debt service of about €3.1 billion (2 percent of GDP) fell due every March until 2023, and smaller payments until 2031, with a weighted average maturity of 7 to 8 years.
- Liquidation of IBRC meant the CBI seized its collateral from IBRC and ELA was eliminated.
- The promissory notes are being replaced by a portfolio of new government bonds with:
  - identical face value,
  - an average maturity of about 34 years,
  - a floating rate coupon (currently below 3 percent) equivalent to the Irish spread (on a weighted average basis) over 6-month Euribor.
- Sales schedule for the new bonds (phased, sales to occur as financial stability conditions permit):
  - €½ billion by end 2014;
  - annual sales of €½ billion in 2015–18;
  - €1 billion in 2019–23;
  - €2 billion thereafter.

### Effects and risks
- The transaction lowers financing needs over the next decade by about 1⅓ percent of GDP annually, bolstering return to market funding.
- Interest savings from the lower interest rate on the new bonds do not improve debt sustainability immediately because the high interest was paid to the government-owned IBRC, but savings cumulate gradually from lower use of market funding.
- Potential risks: benefits could be undermined if markets perceive that the volume of bond sales by the CBI could be disruptively large.

### Market reaction
- ECB President Draghi stated the ECB‘s Governing Council “unanimously took note” of the operation.
- Market reactions were positive, with government bond yields declining 11 to 22 basis points within the first 24 hours.
- The NTMA syndicated a €2½ billion issue at a yield noted in the text (sale noted as part of improving market access).

### Background on IBRC and contingent outcomes
- IBRC was a vehicle to wind down Anglo Irish and Irish Nationwide Building Society (INBS).
- NAMA is issuing bonds to CBI in exchange for a charge over all of IBRC‘s remaining assets, which makes CBI whole.
- IBRC‘s remaining assets will be sold; any remaining shortfall for NAMA (relative to the value of NAMA bonds issued) will be paid out by the Exchequer.
- Any excess assets will be available for the pool of unsecured creditors, including the Exchequer in respect of an estimated €1 billion payment on IBRC liabilities covered under the ELG scheme.

---

### Balance sheet adjustments and macro implications

- Household sector
  - House prices halved from their peak, driving a 38 percent fall in household net worth (the largest fall in the EU).
  - Household savings rate rose to about 12 percent of gross disposable income, from pre-crisis levels below 8 percent.
  - About three-quarters of saving was used for debt reduction during 2010-12.
  - Households cut debt by 12½ percent in nominal terms from its end 2008 peak, yet falling incomes leave the debt ratio at some 208 percent of disposable income.
  - Mortgage arrears over 90 days reached 15.8 percent of the total value of mortgages on principal dwellings and 26.9 percent of buy-to-let mortgages by end-2012 (emergence of new arrears is slowing).

- SME sector
  - SMEs account for about half of gross value added (with Irish-owned SMEs at just over one third of GVA), and 72 percent of employment.
  - Share of property-related debt for SMEs rose from one-quarter to one-half during the boom.
  - Credit outstanding to SMEs is flat; rejections of loan applications are second highest in the EU.
  - Many SMEs, particularly micro SMEs, require restructuring to restore credit flow and facilitate investment and job creation.

- Banking sector
  - The PCAR banks made pre-provision losses (net of other nonrecurrent items) of 0.3 percent of average assets in 2012.
  - Reported core tier 1 capital ratio: 15.4 percent (regulatory minimum of 10½ percent); this buffer declined by 1 percentage point in 2012.
  - NPLs are reported at 24.8 percent of loans.
  - Advancing implementation of loan workouts and improving profitability are important to enhance funding access and willingness and capacity to lend.

- Public sector
  - Public debt of about 120 percent of GDP negatively affects credit standing of domestic actors.
  - Stretched private balance sheets create potential public sector contingent liability if weak growth leads to further rises in NPLs.

---

### Recent economic and financial developments (to Q4 2012 / early 2013)

- Growth and demand
  - Real GDP grew 0.8 percent y/y in Q3 2012, lifting growth to 0.8 percent y/y in Q1–Q3.
  - Staff revised annual growth estimate to 0.7 percent (from 0.4 percent at the 8th review).
  - Domestic demand made a positive contribution to growth in Q3 2012 for the first time since early 2008.
  - Private consumption contracted less than expected in the first three quarters of 2012; investment rose by over 7 percent, led by core business investment.
  - Exports grew more rapidly than expected due to booming services exports; goods exports were hit by the “patent cliff” in pharmaceuticals.
  - GNP expanded 3 percent y/y in Q1–Q3 2012, aided by somewhat lower net income outflows to nonresidents.

- External sector and investment
  - Current account surplus rose to 4.2 percent of GDP in Q1–Q3 2012.
  - Net FDI exceeded the 2011 level, raising employment in FDI-related firms by 4½ percent (direct contribution to overall employment is 0.4 percent).

- Labor market and high-frequency indicators
  - Unemployment rate fell to 14.2 percent in Q4 2012, down from a peak of 15 percent in Q1 2012 (decline mainly owing to falling participation).
  - Employment recorded an annual increase of 0.1 percent in H2 2012—the first annual employment gain in almost five years.
  - Core retail sales rose 1.4 percent y/y in the three months to January 2013.
  - PMIs remained above 50 with service export PMIs particularly strong.
  - Industrial production recovered only modestly from a sharp fall in late 2012, focused on the chemical sector.

- Financial markets
  - Promissory note transaction reinforced downward pressure on Irish bond yields.
  - Secondary market yields declined; NTMA tapped/syndicated on January 8 (noted €2½ billion issue).

---

### Policy priorities and agreed measures

- Three broad policy planks agreed to support durable exit and growth:
  - Financial sector:
    - Framework to promote resolution of non-performing loans (NPLs) to underpin a sustained revival in lending and domestic demand recovery.
    - Targets for banks to achieve durable loan modifications.
    - Steps to promote better engagement of banks and borrowers, make repossession a more effective last-resort option, and enhance loan loss provisioning practices.
  - Fiscal:
    - Implementation of Budget 2013 measures is well advanced, including significant progress on negotiating public service wage and pension savings.
    - Authorities committed to completing wage and pension savings negotiations.
    - Specification of medium-term fiscal consolidation and debt reduction goals will be extended to 2016.
    - Adoption of 3-year rolling ceilings on aggregate and departmental expenditure to aid credibility.
  - Structural:
    - Measures to strengthen activation and training of job seekers in response to high long-term unemployment.
    - Steps to facilitate job creation by SMEs.

- European-level actions and backstops
  - Delivery on European leaders’ commitments is needed to assure durability of Ireland’s exit.
  - Breaking the sovereign-bank link would complement banks’ restructuring by improving funding access and costs.
  - The ESM recapitalization instrument under development could be a highly efficient tool if packaged with extensions of EFSF/EFSFM maturities and possible post-program financial backstops.

---

*International Monetary Fund — Ireland: 1. The Promissory Note Transaction (excerpts from IMF staff report).*

### 3.32 percent, a significant part of the

### _cr1393 - 3.32 percent, a significant part of the

### Market financing, yields, and funding conditions
- NTMA continued Treasury bill issuance, issuing €0.5 billion of three month bills in January and February at yields of 0.2 and 0.24 percent respectively.
- Yields on 2 and 8-year bonds fell by respectively 16 and 35 basis points during the week following the announcement of the promissory note transaction, aided by positive reactions by rating agencies.
- Long-term yields at 3.65 percent are at their lowest level since December 2008; 2 year yields at 1.24 percent are historically low, with both ends of the yield curve below Italy and Spain.
- Yields on government-guaranteed bank bonds have followed sovereign yields downward; yields on recent covered bonds issued outside of the ELG scheme by Bank of Ireland (BoI) and Allied Irish Banks (AIB) are about 2.30 percent—about 80 basis points below their issue rates.
- Rates on new deposits are down by about 1.2 percent from a year earlier, which will further lower average funding costs over time.

### Eurosystem reliance, asset sales, and government transactions
- Total deleveraging of €57 billion in 2011–12 through asset disposals, net amortization and write offs enabled the PCAR banks to reduce reliance on ECB credit to half its peak level.
- The promissory note transaction eliminated Emergency Liquidity Assistance (ELA).
- Government sales and disposals:
  - Sold Irish Life for €1.3 billion (recent sale; Irish Life had been temporarily acquired in early 2012).
  - Sold a €1 billion CoCo claim on BoI to private investors at a yield of just under 10 percent, reducing potential equity exposure.

### Credit conditions, bank performance, and household lending
- Credit developments suggest tentative improvement:
  - Pace of decline in loans outstanding for housing eased to 1.6 percent y/y in 2012, from a 2½ percent fall in 2011.
  - Mortgage drawdowns increased almost 56 percent y/y in Q4 2012, driven by mover-purchasers and first-time buyers.
  - New lending base was about €4.2 billion (2½ percent of GDP) in the year to September 2012.
- Banks made losses in 2012:
  - Pre provision net revenue (PPNR) declined to a loss of 0.3 percent of assets in 2012.
  - Reported nonperforming loans (NPLs) at 24.8 percent of total loans, impairing income and constraining usable collateral.
- ELG scheme:
  - Fees for the Eligible Guarantees Scheme (ELG) contributed to costs; ELG will be ended for new liabilities incurred after March 28, 2013.

### Housing market and risks
- Housing prices:
  - House prices halved in the five years to June 2012, and have since edged up by 1 percent.
  - Annual average house price fall of about 12.8 percent in 2012 is less than anticipated in the PCAR 2011 base scenario (14.4 percent) and well inside the PCAR stress scenario (18.8 percent).
- Transactions and inventory:
  - Transactions are picking up from low levels and listed inventory is declining, especially in Dublin.
  - Substantial “shadow” inventory exists in properties securing nonperforming mortgages.
  - Almost half of all transactions are in cash, reflecting tight credit constraints and limiting potential buyers.

### Fiscal performance and one-offs (2012)
- Fiscal targets for 2012 were met by a significant margin:
  - The exchequer primary balance and general government balance were each inside target by 0.9 percent of GDP.
  - Robust revenues (especially VAT, corporation tax and capital receipts, and a favorable telecom license sale) and lower-than-budgeted capital and interest spending outweighed health and social spending overruns.
- Notable fiscal adjustments and one-offs referenced for comparability in out-turns include:
  - €251 million corporation tax payment delayed from December 2011 into January 2012 is booked to 2011 tax revenue.
  - €600 million in interest payments met in Jan-Dec 2011 via drawdown of the Capital Services Redemption Account (CSRA) included in the 2011 exchequer interest bill.
  - IBRC promissory note payment of €3.06 billion that was settled through bond issuance is included in capital expenditure for 2012.
  - Outlays in respect of ILP (€1.3 billion) and credit unions (€250 million) are excluded from 2012 capital spending.
  - About €1 billion in one-off proceeds arising from the sale of the state's shareholding in BoI is excluded from 2011 other receipts.
  - July 2011 bank recapitalization costs of €7.6 billion are excluded from non-voted capital spending for 2011.

### Macroeconomic outlook: Prospects for 2013
- Recent developments consistent with GDP growth of about 1 percent y/y in 2013.
- Domestic demand and components:
  - Real domestic demand projected to weaken by about 1 percent in 2013.
  - Private consumption allowed to decline a further ½ percent in 2013 (impact of fiscal measures on household disposable income).
  - Fixed investment projected to decline by 1½ percent in 2013 (with upside risks from EIB and NPRF-funded projects).
  - Net exports continue to drive growth in 2013, but contribution allowed to be ½ percent smaller than estimated for 2012 due to higher import growth.
- Financial sector support:
  - Tangible improvement in banks’ profitability expected in 2013 relative to 2012, reflecting staff and branch cuts, repricing of loans and deposits, and elimination of ELG for new liabilities.
  - Improved profitability expected to facilitate a pickup in new lending to households and SMEs in 2013, relative to the low base of about €4.2 billion (2½ percent of GDP).
  - Continued high debt repayments mean credit outstanding to households and non financial corporations would still decline, although more slowly than in 2012.

### Medium-term baseline and recovery dynamics
- Baseline assumes a protracted recovery:
  - External recovery supports stronger export growth by 2014; net exports remain main contributor to growth.
  - Domestic demand expected to contribute to growth from 2014 after six years of decline.
  - Private consumption expected to grow around 1¾ percent annually from 2014 on; real consumption would take ten years to return to pre-crisis levels under the forecast.
  - Investment growth expected around 6 percent in the rebound phase, implying a long recovery period.
- Comparison with other boom-bust cycles:
  - Recovery slower than Sweden and Finland late-1980s cycles; those recoveries saw consumption recover in five and seven years respectively.
  - Irish households benefit from low euro area interest rates, leaving interest bills at about 7 percent of disposable income.

### Promissory note transaction: fiscal and debt impacts
- Fiscal balance impacts:
  - Transaction impacts fiscal accounts via: (i) exchequer outlays for ELG payouts, (ii) lower coupon and amortization payments on new government bonds vs the promissory note in the next decade, and (iii) interest savings from lower market financing needs and higher expected CBI dividends.
  - Transaction largely deficit neutral in 2013 as lower interest costs offset ELG outlays.
  - Improves general government balance by 0.6 percent of GDP in 2014, rising to 0.7 percent of GDP in 2016, and moderating to 0.4 percent of GDP by 2018.
- Debt dynamics:
  - Initial adverse impact on debt of 0.8 percent of GDP in 2013 due to lower upfront cash savings on interest.
  - Under the baseline, general government gross debt peaks at 123 percent of GDP in 2013 and declines to 106 percent by 2018—2½ percentage points lower than without the promissory note transaction.
  - The higher interest payments made to the IBRC on the promissory notes were building capital that would eventually have returned as dividends to the government, suggesting the long run benefit may be overstated.
- Debt issuance and market impacts:
  - Bonds replacing promissory notes significantly reduce debt service due from the government by €1¼ to €2¾ billion annually until 2023.
  - Net debt issuance reduced by up to about €24 billion cumulatively until 2023.
  - Phased sales of new bonds by the CBI will occur; market funding of promissory note debt service would have increased rollover needs absent the transaction.

