Transcript of a Conference Call on the Eighth Review under Extended Fund Facility Arrangement for Ireland
December 19, 2012
with Craig Beaumont, Mission Chief for Ireland, European Department, and
Olga Stankova, Senior Press Officer, External Relations Department
December 19, 2012
MS. STANKOVA: Hello, everybody. The conference call today is on the eighth review under the Extended Fund Facility arrangements with Ireland. Today we are publishing a staff report in addition to the press release which was published on December 17, following the Board decision that day.
I would like to draw your attention to the fact that there is a supplement to the staff report, which contains updated information on developments that took place after the staff report was prepared.
With this I will pass the microphone over to Craig Beaumont, who will hold the conference call today. I would like just to remind you that the conference call is under embargo, as well as the documents posted now on IMF’s Press Center, until 12 noon D.C. time. Thank you.
MR. BEAUMONT: Thanks very much Olga. Today we’re publishing the staff report for the 8th quarterly review. Ireland continues its track record of strong program implementation. Their fiscal targets were met for the eighth quarter running, and financial and structural reforms continued, with two structural benchmarks observed on the regulatory framework for credit unions and a levy on credit institutions for resolution costs. Let me highlight some key aspects of the staff report before turning to your questions.
We’ve updated our macroeconomic outlook in Section III of the report. We continue to expect real GDP growth of around half a percent this year, and the GDP data that were released for the third quarter yesterday are broadly consistent with this estimate.
Our baseline outlook is for a gradual economic recovery, but we’ve revised down growth for 2013 and 2014 by about 0.3 percentage points to 1.1 percent and 2.2 percent, respectively, mostly owing to weaker trading partner growth. We see a range of risks to that baseline, including potential delays in the benefits from the financial sector reforms in terms of access to market funding for expanding lending, the debt overhangs in the public and private sectors, and drag from fiscal consolidation.
If these factors hinder a gradual pickup in growth in coming years, Ireland’s debt outlook would be significantly affected. Rather than peaking at 122 percent of GDP next year and then declining, the debt ratio would continue rising if growth were to stagnate at about one-half percent in coming years. One factor that could magnify these risks to debt sustainability is a renewal of the “bank-sovereign loop” where prolonged low growth could lead to new bank capital needs that only increase public debt.
These risks to growth and the debt outlook mean that Ireland’s recently regained access to market funding still faces some vulnerabilities. In that context, it’s critical that Ireland continue to implement fiscal consolidation and financial and structural reforms to support debt reduction and growth. But it’s also important for Europe to deliver on the commitment made to improve the sustainability of the well-performing program that was made on June 29 this year. Together, these joint efforts can much reduce the risk that Ireland would need to continue rely on official financial assistance after the current EU-IMF program ends in late 2013.
In Box 2 of the report staff provides some views on how the sustainability of the program could be improved. The key points here are that a range of tools could potentially be used in a manner that would cement Ireland’s recently regained market access. In the near term, dealing with the promissory note issue would be useful to address the heavy debt service burden on this debt.
Looking further ahead, the ESM’s direct bank recapitalization tool could play a valuable role in directly reducing Ireland’s debt and breaking the sovereign-bank loop, which would support confidence and growth. We suggest the ESM play the role of a patient long-term investor when it participates in bank equity. On the issue of impaired assets, staff suggests the need for prudent valuations rather than excluding these assets altogether, as this would preserve and not break the bank-sovereign loop.
Financing backstops, together with the ECB’s outright monetary transactions, could also play a useful role in safeguarding market access against shocks and thereby facilitating a smooth exit from drawing on official financing.
Turning back to Ireland’s fiscal position, it’s welcome that the deficit for 2012 remains on track to be within the target of 8.6 percent of GDP. A key aspect of the 8th Review is the budget for 2013. This is Ireland’s sixth contractionary budget and it entails very difficult spending and revenue measures totaling over 2 percent of GDP to reduce the deficit to 7.5 percent of GDP in 2013. The supplement that is included in the bundle released today provides a more detailed analysis of the budget.
We consider the 2013 budget a key step along the path to putting Ireland on a sound fiscal position and are urging the full implementation of all the budget measures, especially the steps to keep health spending within its 2013 ceiling, the implementation of the property tax to broaden Ireland’s tax base in a progressive manner, and the reductions in the public pay and pensions bill that are under discussion with public sector unions.
At the same time, if next year’s growth were to disappoint, leading to a reduction in revenues, we are recommending to avoid any significant additional consolidation measures in 2013 so as to protect the recovery. If additional measures are needed to reach the 3 percent of GDP target by 2015, they can be deferred until 2015 when the fiscal measures planned are smaller. Let me be clear, we’re not suggesting that the measures in the budget already released should be deferred as some media reports have said.
The report also calls for financial sector reforms to be galvanized to enable a revival of sound lending to support economic recovery. So we welcome the Central Bank’s plans to supervise banks’ progress in durably resolving problem loans, which, together with personal insolvency reforms, will help address household debt distress and also arrest the deterioration in banks’ asset quality.
