Transcript of a Conference Call on the Ninth Review under Extended Fund Facility Arrangement for Ireland
with Craig Beaumont, Mission Chief for Ireland, European Department, and
Olga Stankova, Senior Press Officer, External Relations Department
April 3, 2012
MS. STANKOVA: Hello, everybody, and welcome to the conference call on the release of the staff report for the ninth review under the Extended Fund Facility arrangement with Ireland. The IMF’s Executive Board concluded the review on Friday, March 22, and the press release on the Board’s decisions was issued that day. You probably have a copy. You probably also have a copy of the staff report for this review. The staff report was posted on the IMF’s password-protected website for journalists yesterday.
Before I pass the microphone over to Craig Beaumont, IMF Mission Chief for Ireland, who will summarize for you the conclusions of the staff report and answer your questions, I would like to ask you to let me know -- and you are welcome to do it by email right in the course of the conference call or after the call -- if you have any technical problems, asking questions during the call.
With that I will pass the microphone over to Craig Beaumont for his opening remarks.
MR. BEAUMONT: Thanks very much, Olga. Let me give a brief background. Ireland has continued its track record of strong program implementation. Fiscal targets for 2012 were met by a significant margin with a deficit of about 7.7 percent of GDP, well within the target of 8.6 percent. The Fiscal Responsibility Law was enacted and other structural reforms are moving forward, including the enactment of the Personal Insolvency Law to help resolve household debt distress.
A welcome development is the promissory note transaction in early February, which is discussed in Box 1 of the report and on pages 13 and 15. While this transaction results in only a small reduction over time in Ireland’s high public debt, it does substantially reduce market financing needs in the next decade by about 24 billion euros.
Together with broader euro area trends, this progress has supported Ireland’s improved access to market funding. The first 10-year issuance in three years on March 13 totaled 5 billion euros at 4.15 percent, and it attracted broad interest by both region and class of investor.
The macroeconomic outlook is updated in section 3 of the report. Actually, after finalizing the report, preliminary national accounts data for 2012 were released with real GDP growth of 0.9 percent. This is a little stronger than the 0.7 percent we had estimated in the report, but quite close to the 1 percent staff projection in late 2011. An encouraging aspect was the significant slowing in the decline of domestic demand to 1.5 percent for 2012, down from almost 3 percent in 2011.
Our baseline economic outlook is for a gradual economic recovery with growth remaining low at just over 1 percent in 2013, and rising to just over 2 percent in 2014. But we continue to see a range of risks to that baseline, both to the trading partner recovery expected to strengthen exports from 2014 and also to the revival of domestic demand. One of those risks to domestic demand is that lending remains very low, owing to both the slow rate of progress in resolving loans in arrears to households and SMEs and also due to the broader weakness in the profitability of the banks.
If these factors hindered the gradual pickup in growth we have in the baseline, Ireland’s debt outlook would be significantly affected. Rather than peaking at just over 122 percent of GDP this year and then declining, debt would continue rising which could eventually undermine Ireland’s access to market funding.
With that in mind, this ninth review of the program focused on how to ensure Ireland can achieve a durable exit from drawing on official financing at the end of this year when the program is to be completed. We agreed three broad policy planks with the Irish authorities to help support exit and growth.
In the financial sector, a key priority is to make concrete progress with resolving nonperforming loans in order to support a sustained revival of lending and recovery in domestic demand. Initial targets for banks to restructure mortgage loans in arrears have recently been established by the Central Bank, which is a very welcome development. Supporting measures are being implemented to remove unintended impediments to repossession, promote better engagement by banks and borrowers, and improve provisioning practices. Effective repossession procedures are needed as a last resort option to protect debt service discipline during the resolution process. It is not envisaged that repossession will be the main approach to resolution.
The second plank is on the fiscal side, and involves full implementation of Budget 2013, following the good trackrecord in 2011 and 2012. Close monitoring of health sector savings will be needed together with careful implementation of the new property tax. At this stage we see that with full implementation of the budget, Ireland will again be within the ceiling on the deficit in 2013.
Structural reforms are the third plank, which are particularly important to support job creation and to contain the risk of rising structural unemployment by providing effective employment services, especially training that meets the needs of the market, to the long-term unemployed.
