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Transcript of a Conference Call on the Extended Fund Facility Arrangement for Ireland with Ajai Chopra, Deputy Director, European Department
December 21, 2010
MS. STANKOVA: Good morning, everybody and welcome to the conference call on Ireland. The conference call will be held by Ajai Chopra, Deputy Director in the European Department of the IMF. The Executive Board of the IMF approved yesterday an Extended Fund Facility Arrangement for Ireland and today we are publishing a number of documents that outline the details of the economic program that will be supported by the Arrangement.
I'd like to remind you that these documents together with the conference call are under embargo until 10:00 a.m. Eastern Standard Time, and 1500 GMT. With that I will pass the microphone to Ajai for his remarks and then he will take your questions.
MR. CHOPRA: Thank you very much, Olga. I don't have lengthy opening remarks. You have the published papers here. The Letter of Intent and the Memorandum of Economic and Financial Policies were released some time ago so that you have had that available for some time. The report that is new is the Staff Report for our Executive Board that lays out our views and our recommendations to our Executive Board to make the case for them to approve the request for financial support. As you know, the rationale for the program is to restore confidence in the economy and financial stability in Ireland. This is to be done by fundamentally restructuring the banking system and safeguarding public finances. Of course there is also the objective of restoring long-term growth potential. What this report does is that it provides the foundation for these views, and it provides the numbers and the analytical basis for our recommendation to our Executive Board to approve the program. I don't think I need to add very much at this point so that we can go straight to questions.
QUESTIONER: My question is in reading through the IMF documents, I don't see any references to the responsibilities of bondholders. You talk somewhat about the changes that the banks are expected to make in terms of getting rid of some of their nonperforming assets and generally consolidating their balance sheets. What's the role of bondholders in all of this in your view, and can you elaborate on some of the stuff from the November 28 agreement?
MR. CHOPRA: I take it you're asking a question about the bank bondholders. Can you please clarify what exactly you're asking?
QUESTIONER: I'm particularly interested in what kinds of losses the government and the IMF and the E.U. might require of bank bondholders as part of following through with these agreements.
MR. CHOPRA: As you know, the authorities have launched an exchange of the subordinated debt of Anglo Irish at a discount of about 80 percent. This approach reflects the view that such debt holders are next in line to absorb losses after equity and the Letter of Intent and the Memorandum makes clear that under the program the government is exploring the option of a similar exchange for the subordinated debt of other banks and that's what's contained in the program.
QUESTIONER: Is there anything that might affect senior bondholders?
MR. CHOPRA: On this, Minister Lenihan has clearly stated, and I quote, "There is simply no way that this country [Ireland] whose banks are so dependent on international investors can unilaterally renege on senior bondholders against the wishes of the ECB." So far the view of European partners has been that the systemic impact of reneging on senior bondholders would be too great. In light of this, any decision on senior bondholders will need to be taken in consultation with the European partners.
QUESTIONER: Is that the IMF's view that the impact of reneging on senior bondholders would be too great?
MR. CHOPRA: This is a common view at this point, yes.
QUESTIONER: So that this is a view that the IMF shares?
MR. CHOPRA: It's a view that in consultation with our European partners we have adopted.
QUESTIONER: Thank you.
QUESTIONER: This is not my question but it's the logical follow-up. Do you agree with that position on the senior debt?
MR. CHOPRA: Yes.
QUESTIONER: Yes full stop?
MR. CHOPRA: Yes, full stop.
QUESTIONER: Did you agree with that going into these negotiations?
MR. CHOPRA: I think I've answered the question.
QUESTIONER: Fair enough. What I wanted to get to was this. It's a little bit of history and a little bit of context here. I was looking for some sort of sense from your perspective of the scale and complexity of this given the sort of fusion of bank debt and sovereign debt, whether this has been the case in any other IMF program and the degree to which you think this is why it's so difficult for Europe to come to find final agreement on all of this because at the end of the day now it seems they're not just backing up each other's governments, but each other's banks and banking systems and that opens up a whole nother level of doubt and insecurity about the whole thing.