### Risks to the baseline
- Banking sector constraints imperil the projected steady pickup in lending:
  - Banks need adequate funding and profitability to ramp up market funding as bond maturities arise.
  - Profitability must further improve from anticipated 2013 gains to generate capital required to sustain new lending.
  - Structural challenges remain in the financial system, including asset quality and the need for mortgage and SME restructuring to create performing assets and usable collateral.
- Housing market downside risks:
  - Large “shadow” inventory of properties securing nonperforming mortgages could weigh on prices and transactions.
- Macroeconomic uncertainties:
  - Recovery hinges on trading partner growth, renewed domestic confidence, and steady improvement in lending; these conditions may be weaker or slower than assumed.

*IMF staff report content as provided in the supplied PDF extract.*

### 15.      Hence, the main risks to medium-term recovery prospects include the situation of

### Hence, the main risks to medium-term recovery prospects include the situation of Ireland’s financial sector

### Key risks to medium-term recovery
- Trading partner recovery: Net exports remain a key engine of growth; sustained recovery hinges on euro area, U.K. and U.S. developments.
- Fiscal drag: Fiscal consolidation will continue to be significant in coming years, with the growth impact depending on the composition of measures among other factors.
- Financial reform benefits: Implementation of loan restructuring has lagged to date, and the benefits of improved asset quality in terms of funding access and costs are uncertain, depending in part on funding market trends in the euro area.
- Debt overhangs: The envisaged easing in household savings and firming in SME investments may not be realized if households and firms maintain their emphasis on debt reduction, perhaps owing to renewed euro area uncertainties or downside in house prices.
- Bank-sovereign loop: High public debt stocks are compounded by still large contingent liabilities from the banking system. In a scenario where weak growth reduces asset values and heightens loan arrears, vulnerabilities arise for the cost and availability of funding for both the public and private sectors.

### Implications for debt sustainability and market access
- Baseline downtrend in debt is contingent on a pick up in GDP growth and avoidance of additional fiscal costs from financial sector support.
- Stress scenario: If risks keep growth in check, say at ½ percent in coming years, Ireland’s debt ratio would continue to rise, reaching some 134 percent of GDP by 2018.
- Higher loan losses associated with rising unemployment and weaker asset prices would generate new capital needs once banks‘ buffers are exhausted, which could further raise debt ratios in the medium term.
- In such a scenario, Ireland‘s ability to rely fully on the market to cover its large post-program financing needs could easily become strained.

### Policies for exit and growth — Financial sector priorities
- Overarching objective: Create conditions for a lasting revival of sound lending to support economic recovery, through strong implementation of financial and structural reforms and careful design and execution of fiscal consolidation.
- Concrete progress with loan resolution in 2013:
  - Support exit prospects and growth by: (i) strengthening market confidence that bank asset quality issues will be resolved over time at manageable cost; (ii) restoring creditworthiness of viable SMEs, which may require deeper SME restructuring in addition to loan modifications; (iii) reducing household distress regarding sustainability of obligations; (iv) easing uncertainty in the housing market regarding potential impact of property disposals.
- Deal with remaining profitability and viability issues in the banking sector:
  - Despite substantial recapitalization, PCAR banks ran pre-provision losses in 2012.
  - Improved profitability is expected in 2013, but it is unclear profitability will be sufficient to sustain adequate new lending, especially for PTSB.

### Mortgage arrears and restructuring status (mortgages focus)
- Number of mortgage accounts in arrears over 90 days: 123,000 including buy-to-let mortgages.
- Share of mortgages on principal dwellings by value not in arrears: 84 percent.
- Number of restructurings made (about): 80,000 mortgages on principal residences.
- Share of restructurings by value that are temporary forbearance: 78 percent (often interest-only payments), often unlikely to durably address arrears.

### Supervisory and policy actions to accelerate durable resolution (timelines and targets)
- CBI will establish by end-March a target requiring banks to offer a substantial share of restructuring arrangements during 2013 (proposed structural benchmark). A target for completing such arrangements during 2013 will be set subsequently, prior to the completion of the 11th review. CBI will monitor each bank‘s progress closely, including by auditing samples of loan modifications to ensure they can be expected to durably address arrears.
- CBI will modify the CCMA by end-June, where appropriate to facilitate effective engagement with mortgage borrowers in arrears, including review of:
  - restrictions on contacts to facilitate constructive engagement;
  - definition of non-cooperating borrowers to limit protections to timely and consistent engagement;
  - current protection on tracker mortgages in cases where borrowers are offered an alternative arrangement advantageous in the long-term.
- Legislative amendments to ensure repossession procedures work efficiently in practice to be submitted to parliament by end-March, with a view to passing them into law by around mid-year (MEFP ¶12, eighth review).
- Personal Insolvency Act: signed into law on December 26, 2012 (Annex II). Authorities intend to:
  - appoint specialist judges, publish regulations, and begin issuing licenses for personal insolvency practitioners by end-March,
  - start accepting insolvency applications in the second quarter.
- Guidelines on reasonable allowable household expenditures will provide input guiding debt service schedules proposed under the new debt resolution processes and may shape banks‘ loan restructuring offers.

### SME arrears and provisioning
- Bank-by-bank SME restructuring targets to be established by end-June, with aim of completing a substantial share of restructuring arrangements during 2013. Progress will be monitored against comprehensive key performance indicators. Onsite supervisory reviews during 2013 will assess durability of restructuring solutions.
- By end-May, the CBI will update the 2011 Impairment Provisioning and Disclosure Guidelines (proposed structural benchmark) to give further momentum to durable restructuring efforts. CBI will engage with banks to ensure key inputs for provisioning of loans, especially modified loans, are appropriately prudent.
- Authorities have requested an external Basle Core Principles assessment (structural benchmark from the 8th review) to be carried out during the second half of 2013.

### Repossession regime efficiency and related statistics
- Repossessions in Ireland very low: some 0.3 percent of total arrears cases in 2012, compared with rates of 3 to 5 percent in the U.K. and U.S.
- Commercial Court fast track: provides expedited repossession for commercial properties valued above €1 million.
- Suggested enhancements: designate specialist judges at the High Court or large Circuit Courts; legislate conditions courts must assess prior to adjourning cases; ensure prudential policies on banks‘ property management and vendor financing to facilitate timely disposal of property while avoiding market disruption.

### Bank profitability and structural challenges
- By end-2012, the three PCAR banks had closed 61 branches and reduced their head-count by about 10 percent, with additional reductions planned for 2013.
- 2013 profitability target for PCAR banks: improve profitability by ½ percent of average assets, with about one-third of the uplift from operational cost savings, almost half from improved net interest and fee income, and the remainder from phasing out the ELG scheme.
- If BoI and AIB deliver on current plans, they are forecast to have positive pre-provision profits in the second half of 2013.
- Remaining challenges for profitability gains:
  - high share of tracker mortgages with low margins over the main ECB refinancing rate;
  - need for loan resolution to restore loan performance;
  - further operational cost savings.

### PTSB specific concerns and proposed solutions
- PTSB faces more acute challenges; only expected to breakeven as an integrated legal entity in the medium term.
- Restructuring plan based on separation of asset management unit holding low-yielding and non-performing assets; implementation at manageable funding cost has not been possible to date.
- Staff view: a solution to structural profitability challenges needs development as part of European leaders’ commitment to examine Ireland’s financial sector to improve sustainability of the program.
- PCAR and EBA alignment: forthcoming Prudential Capital Assessment Review with loan loss modeling subject to external validation; CBI preparing to conclude PCAR aiming to align with the EBA exercise in September (MEFP ¶12).
- Role for ESM instrument: ESM direct bank recapitalization instrument currently under development could help by sharing cost of past recapitalization and cushioning impact of any new capital need. For PTSB, staff favors mobilizing such assistance in a manner structured to minimize overall cost of placing PTSB‘s retail bank on a viable trajectory.

*Source: IMF staff report excerpt (financial sector and exit policies).*

### 26.      The promissory note transaction is not expected to affect fiscal performance as

### 26.      The promissory note transaction is not expected to affect fiscal performance as

### Fiscal impact of the promissory note transaction
- The promissory note transaction is not expected to affect fiscal performance as measured under the program in 2013.
- Interest savings from the promissory note transaction may be offset by an increase in capital transfers to fulfill government guarantees worth about €1 billion on IBRC liabilities.
- Additional costs could arise from potential compensation to NAMA for any shortfall suffered by NAMA following the asset sale process; the amount will only be clear later in 2013 following a bidding process.
- The Fund‘s assessment of fiscal performance is based on the primary Exchequer balance; therefore:
  - The interest savings from the promissory note transaction have no impact on the Fund‘s assessment.
  - Any one-off costs associated with the transaction will be cushioned by the adjustor for bank support costs.

### Budget 2013 implementation and near-term fiscal performance
- Full implementation of Budget 2013 measures remains critical to reach the 2013 targets and the medium-term consolidation goals.
- Excluding one-off factors, the overall Exchequer balance in January-February is up 0.2 percent of GDP from the same period in 2012, primarily owing to higher tax revenues and lower capital spending.
- The bulk of the 1.7 percent of GDP in new measures in Budget 2013 have been enacted; the residential property tax and social welfare bills signed into law.
- Several important pieces of the budget package, totaling about 0.5 percent of GDP, are to be adopted in coming months (MEFP ¶14).

- Expenditure-side measures:
  - Authorities reached agreement with public service union leaders on a proposal to trim annual net pay and pension outlays by the additional €1 billion targeted by 2015, with €0.3 billion in savings slated for 2013 (MEFP ¶15).
  - Main elements of the three-year agreement, if approved by union members and entering into force on July 1st, include:
    - Increasing the number of standard hours worked (to a minimum of 37 hours).
    - Cutting pay of public servants earning over €65,000 on a progressive scale starting at 5.5 percent and rising to 10 percent for those earning over €185,000.
    - Freezing automatic increments on a progressive scale based on salary.
    - Reducing overtime costs.
  - To prevent renewed health spending overruns, implementation of measures in this sector will be monitored on a monthly basis by a high-level cabinet committee.

- Revenue-side measures:
  - The new residential property tax is expected to yield 0.15 percent of GDP in the second half of 2013.
  - Technical preparations for the property tax, including developing a property registry and valuation model, have been completed; administration of the tax by the Revenue Commissioners has commenced.
  - Legislation to effect higher charging for patients with private health insurance in public hospitals is expected to be enacted by end-June.

### Medium-term fiscal framework and program exit
- Authorities are further developing their medium-term fiscal framework to underpin successful program exit (Box 5).
- Building on the Fiscal Responsibility Act 2012, legislation has been submitted to give statutory basis to the already operational expenditure ceilings (MEFP ¶16), to be set at the aggregate and ministerial level on a 3-year rolling basis.
- Key operational aspects of the ceilings are under discussion, including the role of comprehensive expenditure reviews, carryover provisions, and sanctions.
- Authorities are expected to set out revenue and expenditure paths extending to 2016 in their April 2013 Stability Programme (MEFP ¶17).
- Budget 2014 will provide a further opportunity to articulate structural reforms to underpin future fiscal consolidation while ensuring strong delivery of public services, especially in health, education and social protection.

- Guidance on consolidation beyond 2013:
  - Any change in the consolidation path beyond 2013 should be assessed at the time of publication of Budget 2014.
  - With the previously-specified consolidation effort in 2014–15 (totaling 2.9 percent of GDP), the promissory note transaction contributes to lowering the projected fiscal deficit in 2015 to 2.2 percent of GDP, relative to the target of below 3 percent of GDP.
  - The consolidation path for 2014–15 will be reviewed at Budget 2014 in light of further information on 2013 budget performance and growth prospects.
  - Staff view: given the fragile economic recovery, additional consolidation should not be implemented in 2013 to make up for revenue shortfalls if growth disappoints; significant additional consolidation to reach the 2015 deficit target should be deferred to 2015 where the adjustment burden is lighter.

- Key tabular projections (Ireland: General Government Finances, 2010-15; in percent of GDP unless otherwise stated; excluding financial sector support costs):
  - EDP general government balance: 2010 -10.6, 2011 -8.6, 2012 -7.5, 2013 -5.1, 2014 -2.9, 2015 (not stated in row)
  - Net lending/borrowing (General government balance): 2010 -10.7, 2011 -9.1, 2012 -7.7, 2013 -6.8, 2014 -4.4, 2015 -2.2
  - Primary balance: 2010 -7.5, 2011 -5.7, 2012 -3.8, 2013 -1.9, 2014 0.6, 2015 2.8
  - Structural primary balance (percent of potential GDP): 2010 -5.7, 2011 -3.7, 2012 -2.1, 2013 0.0, 2014 2.0, 2015 3.5
  - Structural balance: 2010 -9.1, 2011 -7.1, 2012 -6.0, 2013 -4.9, 2014 -3.1, 2015 -1.5
  - Remaining consolidation commitment 2/: 2010 3.7, 2011 3.5, 2012 2.7, 2013 2.1, 2014 1.8, 2015 1.1
  - Net general government debt: 2010 74.5, 2011 94.9, 2012 103.1, 2013 106.6, 2014 108.0, 2015 106.0
  - Unemployment rate (percent): 2010 13.9, 2011 14.6, 2012 14.8, 2013 14.6, 2014 14.1, 2015 13.3
  - Note: 2/ Carryovers from revenue measures are included. Projections are consistent with staff's macroeconomic baseline, Budget 2013 and MTFS (2012).

