Transcript of a Conference Call on the Fifth Review under Extended Fund Facility Arrangement for Irelandwith Craig Beaumont, Mission Chief for Ireland, European Department, and
Olga Stankova, Senior Press Officer, External Relations Department
March 2, 2012
MS. STANKOVA: Good morning, everybody, and welcome to the conference call. The call will be held by the Mission Chief for Ireland, Craig Beaumont. We published a press release on this fifth review under the Extended Arrangement with Ireland on Monday, February 27, after the Executive Board discussion and approval of the review. Now we are publishing the staff report and associated documents. The documents that posted now on the IMF’s On-line Media Briefing Center and the content of this conference call are embargoed until 11:00 am DC time.
With that I will pass the microphone to Craig for his opening remarks.
MR. BEAUMONT: Thanks very much, Olga. The Irish authorities have maintained strong implementation of their program, and the Board approved the completion of the review on Monday this week, which made Ireland eligible to borrow an additional €3.2 billion from the IMF, bringing our total disbursements to about €16 billion. Let me highlight some key points in the report and we can then turn to your questions.
On the growth side, Ireland's growth is estimated at about 1 percent in 2011. The growth outlook for 2012 has been lowered moderately from about 1 percent at the last review to ½ percent at this review. This is mostly driven by a weaker outlook for trading partner growth, especially in the Euro Area, but some weakening in consumption and investment is also allowed for.
The substantial fiscal consolidation targeted for 2011 was achieved with a margin. This entailed a consolidation effort of 3½ percent of GDP which reduced the deficit to about 10 percent of GDP, which is well within the program target of 10.6 percent. This result was achieved despite weaker domestic demand in 2011 which reflects the authorities' strong revenue administration and firm control over spending.
Looking to 2012, the budget targets further fiscal consolidation totaling 2¾ percent of GDP and that lowers the deficit to 8.6 percent of GDP. This target is still achievable even with the reduction in the growth outlook for 2012 because the starting point for 2011 was a little stronger than was allowed for in the budget projections, inflation is expected to be a little higher owing to the weaker euro, and the budget projections included some prudent buffers.
In the area of fiscal policy, the report discusses policy reactions in the event of a further reduction in growth for 2012. In the current circumstances, where the Irish authorities have already in Budget 2012 adopted about ½ percent of GDP in measures additional to that originally planned, the IMF would support the accommodation of revenue shortfalls associated with weaker growth. The reason is that additional fiscal consolidation in 2012 would unduly threaten the still-fragile economic recovery, which is needed for debt sustainability and regaining access to market funding.
At the same time, Ireland's overall fiscal deficit remains large and it's important to preserve the credibility of the medium-term fiscal consolidation plan to reach a deficit of 3 percent by 2015. If a reduction in growth in 2012 was part of a more lasting revision in the medium-term economic outlook, it would be appropriate to reevaluate the consolidation plan for 2013 through 2015 to allow the burden of the shock to be spread over time.
Turning to the financial sector, strong progress with financial reforms has continued, but further efforts in this area are critical to ensuring that banks become healthy enough to start to contribute to recovery and domestic demand.
I'll note just a few of the issues the Irish authorities are working on, one of which is the deleveraging of the three banks in the 2011 PCAR exercise. Deleveraging made good progress in 2011, with a total of €34 billion overall being achieved, which is almost half the target to be reached by the end of 2013. This included about €15 billion in asset disposals which were completed at somewhat better pricing than had been anticipated. Nonetheless, the authorities are working on some refinements of the deleveraging framework to minimize risks to domestic lending and to deposit rates, it is also recognized that market conditions have weakened given large-scale deleveraging by other European banks so that it's more likely that the safeguards against fire sales may need to be used in 2012.
The other issue I'd draw your attention to is the progress on modernizing the personal insolvency regime which is important to address debt distress affecting households. The authorities have published a draft outline for a bill to reform the Bankruptcy Act, which reduces the discharge period from 12 to 3 years, making bankruptcy a more viable option where it's appropriate. It also provides for voluntary out-of-court arrangements between borrowers and lenders.
An innovation in the proposal is that these personal insolvency arrangements would cover secured debts such as mortgages. In other countries, voluntary out-of-court arrangements are limited to unsecured debt. This expansion of the coverage is a welcome step which is necessary to address Ireland's current challenges. The design of these procedures includes protections to preserve payment discipline, as eligibility is based on assessments of borrowers' ability to replay, there are limits on access to credit, and creditors may challenge an arrangement in court.
