Transcript of a Press Conference on Irelandwith Ajai Chopra, Deputy Director of the European Department, IMF
István P. Székely, Director for Economies of the E.U. Member States at the Directorate General for Economic and Financial Affairs, EC
Klaus Masuch, Head of EU Countries Division, ECB, and
Amadeu Altafaj Tardio, Spokesperson for Economic and Monetary Affairs Commissioner Olli Rehn
July 14, 2011
MR. ALTAFAJ TARDIO: Good afternoon, ladies and gentleman. Welcome to the European Union House for this press conference of the Troika following the conclusion of the third review mission of the Irish program. It is my pleasure to welcome to this press conference Istvan Szekely who is as you know Director for Economies of the E.U. Member States at the European Commission; Mr. Ajai Chopra who is Deputy Director of the European Department of the IMF; and Mr. Klaus Masuch who is Head of the E.U. Countries Division at the European Central Bank. I believe you all have received the statement of the Troika. This press conference is also webcasted, therefore other journalists in other countries are following this press conference and may send us questions later too, by the way. This will be also broadcasted by satellite.
The way we will proceed consists of the following steps. First Mr. Szekely will provide you with a summary of the main conclusions of this review mission. Then we will take your questions. I will give immediately the floor to Mr. Szekely.
MR. SZEKELY: Good afternoon, ladies and gentlemen. Thank you for coming and taking your time to listen to us. The staff teams from the European Commission, the European Central Bank and the IMF conducted a regular quarterly review of the government's economic program, so that's the business we are here on. The bottom line is that the team's assessment is that the program is on track and is well financed. Ownership of the program on the part of the government is strong and implementation is steadfast and these are defining characteristics of the EU/ECB/IMF Program for Ireland.
Continued strong policy implementation will be important to limit potential contagion from other parts of the world. Regarding the real side of the economy, recent developments are in line with or the focus of positive growth for this year albeit modest growth. Strong exports helped by progress in recovering lost price competitiveness are expected to continue driving the economy but domestic demand will continue to contract. Financial sector reforms are progressing and they are implemented as planned, in fact in certain cases ahead of schedule. Restructuring of the banks is at hand. Removal of the boards and management is underway. The recapitalization of banks is expected be completed by end July as planned. And the fiscal costs are significantly reduced by burden sharing with subordinated debt holders. Deleveraging of banks is also making progress even though it's going to be a long process.
On the fiscal front, the budget deficit target for end June was comfortably met and our forecast is that if current trends continue, then it will be 10-1/2 percent of GDP for this year which is slightly below the program target. The Irish Fiscal Advisory Council was established and that's a major step forward in setting up a new fiscal framework.
Looking forward and thinking about the next review which is scheduled for mid-October, later this year the government will publish a medium-term fiscal consolidation plan for 2012 to 2015 drawing on the findings of the ongoing comprehensive review of expenditures. To produce jobs the government is working with its social partners to develop reform plans for sectoral wage agreements and I'm sure you've heard about this process. In terms of the (inaudible) sectors that are subject to being discussed briefly last time around, at that time it was somewhat new to many of you and now I guess you have heard more about these reforms. Reforms are planned in the legal profession, medical services, the pharmacy profession, in order to low costs and boost purchasing power and these are on track according to plan but these will be reforms that will be reviewed during the next mission in October. Thank you very much.
MR. ALTAFAJ TARDIO: So we will now proceed with your questions. Please identify yourself and the media you represent before asking a question. I will take one single question per journalist. Please be concise, straight to the point and I will also ask by the way the representatives of the Troika to be also concise and straight to the point. The first question, the gentleman with the white shirt.
QUESTIONER: Can the Troika please clarify exactly what were the areas that concerned you most or that the government did not meet its targets on if any? Can you also clarify from the ECB has the downgrading in Ireland's status changed your position in terms of senior bond holders long term or in the medium-term? Thank you.
MR. SZEKELY: I'll take the first one and then the second one was directed to the ECB. There was no target that was not met this time around and our focus was in large part overlooking on the reforms that come up in the next quarter. Those are challenging things and we understand that and we reviewed developments and we are assured that the government has the willingness and the capacity to move ahead but we have to wait and see the results. But we will be back in October to check on it.
MR. MASUCH: On the second question, thank you, no, there is no change in our stance concerning the senior bond holders. I have outlined this last time I was here and also members of the board have mentioned the ECB stance on this, so there is no change.