### Medium-Term Budgetary Framework (Box 5) — main elements
- Reforms include a new set of national fiscal rules and expenditure ceilings, and strengthening of institutions and transparency, set out in the Fiscal Responsibility Act 2012 and the Ministers and Secretaries (Amendment) Bill 2012 (MSAB).
- National fiscal rules:
  - General government budget balance rule: FRA requires general government budget position to be either in balance or in surplus, or that adequate progress is made towards the medium-term budgetary objective (a structural deficit of 0.5 percent of potential GDP) in accordance with the Stability and Growth Pact (SGP). It allows for correction mechanisms in case of deviations.
  - General government debt rule: requires that at least one-twentieth of the difference between the current debt to GDP ratio and the SGP reference of 60 percent be closed every year. This debt rule is only expected to be applied in full some three years after Ireland exits its current excessive deficit procedure in 2015.
- Expenditure framework:
  - General government expenditure benchmark: annual expenditure growth net of discretionary revenue measures should not exceed a reference medium-term rate of potential GDP growth as determined by the European Commission.
  - Aggregate and ministerial level expenditure ceilings: MSAB sets expenditure ceilings on a 3-year rolling basis at aggregate exchequer and ministerial level; operational details to be published when the Bill is enacted. Ministerial ceilings complemented by an employment control framework enforcing public service numbers policy.
- Institutions and transparency:
  - Irish Fiscal Advisory Council: FRA tasks the Council with assessing the soundness of government macroeconomic and budgetary projections and fiscal stance; the law provides statutory basis for independence and funding.
  - Transparency: authorities expected to publish a fully fledged MTBF compiling a complete set of procedures by end 2013; fiscal reporting to be enhanced with a new Government Finance Statistics publication in April 2013.

### Structural reforms and labor market measures
- Authorities continue to promote job creation and growth (MEFP ¶18):
  - Accelerate delivery of investment projects funded through public-private partnerships with the EIB, NPRF, and private investors.
  - Investment resources from proceeds from disposal of state assets; implementation progressing.
  - Fourth Progress Report on the 2012 Action Plan for Jobs indicates over 90 percent of planned actions have been completed; the 2013 Plan contains over 330 new measures to support job creation.

- Addressing long-term unemployment (MEFP ¶19; Box 6):
  - Plans to double the number of case officers through internal redeployment and roll out one-stop-shop Intreo offices.
  - Plan to outsource provision of some employment services for the long-term unemployed to the private sector; aim to issue a tender by end-June 2013.
  - Authorities reviewing tax incentives for hiring long-term unemployed persons to increase take-up among firms.

- Further education and activation (MEFP ¶20):
  - Action Plan for SOLAS published; legislation for SOLAS and Education and Training Boards (ETBs) before Parliament.
  - Under new system, ETBs responsible for delivery of all further education and training in Ireland; SOLAS will oversee ETBs and deliver funding.
  - A review to ensure ETB course alignment with labor market needs and unemployed needs to be prepared by end-September.
  - Review of Employment Support Schemes completed; an action plan to implement reforms to be prepared by end-April.

- SME support and financing (MEFP ¶21):
  - Seed and Venture Capital program: €175 million of Exchequer funding aiming to leverage a further €525 million from the private sector.
  - Innovation Fund Ireland: will receive €125 million of Exchequer funding and further funding from the NPRF, with the objective of reaching a size of €500 million through venture capital manager participation.
  - NPRF announced strategic partnerships; three funds combined will utilize up to €500 million of NPRF funds with the objective of making €850 million available for investment in Irish SMEs.
  - Department of Finance plans to increase resources of the Credit Review Office following independent assessment published in November 2012.
  - A new independent survey on demand for lending will cover October 2012–March 2013 to inform future policy actions.

- Insolvency and examinership reforms:
  - Further enhancement of the examinership framework for SMEs to be considered by end-September (MEFP ¶21).
  - Amendments to the Companies Bill 2012 published on December 21 to reduce examinership costs for SMEs by designating Circuit Courts, rather than the High Court, as competent for examinership of companies within EU small company thresholds.
  - Staff urged streamlining court oversight of examinership procedures for SMEs where feasible to facilitate restructuring, especially in cases with multiple creditors.

### Financing and program modalities
- Program conditionality updated:
  - Quantitative performance criteria proposed for end-June 2013 (MEFP Table 2).
  - Performance criterion for the Exchequer primary balance at end-March remains unchanged; the indicative target for end-June reset slightly and converted into a performance criterion.
  - End-September indicative target has been reset.
  - Indicative targets on net central government debt amended to incorporate implications of the promissory note restructuring.
  - TMU modified to include an adjustor for the net central government debt indicative target to the extent that the NPRF‘s liquid assets are invested in SME-related Funds (up to a cap of €500 million).

- Two additional structural benchmarks proposed (MEFP Tables 1 and 3):
  - Establish public targets requiring the principal mortgage banks to offer mortgage restructurings expected to be durable for a substantial share of arrears cases, by end-March.
  - Establish similar targets applying to the completion of mortgage restructuring arrangements prior to concluding the eleventh review of the program.
  - Publish an update, as necessary, of the 2011 Impairment Provisioning and Disclosure Guidelines by end-May.

- Market access and exit strategy:
  - Ireland’s increasingly robust return to the market underpins the strength of financing under the program.
  - The restructuring of the promissory note in February added to improved sentiment, with positive reactions from rating agencies.
  - To underpin successful exit, authorities intend to end the program with a cash buffer sufficient to cover expected financing needs for 12–15 months beyond the end of the program.
  - NTMA plans to issue around €8 billion in long-term bonds during 2013, with €2½ billion of this already raised on January 8 by reopening a 2017 bond at a yield of (text truncated in source).

*Source: IMF staff report text provided in the content unit.*

### 3.32 percent.  This issue was substantially over subscribed and achieved a significant

### _cr1393 - 3.32 percent.  This issue was substantially over subscribed and achieved a significant

### Financing, market access, and issuance plans
- Recent issue yielded "3.32 percent" and was substantially over subscribed, achieving significant diversification of the investor base across institutional and geographic grounds, including investors from the U.K., the Nordic countries and continental Europe.
- Authorities plan to:
  - Issue a benchmark bond later this year.
  - Restart a regular bond auction program, market conditions permitting.
  - Continue regular Treasury bill issues, with the possibility that the current three-month issues will be supplemented by issues of longer dated bills.
- Chart label present in source: "Treasury Bond Issuance (Billions of euro)" covering 2013–2018 (Source: IMF staff projections).

### Near-term risks around financing strategy
- Risks have declined in the near-term, but significant challenges remain:
  - Exposure to changes in sentiment regarding prospects for European support or euro area periphery stress that could affect market access terms.
  - Recognition of additional contingent liabilities remains a potential ongoing risk, including the true-up with NAMA in the near-term (see Annex I).
  - Persistent market tensions would complicate managing a large and uneven financing schedule over coming years.
- Policy responses under way:
  - Discussions initiated requesting lengthening of maturities of EFSF/EFSM loans to smooth the financing profile.
  - Ongoing discussions on post program options, including the possibility of precautionary arrangements, to be revisited in coming reviews.

### Exceptional access criteria and justification
- Staff concludes exceptional access criteria continue to be met, although subject to significant risks:
  - Under the baseline macroeconomic framework, debt sustainability is expected to be maintained over the medium term, but is subject to significant risks if growth does not strengthen or if further contingent liabilities materialize.
  - As debt sustainability is not assured with a high probability, the program is justified on the basis of systemic international spillover risks given euro area fragility.
  - Given Ireland‘s strong program performance and commitments and recently regained market access, there are adequate prospects to retain and expand access to private capital markets before Fund repurchases begin in July 2015.
  - Risk flagged: inadequate progress toward stronger European support would weaken assurances of adequate and durable market access given Ireland‘s public debt and financial sector vulnerabilities.

### Staff appraisal — policy implementation and recent results
- Positive developments and reforms:
  - Strong policy implementation has continued and positive results are emerging.
  - Fiscal deficit in 2012 was well within program targets.
  - Important reforms adopted: Fiscal Responsibility Act and the Personal Insolvency Act.
  - Positive indicators for revival of domestic demand, employment, and credit extension.
  - Government market access has deepened and market conditions improved following the promissory note transaction, helping address Ireland‘s heavy debt burden arising from bank support.
- Growth outlook and uncertainty:
  - Growth expected to remain sluggish in 2013.
  - Recent indicators consistent with previous projections for growth on the order of "1 percent" in 2013.
  - With public and private debts still high, banking system weak profitability and limited credit provision, significant hurdles remain to achieve domestic demand growth needed for stronger recovery and job creation from 2014 onwards.
  - Continued weak growth could erode confidence and potentially undermine market access, threatening the path to lower public debt.

### Banking sector, non-performing loans, and insolvency
- Critical priorities to strengthen recovery prospects:
  - Sharp improvement in dealing with non-performing loans (NPLs) is critical.
  - Inadequate bank progress led to adoption of targets for restructuring mortgage loans in arrears and a similar approach for SME loans in arrears.
  - Objectives of NPL resolution:
    - Demonstrate banks‘ high NPLs will be resolved at manageable cost.
    - Reduce uncertainties overhanging property markets.
    - Enable viable SMEs to access capital and create jobs.
    - Address household distress from unsustainable debt burdens.
- Supporting steps recommended:
  - Facilitate effective engagement between mortgage borrowers and lenders.
  - Make repossession a more effective last resort to protect payment discipline.
  - Ensure provisioning provides the right incentives to banks.
  - Timely and sound implementation of personal insolvency reforms, including appropriate guidance on reasonable allowable household expenditures.
  - Consider further reforms of examinership for SMEs.

### Fiscal framework and medium-term consolidation
- Key fiscal recommendations and observations:
  - Maintain Ireland’s strong track record of budget execution in 2013.
  - Build on strengthening of the medium-term budget framework to support durable exit.
  - Full implementation of budget measures remains necessary, including concluding the proposed agreement with public service unions.
  - Close monitoring of health spending is appropriate following overruns last year.
  - Successful introduction of the property tax is needed to broaden the tax base.
  - Adoption of the Fiscal Responsibility Act and forthcoming legislation to underpin expenditure ceilings will provide a sound framework for the substantial fiscal consolidation required in the medium term.
  - Authorities should develop structural reforms to enable core public services to be delivered within a limited resource envelope, especially in health, education, and social protection.
  - Fiscal consolidation path should be reviewed at the time of Budget 2014, taking into account growth prospects and budget performance, to ensure medium-term consolidation targets are achieved in the most growth-friendly manner.

### Labor market activation and skills
- Focus on long-term unemployed to prevent rise in structural unemployment:
  - Recovery in economic growth is necessary for job creation, but activation is crucial to keep job seekers in the labor force and acquire in-demand skills.
  - Redeploying staff to double the number of case workers is welcome; further redeployments and suitable training likely needed.
  - Progress on involving the private sector in providing employment services should be maintained.
  - Ongoing reforms of the further education system should ensure training aligns with market needs given signs of skill mismatches.

### Role of European support and ESM recapitalization
- Durable exit from official support depends on timely and forceful delivery of European pledges:
  - Promissory note transaction moderates Ireland‘s financing needs in the next decade, but public debt projected to remain at high levels.
  - Deep balance sheet adjustments, weak bank profitability and lending capacity, and soft external demand create substantial uncertainties around medium-term recovery.
  - Failure to realize stronger growth could revive debt sustainability concerns and undermine needed market financing.
  - Direct bank recapitalization by the ESM identified as the most definitive way to:
    - Address financial sector challenges.
    - Protect debt sustainability.
    - Insulate the sovereign from potential contingent liabilities from the banking sector.
  - Such recapitalization should be structured to efficiently address banks‘ remaining profitability challenges, removing a key barrier to domestic demand recovery and job creation.
  - Timely progress on this work is a critical component of a comprehensive strategy for Ireland‘s durable exit from drawing on official financing.

*Source: IMF staff report (8th Review) — IRELAND*

### 45.      Staff supports the authorities’ request for completion of the ninth review.

### _cr1393 - 45. Staff supports the authorities’ request for completion of the ninth review.

### Real sector and inflation indicators
- Net exports remained the main contributor to growth throughout the first three quarters of 2012.
- Retail sales continued to grow in the last quarter of 2012 and at the beginning of 2013.
- Industrial production recovered some patent-cliff-related losses while new export orders remained in expansion territory.
- The current account remained in surplus in the first three quarters of 2012 as strong net exports outweighed income outflows.
- Inflation started to abate in September on account of moderating energy and administered prices.
- Unemployment remained close to 15 percent, with over 60 percent long-term unemployment and youth unemployment still above 30 percent.
- Key indicators and contributions:
  - Current Account Balance Composition presented in Billions of euros (series shown for 2007–Q1–Q3 2012).
  - Contributions to Real GDP Growth by component (Net exports, Inventories, Consumption, Investment, GDP) shown for 2007–Q3 2012.
  - Unemployment rates: Less than one year, Long-term, Youth unemployment (RHS) series covering 2006–2012.
  - Contribution to Annual HICP Inflation: Core inflation, Energy and unprocessed food, HICP (Jan-09 to Jan-13).

### Household finance and housing developments (2001–12)
- Household savings remained elevated, with three-quarters of savings devoted to debt reduction since 2010.
- Household balance sheets remain burdened with large debt, although interest payments are low.
- Mortgage arrears continued to increase, although the flow of new arrears was abating.
- Property price decline halted after prices halved from peak levels; rental yields and house price-to-income ratios moved toward more normal levels.
- Low volume of new mortgage lending restricts the circle of new buyers and impedes the housing recovery.
- Key statistics and series:
  - Loans for House Purchases (Billions of euros) series 2006–2012.
  - Decomposition of Household Savings (Percent of Gross Disposable Income) 2008–2012 with Saving rate, Transactions in financial assets/liabilities, Gross fixed capital formation.
  - Residential Property Prices (2005M1=100) National and Dublin 2007–2013.
  - Indicators of Housing Valuation Levels: House prices to disposable income per capita (ratio) and Rental yield (percent), historic series.
  - Mortgages in Arrears (Percent of total mortgage value): Arrears over 180 days and Arrears 91 to 180 days for 2009Q4–2012Q4.
  - Household Debt and Interest Payments (Percent of disposable income): Debt burden, Interest burden, Effective interest rate (series footnoted definitions).

### Credit developments (2006–12)
- Private sector deposit levels stabilized.
- Credit to households and corporations continued to contract as repayments exceeded lending.
- Total SME credit remained low and outstanding credit was largely flat.
- Sectoral credit trends included continued declines in construction and hotels & restaurants, with some rise in agriculture.
- Credit standards kept tightening for consumer loans; credit demand started to show signs of life with mortgage applications rising.
- Key metrics:
  - Bank Deposits (Billions of euro) series Apr-09–Oct-12 by deposit type.
  - Loans Outstanding to Irish Residents (Year-on-year percentage change) 2009–2013 by households and non-financial corporations.
  - Outstanding SME Credit (Billions of euros) and Gross new lending (thousands) Mar-10–Sep-12.
  - Outstanding SME Credit by Sector (2010Q1=100) for Total, Agriculture, Manufacturing, Construction, Wholesale/Retail, Hotels and Restaurants.
  - Changes in Credit Standards and Credit Demand (2006Q1=100 baseline) for Corporate, Mortgage, Consumer through 2012Q4.

