## _cr1520

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### Program overview and objectives
- IMF approved in December 2010 an exceptional access Extended Fund Facility (EFF) arrangement for SDR 19.466 billion (2,321.8 percent of quota).
- Broader financing package: €85 billion total; EU and bilateral European lenders pledged €45 billion; Irish authorities contributed €17.5 billion from cash reserves and other liquid assets.
- Program focus:
  - Address Irish banking crisis to break adverse feedback loop between banks, the sovereign, and the real sector.
  - Restore banking system health: smaller banking sector, high capital buffers, more stable funding.
  - Secure fiscal sustainability while limiting near-term demand drag.
  - Provide large external financing as a crisis response element.
- Financing and access details:
  - Board approved a three-year EFF for SDR 19.5 billion (€22.5 billion, or 2,321.8 percent of quota).
  - Upon approval SDR 5.0 billion (399 percent of quota) was disbursed.
  - Frontloading: 26 percent of total access (first purchase).
  - Staff identified a notional buffer of €35 billion for the banking system (€25 billion for immediate recapitalization; €10 billion contingency).

### Implementation assessment and macroeconomic outturn
- Implementation assessment:
  - Program implementation was very strong; all performance criteria and most structural conditionality were met.
  - All performance criteria met at each review; about 97 percent of structural conditionality met; only one structural benchmark not met.
  - Final (12th) review concluded on December 13, 2013.
- Macroeconomic outcomes:
  - Real GNP contracted by 9½ percent in 2008–10 (GDP by 9 percent) — pre-program crisis facts.
  - Real GDP growth: 0.9 percent per annum during 2011-13 versus 1.7 percent projected.
  - Average GNP growth: 1.5 percent per annum versus 0.2 percent projected at program request.
  - Domestic demand generally weaker than programmed; unemployment remained high.
  - Current account improved substantially, notably due to a large increase in undistributed profits of redomiciled multinational firms.
  - Financial account recorded sizable net outflows as anticipated.
- Key pre-program and crisis facts:
  - Credit to private sector expanded by 20 percent per annum during 2002-07.
  - Total assets of domestic banks reached over 520 percent of GDP by 2008.
  - Wholesale funding reached some 60 percent of banking liabilities prior to the crisis.
  - By mid-2010 government had injected €46.3 billion of capital into banks (roughly 30 percent of GDP).
  - ECB exposure to Ireland peaked at €90 billion through regular operations and €150 billion including ELA (close to 100 percent of GDP).
  - Consolidation measures of 6.2 percent of GDP implemented between 2008 and 2010.
  - Deficit (excluding financial sector support) reached 13.3 percent of GDP in 2010.
  - Public debt jumped from 25 percent prior to the crisis to close to 100 percent of GDP in 2010.
  - CIFS guarantee equivalent to 240 percent of GDP.

### Financial sector strategy, actions, and outcomes
- Program objectives for banking sector:
  - Separate non-viable banks from viable banks; downsize sector; reduce systemic risk; increase shock-absorbing capacity.
- Core policy actions implemented:
  - Wind down Anglo-Irish bank and INBS (non-viable); merge and subsequently liquidate.
  - Early, stringent Prudential Capital Assessment Review (PCAR) including asset quality review and three-year stress test; disclosure within three months.
  - Recapitalization within first six months based on stress test; Core Tier 1 (CT1) ratio targets: 10.5 percent in base case ongoing and 6 percent in stress case.
  - Prudential Liquidity Assessment Review (PLAR); target loan-to-deposit ratio (LDR) of 122.5 percent by end-2013 (later dropped and replaced with monitoring of noncore asset sales).
  - Reform personal insolvency regime (structural benchmark); central credit registry (structural benchmark); strengthen bank resolution framework and supervision.
- Funding and liquidity outcomes:
  - Loan-to-deposit ratio declined from 190 percent at end 2010 to under 120 percent at end-2013.
  - Banks’ recourse to the Eurosystem declined from a peak of €90 billion to €26 billion at end-2013.
- PCAR and capital requirements:
  - PCAR resulted in capital requirements of €24 billion, including a contingent equity buffer of €3 billion.
- Aggregated balance sheet changes for BOI, AIB, and PTSB (end 2010 vs end 2013, selected items):
  - Cash & due from Eurosystem: 6.1 EUR bn -> 10.6 EUR bn (change 4.57 EUR bn, 74.3 percent)
  - Net loans: 244.3 EUR bn -> 179.4 EUR bn (change -64.9 EUR bn, -26.6 percent)
  - Total assets: 343.2 EUR bn -> 275.4 EUR bn (change -67.8 EUR bn, -19.8 percent)
  - Due to Eurosystem: 71.9 EUR bn -> 26.1 EUR bn (change -45.9 EUR bn, -63.8 percent)
  - Deposits: 134.8 EUR bn -> 161.9 EUR bn (change 27.1 EUR bn, 20.1 percent)
  - Net equity: 14.6 EUR bn -> 20.8 EUR bn (change 6.1 EUR bn, 42.0 percent)
  - Gross NPLs: 31.5 EUR bn -> 56.4 EUR bn (change 24.9 EUR bn, 79.2 percent)
  - Gross NPLs to gross loans (%): 12.1 -> 27.1 (change 15.0)
  - Provisions to gross NPLs (%): 44.1 -> 51.4 (change 7.3)
  - Net NPLs to net equity (%): 120.3 -> 132.0 (change 11.7)
- Balance sheet downsizing and asset sales:
  - Total assets reduced by 20 percent (excluding transfers to NAMA; including such transfers would show contraction by more than one third).
  - The three intervened banks sold or disposed €45 billion in assets.
  - Domestic loan book shrunk by more than 25 percent between 2010 and 2013.
  - Banking assets at end-2013 about 2.5 times GDP, less than half their ratio prior to the program.
- NPLs and restructurings:
  - NPLs rose to 27 percent of total loans at end-2013 (10 percent at end-2010).
  - Households and SMEs accounted for 60 percent of end-2013 NPL stock.
  - Over 70 percent of end-2013 NPL stock was 720 days or older.
  - About one-quarter of mortgage arrears were restructured by end-2013.
  - At end-2013, 17 percent of mortgage NPLs were restructured (Box 2).
- Personal insolvency and credit registry:
  - New personal insolvency regime took effect in 2013: discharge period shortened from 12 to 3 years; out-of-court debt enforcement option introduced (subject to creditor approval thresholds).
  - Central credit registry was not implemented by program end.
- Profitability and capital ratios:
  - CT1 ratio declined from 16.5 percent at end-2011 to 13.4 percent at end-2013, remaining above regulatory minimums.
  - Banks reported losses for a sixth consecutive year in 2013; PTSB recorded net cumulative losses of €1.7 billion during 2011-13 and was not expected to break even after provisioning expenses until 2017.

### Fiscal policy design, implementation, and outcomes
- Authorities’ three-year adjustment objective: €15 billion (9 percent of [2010] GDP) in measures relative to baseline, with €6 billion effective in 2011.
- Composition:
  - Two-thirds of adjustment from expenditure reductions (capital spending, public sector staffing and salaries, social welfare and public pensions for new entrants).
  - Revenue measures to broaden income tax base and increase progressivity; from 2013 further indirect taxes (phased VAT increases and a new property tax).
  - Structural reforms: new Fiscal Council, fiscal responsibility law, medium-term fiscal framework.
- Fiscal outturn (2010–2013):
  - All quantitative fiscal targets were met.
  - Overall deficit narrowed by 3.4 percentage points of GDP between 2010 and 2013.
  - Primary deficit narrowed by 5 percentage points of GDP.
  - Gross debt ratio increased to 124 percent of GDP.
  - Some €0.5 billion additional fiscal measures taken in 2012 to meet deficit target; largely unwound by lower measures in 2014.
- Interest payments and savings:
  - Considerable interest savings relative to original program path: cumulative €4.4 billion during 2011-13, or 2.7 percent of 2013 GDP.
  - Interest savings largely offset by weaker revenues; lower interest payments did not yield a stronger overall fiscal balance.
- Interest payments: Original Program vs. 12th Review (Euro billion)
  - 2011: Program request 6.0 -> 12th review 5.3
  - 2012: Program request 7.2 -> 12th review 6.1
  - 2013: Program request 10.3 -> 12th review 7.6
  - Interest savings (Percent of 12th review GDP): 0.4 (2011), 0.7 (2012), 1.6 (2013)

### Program risks, exceptional access criteria, and instrument choice
- Program risks rated high: main domestic risks included uncertain bank losses, challenging public debt trajectory, downside growth risks, and a pending general election.
- Exceptional access criteria (staff and Board agreed all four met at approval):
  - Criterion 1: exceptional BoP pressures requiring Fund financing beyond normal limits.
  - Criterion 2: public debt judged sustainable in the medium term with high probability was not met; exceptional access justified on basis of high risk of international systemic spillovers.
  - Criterion 3: prospect of regaining private capital market access within timeframe when Fund resources outstanding.
  - Criterion 4: program provided reasonably strong prospect of success given Ireland’s institutional and political capacity despite risks.
- Appropriateness of EFF:
  - EFF used because of medium-term BoP need and longer repayment period; helped secure favorable repayment terms from European partners.
  - Program was the first exceptional access EFF; lessons informed subsequent treatment of other cases.