QUESTIONER: Could I ask you what is the assessment of the Troika on the Moody's report suggesting that Ireland will need another bailout once this loan package expires? And could I ask you also to comment on something that the Minister for Finance told us this morning when he said that Ireland has a big hurdle to get over in 2014 when a large repayment of up to 12 billion euro must be met? What are the prospects of getting over that hurdle without additional assistance? Thank you.
MR. CHOPRA: Maybe I'll get started on this and I'm sure my colleagues might have some more to add. I think firstly we need to keep in mind that the Moody's decision was directly linked to the Euro Area policy stance, especially the prospect for private-sector participation in any future financial support programs in Euro Area countries. . I think it's also worth pointing out that rating agencies have in the past got it wrong on the upside during boom times by underestimating risks, and it's entirely possible that they're also getting it wrong on the downside by overestimating the risks.
I think it's also very important to point out that in the Irish context, we are seeing a very, very sharp spike in spreads and I'm sure this is something that the rating agencies also looked at. The point I would make over here is that if it wasn't for contagion risks we would be seeing significantly lower spreads in the case of Ireland. I think it's very worthwhile to recall that after the stress test results were announced at the end of March, we actually had a very positive market reaction with spreads coming down, and then it was broader Euro Area news and negative developments that led to the spreads going back up again. I think in this context it's very important for all of us to try to abstract from these contagion risks, which definitely need to be addressed, but to abstract from contagion and look at the positive elements in the case of Ireland. I'd like to list five of these elements and I'm going to go against Amadeu's suggestion to be brief, but I think this is important to outline.
The first is that we are beginning to see signs of growth and the economy stabilizing after 3 years of very, very wrenching adjustment and contraction of the economy. I think we're beginning to see the signs of some growth returning and a turnaround. The second is that banks are being recapitalized and will have significant buffers and there's a comprehensive plan to make the banks more healthy by right-sizing these banks and proceeding with deleveraging so that they focus on their core activities. The third is that the fiscal program is very much on track as Mr. Székely has already mentioned and this government has developed a great deal of fiscal credibility building on the fiscal credibility established by previous governments. The fourth is that competitiveness is improving. Finally, I would say that the government has the political will and the determination to implement this program in a successful way. So I would say if it were not or contagion, we'd be seeing a very different result.
The country needs to be judged on its own merits. I think if one can address some of the broader issues, there are good prospects of getting back to market access. As has already been emphasized, this program is fully financed through the end of the program. .
MR. SZEKELY: Let me just add one kind of personal comment that I have been working on this country for now close to a year and started before the program started and I have not seen one single occasion when Ireland wouldn't have received the necessary support it needed at that point, and credibility is very high in terms of program implementation. So I think this is the kind of credibility and support that we can reasonably expect.
QUESTIONER: Thank you. Is it fair to say that the next quarterly review will be somewhat more onerous than this one, that there is a lot of legislation you're hoping to see on the books to implement some of your requirements? Could you outline the main points that you want the Irish government to hit in the mid-October review?
MR. SZEKELY: Once something is under your belt you start to undervalue it. It's given. I wouldn't say that this was not challenging. Every review is challenging and I think Ireland is undergoing a kind of restructuring and change of direction in economic policy and strategy that is unprecedented in the developed world. So I think we should not underestimate the effort that goes into every and each review.
The next will be also challenging partly because some of the important structural reforms are coming up, the ones that I already mentioned in my introductory remarks. But also the budget time is coming and in addition the medium-term fiscal plans will have to be discussed, so these are major items. But also in the financial sector reforms we shouldn't forget that the recapitalization of the banks will be by end July. We still have to have several details of that checked upon when we are back. Then the deleveraging program will be again in the focus of attention. So I think we have a long list of items for that review, but I can promise that each review is going to be challenging because the task ahead of us is huge.
QUESTIONER: I'd like to direct this question to the ECB and EC if I could. Is there a need for Ireland to consider some of the proposals that have been suggested in the case of Greece, for example, some of the proposals that are under consideration are being proposed earlier this week and I'm wondering should they be looked at in the Irish context.
MR. SZEKELY: Let me start and then Klaus will come in. First of all, I think what we heard from the Euro Group are very promising things particularly for Ireland. In fact, I personally believe that this kind of increased flexibility of the schemes, Ireland will be in the best position to benefit from this and get the necessary additional support. And I think we should certainly when those new flexible instruments are there or increased flexibility is there use as much of it is as possible for Ireland because they are created in order to be used. So I have no hesitation to suggest that once they are created we will look into what fits best Ireland's conditions in the program and the needs of the country in the program.