MR. CHOPRA: All I have to say on this aspect is what the Managing Director has already said. He has said that a country-by-country approach is not as successful as we would want it to be and it's therefore imperative that European countries put in place a comprehensive pan-European policy framework that among other objectives helps to address the fundamental problems in Europe's financial system while limiting the burden on already fragile sovereign balance sheets and that remains the approach for the IMF right now. One needs to keep in mind that in Ireland of course the banking system is exceptionally large and that introduces its own complexities.
QUESTIONER: I guess what I'm asking is it seems like there are a number of European countries where the banking systems are exceptionally large in relation to GDP and I'm wondering if historically the IMF has ever had to unravel that sort of problem where you had financial systems sort of way out of scale with a country.
MR. CHOPRA: Iceland is a clear example of this.
QUESTIONER: But before you got into Europe?
MR. CHOPRA: The IMF has been involved in a number of programs where bank restructuring has been central to the programs so that that aspect is not unusual in the design of IMF programs.
QUESTIONER: What's a good size?
MR. CHOPRA: I don't think that there's any magic number over here. There's a process that is in train to right-size the Irish banking system and there is just no way one can put a number on this.
QUESTIONER: Thank you.
QUESTIONER: I've just been reading the Staff Report and I see that you forecast that the budget deficit will be 4.8 percent of GDP in 2015. Am I reading that correctly that on the current plan given the measures that are in place, the government will fail to meet the goal of cutting its deficit to 3 percent of GDP by 2015? If that's the case, does the program require that they take additional steps to the 4-year program already announced to hit that target or is that a separate goal that the Irish government agreed with the E.U. and that you don't have a view on?
MR. CHOPRA: Let me explain the background on the fiscal forecast. Firstly, what we do is we've taken the government's fiscal adjustment intentions of 15 billion euro over the next 4 years so that that's built into the program. And remember that's through the next 4 years so that that takes us through 2014. That's the first point. The second point is that we put in a more conservative growth assumption to determine how we see the evolution of the deficit given the discretionary adjustment that is built into the program.
The third point is that when we come to 2015 we have a convention where we do not assume policies beyond what has already been specified. The 4.8 forecast for 2015 assumes no further change in policy after 2014 and that is a convention that we've had from the World Economic Outlook that are forecasts are based on current policy plans. What this suggests is that given our growth forecasts, to reach a deficit of 3 percent of GDP in 2015 will require additional measures in the medium-term. Whether these measures are implemented in 2013, 2014 or 2015, I think that's something that's going to have to be seen as that's quite far out from now. But again I want to reiterate that the forecast of 4.8 percent in 2015 just takes the policy measures through 2014 and extrapolates by 1 year with unchanged policies.
QUESTIONER: So that this doesn't indicate that you believe that more needs to be done right now?
MR. CHOPRA: The point is that there's a great deal of uncertainty about the growth outlook. Our view has been that the discretionary fiscal adjustment of 15 billion euro over the next 4 years is the appropriate size of fiscal adjustment and that's what the program is built on. We will need to see how this economy evolves and then come to a view on what additional fiscal adjustment might be needed. Under the Excessive Deficit Procedures the authorities have committed to reach a deficit of 3 percent in 2015 and that's the agreement with the European authorities and they're making a very bold and ambitious start with the frontloading in 2011. But I think for us to try to specify exactly what's going to be needed in 2015 is premature because I don't think our ability to forecast growth over this period 3 or 4 years from now is all that great.
QUESTIONER: May I ask a second question?
MR. CHOPRA: Sure.
QUESTIONER: The people who you've negotiated this agreement with, the current government, is very, very unlikely to be in power much beyond March of next year and the opposition parties have made it clear that they are not happy with the terms of this overall package. I know that you've met with opposition politicians in Dublin during your time there. How big a risk do you think it is that after the election whenever that happens the commitment to following through on these measures will wane and you'll be left going back in there to renegotiate?
