Transcript of a Conference Call on Ireland
June 25, 2009Washington, D.C.
Wednesday, June 24, 2009
MS. LOTZE: Good day. This is Conny Lotze of the External Relations Department. Thank you very much, everybody, for dialing in to this conference call on the Ireland Article IV consultation. Hopefully, you've all seen access to the documents, the staff report and the Public Information Notice, which is a summary of the Board discussion and some key findings.
I will turn this call over to the Mission Chief to Ireland and Assistant Director in the European Department, Ashoka Mody, and he will make some introductory remarks, and then we'll go to your questions. This call is on the record, as you all know. Thanks very much. Over to you, Mr. Mody.
MR. MODY: Thank you very much. The basic message of the report is straightforward: the imbalances in the Irish economy were serious, the response to the ongoing global crisis has been appropriate, and yet the size of the problem is such that the road ahead is a long one.
Let me consider each of these positions in a brief manner. I look back at the imbalances not to assign any blame, but they are a necessary part of the diagnosis. There were three features that were particularly prominent in the evolution of this crisis: overvalued property prices, the vulnerabilities built up within the banks—many of those related to the overvaluation of property prices—and the gradual loss of competitiveness of the Irish economy over a period of several years.
Put together, when the global crisis manifested itself in the middle of 2007, these domestic vulnerabilities interacted with the global crisis and that has now led to what is likely to be a protracted downturn.
The authorities have responded in the right manner, as we say in the report, on the two aspects that matter the most: the financial sector and fiscal consolidation. The essential policy framework within which the authorities are operating is the right one. There are which I will briefly highlight in each of these areas.
The international evidence is very clear that the financial system must be restored to healthy functionality. This is crucial to a sustainable overall economic recovery process. The proposed National Asset Management Agency, which is also consistent with international experience, as the vehicle to start a bank restructuring process, particularly, since the restructuring of banks is likely to be quite significant.
The success of NAMA will depend on a number of very complex decisions that will need to be taken in designing it during the course of the coming months and then in its implementation. To be clear and to be fair to the authorities, the complexities here are not necessarily related to Ireland itself. These are well-known complexities associated with the pricing of the assets, and the burden that the taxpayer eventually needs to bear. Nevertheless, these are difficult decisions and will require careful consideration as the process unfolds.
On fiscal policy, our assessment is that the initial response was about right; that the framework laid out for a multiyear consolidation to bring the deficit below three percent also sets the right basic agenda. Our view is that the goal of three percent is reachable but may take somewhat longer than what the authorities currently project because our growth forecasts are somewhat weaker than those of the authorities. Nevertheless, the goals are achievable in a time frame that is reasonable.
The big task is now putting more detail into the framework that has been outlined, and crucially to put in place a mechanism that is a focal point for continued attention to the need to reduce the deficit. In other words, if this moment of crisis were to pass and victory were to be declared before the goals are achieved, that would be a serious mistake. There is no reason for us to think today that that is a likely outcome, but it is one concern that needs to be borne in mind, and to that end we would like to see the authorities create more mechanisms to commit themselves to this long-run.
Let me just end by saying that there are a number of positive factors that have created wealth in the Irish economy over the last two decades. The openness of the Irish economy has served it well—the openness in terms of trade, foreign investment, in terms of the flow of people—and that basic structure should allow Ireland to reconnect to the global economy in a vibrant way. There are many challenges to bringing back Irish competitiveness to a level that allows for solid and sustained growth, but the potential to do so is clearly there, and the authorities are moving the economy in a direction where that potential should once again become achievable. With that, I'm happy to take some questions.
QUESTIONER: Good afternoon. I was wondering if you could just explain your forecast for growth for the Irish economy? You talked about a contraction of 13.5 percent. Is that for 2009 and '10?
MR. MODY: That is for 2008, '09, and '10, the cumulative decline over a three-year period.
QUESTIONER: And do you see that—I mean are you sticking to that or do you think you could revise that up or down?
MR. MODY: I think that we are for now comfortable that that is in the right range, so I don't expect that we will be revising it in a short period of time.
QUESTIONER: And I have one more question on this, please, and it's got to do with the Agency and for the bad loans. I was wondering if you could just explain a little bit more why you think that it's more appropriate that all loans or process of assets should be covered by this agency?
MR. MODY: The principle here is that it is important that bank be able to return to healthy functionality. And the challenge therefore is that there should come a point where they're able to deal with some bad loans from their ongoing operations and profits.
But given the size of the bad loans that are projected at this point, the authorities are doing the right thing by removing the loans related to property development. Our suggestion comes as a consequence of our growth projections which implied that as the economy continues to contract in 2009 and 2010, more categories of loans could become nonperforming. And if they are large enough, then they could weigh down the ability of banks to function more normally.
And while we are not saying that this will necessarily happen, it seems to us that there is no harm in having the flexibility to also treat those other loans in the same way as property development loans are to be treated under the currently-proposed NAMA process.
QUESTIONER: Thank you. You say that nationalization could be necessary but it should be seen as complimentary to NAMA. I just wondered to what extent you believe nationalization could become necessary when dealing with the bad banks? And you also mention in the same paragraph that nationalization could be used to affect needed mergers. So I'm wondering what mergers you believe are needed in the financial sector in Ireland?
