Transcript of a Conference Call on IrelandWashington, D.C.
Tuesday, December 20, 2011
MR. OUDEJANS: Good morning, and welcome to this Conference Call for the Fourth Review for Ireland from the IMF. We have here with us Mr. Craig Beaumont, Mission Chief for Ireland. He will start with a few opening remarks and after that we'll continue with a question-and-answer session. Mr. Beaumont, over to you.
MR. BEAUMONT: Thank you. Good morning or good afternoon depending where you are. The report we're publishing today contains the IMF staff's analysis that forms the basis for the Executive Board's quarterly review of the EU/IMF supported program for Ireland, which as you know started about a year ago now. The Board approved the completion of the review on Wednesday last week, the 14th, which made Ireland eligible to borrow an additional 3.9 billion euros from the IMF which brings our total disbursements to about 13 billion euro.
Let me highlight some key points in the report and then we can turn to your questions.
The Irish authorities have maintained strong policy implementation in the face of continuing external volatility. The crucial first phase of the financial sector reform strategy has been successfully completed, including the restructuring and recapitalization of domestic banks, and the process of deleveraging their balance sheets is off to a good start in the second half of 2011. The budget is on track for the major fiscal consolidation targeted in 2011 and all the quantitative performance criteria and structural benchmarks for this review were met, which included publishing a memorandum of understanding on banking sector oversight and a introducing a medium-term expenditure framework.
All of these efforts contributed to a notable decline in Ireland's bond spreads in recent months, together with renewed confidence in Ireland's medium-term quota potential following strong export-led growth in the first half of 2011. More recently, since the Board meeting, the preliminary GDP growth figure for the third quarter has been released which was a decline of 1.9 percent. Let me note that some reversal of the very strong performance in the first half was built into the IMF's projections so that there shouldn't be too much impact on the full year projection for 2011.
Looking ahead to 2012, there has been a substantial deterioration in the regional economic outlook, which represents a major external drag on Ireland's recovery and also poses downside risks. This calls for continued careful design and sound implementation of fiscal consolidation, financial sector reform and structural reforms to help sustain the nascent economic recovery.
Let me note some important steps the Irish authorities have taken in that respect. They renewed their commitment to putting the budget on a sound footing to ensure that debt is on a firmly downward path, and their Medium-Term Fiscal Statement lays out a credible strategy to reduce the deficit to 3 percent of GDP by 2015. The recently announced 2012 Budget includes 3.8 billion euros in spending and revenue measures to reach the deficit target of 8.6 percent of GDP in 2012, where this adjustment exceeds the original program amount of 3.6 billion. You'll find a more detailed analysis of the budget in the supplement that's at the end of the package being published today.
The additional consolidation efforts planned in 2012 and 2013 to reach the original deficit targets despite a worse-than-expected external environment, confirm the authorities' commitment to putting the budget on a sound footing. Taking this additional adjustment into account, and the high credibility Ireland has earned in fiscal policy implementation, if growth and revenues fall short of projections, IMF staff favors maintaining this scale of discretionary fiscal adjustment in 2012--the 3.8 billion euros--in order to avoid amplifying recessionary shocks.
Turning to the financial sector, while very good progress has been made to restoring the health of the financial system in the first year of the program, continued intensive efforts are needed to protect financial stability and ensure that the financial system supports sustained economic recovery. Here the Irish authorities are working on a wide range of issues which include provisioning and disclosure guidelines, challenging banks' business models, and establishing relationship frameworks between the Department of Finance and the state-owned banks to ensure that the banks' core businesses are managed on a commercial basis.
The Irish authorities are restructuring the credit union sector to address weaknesses and to improve regulation and governance in that sector. They are also working on improving financial supervision, modernizing the personal solvency regime, and establishing an effective credit register which are important to contribute to the work out of problem loans and to improve the quality of future lending. Over time all these efforts aim to allow banks to resume access to market funding at reasonable cost and undertake sound lending to contribute to Ireland's recovery.
While most of the emphasis in the program is on financial sector reforms and fiscal consolidation, there are also focused structural reforms to help support competitiveness, growth and hiring. Reforms to sectoral wage agreements will enhance potential for hiring in sectors that have been hard hit by the crisis. In view of the sharp rise in unemployment and its high incidence in certain sectors, we support efforts to strengthen active labor market policies and training which are needed to contain the risk of structural unemployment. We also note that a carefully designed program of public asset disposals could enhance economic efficiency and growth if it is underpinned by an appropriate regulatory framework.
In conclusion, the Irish authorities have built an exceptional track record of policy implementation in the first year of their program. In the face of a sharp deterioration in growth prospects owing to external shocks, the authorities have strengthened fiscal efforts and are advancing financial and structural reforms. But circumstances have become more adverse, posing risks to growth and the cost of regaining market access and, therefore, to debt sustainability. Also the environment for further deleveraging of the banks is more challenging going forward in view of developments in the European banking system. In that context, IMF staff suggests that stronger European support for Ireland's recovery would help reinforce the prospects for program success and therefore promote the public good of European stability.