### Lessons learned and policy recommendations
- What worked well:
  - Strong country ownership.
  - Realistic and tailored targets that were met.
  - Effective communication and pro-active engagement.
  - Strong and credible upfront actions in a banking crisis.
- Financial sector program design lessons:
  - Bank recapitalization alone insufficient to advance debt workouts and restore profitability—stronger supervisory interventions and supportive steps needed.
  - Bank recapitalization should be limited to institutions with viable medium-term business strategies.
  - Unsecured and non-guaranteed creditors of failed banks should be bailed in, provided a strategy to ring fence potential systemic risks can be put in place.
  - Macro-financial linkages require careful attention to limit sovereign-banking feedback loops.
- Fiscal policy lessons:
  - Fiscal policy must balance debt sustainability and domestic demand conditions.
  - Fiscal policy needs a clear and clearly communicated anchor; multiple anchors among partners complicated communication.
  - Case for moderately stronger fiscal adjustment toward end of program period once tail risks receded; example: saving just over half of interest savings vis-à-vis original assumptions in final program year could have improved structural deficit by about 1 percent of GDP in 2013.
- Lessons related to Fund policies and monetary union context:
  - Shortcomings in the systemic exemption clause in exceptional access Criterion 2 were identified; systemic exemption must be met at every review unless public debt is sustainable with high probability.
  - For members of a monetary union, Fund programs require close and effective interaction with union authorities; secure stronger upfront commitments from monetary union authorities where critical for program success.
  - Fund program documents should cover risks from monetary union membership in sufficient depth.

### Program design issues and unresolved challenges
- Trade-offs and sequencing:
  - Program heavily frontloaded with most conditionality in first year; some key measures (distressed household and SME debt resolution, personal insolvency, credit registry) progressed more slowly or were deferred.
  - Deferred measures contributed to persistent NPL, profitability, and creditor/debtor framework challenges at program exit.
- Early recapitalization effects:
  - Early recapitalization provided capital cushions but did not accelerate orderly restructuring of distressed household debt.
  - Legal constraints, foreclosure moratorium, and high court ruling in 2011 limited foreclosure options.
  - Supervisory guidance and earlier legal reform could have increased NPL resolution pace.
- Bail-in and legacy effects:
  - Subordinated debt liability management reduced bank liabilities by about €15.5 billion (some 10 percent of GDP) during 2008-11; senior creditors did not participate, leaving bondholder exposures of about €16.4 billion at program start.
  - Arguments for bail-in: reduce moral hazard, contain public sector costs, equitable burden sharing. Arguments against: potential cross-border euro area spillovers and contagion given extensive cross-holdings.
  - EU Bank Recovery and Resolution Directive includes senior bondholder bail-in effective January 1, 2016.
- Fiscal adjustment speed debates:
  - Gross public debt increased by almost 100 percentage points since 2007, exceeding 120 percent of GDP in 2013.
  - Primary balance remained in deficit; surplus not expected until first post-program year; debt sustainability analysis indicated high risks at end of program.
  - Trade-offs exist between faster adjustment to reduce vulnerabilities and avoiding deeper contraction in a weak economy.

### Selected quantitative performance and macro indicators (as presented)
- Cumulative exchequer primary balance — selected targets and actuals:
  - 1st & 2nd Review (Dec-10 / Mar-12): Target -15.8, Actual -14.7
  - 3rd Review (Mar-11): Target -7.9, Actual -6.3
  - 4th Review (Jun-11): Target -10.1, Actual -8.4
  - 5th Review (Sep-11): Target -20.2, Actual -18.3
  - 6th Review (Dec-11): Target -22.3, Actual -21
- Ceiling on stock of central government net debt — selected targets and actuals:
  - 1st & 2nd Review (Dec-10 / Mar-12): Target 83.6, Actual 81.7
  - 3rd Review (Mar-11): Target 92.1, Actual 88.5
  - 4th Review (Jun-11): Target 94.6, Actual 91.7
  - 5th Review (Sep-11): Target 115.9, Actual 111.7
  - 6th Review (Dec-11): Target 117.2, Actual 115.7
- Selected national accounts (constant prices) entries for 2008–2014 (as presented):
  - Real GDP: -2.6-6.4-0.30.92.81.9-0.32.40.23.04.1
  - Final domestic demand: -2.5-8.9-4.9-3.1-1.70.5-0.21.3-0.72.03.3
  - Private consumption: 0.0-5.40.9-1.0-1.20.5-1.21.2-0.81.51.0
  - Real GNP: -2.3-9.01.7-1.5-0.90.82.01.43.32.33.5
- Prices, wages, employment (annual average) — selected entries:
  - Harmonized index of consumer prices: 3.1-1.7-1.6-0.51.20.21.91.30.51.30.6
  - Unemployment rate (in percent): 6.412.013.9    13.514.6    12.814.7   12.313.0    11.511.2
- Public finance (in percent of GDP) — selected entries:
  - General government balance (excl. bank support): -7.0-11.5-13.3   -10.5-8.6-8.6-8.0-7.5-5.7-5.1-3.9
  - General government gross debt: 42.662.287.4  112.8    111.1  120.0121.7 124.5123.3  124.1111.2

### Irish authorities’ assessment and views (summary)
- Authorities broadly agree with main findings and welcome focus on lessons learned.
- They emphasize:
  - Strong country ownership and realistic, tailored targets; program commitments delivered within agreed deadlines.
  - Financial sector substantially restructured with enhanced supervision; ECB Comprehensive Assessment confirmed capital adequacy of two main banks.
  - A primary surplus achieved; debt stabilized and on downward trajectory; on target to bring general government deficit below EDP ceiling in 2015.
  - Economic growth: "by around 4.7% this year" and "is forecast to grow by close to 4% in 2015" (authorities’ statements).
  - Proposed early repayment of IMF loan: "around €18.3 billion of our IMF loan of €22.5 billion" — with "€9 billion to be repaid in December 2014".
- Authorities’ caveats:
  - Review timeframe stops at end-2013 and is backward looking; limits value of lessons given publication more than one year after program exit.
  - Constraints at crisis time (e.g., lack of available senior bond bail-in tools) and limited administrative capacity shaped policy choices and sequencing.
  - Stress need for programme flexibility to reflect national circumstances and social considerations; highlight social burden borne by the public.

*International Monetary Fund staff report excerpt on Ireland’s EFF program implementation, outturn, and lessons (source: _cr1520).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Program overview and objectives
- The IMF approved in December 2010 an exceptional access Extended Fund Facility (EFF) arrangement for SDR 19.466 billion (2,321.8 percent of quota) in support of Ireland’s home-grown program and as part of a broader financing package of Ireland and its European partners.
- Program focus:
  - Address the Irish banking crisis to break the adverse feedback loop between banks, the sovereign, and the real sector.
  - Restore the banking system to health, including by establishing a smaller banking sector with high capital buffers and more stable funding sources.
  - Secure fiscal sustainability while limiting the near-term demand drag from fiscal consolidation.
  - Provide large external financing as a key element of the crisis response.

