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Transcript of a Conference Call on the Twelfth and Final Review under Extended Fund Facility Arrangement with Ireland
November 8, 2013
MS. STANKOVA: Good afternoon everybody and welcome to the conference call on the 12th and final review under the IMF’s Extended Fund Facility Arrangement with Ireland. I will pass the microphone now over to Craig Beaumont, IMF mission chief for Ireland, for his introductory remarks and then we will take your questions.
MR. BEAUMONT: Thanks very much Olga. The mission for the 12th and last review of the Irish Government's program found that it remains on track. The budget figures from the first 10 months are on profile and we expect the final outcome to be within the annual targets from Budget 2013. Budget 2014 was announced on October 15th and it appropriately targets a primary balance, which is no deficit aside from interest payments. Including interest payments it targets a deficit of 4.8 percent of GDP, which is within the ceiling from the excessive deficit procedure of 5.1 percent. There's a health check underway on bank balance sheets as we exit the program and that's advancing, but the full stress test for the banks will be taking place next year as part of the Single Supervisory Mechanism.
As the EU and IMF arrangements that have supported the Irish authorities’ policies in the last three years come to their conclusion, I'd like to take a few minutes to take stock of the achievements and remaining challenges.
Regaining market access on good terms has been a key achievement of the program. In 2013 Ireland issued 7.5 billon Euro in bonds, including a 10-year benchmark bond at a yield of 4.15 percent. Now that 10-year bond is trading down at 3.55 percent. The investor interest in those issues was both large and diverse. Banks are also issuing covered bonds at a range of maturities on increasingly favorable terms and we saw an example yesterday from the Bank of Ireland.
Growth is not what we would call an achievement of the program--it has in fact disappointed original program projections. But we have to take into account that the external environment was much worse than was anticipated at the end of 2010. Ireland’s overall growth in 2011 to 2013 is similar to that seen in the United Kingdom and is much stronger than in the Euro Area, which has been in recession in both 2012 and this year.
The budget has been a particular strength of the Irish program. Real progress has been made in getting to a sound fiscal footing. Before interest, the deficit has been cut by about 5 percentage points of GDP in the last three years and it's on course for a primary balance in 2014 as I mentioned. But public debt is over 120 percent of GDP and the overall deficit is still quite high, so the government will need to continue its fiscal consolidation efforts in the next few years.
Regarding the financial sector, this is very much a program focused on addressing a banking crisis and it has succeeded in stabilizing the situation with much stronger capital and provisions and much improved liquidity. Nonetheless, there's still work to be done, where the main goal is to improve capacity to lend, which means improving bank's profitability and reducing their nonperforming loans. This is what is needed to help sustain an economic recovery that will help reduce unemployment.
The repair of the banks is ongoing as I mentioned, including to address the large number of mortgages in arrears. Each case needs its own appropriate lasting remedy. Banks can continue to improve their processes based on experience and there's also a need for borrowers to work with their banks. Here we welcome a recent initiative to bring a consumer advocate into the process to provide free advice to households, which has been implemented by one of the banks.
The most important challenge we see coming out of this program is the high level of unemployment. Although it has declined from just over 15 percent last year, unemployment is still just over 13 percent most recently, so it remains high. Three-fifths of the unemployed have been out of work for over a year, and some of them will find it difficult to regain work even as employment starts to recover. The government has a number of initiatives to provide better services to the unemployed and better training. These need to be implemented vigorously and we see the scope to strengthen their effectiveness by providing more resources.
That's how we see Ireland’s main achievements in the last three years and remaining challenges. I'd welcome questions. Thank you.
QUESTIONER: Hi Craig. How are you? So the main question is what is your view on whether the government should seek an additional standby credit facility. Would you like them to exit a program with this facility, or what's your view overall?
MR. BEAUMONT: We did discuss Ireland's exit strategy during the mission. We've maintained the view that we've expressed a number of times. It's not uncommon for countries exiting Fund arrangements to have a backstop in place for some time after the program. Ireland is now in a quite strong position in terms of its bond yields and its sizeable cash buffer, but some uncertainty still remains in Europe and the global economy. It's up to the Irish authorities to decide whether they would find a backstop useful. As we understand it from the discussions, the authorities are still considering this issue and currently see the matter as finely balanced.