Alongside this need for continued strong policy implementation by Ireland, it’s also important for Europe to deliver on the commitment made on June 29 last year to examine the situation of the Irish financial sector with a view to improving the sustainability of Ireland’s well-performing program. We see that as crucial to help address remaining profitability challenges of banks that could impede Ireland’s economic recovery, and to do so in a manner that protects Irish debt sustainability and facilitates a durable exit from drawing on official financial support at the end of the program.
I’ll be happy to take your questions.
SPEAKER: Hi, everybody. If you’d consider just a few comments about the prospects for unemployment staying high for many years and about the, I guess, background of last week’s bi-election votes, which showed or did suggest certainly a degree of anger at unemployment and the particularly long years of austerity.
MR. BEAUMONT: Yes, we see the risk of unemployment remaining high as very worrisome. In our current projections the unemployment rate declines gradually over the next years, but still remaining in double digits for a number of years. This risks a situation where people become discouraged and they exit the labor force and that impedes Ireland’s ability to recover from this crisis. That’s why we urge a very strong focus on improving employment services and supporting job creation.
SPEAKER: Hi, Craig. Just wondering, have you discussed yet with the Department of Finance and the Central Bank any possible exit package you would put together for Ireland that had potential contingency funding for next year.
MR. BEAUMONT: We have discussed the range of options that are available on both the European Union side and the IMF side. It’s very much in the early stages, exploring the options, considering their pros and cons. Certainly we haven’t gotten to the point about potential amounts at this stage. It’s more a matter of thinking through the pros and cons of the different options.
SPEAKER: Has the issue of Ireland accessing the OMT come up in those discussions?
MR. BEAUMONT: No we haven’t discussed that intensively.
SPEAKER: Okay, thank you.
SPEAKER: Hi, Craig. In the report you say that the consolidation path for 2014 and 2015 will be reviewed at the time of the next budget. And both the Prime Minister and the Finance Minister have said that that’d be 1 billion euros in savings from the promissory note deal and will be reflected in those two budgets, effectively promising the people less austerity than originally planned in the next two budgets. Where does the IMF stand on that? Would you be satisfied if the budget for this year was less than 3.1 billion, if targets were still going to be met?
MR. BEAUMONT: Our main focus is on reaching the medium-term fiscal targets, which are important for Ireland’s exit, and doing so in a manner which best enhances Ireland’s capacity to recover. So we would take a fresh look at the consolidation path, but still would be looking to safely achieve the medium-term targets, especially reaching a deficit below 3 percent of GDP by 2015.
SPEAKER: So if Ireland can get there with less austerity --
MR. BEAUMONT: There would be a need to look at fiscal performance in 2013 and also take a fresh look at the growth outlook and the potential for revenue growth just as in the normal process that Ireland has gone through in recent years with the Medium-Term Fiscal Statement.
SPEAKER: Hello. In relation to the liquidation of the IBRC, does the Fund think that it was necessary and good?
And a second question in relation to the Cyprus precedent, what does the Fund think that will mean for Ireland and particularly in the case of the banks needing further capital? Thank you.
MR. BEAUMONT: On the liquidation of the IBRC, this was an effective measure to enable the exchange of the promissory notes for longer-term debt, which has significantly reduced Ireland’s market financing needs in the next decade. From that perspective, it’s a very welcome development.
I wouldn’t comment on implications from Cyprus for Ireland. We still have to go through the analysis for Ireland at this stage.
SPEAKER: Two questions for Craig. The first one, you said today that you thought it was pretty adamant that the stress test on the bank, that a stress test would take place before Ireland left the aid program at the end of the year. And the government’s been pretty clear that it would like to do the stress test next year in line with one of the European stress tests. So there seems to be some pushback there from the Commission. And what’s the IMF view when the timing of the next round of stress tests?
MR. BEAUMONT: We would like to make sure that when Ireland exits the program, it’s achieved with a financial system which is clearly in very healthy condition that can support Ireland’s continued recovery. And we’ll discuss with the authorities the timing of the stress test on the next review.
SPEAKER: Do you have a view? I mean the Commission was fairly open in its view. Do you have a view?
MR. BEAUMONT: We would think that the stress test would help us have the information needed to do any further steps to ensure the financial sector is healthy -- if any issue was identified, it would be good to remedy that while we’re still in the program.