Making these procedures work well in practice will require particular care in the finalization of the legislation and also setting up the necessary infrastructure, including the insolvency service and the regime for insolvency trustees. Overall, this is an important step to help resolve the household debt distress in coming years while still ensuring the protection for creditors needed to allow for new lending. It will help avoid repossessions except when necessary, supporting the housing market, and more broadly help reduce uncertainty and support the recovery of domestic demand.
On structural reforms, progress continues on reforms of the Employment Regulation Orders and Registered Employment Agreements, and on the Pathways to Work Plan aimed at strengthening labor activation and training policies and their implementation. Most recently the government announced an ambitious state asset disposal program of €3 billion which is consistent with the commitments under the program.
Finally, the report reviewed the prospects for the government regaining access to market funding. Recent market developments are favorable, with the spreads of Irish bonds falling to about 450 basis points on 2-year bonds, down from a peak of 2,200 basis points in the middle of 2011. The government is in regular contact with market participants and currently intends to return to the markets by issuing treasury bills in the second half of 2012. We think it's reasonable at this stage to expect the modest market financing projected for 2012 will be achieved, although developments will be kept under review.
There is a more substantial need for market funding in 2013. Whether the government manages to meet its financing needs next year will depend not only on continued strong policy implementation on its part, but also on developments in the Euro Area. Because of this uncertainty, the IMF staff is encouraging the European authorities to proactively take steps to reinforce the prospects for Ireland having adequate market access in 2013. Such steps could help Ireland avoid ongoing reliance on official funding and would also contribute to overall European economic stability.
At this point I'd be happy to take questions.
QUESTIONER: Craig, thanks for doing this. I wondered, Craig, if you could speak a little more about this issue of getting Ireland back to market access. I know you say it looks like they can do this with a little bit of financing in 2012, but 2013, I think the report put the figure at something like €14 billion and there seemed like an awful lot of caveats throughout the document about why they might not be able to do it. I guess my question is, is the IMF worried that if Ireland can't be counted on to graduate back to markets, what does it say about the rest of the bailout countries?
MR. BEAUMONT: In our review of financing assurances, we typically only look about four quarters ahead, so that we focused on 2012 and we have reasonable confidence that the market financing needed is achievable in 2012. But as you say, we did see some uncertainty about 2013 and the point we're making is that we should try and reduce that uncertainty, and we're suggesting that the European authorities could contribute through some enhanced support of the program to reducing that uncertainty.
QUESTIONER: If I could follow-up, could you be more specific on what you'd like the Europeans to do?
MR. BEAUMONT: We do point out that there are ways to reduce the need for market financing in the medium-term which would help enhance prospects for Ireland to regain market access, which would reinforce their debt sustainability and help the banks deal with this more difficult climate for deleveraging given that other European banks also in a deleveraging process. This is all related to the ongoing technical work that has been mentioned in the past which is still very much a work in progress so that it's difficult to go into great detail.
QUESTIONER: That's not quite more specific, but I guess that's all we're getting.
MR. BEAUMONT: That's it for now.
QUESTIONER: I wondered if you could talk a little bit about the referendum that's going to happen in the next few months in terms of how big a risk it poses for the program, what the consequences you see being of Ireland's rejecting the treaty and given the treaty, if it were rejected we wouldn't be able to access the ESM. Does this make it less likely that Ireland will be able to return markets fully next year again in view of no vote? I just wondered about your thoughts on that.
MR. BEAUMONT: Coming from the IMF, it's not really a matter for me to speculate on the outcome of the referendum. This is very much a matter for the Irish people to determine.
QUESTIONER: Would it be possible to say anything in terms of the next 3 months or so before the referendum whether there will be any added uncertainty to the program itself just talking in terms of the program, any uncertainty given that there will be a vote in 3 months' time?
MR. BEAUMONT: So far we don't see much additional uncertainty. Ireland’s bond spreads seem to have moved up only a few basis points overall after the announcement that there would be a referendum, and our work on the policy issues goes forward without interruption so that I don't currently anticipate any impact on the program. We have a review in April that will discuss progress.
QUESTIONER: I'd like to come back to the -- are you referring to specifically the Anglo-Irish promissory note and the work that's going on there? Is that what's being referred to here?
MR. BEAUMONT: Yes, promissory notes are part of the technical work that's ongoing.
QUESTIONER: At this point would you say you're optimistic about receiving a favorable outcome for Ireland on that or not?
MR. BEAUMONT: We're optimistic in the sense that we continue working quite hard on this issue. Together with the staff of the European Commission, the ECB and the Irish authorities, substantial work is being invested into this, so that I think all parties are working hard to make it possible.
QUESTIONER: Are you optimistic about the potential outcome in terms of -- in the process?