### Program implementation and outcomes
- Implementation assessment:
  - Program implementation was very strong.
  - The program succeeded in stabilizing the banking sector and reducing its size.
  - Fiscal developments were broadly as anticipated.
  - Domestic demand was weaker than programmed and unemployment remained high amid a very challenging external environment.
  - Regaining market access at low interest rates was achieved and benefitted from actions at the wider euro area level.
- Key pre-program and crisis facts informing outcomes:
  - Real GNP contracted by 9½ percent in 2008–10 (GDP by 9 percent).
  - Credit to the private sector expanded by 20 percent per annum during 2002-07.
  - Total assets of domestic banks reached over 520 percent of GDP by 2008.
  - Wholesale funding reached some 60 percent of banking liabilities prior to the crisis.
  - By mid-2010, the government had injected €46.3 billion of capital into banks (roughly 30 percent of GDP), de facto nationalizing domestic banks.
  - ECB exposure to Ireland peaked such that Irish domestic banking system exposure reached €90 billion through regular ECB operations, and €150 billion including Emergency Liquidity Assistance (ELA) (close to 100 percent of GDP).
  - Consolidation measures of 6.2 percent of GDP were implemented between 2008 and 2010.
  - The deficit (excluding financial sector support) reached 13.3 percent of GDP in 2010.
  - Public debt jumped from 25 percent prior to the crisis to close to 100 percent of GDP in 2010.
  - The Credit Institutions Financial Support Scheme (CIFS) guarantee was equivalent to 240 percent of GDP.

### Lessons from what worked well
- Core factors for success:
  - Strong country ownership.
  - Setting (and meeting) realistic and tailored targets.
  - Effective communication and pro-active engagement.
  - Addressing a banking crisis requires strong and credible actions upfront.

### Lessons for future program design
- Financial sector program design:
  - While the main pillars were sound, more proactive and stronger supervisory interventions and other supportive steps could have strengthened banks’ balance sheets and bank profitability and helped resolve problem loans.
  - Bank recapitalization should be limited to those with viable medium-term business strategies.
  - Unsecured and non-guaranteed creditors of failed banks should be bailed in, provided a strategy to ring fence potential systemic risks can be put in place.
  - Macro-financial linkages require careful attention and timely steps to limit sovereign-banking sector feedback loops.
- Fiscal policy design:
  - Fiscal policy must be mindful of debt sustainability but also of domestic demand conditions.
  - Fiscal policy needs a clear anchor.

### Lessons related to Fund policies
- Ireland’s EFF underscores the importance of:
  - Addressing shortcomings of the systemic exemption clause in Criterion 2 of the exceptional access criteria.
  - Exploring ways to secure stronger upfront commitments from monetary union authorities when those commitments are critical for program success.

*Prepared by an interdepartmental IMF team (A. Chailloux (EUR), J. Gobat (MCM), H. Imamura (FIN), J. McHugh (FAD), H. Poirson Ward (SPR), and T. Krueger (lead) (FIN)), December 15, 2014.*

### 12.      The initial crisis response proved insufficient to stabilize the economy, and the

### _cr1520 - 12.      The initial crisis response proved insufficient to stabilize the economy, and the

### Crisis background and Fund request
- Initial domestic response undermined by: rising euro area market tensions (particularly in several southern euro member countries), unraveling of the property market, uncertainties about potential scale of bank losses, contracting economic activity, and rising unemployment.
- Sovereign bond yields came under pressure as substantial public sector support to the banking sector and collapse in tax revenues severely weakened Ireland’s fiscal position.
- With declining fiscal buffers and ECB concern about scale of liquidity support provided by the Eurosystem, the Irish authorities requested IMF and European partner support in late 2010—about three years after the onset of the crisis.
- Prior actions that limited later policy options included blanket guarantees to bank creditors and modest banking-sector burden sharing, intensifying the nexus between banking and the public sector and raising public debt close to 100 percent of GDP (not counting further bank recapitalization).

### Program strategy (A)
- Fund approved an EFF arrangement in support of Ireland’s home-grown program in December 2010.
- Program focus: address the banking crisis to break adverse feedback loops between banks, the sovereign, and the real sector.
- Fiscal targets calibrated to avoid unduly undermining growth while ensuring medium-term fiscal sustainability.
- Program aimed to:
  - Establish a smaller, robust banking sector focused on serving Irish economic needs; banks to maintain high capital buffers and establish a more stable funding base.
  - Secure fiscal sustainability over the medium term while limiting near-term demand drag from consolidation where feasible; authorities’ plans to form basis of 2011 and subsequent budgets.
  - Preserve a strong business environment; program actions limited to addressing remaining impediments to competitiveness, employment, and growth.
- Conditionality:
  - Structural conditionality concentrated on comprehensive banking-sector restructuring and strengthening banking supervision.
  - Fiscal conditionality: two quantitative performance criteria covering the central government cash primary balance and arrears; an indicative target on central government net debt.
  - Use of primary balance measure (rather than overall balance) due to large uncertainty about path of interest rates.
  - Symmetric adjuster for revenues (and a limited number of expenditure items) to accommodate weaker/stronger economic activity.
  - A small number of structural fiscal benchmarks and prior actions, including submission of the 2011 budget.
- Conditionality design: more streamlined than other recent programs, with fewer structural benchmarks overall and a stronger focus on financial sector reforms, reflecting Ireland’s relatively strong institutional framework outside the financial sector.

### Financing, exceptional access, and program risks (B)
- Financing:
  - Board approved a three-year exceptional access EFF arrangement for SDR 19.5 billion (€22.5 billion, or 2,321.8 percent of quota).
  - Program part of a financing package of €85 billion: EU and bilateral European lenders pledged €45 billion; Irish authorities contributed €17.5 billion from cash reserves and other liquid assets.
  - Upon approval, SDR 5.0 billion (399 percent of quota) was disbursed.
  - Frontloading: 26 percent of total access (first purchase), around median level of recent crisis cases and highest among euro area cases.
  - Program duration: 36 months (considered appropriate given medium-term BoP need).
- Justification for access and buffer:
  - Staff identified a notional buffer of €35 billion to support the banking system: €25 billion expected for immediate recapitalization and €10 billion on a contingency basis.
  - Staff argued Ireland’s BoP need reflected: (i) financial account deficit from rollovers of external government debt and outflows from Irish banks; (ii) a current account deficit that would only gradually decline; (iii) need to strengthen reserves to meet government external debt obligations and shore up confidence.
- Exceptional access criteria: staff and Board agreed all four criteria were met.
  - Criterion 1: exceptional BoP pressures requiring Fund financing beyond normal limits (see paragraph 17 rationale).
  - Criterion 2: there was a high probability that public debt was sustainable in the medium term; however, because of significant uncertainties, exceptional access was justified on basis of high risk of international systemic spillovers since public debt was not judged sustainable with high probability.
  - Criterion 3: prospect of regaining private capital market access within timeframe when Fund resources outstanding—successful program implementation expected to be basis for future access.
  - Criterion 4: program provided reasonably strong prospect of success given Ireland’s institutional and political capacity despite substantial program risks.
- Program risks (paragraph 21):
  - Rated high.
  - Main domestic risks: uncertainty about bank losses, challenging public debt trajectory, downside risks to economic growth, and a pending general election.
  - Program provided buffer via additional capital for banks against a stress scenario.
  - Staff sought ex ante support for key program parameters from all major political parties to mitigate election-related political risks.
  - Euro area-wide risks did not feature prominently in staff report for the program request.

### Program implementation and outturn
- Overall assessment:
  - Program implementation was very strong; all performance criteria and most structural conditionality were met.
  - EFF arrangement successful in stabilizing financial sector, reducing its size, and containing systemic risks.
  - Public debt and deficit developments broadly as anticipated.
  - Low cost market access for sovereign regained by end of program, aided by wider euro area actions.
  - Unemployment remained high and domestic demand was lower than programmed amid a more challenging external environment.
  - Substantial further efforts needed post-program to reduce remaining vulnerabilities, especially in fiscal area and banking sector.
- Conditionality compliance:
  - All performance criteria under Ireland’s EFF were met at each review.
  - Of structural conditionality, some 97 percent was met; a few with delay or partial implementation; only one structural benchmark not met.
  - First and second reviews were combined due to early elections; all other reviews concluded as scheduled; final (12th) review concluded on December 13, 2013.
- Macroeconomic framework and structural policies:
  - Macroeconomic strategy aimed for sustainable growth amid major headwinds.
  - Fiscal adjustment to proceed in broadly equal steps per annum to cushion pro-cyclical impact relative to a more front-loaded consolidation.
  - Banking reforms included ring-fencing deleveraging mainly to non-core (foreign) banking assets to limit domestic spillovers.
  - Program anticipated a further decline in real GNP in 2011, with an estimated cumulative decline to almost 20 percent relative to the GNP level in 2007, followed by gradual rebound.
  - Outside financial sector, structural reforms limited: competition enforcement, some service sector reforms, and labor market policies (including efforts to reduce public sector wage bill; an agreed cut in minimum wage was rejected and reversed; later actions to strengthen active labor market policies and reduce minimum wage for new job entrants).
- Outturn specifics:
  - External sector:
    - Provided stronger-than-expected impulse initially due to export exposure (40 percent to the US and the UK) and product specialization sheltering Ireland from euro area slowdown.
    - Later external contributions to growth lower than programmed following further trading partner weakness and the “patent cliff” that affected pharmaceutical exports strongly.
  - Growth:
    - Domestic demand generally weaker than programmed.
    - Overall GDP growth was below original program assumptions: 0.9 percent per annum during 2011-13 versus 1.7 percent projected.
    - Deviations from original projections were comparatively limited given weaker external environment and did not warrant policy revisions.
    - Average GNP growth was higher-than-programmed: 1.5 percent per annum versus 0.2 percent projected at time of program request (note: this point appears in the source discussing patent cliff impact on resident income).
  - Current and financial accounts:
    - Ireland’s current account position improved substantially, notably due to a large increase in undistributed profits of redomiciled multinational firms.
    - Financial account recorded sizable net outflows as anticipated in the access discussion.