MR. CHOPRA: I think the key point to make over here is that this is a program for Ireland and that this is a national response. The IMF has had experience of dealing with such situations where there is a change in government. What we need to do is look at the public record of what the parties have said and here there is a copious public record. We've looked at the statements made by party leaders on their websites. What comes through is that there is a common sense of purpose to restore fiscal and financial stability in Ireland. Different governments can have different priorities as to how precisely to achieve this and there will be a dialogue and there will be a discussion. As I've said in the past, as long as the overall objectives of the program are agreed to by all, and that does seem to be the case, the specific policies as to how to achieve that can be discussed. There is nothing that we've seen in terms of the public pronouncements by the opposition parties in terms of the approach to achieving the goals of fiscal and financial stability that would cause undue problems to achieving the overall goals of the program.
QUESTIONER: Mr. Chopra, just two questions. In terms of fiscal consolidation, is it possible to put a figure in billions on that, that if you think 15 billion is appropriate between now and 2014, do you have any figure in mind on top of that which will be required to bring the deficit down to 3 percent by 2015? My second question is the opposition parties have said they would like to negotiate the interest rate with the EU, ECB and the IMF. I know you can't speak for the former, but would you speak to the opposition parties about renegotiating the IMF interest rate at all?
MR. CHOPRA: Firstly on the fiscal question, as I've said, the program is based on 15 billion euros of discretionary adjustment over the next 4 years and we see that as the appropriate amount of fiscal consolidation in this 4-year period. I think as I said earlier it's premature for us to put a number on the extent of fiscal adjustment that might be needed to meet the 3-percent objective by 2015 because we need to see how the economy evolves and I think it's much too premature to put a number on that right now.
QUESTIONER: As to my second question on interest rates?
MR. CHOPRA: Yes. On interest rates, the IMF's interest rate, firstly just to clarify what that is, it is a floating rate that is linked to the SDR interest rate with some surcharges applied on top of that. The way this works is that the interest rate depends on how much you've borrowed and for how long it is outstanding. Based on current rates for the IMF, the current SDR rate, the interest rate peaks at about 4 percent assuming that all the available loans from the IMF are drawn and that they remain outstanding beyond 3. This is the rate that applies to all member countries of the IMF and this is a formula that applies to all member countries. It's not a number that is case specific. In the IMF we have two different types of loan facilities. One is for low-income countries that qualify for concessional financing, and the other is the regular facilities and that's what Ireland is borrowing under so that this formula for our interest rate does not change.
QUESTIONER: One additional question. Therefore do the opposition parties have any chance of renegotiating the overall rate?
MR. CHOPRA: For the IMF, no. This is the rate that is applied to all member countries.
QUESTIONER: Good afternoon. I've noticed in the Staff Report in relation to stress tests of the Irish banks it talks about there is no way that auditors or accountants who have done previous stress tests over the last 2 years can be in any way involved in the fresh stress testing of the banks. Can you explain why you have this ruling and is this because you're concerned about the accuracy and thoroughness of previous tests?
MR. CHOPRA: No, I don't think that's the reason. The reason is simply to get a fresh independent view to ensure that the new tests are seen as credible by the markets. It's always a good idea to get a fresh pair of eyes in to do such examinations.
QUESTIONER: As to various portfolios, can you give us any sense based on models in previous IMF experiences which one of those portfolios are likely to contain the biggest concerns?
MR. CHOPRA: I think this work needs to be undertaken and I'm not going to speculate on which portfolios might be more problematic. The Central Bank together with its consultants and in consultation with us in terms of the results, we'll need to look at all the portfolios, be stringent in the analysis of all of these portfolios and then come to a view. I think we'll obviously have more to say about this after the stress tests are done and I don't want to prejudge anything.
QUESTIONER: But is there a problem or a danger in the sheer amount of floating interest mortgage loans in the Irish system which is high in comparison to other European countries? Is that something that they will be directly looking at?