MR. BEAUMONT: Like I said, we are applying a good deal of resources to this on all sides so that I think we all have a positive attitude to achieving this goal.
QUESTIONER: Is it a near-term thing? Is it a medium-term thing? Do you think there will be some outcome? First of all, when do you think we'll see -- produced by the Troika, number one? And then when you think we'll see a final outcome on the -- prom note issue?
MR. BEAUMONT: No timetable has been agreed for the technical work in progress. We'd like to move it along reasonably quickly, but at the same time we need to achieve a certain degree of consensus among all the parties so that there is no firm timetable.
QUESTIONER: Is there a certain amount of consensus at this point or are you meeting some -- resistance from other members of the Troika -- ECB? Can you give us a flavor of the level of consensus there at the moment?
MR. BEAUMONT: I think that there is a lot of consensus among the staff involved. It's still a work in progress, but fundamentally the underlying concept has attracted a lot of consensus.
QUESTIONER: Just to be clear, you're saying there is a lot of consensus within the Troika on this particular issue?
MR. BEAUMONT: Yes, among the troika staff.
QUESTIONER: While you are not commenting on the final outcome, you're certainly optimistic on the process and you say there's a positive attitude on all sides achieving some kind of goal there?
MR. BEAUMONT: That's a good summary of the situation thank you.
QUESTIONER: Craig, back on the promissory notes, there is obviously a deadline on this. You may have consensus with the ECB primarily, but there is a bit of a deadline isn't there for the next installment paid in approximately end March.
MR. BEAUMONT: We don't see that as a hard-and-fast deadline. It's a bigger operation than just the one repayment to be worked on.
QUESTIONER: Thanks much. In March the payment may well be made, but for an agreement promissory note sometime in the future, is that the correct reading of it?
MR. BEAUMONT: No, I won't speculate on exactly how the end March payment is dealt with.
QUESTIONER: Good afternoon. You've reduced your growth forecast like pretty much everyone else apart from the Irish government that is still sticking to 1.3 and the Prime Minister said today that he doesn't intend to change it this year. Are you worried that the government is a little bit delusional about the rate of growth?
MR. BEAUMONT: I'm not going to comment specifically on the growth forecast, but the whole macroeconomic framework the Irish authorities have is actually quite similar to ours. If you look at the nominal GDP figure which is the base for the calculation of the projected tax revenues, it's remarkably similar so that we're really on the same page in terms of the underlying assumptions for the budget.
QUESTIONER: Back to the promissory note issue. Would you be able to quantify in terms of debt dynamics, debt sustainability, the kind of outcome that you expect from whatever does eventually come out of these discussions?
MR. BEAUMONT: At this stage we can only say that it does reinforce Ireland's debt sustainability but I can't quantify it.
QUESTIONER: Craig, you've urged that the government doesn't do any additional austerity measures this year even if growth deteriorates some more and the European Commission had a very different view. In their paper this week they said that there may need to be budget changes this year to make up the gap. Where will the consensus fall on this? Obviously you're both coming from very different paths here.
MR. BEAUMONT: I'm reasonably optimistic that the issue will not in fact arise, and that growth will be sufficiently strong and revenues will stay on track so the need to consider additional fiscal measures won't eventuate. But if it does need to be considered, it would be a matter for discussion at reviews of the program later in the year.
QUESTIONER: Thanks very much indeed. A simple query about lending to SMEs and some concerns that there's, I don't know what you call it, a squeeze going on there which would be very detrimental in the medium- to long-term.
MR. BEAUMONT: Yes, we think that it's important to ensure that a foundation for restarting lending to SMEs is established. I saw that there has been some discussion of that today at a conference about SME lending. We'll be looking to learn from that discussion and see what if anything needs to be incorporated in the program as SME lending is part of the process of restoring growth and job creation in Ireland.
QUESTIONER: There's been a lot on promissory notes unfortunately. If there isn't a deal, will Ireland get back to market funding next year on the promissory notes?
MR. BEAUMONT: Next year is some time away, and it's possibly quite a long time away in terms of all the developments that can happen in Europe, and as we've seen with the 3-year LTROs, perceptions can change quite quickly. So it's obvious that we can't make a firm expectation on what will happen with or without some further strengthening of the program. Given the way the markets have been responding to policy developments in Ireland so positively, realistically it's still possible that Ireland can gain adequate access in 2013, but at this stage our sense is that the risks are a little bit on the high side and we'd like to reduce those risks.
MS. STANKOVA: We would like to thank everybody for joining us for this call and remind you that the embargo on the conference call and all the documents from the Media Briefing Center will be lifted at 11:00 a.m. Thank you.