### Competitiveness indicators
- Appreciation of the euro in the last quarter of 2012 slowed earlier improvements in competitiveness indicators.
- Part of earlier improvement reflects a shift to higher value-added sectors.
- Private wages rose in 2012 but have been broadly flat compared with steady rises in the euro area.
- Labor productivity continued to outpace the euro area.
- Competitiveness improvements have not yet been reflected in rising market shares.
- Key series and indices:
  - Harmonized Competitiveness Indicators (1999Q1=100) Nominal HCI, Real HCI CPI-based and PPI-based (monthly).
  - Harmonized Competitiveness Indicators (Quarterly) Nominal HCI, GDP deflator basis, ULC basis (1999Q1=100).
  - Real Effective Exchange Rates on a ULC Basis (2008Q1=100) for business economy and total economy.
  - Hourly Labor Costs in Manufacturing (2006=100; 4-quarter moving average) Ireland vs Euro area.
  - Real Labor Productivity (2005=100, SA) Ireland vs Euro area.
  - Export Shares (Percent of world non-oil imports): Exports of goods, exports of services, exports of goods and services (1996–2013).

### Fiscal consolidation and general government finances
- Of a 10 percent of GDP primary balance improvement (2010–15) almost two-fifths was achieved by 2012.
- Fiscal consolidation is programmed to moderate over time and is expenditure-led.
- Given the weaker recovery in nominal domestic demand, tax measures will not raise revenues as a share of GDP.
- Primary expenditures will fall by 10 percent of GDP, reflecting evenly spread durable savings.
- An overall deficit of 3 percent of GDP is targeted for 2015, and a primary surplus is to be regained by 2014.
- It will take time to unwind the increase in net debt, three fifths of which arose from bank support costs.
- Fiscal composition and projections (selected figures):
  - Primary Expenditure Components (Percent of GDP) 2010–2015: Capital expenditure (excl. bank support), Current transfers, Compensation of employees, Goods and services.
  - Revenue Composition (Percent of GDP) 2010–2015: Other (incl. capital receipts), Corporation tax, VAT & Excise, Pay-related social insurance, Personal income tax.
  - Revenues, Primary Expenditure and Balance (Percent of GDP) 2010–2015: Revenue (incl. capital receipts), Primary expenditure (excl. bank support), Primary balance (excl. bank support, RHS).
  - Sources of Increase in Net Debt-to-GDP Ratio (Percent of GDP): Bank support costs, Interest-growth differential, Primary deficit (excl. bank support), Net general government debt (RHS).
  - Further 5% of GDP effort over the period of 2013-2015 is indicated in consolidation composition charts.

### Macroeconomic projections and medium-term scenario (Tables 1–3 summary)
- Table 1 (Selected Economic Indicators, 2008–14; annual percentage change unless indicated):
  - Real GDP: 2008 -2.1; 2009 -5.5; 2010 -0.8; 2011 1.4; 2012 0.7; 2013 1.1; 2014 2.2 (note: values listed as a single line for 2008–2014 in table).
  - Unemployment rate (in percent): 2008 6.4; 2009 12.0; 2010 13.9; 2011 14.6; 2012 14.7; 2013 14.6; 2014 14.1.
  - Harmonized index of consumer prices: 2008 3.1; 2009 -1.7; 2010 -1.6; 2011 1.2; 2012 1.9; 2013 1.3; 2014 1.3.
  - General government balance (excl. bank support): 2008 -7.4; 2009 -11.5; 2010 -10.7; 2011 -9.1; 2012 -7.7; 2013 -6.8; 2014 -4.4.
  - General government gross debt: 2008 44.5; 2009 64.9; 2010 92.2; 2011 106.5; 2012 117.9; 2013 122.5; 2014 120.7 (percent of GDP).
  - Current account: 2008 -5.7; 2009 -2.3; 2010 1.1; 2011 1.1; 2012 2.9; 2013 3.4; 2014 4.0 (percent of GDP).
- Table 2 (Medium-Term Scenario, 2009–18; annual percentage change unless indicated):
  - Real GDP projections: 2012 0.4; 2013 0.7; 2014 1.1; 2015 2.2; 2016 2.7; 2017 2.7; 2018 2.7.
  - Unemployment rate projections: 2012 14.8; 2013 14.7; 2014 14.6; 2015 14.1; 2016 13.3; 2017 12.4; 2018 11.5 (percent).
  - General government gross debt (percent of GDP): 2012 117.9; 2013 122.5; 2014 120.7; 2015 116.9; 2016 113.8; 2017 110.0; 2018 106.2.
  - General government balance (percent of GDP): 2012 -9.1; 2013 -8.3; 2014 -7.7; 2015 -6.8; 2016 -4.4; 2017 -2.2; 2018 -1.5.
- Table 3 (General Government Statement of Operations, 2009–18):
  - Revenue and expenditure (percent of GDP) and projections through 2018 provided, including detailed lines for Taxes, Social contributions, Expenditure components, Financial sector support costs, Primary balance (excl. fin. sector support) and Net lending/borrowing measures.
  - Notable figures for 2012: Revenue 54.5; Taxes 35.9; Expenditure (excl. fin. sector support) 72.9; Financial sector support costs 4.0; Primary balance (excl. fin. sector support) -15.2 (percent of GDP).

### External and financial vulnerability indicators (Tables 4–6, 2008–12)
- Exports and imports: 2009–2012 value changes shown (e.g., Exports 2009 -1.4; 2010 -2.5; 2011 7.8; 2012 5.7).
- Current account balance (percent of GDP) series: 2008 -5.7; 2009 -2.3; 2010 1.1; 2011 1.1; 2012 2.9.
- Financial market indicators:
  - General government debt (percent of GDP): 2008 44.5; 2009 64.9; 2010 92.2; 2011 106.5; 2012 117.9.
  - Government bond yield (10-year, end-period): 2008 4.4; 2009 4.9; 2010 9.2; 2011 8.5; 2012 4.5 (note on mid-2012: 8 year yield shown).
  - Non-performing loans (percent of total loans): 2008 2.6; 2009 9.0; 2010 8.6; 2011 9.1; 2012 10.7.
  - Total provisions for loan losses (percent of total loans): 2008 1.2; 2009 4.0; 2010 4.2; 2011 4.8; 2012 5.7.
  - Regulatory capital to risk-weighted assets of domestic banks (percent): 2008 10.6; 2009 10.9; 2010 10.4; 2011 17.5; 2012 17.0.
- Balance of payments and capital flows (Table 5) include current account, goods and services balances, income balance, direct investment, portfolio investment, other investment, and program financing details for 2009–18 with values in both billions of euros and percent of GDP.

### Banking sector, monetary and public financing details (Tables 6–10)
- Monetary survey and domestic market credit institutions aggregate balance sheet (Table 6):
  - Aggregate balance sheet assets and liabilities series for Dec-08 through Jan-13, with items such as Claims on non-residents, Claims on Irish resident non MFIs, Private sector claims, Households, Non-Financial Corporations.
  - Irish resident broad money (M3) and intermediate money (M2) series provided for 2008–2012.
  - Credit to deposits (percent) and wholesale funding levels and changes documented (Memorandum items).
- General government financing requirements and sources (Table 7):
  - Gross borrowing need and gross financing sources, Exchequer cash deficit and amortization figures for 2008–2013 (e.g., Gross borrowing need 2008 15.9; 2009 63.4; 2010 71.4; 2011 45.3; 2012 29.8; 2013 25.4).
  - General government debt levels in euros and percent of GDP detailed for 2008–2013.
- PCAR banks' aggregated summary financial statements (Table 10, 2011–12):
  - Total assets: 2011 EUR 326.4 bn; 2012 EUR 301.2 bn; year/year change -25.1 bn (-7.7%).
  - Net loans: 2011 EUR 220.1 bn; 2012 EUR 197.6 bn; change -22.4 bn (-10.2%).
  - Deposits: 2011 EUR 148.9 bn; 2012 EUR 158.8 bn; change 9.8 bn (6.6%).
  - Loan loss & NAMA provisions: 2011 -13.0 bn; 2012 -3.9 bn; change -4.7 bn (-1.5% of TAA).
  - Gross NPLs: 2011 EUR 47.2 bn; 2012 EUR 55.6 bn; change 8.4 bn (17.8%).
  - Provisions to gross loans: 2011 4.9%; 2012 2.0%.
  - Core tier 1 capital (CT1) and CT1 to RWA (%) 2011 27.4; 2012 16.4; CT1 to total assets = leverage ratio (%) 2011 8.4; 2012 7.4.
  - Net income: 2011 -4.0 bn; 2012 -1.2 bn; change -5.9 bn (-1.9% of TAA).
- PCAR banks and sectoral performance metrics include PPP, return on equity, risk-weighted assets, and memorandum items with exact figures for 2011 and 2012.

### IMF program reviews, purchases, and Fund credit indicators
- Schedule of Reviews and Purchases (Table 8):
  - Board approval of arrangement December 16, 2010: Purchase SDRs 5,012,425,200 representing 399 percent of quota.
  - Ninth Review March 15, 2013: Observance of end-December 2012 performance criteria, completion of Ninth Review: Purchase SDRs 831,000,000 representing 66 percent of quota.
  - Total purchases to date: SDRs 19,465,800,000 representing 1,548 percent of quota (table lists each review and associated SDR purchase and percent of quota).
- Indicators of Fund Credit (Table 9, 2010–23):
  - Stock of Fund credit end-period values and projections: e.g., 2010 stock 11,050 (millions of SDR), 2011 stock 16,543, 2012 stock 19,466; Stock in percent of quota: 2010 879; 2011 1,315; 2012 1,548.
  - Stock of Fund credit in percent of GDP and in percent of exports of goods and services provided for the projection period through 2023.
  - Repurchases, obligations, charges, and other lines are shown for 2010–23 with year-by-year entries.

*Source: IMF staff report content as provided in the supplied PDF content unit.*

### ANNEX I. DEBT SUSTAINABILITY ANALYSIS

### ANNEX I. DEBT SUSTAINABILITY ANALYSIS

### General Government Debt: baseline, mechanics, and projections
- Promissory note transaction effects:
  - Initial small upward impact on Ireland’s debt path in 2013 due to higher interest expenses on a cash basis.
  - Cumulatively lowers overall general government debt by about 4 percentage points of GDP until 2021 as the lower fiscal deficit persists until about 2020.
  - Bonds replacing the promissory note have a long average maturity of 34–35 years versus the promissory note average maturity of 7–8 years, significantly reducing rollover risks.
  - The swapping of the fixed coupon promissory note against €25 billion of floating rate long term bonds reduces the share of fixed rate borrowing, but the government has the option to exchange a portion of them against fixed rate bonds when CBI sells them in the market.

- Baseline trajectory and drivers:
  - Under the baseline macroeconomic projection, planned fiscal adjustment puts Ireland’s debt ratio on a declining path from 2014.
  - Ireland’s primary deficit is projected to fall below its debt stabilizing threshold in 2014.
  - Automatic debt dynamics arising from the interest rate-growth differential will add some 1½ percentage points per year to the debt ratio in 2013–14, before stronger growth from 2015 reduces the impact.
  - Subsequently, the impact of the interest rate-growth differential is negligible, with debt reductions driven by the primary surplus.
  - Gross general government debt is projected to fall to around 95 percent of GDP by 2021.

- Key numeric projections and baseline assumptions (selected):
  - Gross general government debt projected to fall to around 95 percent of GDP by 2021.
  - Identified note: “From 2018, no policy change is assumed.”
  - Asset-sale assumptions excluded from baseline: proceeds from state asset disposals of up to €3 billion (around 1¾ percent of GDP), at least half to be used for debt reduction, are not incorporated.

### General Government Debt: risks and contingent liabilities
- Growth risk:
  - Lower economic growth is the principal risk to debt sustainability.
  - If real GDP growth stagnates at ½ percent per year in the medium term, automatic debt dynamics would add 3 percentage points of GDP each year on average over 2013–16.
  - At that stagnation level, debt would be on an unsustainable path to 150 percent of GDP by 2021.
  - Stagnant growth may add to debt from higher bank restructuring costs.

- Contingent liabilities:
  - Range of government explicit guarantees is narrowing as NAMA bonds are repaid and the ELG scheme is phased out, but:
    - Liquidation of IBRC removes need for government guarantees of ELA but is offset by a rise in the stock of government-guaranteed NAMA bonds due to NAMA’s purchase of ex-IBRC loans from CBI.
    - A realization of contingent liability could occur when NAMA is made whole for any shortfall between price paid for these loans and their independently assessed value.
    - As owner of NAMA, the government is exposed to losses in excess of NAMA’s capital on its existing portfolio (heavy exposure to Irish and U.K. property markets).
    - The government is exposed to potential larger loan losses in the financial system, including domestic banks, if current capital buffers are exhausted.
  - Downside scenario allowance: drawing on PCAR 2011 loan-loss differences and NAMA sensitivity to property prices, allowing for an overall impact on the order of 10 percent of GDP appears reasonable in a downside scenario.
  - Contingent liabilities table (in percent of projected 2013 GDP):
    - Senior NAMA bonds: 17.1
    - Other Bank Liabilities covered by Eligible Liability Scheme: 11.4
    - Total: 28.5

- Interest rate risk and buffers:
  - Interest rate shocks are less powerful given baseline built on unchanged, relatively elevated interest rates (with a safety margin since recent declines in spreads are not fully taken into account).
  - Ireland is shielded in the medium term by a still-high share of fixed rate and official borrowing.
  - The government retains options to manage exposure (e.g., exchanging floating bonds for fixed-rate bonds when sold).

- Upside risk from asset sales and banking-system transactions:
  - Baseline does not include proceeds from state asset disposals up to €3 billion (around 1¾ percent of GDP), at least half earmarked for debt reduction.
  - No allowance made for further transactions reducing banking support costs beyond recent sales of interests in BoI and Irish Life.

