IMF Survey: IMF Approves €22.5 Billion Loan For Ireland

IMF News, December 16, 2010

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The IMF’s Executive Board approved December 16 a three-year lending arrangement for Ireland, totaling €22.5 billion.
The loan is part of an international rescue package totaling €85 billion that also involves the European Union, European bilateral lenders, and financing from Ireland’s own cash reserves.
Continued liquidity support for Ireland’s banks from the European Central Bank is an essential component of the program.
A preliminary agreement with the European Union and the IMF was announced November 28.
The IMF loan is provided under the Extended Fund Facility (EFF).

Main goal: restore confidence and financial stability.
Package components:
- Fundamentally restructure Ireland’s banking system.
- Safeguard public finances through a fiscal package.
- Implement reforms to restore the long-term growth potential of Ireland’s economy.
Quote: “The Irish authorities have designed an ambitious package to address the economic crisis facing the nation,” IMF Managing Director Dominique Strauss-Kahn said.

Root causes and vulnerabilities:
- Banks heavily exposed to the Irish property market after massive lending during the boom years.
- Housing prices fell 36 percent since the peak in 2008.
- At the height of the boom, the assets of domestic banks amounted to five times Ireland’s gross domestic product.
- Real estate loans made up close to 30 percent of all loans in 2006.
Consequences:
- Loss of deposits and market funding.
- Overreliance on financing from the European Central Bank.
Restructuring and recapitalization objectives:
- Identify viable banks and return them to health through downsizing and reorganization.
- Recapitalize banks and encourage reliance on deposit inflows and market-based funding.
- Strengthen bank supervision and introduce a comprehensive bank resolution framework.
Financial backstop:
- Joint financing will provide funds necessary for recapitalization.
- The government will have a notional buffer of about €35 billion to support the banking system, although the actual amount needed is expected to be less.

Fiscal consolidation context:
- The Irish government’s National Recovery Plan aims for savings worth €15 billion―amounting to 9 percent of GDP―over the period 2011-14.
- Savings worth €6 billion are planned for 2011 alone.
Policy mix:
- Two-thirds of the savings will be achieved by reducing public expenditure.
- Measures include reducing the size of the public sector and cutting universal social welfare benefits, designed to be socially fair and to protect the most vulnerable groups.
- Revenue measures include broadening the tax base and increasing tax rates.
- Current tax incidence: 45 percent of Irish households have not paid income taxes until now.
- Reforms will increase the number of taxpayers and make income tax more progressive, for instance by reducing tax relief for private pensions.
Debt outlook:
- Public debt will remain high for the next few years but is projected to decline thereafter.

Growth prospects:
- After a sharp contraction in 2008-09 amounting to 11 percent of GDP, Ireland’s economy is expected to stabilize in 2010, with moderate growth resuming in 2011.
- Initial recovery expected to be export-driven as domestic imbalances are repaired.
Competitiveness and investment:
- Ireland’s business-friendly legislation and highly educated labor force have supported foreign direct investment in recent years.
- Government plans further measures to remove restrictions on trade and competition to encourage new investment and job creation.
Labor market and social policy:
- Unemployment is high at more than 13 percent of the labor force.
- The unemployment benefits system will be reformed to improve incentives to take up employment.

With international support, Ireland should be able to restore confidence and return to growth in 2011.
The IMF loan under the Extended Fund Facility (EFF) is intended to provide breathing space to rebuild the economy.
Repairing the damage from the bursting of the bubble is expected to take years.

IMF loan amount: €22.5 billion
International rescue package total: €85 billion
Notional government banking support buffer: about €35 billion
Housing price decline since 2008 peak: 36 percent
Domestic banks’ assets at boom peak: five times Ireland’s gross domestic product
Real estate loans share in 2006: close to 30 percent of all loans
National Recovery Plan savings target: €15 billion (9 percent of GDP) over 2011-14
Planned savings for 2011: €6 billion
Households not paying income taxes previously: 45 percent
Contraction in 2008-09: 11 percent of GDP
Expected stabilization: 2010
Expected return to growth: 2011
Unemployment: more than 13 percent

Source: IMF Survey: IMF Approves €22.5 Billion Loan For Ireland