*International Monetary Fund staff report excerpt on Ireland’s EFF program implementation and outturn.*

### 26.      The slow recovery in domestic demand likely reflected more protracted repercussions

### _cr1520 - 26.      The slow recovery in domestic demand likely reflected more protracted repercussions

### Slow recovery in domestic demand
- Ireland’s domestic demand contraction lasted longer than in other advanced economies that faced a financial crisis and private debt overhang; in those comparator countries private consumption growth typically turned positive again some three years after the peak.
- The Ireland EFF anticipated a slower response: private consumption was to turn positive in 2012, i.e., five years after its peak.
- The simultaneous and very large deterioration of government, corporate, and banking balance sheets, combined with a very large household debt burden, were likely more detrimental to investment, consumption, and overall growth than originally anticipated.
- The intensifying euro area crisis likely also weighed on domestic confidence in the early years.

### Financial sector: program strategy
- Program objectives:
  - Separate non-viable banks from viable banks and return the latter to healthy entities.
  - Downsize the banking sector.
  - Reduce systemic risk and increase the banking sector’s shock-absorbing capacity.
- Core policy actions:
  - Wind down Anglo-Irish bank and INBS (non-viable).
  - Subject remaining intervened banks (AIB, EBS, BoI, and PTSB) to an early, stringent prudential capital assessment review (PCAR) including an independent diagnostic asset quality review and a three-year stress test; capital needs to be determined against base and stress cases and results disclosed within three months of the program.
  - Promptly increase capital buffers; recapitalization to be completed within the first six months based on stress test outcome. Banks required to observe the Core Tier 1 (CT1) ratio of 10.5 percent in the base case on an ongoing basis and 6 percent in the stress case.
  - Prudential liquidity assessment review (PLAR) to reduce reliance on short-term wholesale funding and ensure convergence with Basel III liquidity requirements; CBI prepared PLAR based on deleveraging plans and set liquidity targets, with banks aiming for a target loan-to-deposit ratio (LDR) of 122.5 percent by the end of 2013. LDR targets were dropped by the 7th review and replaced with monitoring of nominal targets for banks noncore asset sales.
  - Address distressed debts of households and SMEs via a combination of options, including reforming the personal insolvency regime (structural benchmark), introducing a central credit registry (structural benchmark), and recapitalizing and strengthening banks’ capacity for voluntary restructurings.
  - Address institutional weaknesses: strengthen banking supervision; establish a comprehensive bank resolution framework, including a special resolution scheme for deposit taking institutions.

### Financial sector: program outturn and key statistics
- Implementation summary:
  - Implementation was largely as envisaged and capital buffers were increased significantly.
  - The three intervened banks were recapitalized within six months of program onset; capital buffers roughly doubled and remained well above regulatory requirements.
  - BOI attracted some private capital; public sector capital injections were below initial program assumptions.
  - Anglo-Irish bank and INBS were merged and subsequently liquidated.
  - NAMA’s asset disposals proceeded somewhat faster than initially envisaged.
  - Steps to strengthen financial supervision were implemented as programmed.
- Funding and liquidity outcomes:
  - Loan-to-deposit ratio declined from 190 percent at end 2010 to under 120 percent at the end of the program in late 2013.
  - Banks’ recourse to the Eurosystem declined from a peak of €90 billion to €26 billion at end-2013.
- PCAR and capital:
  - The PCAR resulted in capital requirements of €24 billion, including a contingent equity buffer of €3 billion.
- Aggregated balance sheet changes for BOI, AIB, and PTSB (selected items, end 2010 vs end 2013):
  - Cash & due from Eurosystem: 6.1 EUR bn -> 10.6 EUR bn (change 4.57 EUR bn, 74.3 percent)
  - Net loans: 244.3 EUR bn -> 179.4 EUR bn (change -64.9 EUR bn, -26.6 percent)
  - Total assets: 343.2 EUR bn -> 275.4 EUR bn (change -67.8 EUR bn, -19.8 percent)
  - Due to Eurosystem: 71.9 EUR bn -> 26.1 EUR bn (change -45.9 EUR bn, -63.8 percent)
  - Deposits: 134.8 EUR bn -> 161.9 EUR bn (change 27.1 EUR bn, 20.1 percent)
  - Net equity: 14.6 EUR bn -> 20.8 EUR bn (change 6.1 EUR bn, 42.0 percent)
  - Gross NPLs: 31.5 EUR bn -> 56.4 EUR bn (change 24.9 EUR bn, 79.2 percent)
  - Gross NPLs to gross loans (%): 12.1 -> 27.1 (change 15.0)
  - Provisions to gross NPLs (%): 44.1 -> 51.4 (change 7.3)
  - Net NPLs to net equity (%): 120.3 -> 132.0 (change 11.7)
  - Sources: CBI; and IMF staff estimates.
- Balance sheet downsizing:
  - Total assets reduced by 20 percent (note: this excludes transfers to NAMA; including such transfers would show a contraction in assets by more than one third).
  - The three intervened banks sold or disposed € 45 billion in assets.
  - Domestic loan book shrunk between 2010 and 2013 by more than 25 percent.
  - Banking assets at end 2013 stood at about 2.5 times GDP, less than half their ratio prior to the program.

### Remaining banking sector challenges and performance metrics
- Nonperforming loans and restructurings:
  - NPLs continued to rise until the end of the program period, reaching 27 percent of total loans at end-2013 compared to 10 percent at end-2010.
  - Households and SMEs accounted for 60 percent of the end-2013 NPL stock.
  - Over 70 percent of the end-2013 NPL stock was 720 days or older.
  - About one-quarter of mortgage arrears were restructured by end-2013; repeat defaults remained low.
  - Loan restructuring activity advanced starting mid-2013 following a more prescriptive stance by the CBI, including quantitative SME and mortgage arrears restructuring targets and strengthened provisioning and classification standards.
- Personal insolvency framework and credit registry:
  - A new personal insolvency regime went into effect only in 2013; the reform shortened the discharge period from 12 to 3 years and introduced an option for out-of-court debt and enforcement procedures for restructuring mortgages, subject to creditor approval by certain majorities.
  - The central credit registry was not implemented by program end.
- Profitability and capital ratios:
  - Banking sector losses declined and intermediation margins improved, but high NPLs and provisioning costs limited profitability recovery.
  - Low returns on sizable asset positions (including on tracker mortgages) and limited progress in improving efficiency and reducing operating costs contributed to continued weak profitability; banks reported losses for a sixth consecutive year in 2013.
  - CT1 ratio declined from 16.5 percent at end-2011 to 13.4 percent at end-2013, though remaining above regulatory minimum requirements.
  - Forward-looking profitability concerns were most pronounced at the smallest of the three domestic banks (PTSB).