QUESTIONER: Do you have a preference though?
MR. BEAUMONT: I can refer you to comments by our First Deputy Managing Director, David Lipton, which were recently made in Germany, where he noted the benefits that such a backstop could provide. So we are pointing out these benefits, but it really remains in the hands of the Irish authorities to consider the issue.
QUESTIONER: Okay, thank you.
QUESTIONER: Hi Craig. Just wondering if you could give any update on the balance sheet assessment? I don't know if you got any sort of draft numbers during the mission and what the IMF's view is on that, and whether you think the banks may need to make deeper provisions this year as a result, or if they're looking. Okay.
MR. BEAUMONT: The balance sheet assessment is a very deep dive into the banks’ balance sheets. It has numerous loan file reviews and also reviews of the models they use for provisioning. It is making very good progress but there's still work to be done. It would be quite premature to comment on the actual results as we continue to be engaged with the authorities and get updates, but this is really too early to discuss the outcome.
QUESTIONER: Good morning. In your introductory remarks, you spoke about the achievements to date under the program and you said that on the banking side of things, the authorities had succeeded in stabilizing the situation. Given that this was primarily a banking crisis to begin with, is that enough of an achievement and where do you stand on the need or the necessity for some sort of further financing from the Euro zone to deal with the tracker mortgages and other problems in the banking system?
MR. BEAUMONT: Stabilizing the banking situation did require quite a combination of efforts. It was not just a matter of putting money into the banks--the recapitalization--though that in itself was a significant achievement because there was bail-in of subordinated creditors, which helped to reduce the cost to the budget, and that required skillful implementation of liability management exercises. Other efforts have been to deleverage the banks, primarily through the disposal of noncore assets, which has substantially improved the ratio of their loans to deposits over time at a cost significantly less than was originally anticipated in terms of the capital impact.
The other main piece of work that's been in progress is trying to reduce the very high level of nonperforming loans and this would be the area besides bank profitability that we would still think that there's significant work ahead. There's a framework in place, the mortgage arrears resolution targets. There's also a less prominent, but quite significant process going on for the SME loans and both these processes are continuing to go forward. Especially in 2014, we expect to see a more visible progress in those areas.
Bank profitability has actually improved quite notably in the first six months of this year. The banks’ interest margins are improving as deposit rates come down. They are reducing their operating costs. They no longer have to pay a guarantee fee. So they're making progress on profitability though we see a need for further progress. We would be very much open to any type of framework that would help lower their funding costs. This is still an area where technical work has been done, but there's no concrete proposal for further discussion at this stage.
QUESTIONER: Hello there Craig. How are things? Just two questions and the first thing is like a follow-on to your answer to both questions there with reference to the technical work that's been made in allowing for some sort of additional Euro zone funding. I was just wondering if you might -- whether you'd be interested in taking the opportunity of the final IMF review to express any thoughts or opinions on whether that technical work has been unnecessarily delayed in any way. Or whether you would have preferred to see some sort of retrospective recount kicking in by now in terms of the sustainability for an exit. And then secondly, just on a procedural thing. I was just wondering what the IMF's understanding of the total fiscal adjustment that was proposed in the budget for 2014, whether the IMF's understanding was that was 2.5 billion or 3.1 billion.
MR. BEAUMONT: There's certainly been no delay in the technical work on options for bank funding. We have received reports from the authorities as scheduled and had good discussions at the technical level on the pros and cons of the different ideas. So there's certainly no delay. Naturally, the IMF has long expressed that the view that mobilizing the ESM to help break the sovereign bank loop would be a game changer, not only in Ireland, but throughout Europe in terms of providing a better environment for recovery. The process is governed as you know by decisions at the Euro area level. So in that respect, in the program we can express views and make recommendations, but it's not something that the authorities alone can deliver upon.