MR. CHOPRA: Absolutely. I said this when I was in Dublin, that the mortgage loan book and mortgage loans will need to be looked at, that the stress tests will need to look at the implications of a possible rise in interest rates on this loan book.
QUESTIONER: Good afternoon. Coming back to the issue of what can be rediscussed or renegotiated upon a change of government, the main opposition party which is expected to become the senior coalition partner in the new administration has repeatedly said that it would seek hair cuts on senior bank bonds and the junior coalition partner has said that it opposes the size of the adjustment next year. The current adjustment as you know is 6 billion and it advocates an adjustment to 4.5 billion. Can you say whether either of these positions would be open to discussion upon a change of government? Thank you.
MR. CHOPRA: On the first one, I think I answered that question right at the top of this call in terms of what the position is so I have nothing further to say on the issue of imposing hair cuts on unguaranteed senior bank creditors. That question has been dealt with and answered. We are well aware that the Labour Party has come out against the excessive frontloading of adjustment but they do accept that the deficit must be brought under control. That's in their public documents. We are also well aware that their view is that the current adjustment poses a risk to jobs and growth in Ireland and that they had proposed 5 billion in adjustments and recycling half a billion into job creation implying a net adjustment of 4-1/2 billion in 2011. The budget for 2011 is already in place and we would need to see. I'm not going to comment on precise issues such as this. In the context of reviews we would obviously have to have a discussion on the overall objective of bringing the deficit under control and seeing how any particular path to adjustment will fit in with that overall objective so that I don't have anything further to say on this at this point.
QUESTIONER: Sorry for the problem before. In a populist sense I have two questions. The greatest outrage in Ireland in the last few weeks and months is concern over bonuses being paid to bankers. Are there any strings attached to this bailout for there to be any limits on bankers? Then in an overall sense, can you explain in plain terms and address some of the concerns that some people have that this somehow impinges on sovereignty? What can you say to reassure people in their concerns about the questions about sovereignty?
MR. CHOPRA: On the first question, the way the program is designed is that it establishes a process to ensure that banks are sufficiently well capitalized. There are a number of ways of doing this and one aspect is of course the earnings of the banks and what the banks put back from its retained earnings in terms of rebuilding its capital. This has implications for its compensation policy and has implications for dividend policies and so on. We do not have specific conditions on the various sub-elements. We are focused on ensuring that the banks themselves are adequately capitalized, and within that, compensation and dividend policy obviously come into play but we do not have specific conditions on that.
On the issue of sovereignty, as I said earlier, our view is that the basic content of this program was very much designed in Ireland itself by the Irish government. As I said earlier, we see this as a national response. We think that it's important that the spirit of cohesion continues going forward to implement policies that are in the national interest. The fiscal adjustment program is based on the government's 4-year program for national recovery. The financial sector approach was discussed with the Central Bank and with the government and it has very much their imprint and ownership on it so that I do not see this as a loss of national sovereignty. Our job is to advise on policies that the authorities design themselves and that they own themselves through a process of dialogue. There may be some adjustments to these policies, but our experience is that if the policies are not owned by the country, they tend not to be implemented strongly enough. In sum, we see this a program that is an Irish program that is a national response that is owned by Ireland.
MS. STANKOVA: I would like to add at this point that we have time for one more question if we have another question.
QUESTIONER: Thank you. Mr. Chopra, just to revisit the subject of a few minutes ago in relation to pay and compensation, do you think without talking about specific institutions and so on it would be wise in terms of the context of your banking program for the institutions to revisit their existing compensation programs in the light of these challenges they all face?
MR. CHOPRA: We are not in a position to answer a very specific question such as that. There are obviously a range of issues that enter into such decisions and I'm not in a position to answer that right now.
MS. STANKOVA: I think this will conclude our conference call for today. Thank you for joining again. And just to remind you that the conference call is embargoed along with the documents until 10:00 a.m. Eastern Standard Time and 3:00 p.m. Dublin time, 1500 GMT.
MR. CHOPRA: Thank you very much.
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