SPEAKER: Great. Do you think the Irish banks will need more capital, leaving aside the Basel standards in terms of the --
MR. BEAUMONT: Well, like I said before, the analysis hasn’t been done and we can’t prejudge it.
SPEAKER: Okay, final question. There’s been a lot of talk about people who can pay their mortgage not paying their mortgage. What’s your view of that? Do you think there is a certain amount of that going on or is it an urban myth?
MR. BEAUMONT: We don’t have a precise view on this issue. It has been quite clear that the decline in household incomes and the rise in unemployment have been key factors driving up arrears, which suggests that a lot of the arrears reflects an inability to pay. We can’t put a number on how much strategic default there may be, but we would think that the recently proposed reform of the repossession proceedings should help deter that to the extent that it does exist.
SPEAKER: Great, thank you.
SPEAKER: Hi, thank you, two questions. I know you said you don’t want to comment on implications from the situation in Cyprus. Can I ask if your team is concerned at all of any kind of spillover of risk for Ireland from the instability in Cyprus and potentially then the Italian political situation just in terms of the environment and the return of risk to the Eurozone. That’s my one question.
The other question is slightly more existential. We hear here in Brussels as well about this kind of how robust the implementation of the Irish program is and how well it’s going. Yet at the same time in the same breath you’re telling us about very sticky, very high, unemployment rates and also obviously many loans in the red. So I’m wondering what exactly makes the Irish program so successful in one sentence.
MR. BEAUMONT: In terms of spillovers from Cyprus, naturally developments are being monitored very closely. We don’t see any impact on the banking system except for a small rise in the yields on the covered bonds that were recently issued, but it’s been very stable otherwise. But naturally both ourselves and the authorities will continue to monitor the situation closely.
What makes Ireland’s program well performing? We see it’s a matter of ownership. The authorities design the fiscal consolidation measures. They design the financial sector reforms. They design and implement the structural reforms. That’s the critical key positive feature about the Irish program, which makes it particularly well performing.
Of course, it doesn’t mean that there aren’t many challenges that need to be addressed over time as you identified, the high unemployment and the high nonperforming loans, and these will require effort over a number of years.
SPEAKER: Hi, Craig, just wanted to turn back to mortgages for the moment. You say that mortgage relief is vital for Ireland’s economic recovery. What’s your opinion? What’s the IMF’s opinion on how slow the Irish banks have been to offer mortgage relief to their customers?
MR. BEAUMONT: We’ve said for some time now that it’s been too slow. I think we said that back in the Article IV Consultation in the middle of last year that progress has been too slow. This is what’s led to the development of the targets set by the Central Bank as a means to galvanize the process and push it forward and make sure all the banks are working as hard as possible on the issue.
SPEAKER: And should the government be more active in trying to push the banks or get the Central Bank involved to push the banks into action?
MR. BEAUMONT: We think that the target framework is well designed. It has a broad coverage of the banks. It provides a broad range of options to achieve a durable restructuring. We’ve got to remember that this involves thousands and thousands of cases that need to be worked through on a case-by-case basis, so some time for that engagement is needed.
SPEAKER: Yes, hello. Thanks a lot. It actually follows up on that. If it’s possible for you, can you -- how do you think this state of mortgage arrears in Ireland compares to that in the U.S. at the height of the crisis?
And also I’ve heard that the IMF is somehow in favor of changing some of the foreclosure and repossession laws. Is that true and is it limited just to the buy-to-let or is that something that the IMF would actually like to see more homes seized for arrearage?
MR. BEAUMONT: The situation in Ireland is that the household debt distress is much broader than was experienced in the U.S. on average, but it’s not too different from a number of the so-called sand states like Florida, Nevada, and California where arrears also rose to quite high levels. So there is something to be learned from the experience in those states. One of the lessons was that prolonged repossession procedures tend to slow the whole recovery from a housing bust, so this is something that we’re urging the authorities to work on. There’s a box in our report which outlines the issue and offers some ideas on how it could be addressed. We’ll be monitoring how this current reform--which is to remove an unintended barrier to repossession--how that impacts developments in terms of improving the number of cases moving forward and the time they take to be concluded. We’ll be monitoring that to see if this first step is enough.