QUESTIONER: Hi Craig. All my questions have been asked already. There's one thing. What would you say the greatest couple of challenges that remain outstanding? Is it the banking issue? Is the posterity of the Euro debt crisis blowing up again? What would you say your biggest concerns would be or growth not coming through?
MR. BEAUMONT: There are a range of risks to growth that we've highlighted in recent reports. A number of indicators are now signaling the domestic economy is showing quite positive signs. Euro area indicators are also turning up but there are still some concerns about how strong the Euro area recovery will be. Given that the Euro area is Ireland's main trading partner--I think it may absorb 40 percent of exports--and total exports are over 100 percent of Irish GDP that matters a great deal for Ireland's recovery.
As we've pointed out previously the process of resolving nonperforming loans has been quite lengthy though efforts are being made to accelerate the pace. Progress with nonperforming loan reduction affects the banks ability to lend, support investments and support job creation. So there's a strong connection between the pace of financial sector repairs and sustaining a job-creating recovery, so experience to date suggests some risk to growth in the medium term.
At this stage, we don't see immediate risks arising from the Euro area financial market conditions. But the process of transition towards a banking union is a complex exercise and markets could become uncertain. It would be significantly less risky if backstops were available for counties, so that markets would be less concerned about the possible implications of the stress tests next year. Such uncertainty could feed into yields and the ability to issue on good terms across the euro area.
QUESTIONER: Hello Craig. You spoke of growth not being as strong as hoped and I'm just wondering what other disappointments do you have of the mission? What hasn't been achieved that you would have liked to have seen achieved?
MR. BEAUMONT: I think we've flagged before the area that we would identify where progress hasn't been quite as fast as we might have liked. It's the whole area of dealing with mortgage arrears and with nonperforming loans more broadly. This is not owing to a lack of effort. There was a large investment of time and effort into making the household bankruptcy regime more workable and it's now up and running. There were efforts also to remove an unintended barrier to the repossession of housing, which is a last resort solution, but it's important that households know that there is ultimately a consequence from running prolonged arrears. But it seems there has been something of a “wait and see” attitude from households and much the same from banks. They may be waiting and hoping that the situation would get better and naturally cure problems so they wouldn't need to do anything. So on both sides, there seems to be insufficient engagement to deal with the problems. So long as they fester, a cloud of uncertainty hangs over the banks’ balance sheet and over the property market, and together they hold back Ireland's potential recovery.
QUESTIONER: Thank you. Hi Craig. I wonder if you could share with us your message of farewell to the Irish people.
MR. BEAUMONT: I should first mention that the IMF has relationships with member countries that change over time--we change the nature of relationship, but Ireland is still a member of the IMF. So as we move away from the very intensive engagement under the program we're supporting, we will be following it up with completely normal engagement, which is called Article IV surveillance where we visit Ireland once a year and discuss economic policies. The main thing that would be different is that there would be there would no disbursements of resources linked to those discussions. Because Ireland has substantial credit outstanding from the IMF, there will also be a short interim visit. So the IMF would be here every six months for a discussion on the appropriateness of policies in a completely normal fashion that we do with every member country.
The program with Ireland certainly has been a very intensive engagement, and for us, it's been an enormously positive experience because the authorities have shown such strong commitment to addressing the underlying problems and also shown strong leadership in developing the policies needed to tackle those challenges. So my message is that Ireland's program will become an example that we learn from in the future.
QUESTIONER: Hi Craig. A couple of questions for you. You mentioned that the government would have to continue with the fiscal consolidation for the next few years. Just wondering how long that fiscal consolidation in your opinion would probably have to continue for and what will it involve, more taxes, more (inaudible), more spending cuts. How do you see -- you know, what measures are they going to have to take and implement that. And on the banking side, we've seen Dansker (phonetic) and ACC indicate that they're going to pull out of the market here and what's the IMF's view on competition in the banking markets. And have you any concerns about PTSB because its recovery is still somewhat fragile and I wonder if you have any thoughts on whether some external mechanism should be put in place perhaps to take the tracker book off PTSB to help us recover.