Relatedly, in paragraph 29 of the report we support the government’s plan to introduce legislation by the end of March 2013 to address issues identified by case law on repossessions. In fact, we suggest a broader review of the repossession framework to ensure it works efficiently in practice. The goal of these steps is not that large-scale repossessions will be the primary tool to address household debt distress, although, in some cases, repossession will be necessary. Rather the goal is to protect debt service discipline, which supports the possibility for loan modifications to be effective solutions, and it also supports banks’ willingness to lend, which is important for domestic demand to gradually revive.
Economic recovery is also needed for job creation to reduce high unemployment. The phasing of the fiscal consolidation over a number of years and the deep reforms of the financial system to get it back to full health both aim to support a recovery. It is also important to keep job seekers in the labor force, and we support work to provide integrated employment services--especially plans to increase the engagement with the long-term unemployed--reforming further education to ensure that training is in line with what the market needs, and replacing the current housing supports with a new housing assistance payment to avoid employment disincentives.
With that, I’ll be happy to take questions.
QUESTIONER: Hi, Craig. Just very briefly, when you say in the supplementary information, this is a double-check, the GDP forecast is still in 2013 1.1 percent and 2014 2.2 percent? I’ll ask another question.
MR. BEAUMONT: Yes, the GDP projections are not changed in the supplement.
QUESTIONER: Good. And just the question is that you’ve made such -- you’ve urged in the past for euro zone authorities to deliver some sort of deal for Ireland. How would you categorize this one? How would you categorize this urging? Is it your strongest yet, starkest yet?
MR. BEAUMONT: I think it’s a consistent message that we also gave in the previous review in relation to the need, especially in the case of Ireland, to break the sovereign-bank loop, and drawing attention to the fact that the ESM direct bank recapitalization instrument, which is under development, would be an excellent tool to address that issue.
QUESTIONER: And just a follow-up question on that. What’s your view? You know, you are part of the troika. Is there a schism here with your colleagues in the ECB and about the promissory note deal? And just if you could talk a few words about that as well, maybe a few words about that.
MR. BEAUMONT: No, I don’t see any schism. This is a commitment made by euro area leaders to review the situation in Ireland’s financial sector and to improve the sustainability of the well-performing program, and our Commission and ECB colleagues are working together with us on how to do that.
QUESTIONER: Hi, Craig. Just again on the promissory notes could you just give us an update of what the main sticking points are or what stage the negotiations are on the promissory notes?
And secondly, (inaudible) a deal on the promissory notes be enough in and of itself to get Ireland over the line to exit its bailout and return to the market or does the IMF think it needs something else as well, for example, the ESM bank, some kind of clarity on the ESM bank recap? Thank you.
MR. BEAUMONT: I won’t go into the details of the discussions on the promissory notes other than saying that they are ongoing and intensive. In terms of the benefits, the significant benefit would be to reduce Ireland’s debt service schedule because the promissory notes are due to pay about 3.1 billion euro annually for at least the next 10 years and there are further smaller payments after that. Reducing this heavy debt service schedule would significantly contribute to Ireland’s ability to regain market access on reasonable terms.
Regarding whether a promissory note deal is enough by itself, there is a need to focus on the goal to make sure Ireland’s strong policy implementation efforts lead to a positive outcome in terms of reliance on market funding to enable an exit from official financing. We would encourage a forceful approach to achieving that which could require a combination of measures not only dealing with the promissory notes, but also the broader issues, including the bank-sovereign loop that I mentioned.
QUESTIONER: I’m just -- my last follow-up question is would you expect a promissory note deal by March?
MR. BEAUMONT: We certainly hope for and encourage a promissory note deal before March.
QUESTIONER: Thanks. Hi, Craig. I was just wondering in relation to the promissory note if there is no agreement by March and the payment is made, that leaves very little head room in the Irish budgetary figures for 2013. And your growth estimate seems to be somewhat lower than the Irish government’s. Is there any room at all for slippage in the Irish budget arithmetic absent any agreement on the promissory note?
MR. BEAUMONT: From the general government deficit perspective the promissory note payment is not a factor in the deficit, so we don’t see the promissory note issue as one that contributes in any quantitative way to the achievability of the 2013 budget targets. We do note in the supplement that some of the buffers that prudent planning builds into the budget are a little bit narrower in this budget than in previous budgets, which means that we are strongly encouraging very careful implementation of the budget to make sure all the measures that have been announced are fully realized.
QUESTIONER: But you say it has no deficit impact even if there is a promissory note deal.
MR. BEAUMONT: In terms of the general government deficit, changing the timing of when the principal payments are due does not affect whether or not the target of 7.5 percent of GDP is achieved.
QUESTIONER: Thank you very much. I’m wondering what are the main results that you think are necessary from the EU commitment? Is it a lowering of the debt or a lowering of repayment interest?