### Fiscal policy: program design and outturn
- Program design:
  - Authorities’ three-year adjustment objective: €15 billion (9 percent of [2010] GDP) in measures relative to a baseline scenario, with €6 billion to become effective in 2011. This aimed to steady reduce the overall deficit and stabilize the debt ratio by 2014 at somewhat above 120 percent of GDP.
  - Expenditure reductions to account for two thirds of the adjustment (capital spending, public sector staffing and salaries, savings on social welfare and public pensions for new entrants).
  - Revenue measures aimed at broadening the income tax base and increasing progressivity; from 2013 onward further revenue measures to raise indirect taxes (phased VAT increases and a new property tax).
  - Structural reforms included a new Fiscal Council, a fiscal responsibility law, and a medium-term fiscal framework (structural benchmarks).
  - Debate among Troika partners over pace of adjustment and fiscal anchor; attainment of the 3 percent of GDP deficit threshold of the Stability and Growth Pact was delayed to 2015 (one year later than originally targeted in the NRP).
- Fiscal outturn (2010–2013):
  - All quantitative fiscal targets were met.
  - Between 2010 and 2013, the overall deficit narrowed by 3.4 percentage points of GDP.
  - The primary deficit narrowed by 5 percentage points of GDP.
  - Gross debt ratio increased to 124 percent of GDP.
  - Some €0.5 billion of additional fiscal measures were taken in 2012 to meet the deficit target, but were largely unwound by somewhat lower measures in 2014.
- Interest payments and revenue dynamics:
  - Considerable interest savings relative to the original program path: a cumulative €4.4 billion during 2011-13, or 2.7 percent of 2013 GDP; savings reflected lower-than-programmed interest rates and re-profiling of European partner support.
  - Interest savings were largely offset by weaker revenues which underperformed in relation to GDP; lower interest payments did not lead to a stronger overall fiscal balance.
  - Improvement in the structural primary balance was some 1½ percent of GDP per annum during the program period, but this pace was some 1 percentage point per annum slower than in the two years prior to the EFF-supported program.
- Interest Payments: Original Program vs. 12th Review (Euro billion, unless otherwise indicated)
  - 2011 2012 2013
  - Program request 6.0 7.2 10.3
  - 12th review 5.3 6.1 7.6
  - Interest savings (Percent of 12th review GDP) 0.4 0.7 1.6

### Program design issues highlighted
- Early program trade-offs: the program was heavily frontloaded with most conditionality in the first year and reduced conditionality from the middle of the program onward.
- Some policy challenges (notably distressed household and SME debt resolution, personal insolvency framework, and credit registry implementation) were deferred or progressed more slowly than envisaged, reflecting capacity and political constraints as well as the absence of quick technical fixes.
- These deferred or incomplete measures contributed to the banking sector exiting the program period still facing significant challenges in NPL resolution, profitability, and structural creditor/debtor frameworks.

*International Monetary Fund staff summary of _cr1520 - 26.      The slow recovery in domestic demand likely reflected more protracted repercussions*

### 39.      The early recapitalization of banks did not accelerate an orderly restructuring or

### _cr1520 - 39.      The early recapitalization of banks did not accelerate an orderly restructuring or

### Early recapitalization and distressed debt resolution
- The program provided banks upfront with a fairly robust capital cushion based on initial stress tests and asset quality review, but banks generally did not employ the capital buffers to proactively restructure distressed household debt.
- Significant reforms to facilitate debt restructuring were put in place only in 2013.
- Legal issues delayed reforms, including delays in introducing the personal insolvency regime and the central credit registry.
- Historical and political constraints limited options (for example, repossessions of a significant number of owner-occupied residences were seen as not viable).
- The introduction of a one year moratorium on foreclosure of residential mortgage arrears and a high court ruling in 2011 made it more difficult for banks to initiate summary foreclosure proceedings on mortgages taken out before 2009, which may have led to some borrowers with adequate financial resources to default (“strategic defaulters”).

### Building consensus and reform timing
- Progress was slow but used to build a broader consensus on a restructuring reform strategy; it took about five years since the property price bubble began to burst to reach this point.
- Little fiscal space existed for generalized debt relief to the private sector during the program period.

### Areas where faster action could have materially helped recovery (examples debated)
- More forceful supervisory intervention and prudential guidance that could have:
  - (i) addressed deficiencies in banks’ provisioning treatment of impaired assets, including restructured loans;
  - (ii) provided guidance on loan restructuring options, including any debt discharge, to liquidity constrained but ultimately viable borrowers;
  - (iii) set sooner realistic targets for the reduction of problem loans; and
  - (iv) encouraged write offs of uncollectible loans.
- Putting in place a personal insolvency regime that balances creditor and debtor interests; legal amendments were delayed and the ultimately adopted framework did not incorporate some relatively fast and objective resolution mechanisms used elsewhere.
- The amendment to the Land and Conveyancing Act in 2013 strengthened options to pursue foreclosures as part of the resolution process (useful for defaults on investment “buy-to-let” properties).

### Bank profitability, viability, and recapitalization choices
- All intervened banks continued to record a loss (net of provisioning) throughout the program period due to operational and funding costs, large holdings of low yielding assets (especially tracker loans and non-income earning NPLs), and sales of profitable foreign assets to reduce ECB funding reliance.
- Loan-to-deposit ratio targets in part of the program period constrained domestic activities and pushed deposit rates up in 2011–12.
- More substantial progress on containing banks’ operational costs began in 2013.
- Recapitalizations were based on asset quality review and stress tests but did not address whether banks had a viable business model going forward.
- The medium-term viability of PTSB remained to be established at program end.
  - PTSB was recapitalized in July 2011 by the government with €2.7 billion, net of receipts of €1.3 billion from the sale of its life insurance business.
  - PTSB recorded net cumulative losses of €1.7 billion during 2011-13.
  - PTSB had a large portfolio of low yielding tracker mortgages (some two-thirds of its total assets in 2013).
  - The Fund-supported program ended acknowledging PTSB faced the greatest challenge in restoring profitability and was not expected to break even after provisioning expenses until 2017.

### Deleveraging of foreign assets and cross-border fragmentation
- Banking sector strategy called for rapid sale of mostly noncore foreign assets because domestic banks had assets of around 520 percent of GDP and were considered too large.
- Sale of foreign assets improved liquidity and reduced systemic size-related risk but increased concentration of domestic risk exposure.
- Sales of non-core assets by Irish and other euro area banks tended to add to fragmentation in the region and could aggravate sovereign-banking feedback loops.
- The deleveraging strategy was judged reasonable overall, with safeguards against fire sales; however, the strategy did not internalize spillover effects on other countries.

### Bail-in of private creditors and legacy effects
- Subordinated debt liability management exercises during 2008-11 generated a reduction in bank liabilities of about €15.5 billion (some 10 percent of GDP); subordinated debt was not fully written down as some cash payouts were provided.
- Senior creditors did not participate; remaining bondholder exposures totaled some €16.4 billion by the start of the Fund-supported program.
- Arguments for bailing in senior unsecured bondholders:
  - Reduces moral hazard and risk of future crises.
  - Contains public sector costs and weakens banking-public sector links.
  - Could be considered equitable burden sharing.
- Main argument against bail-in: concerns about cross-border euro area spillovers and contagion given extensive cross holdings of senior bonds and lack of euro area firewalls in late 2010-11.
- Evidence on cross-border spillover risks from bailing-in Irish senior unsecured creditors was not clear; markets appeared to price expectations of some principal haircut in senior bond prices.
- Possible policy measures to limit spillovers included supporting steps by other countries’ authorities if their banks’ solvency were threatened and forceful ECB liquidity support to prevent funding market disruptions.
- Legacy effects of not bailing in senior unsecured bondholders include fiscal costs and concerns about fairness and burden sharing.
- The EU Bank Recovery and Resolution Directive includes senior bondholder bail–in in banking rescue operations, effective January 1, 2016.

### Fiscal adjustment speed
- Gross public debt increased by almost 100 percentage points since 2007, exceeding 120 percent of GDP in 2013.
- The primary balance remained in deficit and was not expected to record a surplus until the first post-program year; debt sustainability analysis indicated high risks to debt sustainability at end of program.
- Arguments for faster fiscal adjustment:
  - Would help contain vulnerabilities and reduce exposure to unforeseen events.
  - Avoid adjustment fatigue and the rising difficulty of cuts later.
  - Ireland’s fiscal multiplier was relatively low given its open economy, implying lower adjustment costs.
  - There was room to cut spending (which had increased sharply in real terms in the boom years) or raise revenues (which remained low relative to GDP).
- Arguments against faster front-loaded adjustment:
  - Adverse impact on an already very weak economy.
  - Value of maintaining ownership by staying with the home-grown Irish adjustment program.
  - Ireland’s track record of delivering planned adjustments provided some assurance that future adjustment needs could be addressed outside a Fund-supported program.