### External Debt: levels, composition, and short-term changes
- Non-IFSC external debt levels and recent movement:
  - At end-Q3 2012, total external non-IFSC debt stood at around 297 percent of GDP, down from 306 percent of GDP recorded in Q2 2012, and 25 percentage points of GDP below the end-2011 outcome.
  - The decline was driven by falls in external debt of the Central Bank, MFIs, and the non-MFI sector as the central bank reduced Target 2 liabilities and institutions deleveraged.
  - External debt of the government sector rose as authorities continued to draw funds under the EU-IMF program.

- Total external debt including IFSC:
  - Total external debt including the IFSC remained very high at end-Q3 2012, at around 1,030 percent of GDP.
  - Since end-2011, total external debt has fallen by almost 45 percentage points of GDP, majority of decline in the first quarter.
  - Gross external debt of the IFSC sector fell by around 20 percentage points of GDP since end-2011.

- Net international investment position:
  - The net international investment position in Q3 2012 stood at the end-2011 of 96 percent of GDP as the reduction in net liabilities of the IFSC sector was offset by a fall in net asset position of the non-IFSCs.

- External debt composition (end-Q3 2012, percent of projected 2012 GDP; sectors listed in figure):
  - Non-IFSC and IFSC contributions shown across asset and liability categories (figure provided in source).

### External Debt: projections, stress scenarios, and financing needs
- Baseline projection:
  - By 2017, external debt is expected to fall to 225 percent of GDP.

- Downside scenarios and sensitivity:
  - Stagnating growth remains the main risk: a macroeconomic scenario at historical averages would fail to stabilize debt in next five years, bringing external debt to around 315 percent of GDP in 2017.
  - A permanent ½ standard deviation shock to growth (implying almost 1 percent contraction in real GDP in 2013 and average growth of around 0.6 percent thereafter) would raise the debt-to-GDP ratio to 251 percent of GDP in the medium term—around 26 percentage points above the baseline.
  - A permanent ½ standard deviation shock to the non-IFSC current account (excluding interest payments) would raise medium-term debt by around 20 percentage points compared to the baseline.
  - A combined shock of ¼ of the standard deviation applied to the current account, interest rates, and GDP growth would increase medium-term external debt to 253 percent of GDP.
  - A one-time real depreciation of 30 percent in 2013 is presented as an illustrative shock (figure).

- Key external debt metrics and drivers (selected table highlights):
  - Baseline external debt path (selected years, in percent of GDP): 
    - 2012: 322.1 (baseline row shows 322.1 for 2012)
    - 2017: 224.5 (baseline row shows 224.5 for 2017)
  - Change in external debt (selected): 2013: -11.6; 2014: -14.4; 2015: -14.3; 2016: -17.0; 2017: -18.4
  - Gross external financing need (in percent of GDP, selected): 2012: 37.5 (table row indicates 37.5 for 2012); projected declines thereafter with values e.g., 2017: 26.8? (table contains detailed series)
  - External debt-to-exports ratio (selected): 2007: 375.2; 2012: 384.4; 2017: 229.1 (table entries).

### Stress-test figures and scenario labels (as presented)
- Public Debt Sustainability bound tests (Annex I Figure 1):
  - Historical average for public debt shown as 142 (in figure box).
  - Baseline public debt shown as 95 (in figure box).
  - Scenario endpoints in figures for shocks:
    - Growth shock path leads to public debt path reaching 150 (text) and illustrated in figure.
    - Primary balance shock, interest rate shock, combined shock, contingent liabilities shock (illustrative one-time 10 percent of GDP shock to contingent liabilities in 2013) presented with box averages (e.g., combined shock box shows 128; contingent liabilities shock box shows 106).

- External Debt Sustainability bound tests (Annex I Figure 2):
  - Historical average external debt shown as 315 (figure).
  - Baseline external debt shown as 224 (figure box).
  - Scenario boxes and outcomes:
    - CA shock box: 245
    - Combined shock box: 253
    - Real depreciation 30% box: 226
    - Growth shock box: 251
  - Gross financing need under baseline shown on right scale in figures.

*Source: ANNEX I. DEBT SUSTAINABILITY ANALYSIS (text and tables) from the provided IMF content unit.*

### ANNEX II. THE NEW PERSONAL INSOLVENCY ACT 2012

### ANNEX II. THE NEW PERSONAL INSOLVENCY ACT 2012

### Overview and purpose
- The Personal Insolvency Act was passed in December 2012 to introduce comprehensive reforms in personal insolvency, addressing the large scale of household financial distress resulting from the crisis.
- Enactment follows intensive discussions spanning several years on including mortgages in a voluntary debt resolution procedure and on balancing debtor and creditor rights.

### Key reforms and objectives
- Introduction of three new procedures for debt resolution and substantial reforms to the Bankruptcy Act of 1988.
- Bankruptcy changes:
  - Automatic discharge from bankruptcy, after three years, subject to certain conditions.
  - Court orders may require payments from income for up to five years in the bankruptcy process.
- Overall aim: assist debtors and creditors in reaching sustainable arrangements, reduce need for judicial bankruptcy petitions, and facilitate resolution of mortgage distress.

### The three new debt resolution procedures
- Debt Relief Notice:
  - Allows discharge of relatively small amounts of unsecured debt, subject to conditions.
  - Up to €20,000 total for persons with essentially no income or assets.
  - Subject to a supervision period of three years.
- Debt Settlement Arrangement (DSA):
  - For settlement of unsecured debt (no monetary debt limit).
  - Normally over a five year period.
- Personal Insolvency Arrangement (PIA):
  - For settlement of secured debt up to €3 million (though this limit may be increased by agreement of the creditors) and unsecured debt (no limit).
  - Normally over a six-to-seven year period.

### Process, protections, and voting thresholds
- Application by a licensed personal insolvency practitioner to the Insolvency Service for a DSA or PIA grants a protective certificate against creditor enforcement actions for a 70-day period (with possible extension).
- Proposed arrangements must be prepared by a personal insolvency practitioner appointed by the debtor and approved by the debtor and a qualified majority of creditors (in terms of the value of claims).
  - DSA approval threshold: 65 percent of creditors must approve.
  - PIA approval thresholds:
    - 65 percent overall, and
    - more than 50 percent of secured creditors, and
    - 50 percent of unsecured creditors.
- The Insolvency Service of Ireland is responsible for proper functioning; the courts are involved at stages including granting protective certificates, approving final arrangements, and deciding creditor objections.

### Voting mechanics and implications for secured creditors
- For voting purposes under a PIA:
  - Secured creditors vote in the secured creditor class to the extent their claim is supported by the value of the collateral.
  - Any deficiency is voted in the unsecured creditor class.
- Consequences:
  - Significant negative equity shifts voting power to large secured creditors (e.g., mortgage lenders).
  - Arrangements would likely entail significant reductions on unsecured debts.
  - Large secured creditors could block a PIA, but doing so risks debtors resorting to judicial bankruptcy given the shortened automatic discharge period.

### Mortgage restructuring under the PIA
- PIA is tailored to facilitate resolution of mortgage distress; eligibility requires debtors be cash-flow insolvent (unable to pay debts as they fall due).
- Possible restructuring options include those in the Report of the Inter-Departmental Mortgage Arrears Working Group, such as split mortgages, mortgage-to-rent, or trade-down (and other suitable solutions).
- There is no presumption that PIA involves write-down of secured claims; loan principal cannot be reduced below the market value of the collateral unless the relevant creditor agrees.
- Family home protections are included except where costs, accommodation etc. are disproportionately large.
- Clawback provision: if the property is subsequently sold at a higher price, a clawback provision for the creditor extends for 20 years.

### Implementation steps and transitional behavior
- The framework becomes operational once infrastructure is in place:
  - Staffing of the Insolvency Service, appointment of specialist judges, licensing of personal insolvency practitioners, and establishing IT systems.
- In practice, while preparations are underway, mortgage lenders are expected to increasingly work bilaterally with debtors toward durable mortgage restructurings in the shadow of the new legal framework.
- The Insolvency Service will license and regulate personal insolvency practitioners; a number of specialist judges will be appointed to the Circuit Courts.
- Courts’ role is expected to be essentially supervisory, but additional resources are needed for the complex regime.

*Source: ANNEX II. THE NEW PERSONAL INSOLVENCY ACT 2012 (extracted from the provided IMF content).*

### 2.      Recent developments in sovereign and bank funding markets have also been

### _cr1393 - 2.      Recent developments in sovereign and bank funding markets have also been

### Recent developments in sovereign and bank funding markets
- Demand for Irish sovereign debt has continued to broaden, driving bond yields down to their lowest level since April 2010.
- Most recent 5 year issuance yield: 3.32 percent.
- Treasury bill yields recently fell to 0.2 percent, down from 1.8 percent when Ireland returned to the bill market last summer.
- Guaranteed bank bond yields have declined in line with sovereign yields; banks recently issued non-guaranteed covered bonds on favourable terms.
- Average rates on new bank deposits have declined to 1 percent even as deposit inflows have continued.
- Signs that bank lending may be turning a corner, associated with a potential bottoming out in housing prices in 2012.

### Exit strategy and programme engagement
- Building on continued strong programme implementation and supportive European policy initiatives, authorities are determined to successfully exit the programme.
- Initial discussions on an exit strategy took place during the review; further development with external partners is underway.
- European policy developments highlighted: commitment by euro area leaders to break the vicious circle between banks and sovereigns and to examine the situation of Ireland‘s financial sector to improve sustainability of the adjustment programme.

### Financial Sector Policies — objectives and planned actions
- Primary goal: ensure Ireland’s economic recovery is supported by a healthy flow of new bank credit by decisively resolving distressed assets in 2013.
- Rationale: banks recapitalised but high nonperforming loan ratios reflect household and SME distress in a still weak economy.
- Actions planned for 2013:
  - Drive forward implementation of loan resolution to ensure banks proactively achieve lasting solutions for impaired assets.
  - Bring greater certainty and sustainability to household and SME balance sheets to help unlock bank credit for sound productive purposes.

### Troubled residential mortgages — targets, monitoring, and publication
- Public target: require the principal mortgage banks to offer a substantial share of restructuring arrangements during 2013 (proposed structural benchmark, end-March).
- Additional targets: propose by end-June targets to complete a substantial share of restructuring arrangements during 2013.
- Consultation: targets to be established in consultation with staff of the EC, ECB, and IMF, and finalized before completion of the eleventh review at the latest.
- Monitoring and quality assurance:
  - Monitor each bank's progress closely, including via a public target for the share of concluded arrangements for which the terms are being met.
  - Restructuring arrangements must be expected to durably address arrears to count toward targets.
  - Publish re-default rates as part of banks' key performance indicators.

### Mortgage Code review and borrower engagement
- Complete a review of, and modify where appropriate, the Code of Conduct on Mortgage Arrears by end-June 2013.
- December 2012 clarifications included restrictions on contacting borrowers; a full review with public consultation is underway.
- Review will explore:
  - Reforming and streamlining contact restrictions to facilitate constructive engagement while ensuring consumer protections.
  - Amending the definition of a non-cooperative borrower so protections extend only to borrowers engaging in a timely manner consistent with addressing arrears.
  - Permitting modifications of the interest rate setting mechanism where the lender has offered an alternative arrangement advantageous to the borrower in the long-term.

### Repossessions and legal procedures
- Recognise that resolving nonperforming loans will require repossessions in some cases; legal procedures must be efficient.
- Keep under review the effectiveness of statutory repossession arrangements based on ongoing experience.
- Review will include issues such as length, predictability and cost of proceedings, systems for dealing with non-cooperative borrowers, and investment property debts.
- Where necessary, bring forward appropriate measures quickly to address problems.

### Personal insolvency framework activation
- Following passage of the Personal Insolvency Act, actions to be completed by end-March:
  - Finalise arrangements for appointment of specialist judges.
  - Finalise licensing and regulation of personal insolvency practitioners.
  - Publish guidelines for reasonable allowable household expenditures for debtors.
- Expect the newly established Insolvency Service to begin accepting applications from eligible borrowers in the second quarter of 2013.

### SME arrears resolution and supervisory oversight
- Bank-by-bank restructuring targets for SME loan arrears to be established by end-June to complete a substantial share of restructuring arrangements during 2013.
- Track progress using key performance indicators developed in coordination with banks.
- On-site supervisory reviews will assess effectiveness of restructuring solutions implemented.

### Provisioning practices and guidelines
- Continue to ensure banks apply conservative loss provisioning practices based on justifiable estimates of loan portfolio risk.
- By end-March 2013, the CBI will engage with each bank to ensure appropriately prudent provisioning, including on inputs such as estimating cure rates for originally performing, forborne, and modified loans, ensuring cures reflect durable modifications.
- In consultation with EC, ECB, and IMF staff, the CBI will update, where necessary, by end-May 2013 the 2011 Impairment Provisioning and Disclosure Guidelines (proposed structural benchmark).
- The review will take account of assessment of application of current guidelines and existing provisioning methodologies and assumptions employed by banks.

### Permanent TSB restructuring
- Permanent TSB implementing internal restructuring; bank divided into three distinct internal strategic business units and focusing on stemming new arrears.
- Separation of certain asset portfolios from the bank could underpin return to profitability.
- Authorities will work with external partners to achieve an appropriate solution as part of examining the Irish financial sector situation.

### Preparation for Prudential Capital Assessment Review (PCAR) 2013
- PCAR 2013 is a rigorous stress test building on prior data validation and asset quality review work.
- CBI, supported by consultants, is developing loan loss forecasting models subject to external validation.
- Ensure banks implement findings of the credit regulatory capital review on risk-weighted asset calculations, forecasting and stress testing in advance of PCAR 2013.
- Report to staff of the European Commission, the IMF and the ECB on progress with implementation of specific mitigating actions communicated to banks and consult with them on PCAR 2013 methodology features.
- Aim to align timing of publication of PCAR 2013 results with the next EBA exercise.