And in terms of the ESM bank recap, there’s talk of purchasing the Irish bank’s shares. This could be as little or even less than 8 billion euros. I’m wondering if you think that’s enough or if there should be another structure there.
And on the structuring of the promissory notes, could you say how essential this is?
And in your overall analysis then, while you’re really issuing some warnings there, if all of these things don’t happen and if growth is lower than is required, would this place the future IMF support in a position where it would be questioned? Thank you.
MR. BEAUMONT: That’s quite a combination of questions. In terms of the direct recapitalization of the banks by the ESM, we see that as driving an initial up-front debt reduction which would be of significant benefit for Ireland’s market access. We won’t speculate on the precise amount, but in the last report we did provide an illustrative example where the amount was 24 billion euro, which is exactly the same as the recapitalization of the banks within the program. That was purely illustrative. The main benefit for market access is that up-front stock reduction that occurs when you sell equity in the banks to the ESM, which would then have ongoing benefits in terms of reduced interest payments.
In terms of the promissory note, we consider that resolving this issue is an essential part of the whole package that would be needed for a smooth exit to reliance on market funding. That’s why we’re strongly encouraging that a resolution of the issue be reached before the next payment is due at the end of March.
I certainly won’t speculate on what future reviews will consider in relation to the IMF’s support. The IMF has consistently supported the strong implementation of this program. What we’re warning is that this implementation effort should be matched by delivery on the commitments that have been made, in order to “lock in” the market access recently gained and deepen it to ensure a smooth exit from official financing, which benefits not only Ireland, it’s to the benefit of the euro area as a whole.
QUESTIONER: And basically are both these things on (inaudible) essential for Ireland to get back into the markets in a realistic way?
MR. BEAUMONT: Ireland is already back in the market in a quite significant way. It’s one of these situations where we can’t say absolutely that without these new arrangements being made that it would be impossible for Ireland to reenter the market in a sustained way, but in the report we do draw attention to the quite substantial amount of financing that needs to be raised in coming years, so there are, as a result, risks to leaving these issues unresolved.
QUESTIONER: Hello. Three questions, if I may. First on debt sustainability, is it accurate to say that you’re more pessimistic now than in your last report on the outlook for debt sustainability?
Two, you advise the government in terms of its budgets after 2015 to set out in detail what it’s going to do. Are you saying that it should give all detail, in other words, there should be no further annual December outlining of budgets, but everything should be set out up front?
And three, you go into health care over -- the cost health care overruns in some details. You don’t mention welfare, the overrun of the welfare budget. Is that because you put the welfare budget down to an automatic stabilizer effect rather than a problem with managing the budget? Thanks.
MR. BEAUMONT: Thank you. Let me first follow up on the last question. It’s very much the case that we see the additional spending on social welfare as a consequence of higher unemployment than was anticipated. We think that that type of cyclical factor should be accommodated, so we mention in the supplement that it was appropriate to adjust the social welfare expenditure ceiling for 2013 for the same reason.
In terms of debt sustainability, the gross debt projections are a little higher than we had at the past review, by about 3 percentage points of GDP at the end of 2013. Most of that, I think almost all, is due to the authorities’ prudent plan to end 2013 in a strong cash position to best ensure that market access is sustained in 2014. So the net debt outlook isn’t affected very significantly at all.
Looking further ahead, the pace at which debt declines is somewhat slower than we previously had because we have a more gradual recovery path. But the overall picture is not fundamentally changed and we had quite similar commentary on the fragility of debt sustainability in the previous review.
In terms of specifying measures, what we encouraged was that the government would outline the remaining consolidation measures. When we say “outline,” it would be in much the same way that it was foreshadowed that a property tax would be implemented in 2013, so that people would have some sense on the direction of forthcoming measures. There was quite significant progress in that respect in this current budget because, for example, the property tax has only half of its full-year effect in 2013, so there is what we call carryover into 2014. As a result, part of the adjustment need for 2014 has already been foreshadowed in this budget; with a total carryover of 1 billion euro, there are 1 billion euro less in new consolidation measures that need to be announced in the 2014 budget.
QUESTIONER: It’s still just not clear to me how much extra detail you want. As you know, the size of the consolidation each of the next years is set out as is the composition between taxes and spending. So what sort of additional information are you urging the government to produce?
MR. BEAUMONT: If we look back to the start of the program, to the National Recovery Plan, in fact, every measure needed to achieve the fiscal consolidation through 2014 was specifically set out with the quantification of the contribution that it would make to the adjustment. We are not suggesting to go to that level of detail, but to set out at least the main areas that would be developed into specific measures to give households and businesses somewhat more certainty about what measures will be coming.
MS. STANKOVA: Thank you very much, Craig, and thank you, everybody, for joining us for this conference call. The embargo will be lifted in about 25 minutes. Thank you and have a good day.