MR. MODY: On the latter question, we do not see ourselves as specifying particular mergers or particular transactions or thinking about the prospect of individual financial institutions, but offering out what we think are general principles in the context of the particular country. And what is clear is that the size of the financial sector in Ireland was significantly higher in relation to GDP than is the case in most advanced countries, and it seems likely that as this contraction continues that some of the banks are likely to be well served by thinking in terms of merging their operations. Now, that may not happen, but again in the same spirit with which I answered the previous question, that clearly is a possibility and again it is important that the authorities have the flexibility to achieve such mergers if that becomes necessary. Your first question?
QUESTIONER: The first question was to what extent you believe that nationalization could become necessary in relation to dealing with the bad banks.
MR. MODY: That's a good question. I think the answer to that is that that is going to depend on evaluation of individual bank prospects. Again, in the course of the kind of investigation we do, we do not actually look in detail at the financial positions of individual banks. So what the report says is that if there was a sense that the bank was so severely undercapitalized that its functioning was very significantly compromised, then nationalization should be part of the policy toolkit that the authorities use. Again, the evidence is that temporary nationalization—and I use the word somewhat carefully because the term nationalization is often used in a very wide variety of contexts—we see temporary nationalization as a vehicle for the authorities to be able to take over a bank, deal with its restructuring problems and then bring it back into the private sector. The key point here is that that option should not be ruled out.
QUESTIONER: I'm wondering that by specifying that that option should be there or should not be ruled out, does that imply that you believe that there is the possibility that an additional or another financial institution in Ireland could need to be nationalized?
MR. MODY: Again the answer is that not having looked at the books of the individual banks, all we can say is that given the size of the economic contraction—of the order of between 13 and 14 percent of GDP—and given the heavy concentration that banks had built up in property-related sectors, their dependence on property prices remaining buoyant, their dependence on wholesale financing, it would not be a complete surprise if banks became significantly undercapitalized as this contraction continues.
QUESTIONER: I was wondering if there's a possibility of the government defaulting in any way and the IMF talking to the Irish authorities about financing at this stage?
MR. MODY: There is absolutely no reason to think that the Irish authorities are going to default on their debt. There is no basis in the slightest for even considering such a possibility. And there is no discussion at this time on a Fund relationship within which the IMF that provides any financial support.
QUESTIONER: Thank you. I figured I'd better ask that one because there's a lingering question as you know in the markets. I was also wondering, if I might have more follow-up, what are your prospects? How long do you see this recovery taking place? You're talking about a modest recovery beyond 2010. How long do you think this recovery could take or is that quite an unknown?
MR. MODY: We do take something of a position on that inasmuch as we claim that the recovery even beyond 2011 will be relatively slow. If you'll give me one minute, the growth rate projected for 2011, the GDP growth in 2011, is only 1 percent. So coming after a 13-percent contraction, the recovery begins very modestly, and then growth is in the 2½ percent range for the next few years.
That's the sense in which we view that the recovery will be modest and that judgment reflects an analysis early in the report in Box 1 which says that the Irish economy's potential to grow had begun to erode even earlier in this decade, well before the crisis became manifest and that it reflected long-term tendencies which were the consequence of the fact that the Irish Miracle as we know it seemed to have run its course by the early part of this decade and new sources of growth had not really emerged in any significant or vibrant manner. Therefore, when this recovery occurs, it will be important that if Ireland is to go back to something that resembles its more vibrant years that there will have to be a regeneration of new sources of growth.
QUESTIONER: Good evening. I was wondering can you give any more details on how you arrived at the figure of €35 billion for the bank losses? I know you refer to a review of estimates. Can you give us any more information on this review?
MR. MODY: Yes. As I said in response to earlier questions, our review is not based on a very detailed analysis of individual bank data. We don't for example have the opportunity as part of this consultation process to do extensive stress tests in a manner that would be considered to be a proper accounting. So when the term “available estimates” is used, what we did was to look at published estimates of market participants including some Irish observers as well as international observers. These are estimates that are in the public domain. Then calibrating those estimates to growth prospects and looking also at the market's estimate of some key asset prices associated with these banks, we reached a judgment that the losses would be in that range. We used multiple sources including some published estimates, but also then combining them with some data on current asset prices as well as our estimates of growth prospects.
QUESTIONER: Just to follow-up, if I may, you say that there are still significant risks remaining for the economy. If you're calibrating your estimates on loan losses against your growth prospects, would the same rationale apply for those loan loss estimates, i.e., are there also downside risks to those forecasts or is it too difficult to say?
MR. MODY: Yes, I think you have made my task a little easier by saying it is too difficult to say. I think in this business it is very important to be extremely sensitive to not speculate too wildly. Clearly we made the determination that a number was useful to publish even with the risk that these estimates are uncertain. I think speculating beyond that on the uncertainty in these numbers would be sort of claiming a position that is simply not there in the analysis that we do.
MS. LOTZE: If there are no more questions, then I think we will conclude the conference call here. Thank you very much everybody for participating. Thank you and good-bye.