### Fiscal Policies — 2012 outturn and 2013 implementation
- 2012 general government deficit expected to come in below 8 percent of GDP, within the 8.6 percent ceiling.
- Drivers: robust revenue collection across major tax heads, effective aggregate expenditure management within budgetary limits, and some favourable one-off developments; overspends in health and social protection partly offset by non-interest expenditure savings elsewhere.
- Budget 2013 implementation:
  - Bulk of the €3.5 billion consolidation measures enacted, including introduction of the property tax and the social welfare package.
  - Remaining measures in process: legislate higher charging for private patients in public hospitals and mandate greater generic drug use (by end June); seek agreement with public sector unions on reductions in the pay and pension bill (by end-February); prepare roll-out of property tax on July 1.
  - Health Service Executive and Department of Health to report monthly to the Cabinet Committee on Health on implementation of health sector measures.
- Expectation: safely deliver a general government deficit within the 7.5 percent of GDP ceiling in 2013, taking into account a higher revenue base in 2012.

### Public service reforms and efficiency measures
- Successor negotiation to the 2010 Croke Park Agreement launched to achieve substantial further reduction in the pay and pension bill and long-term productivity and workplace reforms.
- If successful, arrangement will deliver additional €1 billion in durable net pay and pension savings targeted by 2015.
- Targeted voluntary redundancy announced to help reduce public service numbers to 282,500 by end 2014, a 12 percent fall from 2008 peak, while protecting core public services.
- Complementary reforms: performance-based budgeting across sectors and deployment of shared services in human resources and pension administration.

### Strengthening fiscal institutions and transparency
- Fiscal Responsibility Act enacted, enshrining independence of the fiscal council and establishing rules for prudent fiscal policy.
- Legislation to give statutory basis to operational ceilings on aggregate and departmental expenditure (set on a 3-year rolling basis) is before the Oireachtas to ensure compliance with the Stability and Growth Pact.
- Enhancing fiscal transparency via dissemination of public service performance indicators on Ireland Stat website and publication of the Government Financial Statistics Report by the CSO in April.

### Medium-term fiscal consolidation and market confidence
- April 2013 Stability Programme will set out revenue and expenditure paths extending to 2016, consistent with the Stability and Growth Pact.
- Structural budgetary reforms and improved processes (e.g., comprehensive expenditure reviews) position authorities to design and implement reforms to ensure strong delivery of public services within medium-term resource envelopes.
- Budget 2014 will further articulate reform policies, especially in health, education and social protection.

### Structural reforms and investment projects
- Identified projects to promote job creation and growth: education facilities, roads, primary health care centres, courthouses, and police headquarters to be developed through public private partnerships with the European Investment Bank, the National Pension Reserve Fund (NPRF), and private investors.
- Work with the National Development Finance Agency to streamline tender process and accelerate project delivery.
- Planned tender timetable:
  - Initiate tenders for education and justice projects in the third quarter of 2013.
  - Road and primary care centre projects to follow by year end.
- State asset disposal plans for 2013 in energy generation and forestry sectors progressing; at least half of resulting proceeds to be used to reduce public debt, with remaining proceeds invested in job-rich commercial projects consistent with fiscal targets.

### Labour market activation and Pathways to Work
- Priority: address long-term unemployment and accelerate implementation of Pathways to Work with objective of leaving no-one outside the activation system.
- Commitments and targets:
  - Ensure Intreo offices are established as scheduled, with full roll out by the end of 2014 or earlier if possible.
  - Redeploy and train staff within the Department of Social Protection to boost direct engagement with the long-term unemployed and increase group and one-to-one engagements.
  - Seek to achieve a doubling of case workers by the end of 2013 through internal redeployment, with further increases in 2014.
  - By end-April 2013 decide on a timetable for procuring activation services from private providers, aiming to issue a tender by end-June 2013.
  - Review Employer PRSI Refund and Revenue Job Assist schemes by end-June 2013 to promote better take-up among firms.

### Further education, training, and activation alignment
- Reform of further education system targets:
  - Establish Education and Training Boards (ETBs) and the Further Education and Training Authority (SOLAS) by end-June 2013.
  - Transfer six of the FAS training centres to local ETBs by end-December 2013.
  - Prepare a strategic review of training and further education provisions by end-September 2013 to guide ETBs and SOLAS.
  - Put in place procedures to regularly evaluate training and activation outcomes for labour market alignment and cost effectiveness.
- Activation and training schemes:
  - Following Review of Employment Support Schemes, prepare by end-April 2013 an action plan to increase effectiveness of training and activation support schemes.
  - Improve targeting by ensuring participation is guided by case workers and priority is given to the long-term unemployed.

### SME support, financing, and reforms
- SME lending and financing initiatives:
  - €4 billion lending target assigned to pillar banks in 2013 for the SME sector.
  - €350 million of budget resources earmarked to leverage private funding to provide more than €1 billion of venture capital and equity financing to high potential innovative SMEs.
- NPRF and strategic investment:
  - NPRF announced in January 2013 it will invest up to €500 million in three new SME funds which will make up to €850 million available to SMEs through equity, credit and restructuring/recovery investment.
  - Authorities intend to establish a strategic investment fund (redeploying NPRF resources) with an Ireland focused investment mandate to invest on a commercial basis in areas of strategic importance.
- Legal and institutional measures:
  - Consider by end-September 2013 additional legislative amendments to enhance SME examinership framework, drawing on Insolvency Service experience and Company Law Review recommendations, including potential for an administrative body to facilitate SME restructuring.
  - In 2013, the SME State Bodies Group will prepare a detailed work programme to ensure financing initiatives reach full potential and ensure cohesion of access-to-funding policies across government.
- Tax reform:
  - A 10 point tax reform plan to help support small companies‘ cash flow position, access funding more easily, export capacity and reduce cost of tax compliance.

*INTERNATIONAL MONETARY FUND (content unit _cr1393)*

### 22.      The programme is adequately financed and our financing strategy aims to

### _cr1393 - 22.      The programme is adequately financed and our financing strategy aims to 

### Programme financing and market re-entry
- In January we raised €2.5 billion through a tap of our bond maturing in 2017 at a yield of 3.32 percent.
- The January bond issue was significantly over subscribed and attracted a diverse investor base: more than 200 institutional investors—including fund managers, pension funds, bank treasuries and insurance companies—placed orders with strong demand from the U.K., the Nordic countries and mainland Europe.
- Continued regular three-month Treasury bill auctions, with yields declining to 0.2 percent at the recent January auction.
- Strategy: seek further opportunities to issue medium to long term debt ahead of a potential return, market conditions permitting, to more regular bond issuance later this year.
- Following the sale of contingent capital claims of €1 billion on Bank of Ireland, seek further recovery of bank support costs, including through the sale of Irish Life if market conditions permit.
- Maintain a prudent cash buffer and aim to end the programme with a buffer covering around one year of financing needs to support market confidence.
- In a medium to longer term context, a lengthening of maturities on EFSF/EFSM loans is under discussion.

### Authorisations
- Authorise the IMF and the European Commission to publish the Letter of Intent and its attachments, and the related staff report.

### Technical Memorandum of Understanding (TMU) — scope and exchange rates
- TMU date: March 12, 2013.
- Programme exchange rates (prevalent on December 30, 2011, as shown on the IMF‘s website, accessed 19 January 2012): €1 = 1.2939 U.S. dollar and €1 = 0.842786 SDR.
- For programme purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at ―programme exchange rates‖, except items affecting government fiscal balances, which will be measured at current exchange rates.

### Quantitative performance criteria — Floor on the Exchequer primary balance
- Exchequer primary balance defined as the Exchequer balance excluding net debt interest payments in the service of the National Debt.
- From January 2013 all payments related to the IBRC promissory notes are excluded from the Exchequer primary balance measure used for programme monitoring purposes.
- Adjustments to the floor on the Exchequer primary balance:
  - (i) downward by payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy (including loans to banks, investments in their equity (requited recapitalisation), unrequited recapitalisation, and purchases of troubled assets).
  - (ii) upward by proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts.
  - (iii) upward by receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012.
  - (iv) downward by the amount of these receipts spent on growth-enhancing projects not included in Budget 2013, up to no more than half of these receipts.
  - (v) downward for Exchequer contributions to the Resolution Fund for the resolution of credit institutions, and upward for any Exchequer recoupment from the Resolution Fund, of such outlays.
  - (vi) upward for any recoupment of Exchequer contributions from the Credit Union Fund.
- Any other financial operation by Government to support banks or other credit institutions including credit unions, including the issuance of guarantees or provision of liquidity, will be reported to EC, IMF, and ECB staffs.
- The floor on the Exchequer primary balance (quantitative performance criterion) in each year will be measured cumulatively from the start of that calendar year.

Key cumulative Exchequer primary balance targets (In billions of Euros; From January 1, 2013)
- End-March 2013 (performance criterion): -3.7
- End-June 2013 (performance criterion): -4.2
- End-September 2013 (indicative target): -4.8

- The performance criterion on the Exchequer primary balance (floor) will be adjusted upward (downward) for the full amount of any over-performance (under-performance) in Exchequer tax revenues, pay-related social insurance contributions (PRSI) and national training fund contributions against the current projection listed below.

Cumulative Exchequer tax revenue & other receipts projections (In billions of Euros; From January 1, 2013)
- End-March 2013 (projection): 10.2
- End-June 2013 (projection): 21.1
- End-September 2013 (projection): 32.5

- Any policy changes, including in administration and enforcement of taxes, which impact the revenue projection set out above will lead to a reassessment of the adjustor in the context of program reviews.

### Ceiling on the stock of central government net debt
- Net central government debt defined as the National Debt less liquid assets of the National Pensions Reserve Fund (NPRF).
- Liquid assets comprise Exchequer cash balances (including cash in the Capital Services Redemption Account), Exchequer deposits with commercial banks and other institutions, investments in investment grade sovereign bills; NPRF liquid assets include these and marketable securities such as equities, government bonds and other listed investments.
- NPRF shares in domestic Irish banks and NPRF‘s non-liquid discretionary portfolio are excluded from the definition of liquid assets.
- Adjustments to the ceiling on central government net debt (indicative target):
  - (i) upward by debt arising from payments for bank restructuring carried out under the programme’s banking sector support and restructuring strategy (including the exchange of the outstanding IBRC promissory notes with government bonds).
  - (ii) downward by proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer or NPRF receipts.
  - (iii) downward by receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012.
  - (iv) upward by the amount of these receipts spent on growth-enhancing projects not included in Budget 2013, up to no more than half of these receipts.
  - (v) upward for Exchequer contributions to the Resolution Fund for the resolution of credit institutions, and downward for any Exchequer recoupment from the Resolution Fund of such outlays.
  - (vi) downward for any recoupment of Exchequer contributions from the Credit Union Fund.
  - (vii) downward by the amount liquidated from the NPRF non-liquid discretionary portfolio.
  - (viii) downward (upward) by valuation gains (losses) in the NPRF liquid portfolio.
  - (ix) upward by the amount of cumulative drawings on NPRF‘s SME focussed funds up to €500 million.
- The ceiling will be adjusted upward (downward) by the amount of any final upward (downward) revision to the stock of end-December 2012 central government net debt.
- Programme exchange rates will apply to all non-euro denominated debt.

Central government net debt figures (In billions of Euros)
- Outstanding stock: End-December 2012 (provisional): 133.7
- End-March 2013 (indicative target): 168.1
- End-June 2013 (indicative target): 171.3
- End-September 2013 (indicative target): 172.5

### Non-accumulation of external payments arrears by central government
- The central government will accumulate no external payments arrears during the programme period.
- External payment arrear defined as a payment by the central government on its contracted or guaranteed external debt that has not been made within five business days after falling due, excluding any contractual grace period.
- The performance criterion applies on a continuous basis.
- The stock of external payments arrears will be calculated based on the schedule of external payments obligations reported by the National Treasury Management Agency.

### Reporting requirements
- Performance will be monitored using data supplied to the EC, IMF, and ECB staffs. Irish authorities will transmit promptly any data revisions.
- Department of Finance reporting (with a lag of no more than seven days after the test date): the Exchequer primary balance, Exchequer tax revenues, payments for bank restructuring carried out under the programme‘s banking sector support and restructuring strategy, proceeds from sales of bank equity held by the government or NPRF that are treated as Exchequer receipts, receipts from disposals of state assets specified in paragraph 21 of the MEFP dated 29 November 2012 and associated outlays on growth-enhancing projects not included in Budget 2013, Exchequer outlays for the resolution and restructuring of credit unions, any return of such outlays to the Exchequer and the recoupment of such outlays by the Exchequer from the Resolution Fund and the Restructuring and Stabilisation Fund.
- National Treasury Management Agency reporting:
  - Provide provisional figures on the outstanding stock of net government debt, including an unaudited analysis of NPRF holdings, with a lag of no more than seven days after the test date. The revised figures will be provided within three months of the test date.
  - Provide the final stock of the central government system external payments arrears to the EC, IMF and ECB staffs, with a lag of not more than seven days after the arrears arise in accordance with the definition in paragraph 12.
- Central Bank of Ireland will provide on a quarterly basis, bank by bank data on the assets of government guaranteed banks, including loans and provisioning by period overdue (90+ days and less than 90 days) and category of borrower, 40 working days after the end of each quarter.