What is certainly not part of our consideration is anything that goes beyond that, that is, I think the view is that public debt is sustainable, the design of the program is intact, in fact, that's again a defining characteristic of this program that the design is basically unchanged since it started and that's a very important thing because we have something strong to build on and there is no reason to speculate about what would be life if this were not the case because it is the case, so I would not want to go beyond this.
The important thing for Ireland is to continue program implementation and if there is increased flexibility, enjoy that or try to benefit from that. And as you have said several times we are on the record that the Commission strongly supports the reduction in the margin for Ireland.
MR. MASUCH: I can support what István Székely just said. I would remind you also of what he said and Ajai said that the continued strong implementation of the program will be important to limit potential contagion effects. I think this is the way for Ireland and I understood what Ajai and Istvan said is exactly in that direction. I would therefore clearly not consider anything which goes beyond what is currently with the program, clearly not any discussion about sovereign debt restructuring is neither needed nor would be helpful. I think Ireland debt is sustainable and remains sustainable. Thank you.
QUESTIONER: You mentioned contagion from events in Europe affecting the perception of the success or otherwise of Ireland's program. What part of that contagion do you attribute to the tardiness if you like of Europe coming to grips with the European debt crisis? And is there any frustration on behalf of the IMF of which occasionally it is suggested at the pace of form in Europe? Thank you.
MR. CHOPRA: My colleagues have already talked about the statement issued by the Euro Group earlier this week and I would also point you to the statement made by our new Managing Director Christine Lagarde right after the Euro Group's statement came out. She of course welcomed the statement and the points that were made there about the Euro Area standing ready to adopt further measures to address the crisis. And apart from welcoming the statement, she made the following point and I'll quote over here, she said, "We look forward to the prompt implementation of the important measures outlined in their statement." Here I would emphasize prompt and I would emphasize implementation. I think this also gives me an opportunity to revise and amend a statement that I made at this same press conference three months ago. The problems that Ireland faces are not just an Irish problem of course. They are a shared European problem. What we need and what is lacking so far is a European solution to a European problem. I think what's critical now is for Europe to dispel the uncertainty that is being created by the lack of what is perceived by markets and many as an insufficient response to decisively handle this crisis by implementing consistent, cohesive and cooperative policies. So we need a European solution to a European problem.
QUESTIONER: In an ability to keep the program on track, if that's the case, why has our Minister for Finance pointed out recently are we paying 9 billion in the interest rate in the long-term and should we not be rewarded for having high credibility and being on track?
MR. SZEKELY: Let me repeat what I said before. The European Commission strongly supports the reduction of the margin for Ireland. I should also add that any decision on the margin is the decision of the European Council. Thanks.
QUESTIONER: Let me just direct this question to the representative of the European Central Bank. The Minister of Finance, Mr. Noonan, has just said about an hour and a half ago that he hopes to open what I think he called fresh negotiations in the autumn in relation to Irish nationwide and Anglo-Irish senior bank bonds and he wants to open those with the ECB. Are you going into those talks saying you'll at least hear his side of the story or are you saying it just can't be done at all?
MR. MASUCH: I thank you for the question. I have already said on the issue of senior bank bonds that the stance of the ECB has not changed. We regard ideas to burn senior bank bonds is rather risky for Ireland, undermining confidence in the Irish banking sector.
Let me just make a more general remark concerning the European Central Bank and the banking sector. I know that there are sometimes criticisms of ECB policy decisions here in Ireland. One has to understand that being in the Euro Area, being part of a single currency, means that the monetary policy in all which comes with it cannot be divided, cannot be set differently from one country than the other. But this does not mean that our monetary policy disregards heterogeneity or disregards different economic situations in different countries of the Euro Area and especially of course here in Ireland. The Governing Council has introduced a number of nonstandard monetary policy measures when the financial crisis hit a few years ago and these nonstandard policy measures imply that the credit provision of the ECB under the rules which are the same for all Euro Area countries, that under these rules the credit provision of the Euro System is very high, it's exceptionally high currently, especially to Ireland. The Euro System and other Euro Area countries in this way provide substantial support to Ireland, to the Irish banking system and to the Irish people.