On that note, I'd be happy to take questions.
MR. OUDEJANS: Thank you, Craig. Are there questions?
QUESTIONER: There were three things that struck me in this report. One was the sensitivity and the vulnerability of the Debt Sustainability Analysis to continued growth. The second you noted was the perception certainly in Ireland that continuing to pay the unsecured senior bank debt was a big contributor to that problem. And the third was your suggestion that Europeans and the rest of the Eurozone should make what contributions they could to the Irish recovery. Do those all not point to at this point revisiting the question whether or not senior unsecured bank debt should be written down?
MR. BEAUMONT: At this point, the authorities have indicated that for the pillar banks which need to continue with business relationships with a wide range of counterparties they would not contemplate any action on senior debt. Then for the Anglo-Irish Bank and INBS--which are now in the Irish Bank Resolution Company--the amount of senior unsecured debt has declined to a rather modest sum so that I don't think that it makes a material difference.
QUESTIONER: But when you say that authorities don't think that, what is your view on whether or not those pillar banks should be treated in that way?
MR. BEAUMONT: At this late stage we're not going to reopen the issue of senior bank debt. Now that the banking system has been restructured, the focus is on regaining market access, restoring lending and supporting the recovery.
QUESTIONER: I have three questions. The first one is whether this bailout can be considered a success without the additional financial help from Europe that you've suggested? The second is, can you quantify the cost of this potential additional financial support to Europe? Finally, you mentioned a range of different measures, guarantees, possible equity stakes. To your mind, what would be the most important support that Europe could offer Ireland? Thank you.
MR. BEAUMONT: European support has been enormously helpful to the program already, which includes the substantial reduction in European interest rates agreed in July this year. What we arere saying is that additional support would reinforce the program and improve the prospects for success. In terms of the cost of this financial support, we indicate a range of options that could be explored, but a lot of technical work that would need to be done on any of those options so it's too early to talk about the cost. The main thing that would be desirable would be to break the link between the sovereign and the financial system more effectively than has been done so far.
QUESTIONER: I have two questions. Firstly, in the report you said that prospects for the program's success are fragile given what's going on in the Euro Area. Is that an admission that the program itself could end in failure, and if so, what specifically constitutes failure of the program and not being able to re-access to debt markets by the end of 2013. Maybe requiring further aid after 2013 or potentially a default or restructuring event? Separately, Greece and Portugal have been paying about 5 percent for 3 months' money in the T bills market. Is that a price worth paying for Ireland to meet its stated aim of getting back into the short term markets as is stated by the government for the middle of next year?
MR. BEAUMONT: On the last question on the price of regaining market access, I wouldn't want to comment on a specific interest rate that the authorities would consider acceptable. At this stage, we still think it's reasonable that we assume a modest amount of market access, actually quite small in 2012, with most market access in 2013 by which time further progress will have been made in fiscal consolidation in Ireland and in stabilizing the financial system. Further progress should also have been made in stabilizing the situation in the broader Euro Area so that prospects for program success remain positive.
QUESTIONER: I wanted to ask you if you could clarify the point you made about re-phasing the disbursements. I wanted to make sure that I've understood that correctly as meaning frontloading the aid program.
MR. BEAUMONT: The re-phasing is only for the amount of money that we have already programmed to disburse in 2012, which we would adjust within the year by bringing forward part of the disbursements that were set aside for the third and fourth quarters into the first quarter. This would strengthen the government's cash balance throughout the whole of 2012 which we think will, in the context of increased volatility in European bond markets, improve market confidence and thereby enhance the possibility for the government to regain market access.
QUESTIONER: Thanks for doing this. Just two things real quick. Is there any possibility of additional IMF help for Ireland? Secondly, I assume from what you just said the possibility that I know Irish officials have mentioned of returning to the bond market or sort of dipping their toes into the water next year, is still possible?
MR. BEAUMONT: On the funding side, we consider that the program is very well financed. Only a small amount of market financing is required this year, so we're certainly not contemplating any change in the IMF's financing volume. I can't comment on whether the Irish authorities would re-access markets through the bond market or by other means, but we think it's reasonable to assume a small amount of market access in 2012.
QUESTIONER: I wanted to check in terms of the re-phasing of the financing. Has Europe agreed to re-phase their financing for 2012, in other words, bringing what was meant to be disbursed in the second half forward to the first quarter?
MR. BEAUMONT: We continue to maintain the broad 2:1 ratio of financing between the European Union and IMF so that they have also made a similar adjustment in their phasing as well.
MR. OUDEJANS: If there aren't any other questions, I think this will conclude our conference call. Thank you for dialing in, and thank you, Mr. Beaumont, for doing this.
MR. BEAUMONT: Thank you.