*Canonical source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1520.pdf*

### 55.      While a case can be made for moderately stronger fiscal adjustment once the economy

### _cr1520 - 55.      While a case can be made for moderately stronger fiscal adjustment once the economy

### Fiscal adjustment, timing, and impact
- Program fiscal adjustment was sizable: "some 1½ percent of GDP per annum in terms of the structural primary balance during the three program years, and a cumulative 10 percentage points during 2009-13."
- Early program year trade-offs:
  - GNP had been expected to decline for a fourth year in a row, "and by 18.7 percentage points relative to its peak in 2007."
  - Any additional fiscal drag in the first year "could have proven self defeating."
- Composition and durability:
  - "Two-thirds of the measures on the spending side"—implying expected durable effects.
- Case for faster adjustment:
  - Becomes stronger toward the end of the program period as "tail risks (also in the euro area) had receded and the fiscal multiplier would likely have been smaller."
  - Example quantified: "saving just over half of the interest savings vis-à-vis the original program assumptions in the final program year would have secured an improvement in the structural deficit of about 1 percent of GDP in 2013."
  - Potential benefits: "moved Ireland somewhat further along toward debt sustainability, and could have alleviated some of the concerns about adjustment fatigue."

### Fiscal anchors and communication
- Multiple fiscal indicators were used by different parties:
  - Authorities guided by the National Recovery Plan (NRP) and MTFS envisioning "a €15 billion nominal adjustment from a baseline over four years" and medium-term objectives for overall deficit and debt-to-GDP.
  - European Commission focused on "the overall deficit and the adjustment path under the excessive deficit procedure," with the program aiming "to bring the deficit to no more than 3 percent of GDP by 2015."
  - IMF staff focused on the NRP nominal adjustment ("€15 billion over four years, with annual targets set for each year"), set a performance criterion for the cumulative exchequer primary balance, and an indicative ceiling on central government net debt.
- Assessment: "More clarity about the fiscal anchor could have been helpful."
  - The staff’s focus on adjustment allowed automatic stabilizers to operate but was "increasingly difficult to quantify" because it was measured relative to a hypothetical “no policy change” scenario.
  - Alternative anchors suggested: "overall (or primary) deficit, possibly allowing for automatic stabilizers," to provide a clearer signal.
  - Use of different fiscal target measures by partners and authorities "did not help in the communication of the fiscal strategy."

### Consistency with Fund policies and exceptional access criteria
- At EFF approval (December 2010) all four exceptional access criteria were deemed met:
  - Criterion 1: Ireland experienced "exceptional balance of payments pressures" despite monetary union membership.
  - Criterion 2: While public debt sustainability could not be asserted with high probability, exceptional access was justified by "a high risk of international systemic spillovers," mainly via the euro area periphery.
  - Criterion 3: Program envisaged progress on banking reform and exceptional financing "would drastically reduce debt default risks and normalize access to private capital markets within the timeframe when Fund resources are outstanding."
  - Criterion 4: Program judged as providing "reasonably strong prospects of success" given Ireland's institutions and consensus-based approach.
- Evolving context and concerns:
  - Shortcomings noted in using the systemic exemption (Criterion 2) in later reviews as euro-area tail risks receded and European firewalls/ECB tools expanded.
  - It "is not obvious that spillover risks remained significant and that the systemic exemption clause was met at the time of the reviews in late 2012 and 2013."
  - The Board’s assessment could have been aided by updating staff analytical work from the original program request.
- Dependence on third-party actions:
  - Program success "depending critically on actions by third parties that were not directly bound by the program"—e.g., ECB liquidity support and broader euro-area stabilization measures.
  - Without euro-area wide actions there was "little prospect of stabilizing Irish banks and establishing a sustainable funding base"—affecting Criteria 3 and 4.
  - Mid-2012 context: "Irish bond spreads ... remained still about 200 basis points above the levels required to secure debt sustainability."
  - Program assumed "an average spread of 3 percent between 2012 and 2020, compared to the market spread of about 5 percent in July 2012."
  - European partners ultimately took prerequisite actions (ECB announcements and facilities) that contributed to a re-tightening of spreads; studies cited suggest ECB/common factors may have reduced Irish yields "possibly by more than 200 basis points."

### Appropriateness of the EFF instrument
- Ireland’s program was "the first exceptional access EFF."
- Rationale for EFF use:
  - Anchored on "a medium-term balance of payments need."
  - Longer repayment period under the EFF "was also a contributing factor in securing favorable repayment terms from Ireland’s European partners."
  - Longer repurchase period helped address market concerns amid combined public and private deleveraging.
- Lessons on instrument choice:
  - The staff’s arguments for EFF versus SBA (repurchase period and need for deep structural reforms) could have applied to earlier programs (e.g., Greece).
  - The use of the EFF "presented therefore in part an early lesson learned from the previous crisis programs" and informed subsequent treatment of other cases.

### Lessons from program implementation (what worked well)
- Principal lessons drawn from strong program performance:
  1. "Country ownership is key." The EFF largely supported a home-grown program; implementation was underway before the Fund arrangement.
  2. "Set realistic targets and meet them." Meeting targets reassures private capital markets; realistic but conservative macro frameworks were critical.
  3. "In a banking crisis, take strong actions upfront"—credible asset quality and liquidity assessments and well-capitalized banking systems are critical; capital increases provided cushions despite fiscal cost.
  4. "Focus conditionality on key challenges." Parsimonious conditionality concentrated on the financial sector and selected fiscal issues, avoiding overburdening implementation capacity.
  5. "Communicate effectively." The Irish authorities and Fund staff engaged in outreach, helping to secure buy-in from public, markets, and Troika partners.
  6. "Be pro-active and closely engaged." Close engagement by the Fund team and resident representation fostered trust and aided program implementation.

*Source: Excerpt from the provided IMF staff report content.*

### 64.      The following lessons relate to program design and are based on a weighing of the

### _cr1520 - 64.      The following lessons relate to program design and are based on a weighing of the

### Lessons Related to Program Design
- 1) Bank recapitalization alone does not advance debt workouts and restore bank profitability—supervisory interventions and other supportive steps are also needed.
  - The program rightly focused initially on addressing the immediate threats to the banking system, recapitalizing banks based on credible asset quality reviews.
  - Subsequently, stronger supervisory guidance—for example, by fully using the room provided under IFRS and prudential regulations (as discussed in Box 2)—as well as further legal reforms could have facilitated more progress in addressing the high levels of NPLs in a sustainable manner.
  - Earlier adoption of a stronger insolvency framework could also have facilitated progress in this area.
  - Stronger supervisory guidance on bank restructuring could have helped in reducing operating costs and improving bank profitability.
  - Taken together, more forceful actions, taken at an earlier stage, could have supported a stronger economic recovery.

- 2) Bank recapitalization should be limited to viable institutions with a clearly sustainable medium-term business strategy.
  - Recapitalizing a non-viable bank and/or not restructuring a bank that does not have reasonable prospects of being profitable over the medium term risks adverse repercussions for the entire sector and the economy at large.
  - In the case of Ireland, a resolution of these issues should have been agreed during the program period.

- 3) Unsecured and non-guaranteed creditors of failed institutions should be bailed in, accompanied by a strategy to ring fence potential risks when needed.
  - Market participants generally anticipated a bail-in of unsecured creditors in failed Irish financial institutions.
  - Moral hazard considerations, the need to contain public debt, and experience outside the euro area argued for this approach, at least in failed institutions that required public support, and that it should have covered not only subordinated debt holders but also senior bond holders.
  - While this approach would have broken new ground in the euro area at a time of area-wide fragility, negative spillover effects to other parts of the area, to the extent that they might have occurred despite the anticipation by market participants, should have been ring fenced at the euro area level.

- 4) Macro-financial linkages require careful analysis, and timely steps should be taken to limit the sovereign and banking sector feedback loops.
  - It proved difficult to identify the build-up of risks ahead of the bursting of the property price bubble in Ireland.
  - This experience adds to the case for strengthening the analysis of macro-financial linkages, especially in countries with large financial sectors, and the toolkit to address related risks—an area where considerable efforts have been underway since the global crisis.
  - Steps to sever or at least limit the sovereign-banking sector feedback loops need to be an important part of the toolkit.

- 5) Fiscal adjustment has to be mindful of debt sustainability but, to the extent that this provides room, also of domestic demand conditions.
  - On this basis, the original fiscal program design struck a broadly appropriate balance.
  - The economy was extremely weak and tail risks were large in the early parts of the program.
  - Given sizable adjustment needs beyond the program period, a case could be made for a moderate tightening of the fiscal stance, especially in the final program year, once the domestic economy stabilized and European policy actions had taken major tail risks off the table.
  - At that point, the fiscal multiplier in Ireland’s very open economy would likely have been small (but, of course, still positive).
  - Saving at least half of the interest savings relative to the original program assumptions would have been one option and brought the primary balance closer to its original program target.