MR. BEAUMONT: In terms of how long the fiscal consolidation continues, the authorities have outlined that in both 2014 and 2015 there would be a need for actual new measures, and for 2014 we've seen them already in Budget 2014. There is a need for new measures to reduce the deficit, which is still somewhat high, to reduce it below 3 percent by 2015. There would still be further reductions in the deficit in subsequent years, but they may not need active measures or maybe not so substantial active measures. Just maintaining a close control of spending growth relative to growth in the economy can over time progressively lower the deficit.
In terms of the actual measures, a key feature of the Irish program has been that the composition of policy changes is very much in the hands of the Irish authorities. So I don't feel a need to comment on which particular measures they should take. We’ve always favored measures which have the least growth impact and for example, if you broaden the tax base rather than raise tax rates, that tends to have the least impact on growth. In terms of spending, it's possible to focus resources on where they're most beneficial. For example, in social protection you can focus your efforts on the lowest income members of society rather than necessarily generally providing benefits to the whole population. So we have advice on the broad structure or nature of measures, but we don't specify exactly the measures Ireland needs to adopt.
In terms of banking, Permanent TSB has been working on a restructuring plan with the European Commission and it's already implementing its plan. As we have noted before PTSB does take some time to regain adequate profitability, and certainly, some type of external solution could accelerate that process, but this is now going to be an issue that's determined within the broader European framework rather than the current program.
QUESTIONER: Yes Craig. I just want to clarify an answer you gave to one of the previous questioners. I'm just wondering, when IMF finishes the bailout here, will you still have a physical presence in Ireland? I know you've had a representative here since the start of the bailout. Will you still have a physical presence or will you simply be visiting every six months?
MR. BEAUMONT: In practice, there's not usually an immediate cessation of a resident representative post after the end of a program. Sometimes they persist for a number of years where the authorities find the relationship useful. We haven't made any firm decision at this point. We're still concluding this current review and we'll have to further discuss the issue with the authorities.
QUESTIONER: Hi Craig. Just kind of a broader question on some of the things that were in the original program, the likes of the sale of state assets, the likes of reform, the legal sector. The various things are bringing in the private sector into getting people back into work in terms of retraining and reskilling and also in the health sector, the various things that were proposed. Are you disappointed that they haven't been really addressed very quickly. Three years in and a lot of these are only being either dealt with now or haven't been dealt with at all.
MR. BEAUMONT: Well, I think for example on the legal services reform, the action agreed under the program, was that the reform would be submitted to Parliament and that was certainly done on the expected schedule and it's now before Parliament. Typically in IMF arrangements, we don't specify any conditionality on the actions of the Parliament. So it's really a matter for the relevant committees in Parliament to progress and obviously we would encourage timely progress without compromising the role of the Parliament. I'm not going to comment on each and every reform. You can always argue that things could be done faster, but there are also capacity constraints. There are legal drafting constraints. There are constraints of the Parliament's time. We would always like things to be done faster if possible, but overall, the progress has been good.
QUESTIONER: Craig, just a couple of quick things. One, how long will it take for Ireland to repay the IMF money in your opinion? And secondly, in terms of the time line if Ireland decides to request backstop arrangements, in terms of that time line, is it possible that that will come early next year rather than before the 15th of December? Purely on the basis that a new German government needs to be formed and until it is and there isn't a mandate there for them to get their approval if you'd like for any credit line.
MR. BEAUMONT: Ireland is drawing on the IMF’s Extended Fund Facility, which is repaid in a phased way, over a period from 4 1/2 years after each drawing out until 10 years afterwards. So if we look at the last drawing, which would be expected to be in the middle of December 2013, in theory Fund credit could remain outstanding until December 2023. There's always the option to repay the Fund earlier if Ireland finds that financially sound. So the outer limit would be December 2023.
In terms of the Fund’s arrangements and possible backstops, we're open for business. Whenever the authorities decide to make a request, the IMF’s Executive Board can consider and approve it. So there's no fixed timeline from our perspective. It could be later this year. It could be early next year. The IMF is very flexible on the timing for responding to member countries' requests.
MS. STANKOVA: Thank you, Craig. We will now conclude the conference call. Thank you for joining.
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