### Programme monitoring — selected table figures
- Table 1: Quantitative Performance Criteria and Indicative Targets — status samples:
  - Cumulative exchequer primary balance: End-December 2012 — Observed.
  - Ceiling on the stock of central government net debt: End-December 2012 — Observed.
  - Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government: Continuous — Observed.
- Table 2 excerpt — Cumulative exchequer primary balance (In billions of Euros):
  - 31-Dec-11 Target 1/ : -22.3
  - 31-Dec-11 Outcome: -21.0
  - 31-Mar-12 Target 1/: -6.9
  - 31-Mar-12 Outcome: -5.7
  - 30-Jun-12 Target 1/: -9.6
  - 30-Jun-12 Outcome: -8.7
  - 30-Sep-12 Target1/: -11.4
  - 30-Sep-12 Outcome: -10.1
  - 31-Dec-12 Target1/: -13.2
  - 31-Dec-12 Outcome: -12.3
  - 31-Mar-13 Target: -3.7
  - 30-Jun-13 Target: -4.2
  - 30-Sep-13 Target: -4.8

*Source: Attachment II. Ireland: Technical Memorandum of Understanding (TMU), March 12, 2013 (as contained in the provided content).*

### 2. Ceiling on the

### _cr1393 - 2. Ceiling on the

### Quantitative targets and ceilings (excerpt)
- Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by the central government 3/:
  - Sequence of reported values: 0 0 0 0 0 0 0 0 0
  - Additional sequence shown: 0 0 0 0
- Indicative Target labels repeated across columns: Indicative Target Indicative Target Indicative Target Indicative Target Indicative Target Indicative Target Indicative Target Indicative Target
- Ceiling on the stock of central government net debt 1/ (series of values across reporting periods):
  - 117.2 115.7 125.0 123.0 130.1 128.2 132.5 130.0 135.8 133.7 168.1 171.3 172.5

### Structural benchmarks under the programme (Table 3)
- Financial sector policies: measures and timing
  - Establish a public target requiring the principal mortgage banks to offer a substantial share of restructuring arrangements during 2013 (MEFP ¶5).
    - Timing/status: End-March 2013 — Proposed structural benchmark
  - Publish an update, where necessary, of the 2011 Impairment Provisioning and Disclosure Guidelines by end-May 2013 (MEFP ¶10).
    - Timing/status: End-May 2013 — Proposed structural benchmark
  - Undertake a review of progress in addressing mortgage arrears (MEFP ¶12, 8th review).
    - Timing/status: End-June 2013 — Structural benchmark

### Letter of Intent — Key findings and requests (Attachment III, Dublin, 12 March 2013)
- Programme status and recent developments:
  - Government focus: measures necessary to achieve a successful exit from the Programme and underpin a durable and sustainable return to market based funding.
  - Positive indicators cited: gradual return to financial markets, successful bond sale in January, sale of contingent capital instruments in one pillar bank at a slight profit, sale of Irish Life announced, continuing fall in bond yields, stabilization in unemployment, better than expected budget outturn for 2012.
  - Resolution of promissory note discussions and enactment of legislation to liquidate IBRC noted as reinforcing positive developments.
- Performance summary and commitments:
  - Over 190 actions completed under the EU/IMF supported Programme for the ninth review.
  - 2012 general government deficit expected to be below 8% of GDP, within the programme ceiling (8.6% of GDP).
  - 2013 budget consistent with observing the 7.5% of GDP ceiling on the general government deficit for 2013.
  - Measures taken to offset cost overruns in the health sector in 2012 and to ensure expenditures remain within allotted ceiling in 2013; a Cabinet Committee on Health established for oversight.
  - Enactment of the Personal Insolvency Act 2012; Personal Insolvency Service established; infrastructure and regulatory framework to accept applications from eligible borrowers in the second quarter of 2013.
  - Progress on resolving stock of non-performing loans in the banking sector highlighted as instrumental to resume lending.
  - Continued advancement of structural reforms (Action Plan for Jobs, labour market activation, further education and training reforms).
  - Strengthened competition authority powers and capacity; progress on water sector reform including groundwork for introduction of domestic water charges.
- Request:
  - Completion of the ninth review and release of the ninth disbursement of EUR 1.6 billion from the EFSF.
- Policy stance and conditionality:
  - Authorities assert that policies in Letters of Intent (3 December 2010 and subsequent) and this letter are adequate to achieve Programme objectives, but stand ready to take corrective actions if circumstances change.
  - Letter addressed to Secretary General of the Council due to Ireland holding the EU Presidency; copied to Mme Lagarde.

### Memorandum of Understanding on Specific Economic Policy Conditionality (Eighth Update, 12 March 2013) — Key commitments
- General commitments:
  - Rigorously implement fiscal policy consistent with the requirements of the excessive deficit procedure; Departments of Finance and Public Expenditure and Reform to ensure effective tax collection and tight supervision of expenditure commitments.
  - Any additional unplanned revenues must be allocated to debt reduction.
  - The nominal value of Social Welfare pensions will not be increased.
  - Strengthen fiscal framework and reporting in line with EU requirements.
  - Use at least half of proceeds from state asset sales for eventual debt reduction; remainder to be reinvested in commercially viable projects meeting ex-ante cost benefit criteria, enhancing employment and preserving long term fiscal sustainability, including Programme and EDP fiscal targets.
  - Continuously monitor financial markets to exploit opportunities to return to commercial funding as soon as possible and on a sustainable basis.
  - Ensure activation services are enhanced to tackle long-term unemployment; Department of Social Protection to improve ratio of vacancies filled off the live register, focus on re-training, and implement sanctions to ensure appropriate incentives; advance new activation measures building on Pathways to Work.
  - Ensure no further exemptions to competition law framework unless consistent with Programme goals and economy needs.
  - Ensure NAMA:
    - (i) maintains the highest standards of governance with appropriate accountability and transparency arrangements;
    - (ii) reduces the costs of its operations; and
    - (iii) constructively contributes to the restoration of the Irish property market in meeting asset disposal targets established and monitored by the NAMA Board, including redemption of €7.5 billion worth of senior bonds by end 2013.
  - Ensure restructuring of credit unions via the Credit Union Restructuring Board to underpin financial stability and long term sustainability; restructuring completed as short a timeframe as possible under a clear plan; first call on funding should be the credit unions or the sector; Exchequer funding to be minimised and recouped over time, compliant with EU state aid rules; Central Bank inspections and use of resolution powers and Resolution Fund resources as needed.
  - Report quarterly on progress in implementing strategy for reorganisation of Irish credit institutions, including steps to strengthen the credit union sector, and discuss with European Commission, IMF, and ECB staff.
  - Ensure continued compliance with the minimum Core Tier 1 Capital ratio of 10.5% for all PCAR banks (AIB, BOI, and PTSB).
  - Consult ex-ante with the European Commission, the ECB and the IMF on adoption of policies not included in the Memorandum that could materially impact Programme objectives.
- Monitoring commitments to the European Commission, ECB and IMF:
  - Provide all information required to monitor progress during programme implementation and to track the economic and financial situation.
  - Provide a compliance report on the fulfilment of the conditionality prior to release of instalments.
  - Ensure reliable and regular availability of budgetary and other data as detailed in Annex 1.

### Actions for the tenth review (to be completed by end Q1-2013)
- Financial sector reforms — Capital Assessment:
  - Authorities to provide a review of developments in the PCAR banks relative to PCAR 2011; overall results to be published by end February 2013; specific details to be agreed with staff of the European Commission, the ECB and the IMF.
- Deleveraging:
  - Authorities, in consultation with EC/IMF/ECB staff, will assess banks' deleveraging based on existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme; avoid fire sales and excessive deleveraging of core portfolios.
- Funding and liquidity monitoring:
  - Authorities to provide staff with a detailed assessment of banks' progress towards relevant Basel III requirements using the advanced monitoring framework.
- Asset quality:
  - Authorities to provide staff with assessment of banks' performance on work-out of non-performing mortgage and SME portfolios in accordance with agreed key performance indicators.
  - Authorities to monitor each PCAR bank's performance relative to already-defined key performance indicators for resolving problem loans and against bank specific targets for reviewing new and existing individual arrears cases.
  - Authorities will publish banks' reported data on loan modifications to permit analysis of effectiveness of alternative resolution approaches.
  - Authorities to establish by end-March a public target requiring the principal mortgage banks to offer durable restructuring arrangements for a substantial share of problem mortgage loans during 2013.
  - Authorities to introduce legislation remedying issues identified by case law in the 2009 Land and Conveyancing Law Reform Act to remove unintended constraints on banks to realise value of loan collateral under certain circumstances.
- Financial supervision:
  - Authorities to present a comprehensive report on progress in implementing the Central Bank of Ireland's action plan for strengthening supervision of credit institutions and discuss it with EC/IMF/ECB staff.
  - Authorities to report on banks' progress implementing strategies to address loan arrears and unsustainable debts in mortgage and SME portfolios.
  - Authorities to engage with each bank to ensure appropriately prudent provisioning including for estimating cure rates for originally performing, forborne, and modified loans to ensure cures reflect durable modifications.
  - Following completion of annual model performance reviews, authorities to report to staff of the EC/IMF/ECB on progress implementing findings from the credit regulatory capital review process and specific mitigating actions communicated to banks.
- Structural reforms — Health sector:
  - Authorities to conduct a study comparing cost of drugs, prescription practices and usage of generics in Ireland with comparable EU jurisdictions.

### Actions for the eleventh review (to be completed by end Q2-2013)
- Financial sector reforms — Capital assessment:
  - Authorities to report by end of May 2013 on the evolution of regulatory capital within the PCAR banks up to end December 2012 and present findings to staff of the EC/IMF/ECB.
  - Authorities to agree with staff of the EC, the ECB and IMF on specific features of the methodology for the PCAR 2013 stress test exercise.

*Source: _cr1393 - 2. Ceiling on the (PDF excerpt supplied)*

### 19.      The authorities, in consultation with the staff of the European Commission, the IMF, and the

### _cr1393 - 19.      The authorities, in consultation with the staff of the European Commission, the IMF, and the

### Financial sector reforms — Deleveraging, funding, and liquidity
- Deleveraging assessment:
  - The authorities, in consultation with the staff of the European Commission, the IMF, and the ECB, will assess banks' deleveraging based on the existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme.
  - Fire sales of assets will be avoided, as will any excessive deleveraging of core portfolios, so as not to impair the flow of credit to the domestic economy.
  - By the thirteenth review (actions to be completed by end Q4-2013): the authorities will produce a final report of the banks' implementation of their deleveraging plans under the PLAR 2011, and discuss compliance with the asset disposal and run-off targets in nominal value terms with staff of the European Commission, the IMF, and the ECB.
- Funding and liquidity monitoring:
  - The authorities will provide staff of the European Commission, the IMF, and the ECB with a detailed assessment of banks' progress towards the relevant Basel III requirements using the advanced monitoring framework.
  - By the thirteenth review (actions to be completed by end Q4-2013): the authorities will produce a final report on progress towards compliance with Basel III liquidity and funding requirements by the relevant dates.
- Reporting requirements (Central Bank submissions, among others):
  - C.1 The Central Bank of Ireland‘s balance sheet: Weekly, next working day.
  - C.2 Individual maturity profiles (amortisation only) for each of the domestic banks as of the last Friday of each month: Monthly, 30 working days after each month end.
  - C.3 Detailed financial and regulatory information (consolidated data) on domestic individual Irish banks and the banking sector in total including profitability (P&L), balance sheet, asset quality, regulatory capital; PLAR funding plan forecasts including LDR, NSFR and LCR outturns and forecasts: Quarterly, 40 working days after the end of each quarter.
  - C.4 Detailed information on deposits for the last Friday of each month: Monthly, 30 working days after each month end.
  - C.5 Data on liabilities covered under the ELG Scheme for each of the Covered Institutions: Monthly, 30 working days after each month end.
  - C.6 Deleveraging committee minutes from the banks and deleveraging sales progress sheets, detailing pricing, quantum, and other relevant result metrics: Monthly, reflecting committee meetings held each month.
  - C.7 Deleveraging reports including (i) progress achieved towards deleveraging in line with the 2011 Financial Measures Programme; and (ii) actual and planned asset disposals: Quarterly, 40 working days after the end of the reference period.

### Financial sector reforms — Capital assessment and PCAR
- PCAR 2013:
  - The authorities will complete the PCAR 2013, conducting a rigorous stress test based on robust loan-loss forecasts, high transparency, assessment of banks' calculation of risk weighted assets, loan loss forecasting, and capital modelling.
  - Before publication, PCAR 2013 results will be discussed with staff of the European Commission, the IMF, and the ECB and aligned with the timing of the next EBA exercise.
  - The results and methodology will be published in full and on a bank-by-bank basis; the authorities will ensure that banks are adequately capitalised.
- Reporting:
  - The authorities will report on the evolution of regulatory capital up to the end of June 2013 within the banks covered by the PCAR and present and discuss findings with staff of the European Commission, the IMF, and the ECB.

### Asset quality and workout of problem loans
- Impairment provisioning and disclosure:
  - In consultation with staff of the EC, ECB, and IMF, the authorities will update, where necessary, by end-May 2013 the 2011 Impairment Provisioning and Disclosure Guidelines setting out clear definitions and principles underpinning banks‘ provisioning models.
  - The review will take account of the assessment of the application of the current guidelines and existing provisioning methodologies and assumptions employed by the banks.
  - The authorities will review the implementation of the 2011 CBI Provisioning and Disclosure guidelines by the covered banks with reference to the end-2012 published financial statements.
- Non-performing mortgage and SME portfolios:
  - The authorities will provide staff of the European Commission, the IMF, and the ECB with their assessment of banks' performance with the work-out of their non-performing mortgage and SME portfolios in accordance with the agreed key performance indicators.
  - The authorities will monitor each PCAR bank‘s performance relative to already-defined key performance indicators for progress in resolving problem loans, and also against bank specific targets for reviewing new and existing individual arrears cases.
  - Actions repeated across review stages (twelfth and thirteenth reviews): ongoing monitoring and reporting of bank performance against KPIs; publication of reported data on loan modifications, including re-defaults of modified loans.
- Public and bank-specific restructuring targets:
  - The authorities will propose a public target requiring the principal mortgage banks to complete durable restructuring arrangements on a substantial share of problem mortgage loans during 2013.
  - The authorities will establish individual bank targets requiring them to complete a substantial share of durable restructuring arrangements for SME loans in arrears in 2013.
  - By the twelfth review: following consultation with staff of the European Commission, the ECB and the IMF, a public target will be established for the share of concluded arrangements for which the terms are being met to ensure the quality and durability of such arrangements.
- Repossession arrangements review:
  - The authorities will keep under review the effectiveness of statutory repossession arrangements in Ireland based on ongoing experience with repossession actions, including length, predictability and cost of proceedings, systems for dealing with non-cooperative borrowers and investment property debts; where necessary appropriate measures will be brought forward quickly.