- 6) Fiscal policy needs a clear and clearly communicated anchor.
  - While all program partners agreed on the broad strategy, each adopted their own anchor and indicators to monitor performance.
  - A unified approach would have helped communicate the program objectives more effectively and avoid possibly uncertainties and mixed signals, if program performance had deviated from the original targets (an issue that ultimately did not arise in Ireland).

### Lessons Related to Fund Policies
- 1) The systemic exemption clause of exceptional access Criterion 2 has significant shortcomings.
  - From the outset, staff considered that Ireland’s public debt could not be judged as sustainable with high probability in the medium term.
  - Invocation of the systemic exemption at the original program request—given the euro area-wide risks then prevailing—meant that this vulnerability was not addressed at the time.
  - The experience under Ireland’s EFF points to significant shortcomings of the systemic exemption clause, and discussions on possible reforms are ongoing at the Fund. 44
  - Pending such reforms, the systemic exemption clause must be met at every review to justify continued Fund financing in these exceptional access cases, unless the country’s public debt is judged sustainable in the medium term with high probability.
  - Consequently, when spillover risks appear to have diminished later in the program period, continued financial support by the Fund needed to be contingent on securing medium-term public debt sustainability with high probability.
  - In the case of Ireland’s EFF arrangement, the application of the criterion was ultimately not covered in much detail in later reviews when spillover risks appear to have diminished.

- 2) For a member of a monetary union, Fund-supported programs require close and effective interaction with the relevant union authorities.
  - On Ireland, the Troika teams invested considerable time and effort into establishing a close and generally very effective working relationship.
  - This relationship offered important benefits, including bringing in very large financial resources, both of the ECB and the EU, as well as to some extent complementary expertise of these institutions.
  - Ireland’s policymaking is also strongly embedded in the European framework, and having its partners involved in the process brought to the table relevant EU-wide issues and constraints.
  - The Fund’s objectives (focused on supporting its member country) may not necessarily always be aligned with those of the EC and ECB (generally focused more on EU and euro area wide concerns).
    - An example here may be the bail in of senior unsecured bondholders, where European institutions focused on wider area concerns even if this resulted in a higher public debt burden for Ireland.
  - Two main lessons from the extended arrangement with Ireland:
    - Ways should be explored to secure stronger upfront commitments and understandings from monetary union authorities, where such steps are critical for program success.
      - Stronger upfront commitments in addition to financing assurances would have strengthened program planning and implementation.
      - This could have involved, for example, broad policy understandings, at least among senior officials, of what it would take and what steps would be envisaged at the monetary union level to support the member’s program success.
      - Such understandings could also have dispelled any doubts that the policy program provided reasonably strong prospects of success and of regaining market access (i.e., that Criteria 3 and 4 of the Fund’s exceptional access framework were met).
      - Fund program documents should also cover in sufficient depth the risks for program success that emanate from a country’s membership in a monetary union.
    - Close and early Fund engagement with monetary union authorities can facilitate program success.
      - There were little Ireland-specific interactions of the Fund with other Troika partners until late 2010, some two years after the property bubble began to burst.
      - In the interim, each party was involved relatively independently with the Irish authorities.
      - Earlier, close cooperation on emerging crisis risks, as well as on other key issues both at the national and union-wide level, could have facilitated faster progress in developing policy solutions and possibly stronger program results.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1520.pdf*

### 1. Cumulative exchequer primary balance 2/

### _cr1520 - 1. Cumulative exchequer primary balance 2/

### I. Quantitative Performance Criterion — Cumulative exchequer primary balance 2/
- Program review sequence and reported figures (Target / Actual as presented)
  - 1st & 2nd Review (Dec-10 / Mar-12): Target -15.8, Actual -14.7
  - 3rd Review (Mar-11): Target -7.9, Actual -6.3
  - 4th Review (Jun-11): Target -10.1, Actual -8.4
  - 5th Review (Sep-11): Target -20.2, Actual -18.3
  - 6th Review (Dec-11): Target -22.3, Actual -21
  - (Additional listing under I. Quantitative Performance Criterion)
    - Program sequence: Target -9.6, Actual -8.7
    - Program sequence: Target -11.4, Actual -10.1
    - Program sequence: Target -13.2, Actual -12.3
    - Program sequence: Target -3.2, Actual -1.8
    - Program sequence: Target -4, Actual -2.2
    - Program sequence: Target -3.7, Actual -2.3

### II. Indicative Target — Ceiling on the stock of central government net debt 3/
- Program review sequence and reported figures (Target / Actual as presented)
  - 1st & 2nd Review (Dec-10 / Mar-12): Target 83.6, Actual 81.7
  - 3rd Review (Mar-11): Target 92.1, Actual 88.5
  - 4th Review (Jun-11): Target 94.6, Actual 91.7
  - 5th Review (Sep-11): Target 115.9, Actual 111.7
  - 6th Review (Dec-11): Target 117.2, Actual 115.7
  - (Additional listing under II. Indicative Target)
    - Program sequence: Target 130.1, Actual 128.2
    - Program sequence: Target 132.5, Actual 130
    - Program sequence: Target 135.8, Actual 133.7
    - Program sequence: Target 167.9, Actual 161.8
    - Program sequence: Target 171.1, Actual 164.6
    - Program sequence: Target 171, Actual 165.4

### Macro framework — Selected economic indicators (Table 5 extracts)
- National accounts (constant prices) — entries as presented for 2008–2014:
  - Real GDP: -2.6-6.4-0.30.92.81.9-0.32.40.23.04.1
  - Final domestic demand: -2.5-8.9-4.9-3.1-1.70.5-0.21.3-0.72.03.3
  - Private consumption: 0.0-5.40.9-1.0-1.20.5-1.21.2-0.81.51.0
  - Public consumption: 0.6-3.5-7.1-4.0-2.1-1.8-2.1    -1.51.4-1.54.5
  - Gross fixed investment: -9.6-20.5-18.0   -10.4-2.93.55.05.0-2.48.09.0
  - Net exports 1/: 1.33.93.33.75.91.5-0.81.50.61.51.6
  - Exports of goods and services: -0.9-4.06.24.55.54.54.74.61.14.76.3
  - Imports of goods and services: -2.6-9.23.00.7-0.63.76.94.00.64.16.0
  - Real GNP: -2.3-9.01.7-1.5-0.90.82.01.43.32.33.5
- Savings and investment (percent of GDP) — entries as presented:
  - Gross national saving (in percent of GDP): 18.516.616.4    10.915.3    11.317.1   11.319.6    11.719.3
  - Private: 20.324.426.3    23.921.6    21.823.3   20.623.5    17.421.7
  - Public 2/: -1.8-7.8-9.9   -13.0-6.3   -10.5-6.1    -9.3-4.0-5.6-2.3
  - Gross investment (in percent of GDP): 24.219.715.8    11.114.5    11.215.6   11.515.2    12.016.0
  - Private: 19.016.012.57.512.27.913.78.413.49.014.4
  - Public: 5.23.73.43.62.43.31.93.11.73.01.6
- Prices, wages and employment (annual average) — entries as presented:
  - Harmonized index of consumer prices: 3.1-1.7-1.6-0.51.20.21.91.30.51.30.6
  - Average wage, whole economy: 5.80.0-1.9-1.1-0.50.40.51.1-0.71.70.9
  - Employment: -0.7-7.8-4.0-0.5-1.80.8-0.61.22.41.52.2
  - Unemployment rate (in percent): 6.412.013.9    13.514.6    12.814.7   12.313.0    11.511.2
- Public finance (in percent of GDP) — entries as presented:
  - General government balance (excl. bank support) 5/: -7.0-11.5-13.3   -10.5-8.6-8.6-8.0-7.5-5.7-5.1-3.9
  - Primary balance (excl. bank support): -5.8-9.5-10.3-5.2-3.9-1.30.2
  - General government gross debt: 42.662.287.4  112.8    111.1  120.0121.7 124.5123.3  124.1111.2

### Box 1 — Estimating Ireland’s Structural Fiscal Balance: findings
- Pre-crisis structural balance estimates understated fiscal deterioration and the revenue vulnerability to asset-price-related taxes.
- Specific revisions and illustrative magnitudes as presented:
  - 2007 Article IV staff report: estimated structural balance in the previous year as a surplus of 1.7 percent of potential GDP.
  - 2009 Article IV: revised structural balance to a deficit of 6.6 percent.
  - 2008 structural primary deficit was in 2009 estimated to be almost 14 percent of GDP; final estimate settled at 10.5 percent of GDP.
- Main methodological weaknesses identified:
  - Output gap estimation difficulties and misclassification of asset-price-driven revenue as structural.
  - Result: program framed in annual fiscal consolidation measures rather than structural balance targets.