The credit provision which is currently flowing into the Irish banking sector all in all taken together from the Euro System is well above 100 billion, it's in the broad range of 150 billion, and this relatively low (inaudible) 1.5 percent currently and these rates would clearly not be available to the banks even if they were to regain access which is part of the program that banks regain to the market even if they would regain access to the market. So I just wanted to explain this is not something which we have designed specifically for Ireland. It's part of our overall policy approach following the crisis but Ireland has clearly substantially profited from this more than every other banking system and every other country inside the Euro Area. And this exceptional support would not be available if Ireland were not a member of the Euro Area and was not having the euro as its currency. That you have to take into account whenever you consider certain aspects of the ECB's monetary policy as providing some disadvantages to Ireland like the recent increase in interest rates where we got some criticism.
Certainly looking at Ireland alone can be considered as not helpful given the difficult economic situation in Ireland, but the overall support which the euro and the Euro System liquidity provision to Ireland provides has a much, much bigger advantage than the disadvantage seen in isolation which you may associate with such other decisions which we have to take because we construct and we design monetary policy for 330 million people in the whole of the Euro Area and we cannot set our interest rate differently for different countries. So Amadeo, that was a big longer.
QUESTIONER: A question for Mr. Chopra. Mr. Chopra, yesterday when David Begg from the Irish Congress of Trade Unions left his meeting with you he said that he told you that he felt the Moody's downgrade was a sign that our bailout plan wasn't working and he said that you guys agreed with him. What's your reaction to that?
MR. CHOPRA: I'm not going to comment on what Mr. Begg may have said. I wasn't there when he told you that. But what I will say is what I've already said, that the downgrade is largely a reflection of events outside of Ireland.
QUESTIONER: Also a question for Mr. Chopra. Mr. Masuch has spelled out the ECB's position in that it has not changed on burning senior bond holders. It has long been suggested that the IMF was favorably disposed to imposing some losses on senior bond holders. Would you look more favorably on Mr. Noonan's request in the autumn?
MR. CHOPRA: Let me make three points on this issue. I think firstly it's very important to remember that there are substantial liability-management exercises involving subordinated debt that are already underway, and these are for the banks that are receiving state assistance and these exercises are an important component of reducing the fresh injection of capital that the government needs to put into these banks. So that's the first point.
The second point is that the government has been very clear that the pillar banks that arise from after the stress tests need to be able to operate in the market as strong banks with a positive future and ongoing relations with all counterparties and this obviously then has implications for how they treat the senior bond holders in these institutions.
The third point is that going forward we would expect the government to continue to approach the issue of burden sharing with bank creditors in a robust legal and institutional framework that strikes a reasonable balance between creditor safeguards and flexibility.
MR. SZEKELY: May I add one sentence? It's important to point out that all these banks that are subject to restructuring and subject to recapitalization come under the State Aid Procedure and the State Aid Rules of the European Union. In fact, these rules and procedures explicitly require burden sharing with the subordinated debt holders so that it's part of that process as well and it's a legal obligation involved and this is happening in each and every case. Also the previous owners of equity of the bank are also losing their investment there so that there is significant burden sharing involved in these exercises.
QUESTIONER: A question for Mr. Chopra. The measures that are being required of the government are giving rise to huge pain, anger and rage as indeed you could hear right on the streets, everything from bus cutbacks to special needs assistance. I'm wondering if you have anything to say to the people who are being very badly hurt by the measures that are being required here.
MR. CHOPRA: As I said earlier, the adjustment to the boom that took place in the mid-2000s in Ireland has been very wrenching and it's resulted in very high unemployment, which is still unacceptably high. The government has had to make a number of very difficult choices. It's very clear to us that this government stands by and owns the various policies that they're implementing. In this connection we think that it is very important, and they do as well, that the poor and most vulnerable segments of society do need to be protected. We are here providing international support with all our institutions to be able to cushion this wrenching adjustment. If this international financial support were not available, the adjustments would need to be much deeper, much more severe and much more painful. But the bottom line is we would all agree that the key objective here is to get growth going again and to create jobs and to bring down the unemployment rate and I think that's going to be the true mark of success of this program.
QUESTIONER: A question for Mr. Chopra. The IMF has continually made clear that it would like to see labor market reforms in all the documentation it's produced so far. In terms of your engagement with the government, are you happy that they are doing that as quickly as you would like? There's been quite a lot of discussion between the coalition partners regarding reforming the joint labor agreements.
MR. CHOPRA: On this program we don't have a strict division of labor on various elements. We are three parties involved in all aspects. But I would say that on structural elements, the Commission staff have the greatest expertise among the three partners over here and I'm going to ask Mr. Székely if he would be willing to handle that.