### Financial supervision and resolution
- Central Bank of Ireland supervision action plan:
  - The authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland‘s action plan for strengthening supervision of credit institutions and discuss it together with staff of the European Commission, the IMF, and the ECB.
  - By the thirteenth review (actions to be completed by end Q4-2013): the authorities will present a final comprehensive report on progress in implementing the Central Bank of Ireland‘s action plan and discuss it together with the European Commission, the IMF, and the ECB.
- Bank strategies on arrears:
  - The authorities will report on banks' progress with the implementation of their strategies to address loan arrears and unsustainable debts in banks' mortgage, and SME loan portfolios; final reports required by the thirteenth review.
- Resolution framework and funding:
  - Upon publication of the EU directive establishing a framework for the recovery and resolution of credit institutions and investment firms, the authorities will review the Resolution fund levy regulation.

### Structural reforms — State assets and access to SME credit
- State asset sales:
  - The authorities will report to the staff of the European Commission, the IMF, and the ECB on the quantum of the proceeds of any realised asset sales to date and for assets yet to be disposed report on progress made and remaining steps.
- Access to SME credit and restructuring:
  - Based on experience of the operation of the Insolvency Service in the personal insolvency reform, the authorities will consider the appropriateness of further enhancements to the company law framework to facilitate restructuring, especially in multi-creditor cases, reduce costs and achieve efficiency gains, including the potential for an administrative body to facilitate SME restructuring.

### Structural reforms — Labour market, further education, and activation
- Labour market wage-setting reforms:
  - The authorities will report to staff of the European Commission, the IMF, and the ECB on the impact on the labour market of reforms to sectoral wage-setting mechanisms undertaken under the programme.
- Intreo and activation services:
  - The authorities will prepare an action plan aimed at increasing the effectiveness of training and activation supports, building on recommendations of the DSP Review of Employment Support Schemes and the evaluation of JobBridge by end-April 2013.
  - The authorities will review progress in rolling out Intreo offices, define measures to address potential shortcomings, and communicate a timetable for procuring activation services for the long-term unemployed from private providers.
  - The authorities will continue to redeploy and train staff from within the Department of Social Protection to significantly increase the number of Intreo case managers and report on progress in achieving the DSP objective of doubling of case managers by end-2013; they will assess skills adequacy and report on training needs and plans.
- Further education and training:
  - The authorities will conduct by September 2013 a strategic review of the training and education provision offered by Education and Training Boards (ETBs) to guide SOLAS and FET provision; the review will evaluate relevance for labour activation and provide recommendations to enhance relevance for activation purposes.

### Structural reforms — Water services and health
- Water services reform:
  - The Commission for Energy Regulation (CER) will carry out consultations to determine the framework for household water charges with a view to start charging by the end of the EU-IMF programme period; CER will conduct consultations to determine pricing methodology for the non-domestic sector.
  - The Government will publish the General Scheme of a Water Services Bill with the aim of defining the regulatory framework for the water sector under a national public utility setting and providing for the establishment of Irish Water in its final form; prior engagement with the European Commission as appropriate.
  - By Q3 2013: the Government will publish, as early as possible in Q3 2013, a Water Services Bill; the Government‘s budgetary perspective will be based on Irish Water becoming substantially self-funded over time.
  - By the thirteenth review (actions to be completed by end Q4-2013): the CER will establish the framework to assess water charges for households, including those without meters; Irish Water, in association with the authorities and the CER, will inform the public on the level of water charges and launch a communication campaign building on the one initiated in February 2013.
- Health sector and eHealth:
  - The authorities will develop an eHealth Strategy in conjunction with the HSE by end Q2 2013, serving as a time-bound action plan for implementation of eHealth systems, including a comprehensive system of ePrescription which uses a unique patient identifier, such as the PPSN.
  - The authorities will set high level annual targets for increasing the share of generic drug usage in the medium-term; enabling measures – such as compulsory prescription by International non-propriety name (INN) by end 2013, where appropriate – required for achievement of these targets will be put in place and kept under further review.
  - Reporting on health budgetary measures and pharmaceuticals:
    - F.11 Report on implementation of budgetary measures in the health sector: Monthly, 30 working days after the end of each month.
    - F.12 Report comparing, against the monthly targets: (i) health expenditure by mains service areas, (ii) pay and non-pay element of current expenditure, (iii) capital expenditure and (iv) income collected: Monthly, 7 working days after the end of each month.
    - F.13 Report on pharmaceutical prescriptions and expenditure, including information on value and volume of drugs and the extent of the use of generics and off-patent drugs: Quarterly, 30 working days after the end of each quarter.

### Consumer protection, mortgage arrears, and Code of Conduct
- Mortgage arrears and CCMA review:
  - The authorities will undertake a review of progress in addressing mortgage arrears.
  - While ensuring balanced incentives and debtors' sustainability, the authorities will complete a review of the Code of Conduct on Mortgage Arrears (CCMA) to explore: (i) reforming and streamlining the restrictions on contacts; (ii) amending the definition of a non-cooperative borrower; and (iii) permitting modifications of the interest rate setting mechanism where the lender has offered an alternative arrangement which is advantageous to the borrower in the long-term.
- Publication and transparency:
  - The authorities will publish banks‘ reported data on loan modifications, including re-defaults of modified loans, to permit analysis of the effectiveness of alternative resolution approaches in improving debt service performance.

### Annex 1 — Provision of data (selected Government and NTMA reporting timelines)
- Department of Finance / Department of Public Expenditure and Reform (selected items):
  - F.1 Monthly data on adherence to budget targets (Exchequer statement, details on Exchequer revenues and expenditure with information on Social Insurance Fund): Monthly, 10 days after the end of each month.
  - F.2 Updated monthly report on the Exchequer Balance and General Government Balance outlook: Monthly, 20 days after the end of each month.
  - F.3 Quarterly data on main revenue and expenditure items of local Government: Quarterly, 90 days after the end of each quarter.
  - F.4 Quarterly data on the public service wage bill, number of employees and average wage: Quarterly, 30 days after the end of each quarter.
  - F.5 Quarterly data on general Government accounts, and general Government debt as per the relevant EU regulations on statistics: Quarterly accrual data, 105 days after the end of each quarter.
  - F.6 Updated annual plans of the general Government balance and its breakdown for the current year and the following four years: 30 days after EDP notifications.
  - F.10 Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes: Quarterly, 30 working days after the end of each quarter.
- NTMA (selected items):
  - N.1 Monthly information on the central Government's cash position with indication of sources as well of number of days covered: Monthly, three working days after the end of each month.
  - N.2 Data on below-the-line financing for central Government: Monthly, no later than 15 working days after the end of each month.
  - N.3 Data on the National Debt: Monthly, 15 working days after the end of each month.
  - N.4 Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for the National Debt: Monthly, 30 working days after the end of each month.
  - N.5 Updated estimates of financial sources (bonds issuance, other financing sources) for the Exchequer Borrowing Requirement / National Debt in the next 12 months: Monthly, 30 working days after the end of each month.

*Prepared By European Department — Annex and action lists as provided in the source document.*

### 1.      This supplement provides an update on financial and policy developments

### 1.      This supplement provides an update on financial and policy developments

### Financial market developments and sovereign bond issuance
- On March 13, the authorities issued a new 10 year bond—the first since January 2010—raising €5 billion at a yield of 4.15 percent.
- The syndicated issue attracted total bids of almost €13 billion from just under 400 investors.
- Investor geography and uptake:
  - Majority uptake by European investors, especially U.K., German, Nordic, and French.
  - 18 percent uptake by Irish residents.
  - 7 percent uptake by U.S. investors.
- Distribution by institution type included fund managers, banks, pension funds, and insurance companies, with relatively little uptake by hedge funds.
- The recent bond issuances contain collective action clauses, which have not hindered demand.
- Authorities raised their 2013 bond issuance target to €10 billion in light of these placements.
- Staff view: the benchmark issuance is a key step toward restoration of full market access for Ireland and is having a virtuous impact on bank funding.
  - Example: Bank of Ireland (BoI) issued €500 million in 5 year covered bonds on March 15, at a yield of 2.75 percent, well below the 3.125 percent pricing on a similar 3 year covered bond issued in November.

### Mortgage resolution framework and supervisory measures
- On March 13, the Central Bank of Ireland (CBI) announced a comprehensive framework to accelerate the resolution of mortgages in arrears.
- Framework scope:
  - Targets address distressed residential mortgages, applicable to the six main mortgage banks as a group and covering mortgages on both principal dwellings and buy-to-let housing.
  - The six banks comprise ACCBank, Allied Irish Banks, BoI, KBC Bank Ireland, Permanent tsb, and Ulster Bank.
- Targets (aggregate, as a group):
  - Main target: aggregate share of sustainable solutions proposed to mortgage borrowers with loans over 90 days in arrears, rising on a quarterly basis to reach 50 percent by end 2013.
  - Targets for the conclusion of such solutions will be established before completion of the eleventh review at the latest.
  - CBI will monitor the share of arrangements where the terms are being met against a benchmark of 75 percent from 2014.
  - New quarterly targets for 2014 will be established on a rolling quarterly basis.
- Complementary regulatory actions to support targets:
  - Possible imposition of additional capital requirements on banks that fail to meet targets.
  - More rigorous provisioning requirements for mortgages over 90 days in arrears and not subject to a sustainable solution.
  - Under the new provisioning requirements, the CBI is minded to require that unsustainably restructured mortgages, or mortgages relapsing into arrears, be provisioned immediately up to the value of the underlying collateral, using valuation, time-to-repossession, and bank-sale discount assumptions observed by the regulator.
  - More stringent Pillar 2 capital adequacy norms to be applied to banks showing poor operational capacity or defective mortgage resolution strategies.
  - Phasing: these requirements and norms will be phased in for 2014, or earlier where banks underperform vis-à-vis the 2013 loan modification targets.
- Staff assessment:
  - Staff welcomes the framework, noting it obviates the need for a structural benchmark proposed for end March.
  - Positive elements: comprehensive scope covering all residential mortgages and all principal mortgage lending banks; broadly defined set of sustainable solutions, including repossession where other arrangements cannot be reached or are not appropriate.
  - Importance of repossession: option to repossess should be available as a resort after other options are exhausted, including to promote debt service discipline during the resolution process.

### Code of Conduct on Mortgage Arrears (CCMA) review
- CBI initiated a review of the CCMA and set out proposed changes for public consultation.
- Proposed amendments include:
  - Replace the limit on the number of contacts initiated by lenders with distressed borrowers with a requirement that lender communications be proportionate, guided by a contacts policy.
  - Clarify the definition of a non-cooperative borrower, thus limiting certain protections under the CCMA—such as the 12 month moratorium on repossession—to borrowers who engage constructively.
  - Align the CCMA with the new personal insolvency framework.
  - Moot greater flexibility to modify the rate-setting mechanism on indexed “tracker” mortgages when part of restructuring arrangements that are advantageous to the borrowers over the long term.
- Consultation timeline:
  - Consultation period concludes on April 10, 2013.
  - CCMA will be modified, where appropriate, by end June.

### Bank remuneration review and government response
- An external review of bank remuneration, commissioned by the Department of Finance, was published covering Allied Irish Banks, BoI, Permanent tsb, and the recently liquidated Irish Bank Resolution Corporation over the period 2008–12.
- Key findings:
  - Remuneration declined by 20–54 percent across the banks, mainly through headcount reductions and reductions in incentive-related pay.
  - Remuneration is now largely comprised of fixed costs for salaries, pension contributions, and fixed allowances.
  - While average total remuneration for continuing employees decreased in each of the three going concern banks, average salaries rose at all four banks reviewed as a result of pay increases provided in 2009 and promotions.
- Government directive following the review:
  - Banks are to come up with plans to deliver savings of 6-10 percent, through reductions in payroll and pension benefits, new working arrangements, and other efficiency gains.
- Staff note: the review is useful and there may be further scope to adjust the distribution of staff by cost center and core function (e.g., headcount per branch, commercial volume per employee) to maximize savings.

### Macroeconomic indicators and recent data
- Inflation fell to 1.2 percent y/y in February 2013 due to moderating core inflation.
- Registered unemployment was 14.1 percent, unchanged from the revised out-turn for January.
- National accounts data for the fourth quarter of 2012 were expected on March 21.
- IMF press release highlights and IMF Board appraisal:
  - The Executive Board completed the ninth review under the EFF and approved a disbursement equivalent to SDR 0.831 billion (about €0.97 billion or about US$1.25 billion), bringing total disbursements under the EFF to SDR 17.37 billion (about €20.18 billion or about US$26.13X billion).
  - The EFF arrangement is SDR 19.4658 billion (about €22.61 billion or about US$29.28 billion).
  - Real GDP growth was 0.9 percent in 2012, and employment rose slightly over the year; unemployment remains high at 14.2 percent.
  - The 2012 fiscal deficit was 7¾ percent of GDP, within the 8.6 percent target.
  - In 2013, the fiscal deficit is projected at 6¾ percent of GDP, moving toward the target of below 3 percent by 2015.
  - Public debt is expected to peak at 122½ percent of GDP this year and decline in later years provided growth picks up from the 1 percent rate projected in 2013.
  - Financial sector: nonperforming loans at about 25 percent of total loans.
  - Authorities established targets for banks to durably resolve distressed mortgages, with banks required to propose sustainable solutions to 50 percent of distressed mortgage accounts by end-2013.
- IMF First Deputy Managing Director remarks emphasized:
  - Steadfast policy implementation and emerging positive signs (nascent revival of domestic demand, falling Irish bond yields, deeper market access).
  - Problem loans remain high; accelerating resolution is key to economic recovery.
  - Supportive reforms include facilitating constructive engagement between banks and borrowers, promoting efficiency of repossession procedures as a last resort, provisioning rules to provide right incentives, and sound implementation of personal insolvency reform.
  - Priority also on resolution efforts for SME loans.
  - Fiscal execution remains critical in 2013, including vigilance on health spending and successful introduction of the property tax.
  - Medium-term consolidation path should be reviewed at Budget 2014 to ensure targets are achieved in a growth-friendly manner.
  - Continued strong policy implementation remains paramount given risks to medium-term growth and debt sustainability; timely and forceful delivery on European pledges to improve program sustainability would aid Ireland’s durable exit from drawing on official support.

*Source: IMF staff supplement and associated press release, March 2013.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1393.pdf_