### Box 2 — Could Irish Banks have Made More Progress in Addressing Problem Loans? — findings and recommendations
- Empirical findings:
  - At end-2013, 17 percent of mortgage NPLs were restructured.
  - Banks made little use of write-offs and long-term default asset collections despite relatively robust regulatory capital levels.
- Accounting and regulatory context:
  - Under IFRS (incurred loss model), recognition requires occurrence of a loss event and objective evidence of impairment.
  - IFRS 9 will move to an expected loss impairment model and will come into effect in 2018.
  - WP reference: See Supervisory Roles in Loan Loss Provisioning in Countries Implementing IFRS (WP/14/170).
- Supervisory role and recommended actions (as articulated):
  - Supervisors should ensure banks’ overall provisions are sufficient and timely and may bridge gaps between accounting regimes and prudential requirements to avoid overstated income and capital.
  - BCBS supervisory guidelines recommend remedial action plans for weak banks, including:
    - (i) negotiate new agreements with viable but weak debtors;
    - (ii) set time-bound targets on reduction of problem loans;
    - (iii) take possession of loan collateral and other debtor assets, when warranted;
    - (iv) write off long-term problem loans;
    - (v) use realistic loan loss provisioning against problem loans;
    - (vi) classify restructured debt as NPL until debtor demonstrates full capacity to repay at market rates.
- Other factors delaying restructuring:
  - Limited bank capacity for large-scale restructurings; delayed credit registry introduction; slower-than-expected implementation of personal insolvency; legal obstacles (one year foreclosure moratorium in CBI’s Code of Conduct for Mortgage Arrears; 2011 high court decision restricting summary repossession for pre-2009 mortgages).
- Supervisory developments:
  - CBI’s 2013 arrears resolution strategy set performance targets for sustainable restructuring of SME and residential mortgage arrears and tightened classification and provisioning standards.
- Concluding assessment:
  - In hindsight, supervisors had scope to act more forcefully and earlier by strengthening classification, provisioning, write-off practices, and setting restructuring targets to accelerate NPL resolution and support economic recovery.
  - IMF Staff Position Note referenced: The Making of Good Supervision: Learning to Say “No”, May 18, 2010.

### Box 3 — Selected country experiences in restructuring household debt overhang — summary of lessons
- Context and policy variety:
  - Country experiences differ by legal tradition, fiscal space, institutional capacity, systemic scale, mortgage prevalence, and bank strength.
  - No single international best practice; preferred approach is a combination of measures tailored to circumstances.
- Key elements of reform in diverse country cases:
  - Many countries amended personal insolvency regimes to address defaulted residential mortgages.
  - Common reform elements include:
    - reducing the discharge period to give debtors a fresh start;
    - defining eligibility requirements;
    - defining capacity to repay;
    - introducing/defining automatic stay periods.
  - Examples of court-administered frameworks:
    - Norway (introduced 1993): allows voluntary and compulsory court debt settlement with adjustments reducing LTV to a maximum of 110 percent and a 5 year payment program with interest-only on secured part; unsecured debt discharged on successful completion if borrower retains the house.
    - Denmark, Finland, Sweden, and Iceland have had similar systems.
- Policy trade-offs noted:
  - Ireland was more reluctant to adopt court-based mortgage resolution, citing constitutional property protections and moral hazard concerns.
  - Many countries also use out-of-court workout mechanisms supported by insolvency frameworks.

*Source: _cr1520 - 1. Cumulative exchequer primary balance 2/ (IMF PDF content provided).*

### Box 3. Selected Country Experiences in Restructuring Household Debt Overhang

### Box 3. Selected Country Experiences in Restructuring Household Debt Overhang

### Government-supported household debt relief measures
- Some governments (Iceland, Latvia, the United Kingdom and the United States) provided financial support to households to address the debt overhang.
- Types of support implemented:
  - Establishing government funded asset management corporations to purchase distressed household mortgages from banks and restructure the debt to restore the borrower’s payment capacity.
  - Providing permanent or temporary payment subsidies to households to help lower the present value of their loan.
- Complementary measures to facilitate mortgage debt restructuring:
  - Recapitalization of banks.
  - Putting in place appropriate provisioning practices for impaired loans.
  - Strengthening regulatory guidance governing NPL resolution.
  - Requiring the establishment of specialized loan workout units.

### Irish authorities’ assessment of the Ex-Post Evaluation (EPE) and programme outcomes
- Overall view:
  - The Irish authorities broadly agree with the main findings of the EPE report and welcome the report’s focus on lessons learned.
  - They note programme implementation was strong and emphasize the importance of strong country ownership and realistic, tailored targets.
- Programme aims and outcomes:
  - Four broad aims: address financial sector weaknesses; raise Ireland’s growth potential; strengthen public finances; fully regain international capital market access.
  - Programme commitments were delivered within agreed deadlines.
  - Post-exit outcomes cited by the authorities:
    - Financial sector significantly restructured with enhanced supervision; ECB Comprehensive Assessment confirmed capital adequacy of the two main banks.
    - A primary surplus has been achieved; debt has stabilised and is on a downward trajectory.
    - Ireland is on target to bring the general government deficit below the Excessive Deficit Procedure (EDP) ceiling in 2015 as required.
    - Economic growth: "by around 4.7% this year" and "is forecast to grow by close to 4% in 2015".
    - Proposed early repayment of IMF loan: "around €18.3 billion of our IMF loan of €22.5 billion" — with "€9 billion to be repaid in December 2014".
- Timeframe critique:
  - The authorities observe the review’s timeframe stops at end 2013 and is backward looking; they state this limits the value of lessons given the report’s publication more than one year after programme exit.

### Policy context and constraints during the crisis
- Bail-in and EU Banking Union:
  - At the time of the crisis, bail-in of senior bondholders (now part of EU Banking Union law) was not available to Irish authorities.
  - Troika advised sovereign support for banks to avoid contagion, shifting the burden to equity holders, junior bondholders, and the sovereign (Irish taxpayer).
  - The authorities stress these constraints should inform assessment of policy choices and be treated as lessons for future programmes.
- Legislative capacity and sequencing:
  - Programme had a heavy legislative burden, particularly for financial sector regulation.
  - Authorities caution about administrative capacity limits and recommend future programmes consider phasing legislative requirements and national priorities.

### Programme flexibility, national circumstances, and banking sector specifics
- Need for flexibility:
  - EU-IMF programmes should allow flexibility to reflect individual market conditions and cultural sensitivities rather than a one-size-fits-all approach.
- PTSB (Permanent TSB) commentary:
  - The report’s discussion of PTSB is characterized as outdated; should not be seen as reopening settled matters.
  - Progress highlighted: reduction in ECB funding of more than 70% from peak; PTSB found sufficient capital in the base case of the ECB assessment but required additional capital in the adverse case and has submitted a capital plan for ECB approval.

### Fiscal consolidation pace and social considerations
- Consolidation context:
  - Ireland’s external assistance programme began in the third year of a domestic fiscal consolidation process that started in 2008; the final year of the programme represented the sixth year of consolidation.
  - Authorities argue frontloading was necessary to signal commitment to fiscal sustainability and to maintain social cohesion; additional frontloading could have been damaging.
- Fiscal figures and outcomes:
  - Voted spending reduction: "reduced by over €10bn from the 2009 peak of over €63bn to the present level of €53  billion."
  - Ireland met and frequently outperformed programme fiscal targets (IMF quarterly Quantitative Performance Criteria and EU EDP annual deficit ceilings) despite growth being lower than projected at programme agreement.
  - The authorities dispute the report’s implication that interest savings should have been applied to debt reduction, noting lower growth outcomes and delicate negotiations that achieved reductions in interest costs for EU loans but not similarly for IMF loans.
- Social burden:
  - Authorities emphasize the significant burden borne by the Irish public and caution against measures that might jeopardize social consensus and the ultimate success of the programme.

### Conclusion from the Irish authorities
- Expression of gratitude:
  - The authorities thank IMF staff for professional and courteous behavior and objective policy advice.
  - They affirm the Fund’s role as a trusted advisor is highly valued.

*Source: IMF April 2012 Dealing with Household Debt; Principles of Household Debt Restructuring; CBI 2013 Mortgage Arrears Resolution Targets*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1520.pdf_