MR. SZEKELY: I'm delegated the task. Labor market reforms are important for the precise reasons that Mr. Chopra already pointed out, because unemployment is so high, and there is a major change in the nature of unemployment in Ireland. The first important change is that long-term unemployment is much higher than it used to be. It's now about half or even higher of the unemployed that are unemployed for longer than 1 year. Second is that the educational achievement of the unemployed started to decline. In the past actually it was continuously increasing. So we have here a large number of relatively young people with limited skill sets sometimes and we need to find jobs for them. So it's very important that labor markets adjust accordingly and we do everything in our capacity to create the possibility, the market conditions, for them to find a job. We cannot create jobs. The private sector can create jobs, but we have to create the environment for this.
How precisely this should be done, I would like to emphasize this is for the government to decide. If you carefully read the documents, it clearly says the government will conduct a few and based on that review the government will formulate a set of policies which we will then of course discuss because there is a program and there are overarching goals and important things that we need to achieve in the program so of course we have to discuss and see whether it fits well. But these are the government's plans and when we see them we will discuss them and then we'll let you know what we think about them and that's one item for the next review mission.
QUESTIONER: The government here has alluded at various points using the 16 billion which was not used for the banking recap to fund the sovereign beyond 2013. Is this something which has been talked about at the recent mission? And would any element of the Troika have any concern about entirely emptying any spare money from the banks and what that might do for confidence in the banks? Thank you.
MR. SZEKELY: I can take this question. Indeed, when we designed the program, the way we arrived at the total size of the program included certain complements. One complement was financial sector reform. At that point it was very difficult to foresee how much that might be so of course we had a conservative estimate. Now after the very thorough stress test and PICAR pillar, now it seems that banks will be fully recapitalized. In fact, one of the best recapitalized banking systems in Europe will be created and we still have significant demand left in that part, but this is not earmarked money. The money is there for the program and all the financing needs in the program. So I think it's just natural that this resource is available to us and we will use as much as necessary to take this program ahead and there's nothing to be discussed about this. This is how the program is designed.
QUESTIONER: I just wanted to ask if there is private-sector burden sharing in Greece? After that would it be possible then to have a second bailout for Ireland or Portugal that wouldn't involve private-sector burden sharing, or once that precedent is made is there any way back?
MR. SZEKELY: First of all, I would not like to speculate about what happens if something takes place because I think we will cross that bridge if and when we get there. But let me again emphasize that this was all in the context of a country for which the debt is not sustainable and our position is that public debt in Ireland is sustainable, so in a way that is not really a relevant question at this stage and at this stage I don't see any reason to change our view on this.
QUESTIONER: So a second bailout without private sector involvement would be possible for Ireland?
MR. SZEKELY: You can reasonably draw this conclusion if you wish.
MR. CHOPRA: Actually, I wanted to add something very brief on this. Earlier when I talked about the need for a clear, concerted European response, I think two elements that I would highlight over here is that we need to come to closure on this debate about private sector involvement. And related to that, it's going to be very important to avoid any impression that the European Stability Mechanism, that any financial support under that is conditional on debt restructuring. We had a Euro Area concluding statement from the Article IV for the Euro Area that came out a few weeks ago and it made these points quite clearly.
QUESTIONER: Just a question for Mr. Chopra. Obviously you want to see Ireland reaching further targets on this program including its deficit target. Do you think personally that the most effective way to do that without hurting growth is to raise taxation or would you think that spending cuts -- in general terms do you think the balance should be struck in the favor of one or the other or are you saying you're leaving that entirely to the government?
MR. CHOPRA: I think this is an issue that we'll have to address in the context of the new review.
MR. ALTAFAJ TARDIO: Thank you very much -- to add I will conclude this press conference here or maybe take a very, very last question from the gentleman who's been waiting.
QUESTIONER: I want to ask the three gentleman how concerned you are about the developments of the last week where the contagion has not spread beyond Ireland, Greece and the other countries to Italy and Spain, and what your position now is on what would the ramifications be of a default by a Eurozone country?
MR. ALTAFAJ TARDIO: I think that that takes us far from this quarterly review, but I would not preempt the gentlemen to engage in such a challenging scenario.
That's for the next press conference. I'm happy to address that question in the margins or in Brussels, but not the framework of this quarterly review of the Irish program which was the subject of this press conference. Thank you very much for your attendance and we'll see you soon.