SPEAKER: Hi, Craig, just want to get into a few of the structural reform issues. If you look through the document, there are issues coming up with regard to water charges, the legal sector, the use of generic drugs in the health system, and also the proposed sale of state assets. Has the government asked you to roll back on some of those deadlines, particularly in relation to water and the legal sector? And also, what do you make of the progress in selling of state assets?
MR. BEAUMONT: The progress in selling state assets is that the preparations are well advanced in a number of areas, especially with the energy generation facilities. It was understood from the outset that the process would take time and that assets would only be disposed of if market conditions were suitable. So as we understand it, progress has been as quick as expected in terms of the state asset disposal. I don’t recall any changes in our other structural reform timetable.
SPEAKER: Thank you, just a couple of follow ups on that in relation to water charges. You still see the timetable that was set out originally that bills would start going out next year, that that is still the timetable?
MR. BEAUMONT: Actually, I don’t like to do this, but the European Commission has the water charges element in its program. It’s not explicitly included in the Fund’s program. We defer to the Commission in that respect because it’s not an area where we have technical expertise.
SPEAKER: Sure. And just on the legal sector as well, are you confident the changes planned will come in on time and that there will be no watering down of the proposals before the government?
MR. BEAUMONT: We’re not going to form any expectation on whether the proposals will be watered down or not. We understand that they’ve been refined over time in consultation with the interested parties, and they now represent a good balance of these issues. We hope it moves forward as is scheduled.
SPEAKER: Hi, Craig. I’m just wondering did you discuss with your troika partners any measures that would take the troublesome tracker mortgages off the Irish banks.
MR. BEAUMONT: Ideas around dealing with tracker mortgages have been discussed on and off throughout the whole program. It’s a difficult issue to resolve. We still have an interest in addressing the issue, especially in the context of making sure that Permanent TSB is firmly on the path to viability.
SPEAKER: But were you any closer to coming to some sort of solution?
MR. BEAUMONT: I’m not going to comment on discussions that are underway.
SPEAKER: Hi again, Craig. PMI, which aside from March is showing the first -- actually quite a shock full for the first time in 13 months -- in Irish manufacturing. Could you talk about that?
MR. BEAUMONT: Yes, even during 2012, Irish goods exports have been quite weak. It’s been important that services exports have been rather strong, so the overall export growth has remained satisfactory. That development seems to be consistent with the weakness we see in other euro area figures that are coming out, and it’s something that is reflected in our still low growth expectation for 2013.
SPEAKER: A follow up on the structural reform issues. In the report you say that the rate of unemployment and underemployment is “staggering at 23 percent” and then you discuss the issue of activation. You say that the number of case officers to deal with the numbers of people unemployed is too small and the plans to increase that number should be pursued “without delay.” But why do you think there has been a delay and what exactly would you like to see done to accelerate the process that you want to see?
MR. BEAUMONT: The doubling in the number of case officers that the authorities will implement by redeploying existing staff to the case officer role is a very welcome step. It would still, however, leave the ratio of case officers to unemployed persons to be served relatively low compared with other countries. So we would see room for further expanding those resources and ensuring that they have the training needed to execute that role.
One way to step things forward is also to bring in the private sector into providing employment services and that’s also in progress. So we would urge that after this doubling that again the adequacy of resources be reviewed, and that continued progress be made on bringing in the private sector.
MS. STANKOVA: We have time for one, maybe more, questions before we conclude the call.
SPEAKER: Thanks. Craig, just one question on the ESM, and you’ve reiterated again that your view should allow it to be used for Ireland and that would make a great difference to Ireland’s exit from the bailout and its recovery. It’s a drum we’ve been beating for quite some time. And the head of the euro group said last month that the aim of the ESM was that it wouldn’t actually be used for direct recount at all and never mind the retroactive use. Are you a lot less confident Ireland will be able to get some benefit from the ESM for its banks given sort of the commentary from leaders and finance ministers over the last number of months?
MR. BEAUMONT: I would here link back to the euro area leaders’ commitment made on June 29 last year, which was to review the situation in the Irish financial sector, and to improve the sustainability of the program. We continue to see that one tool that could effectively perform that role is the ESM direct bank recapitalization.
MS. STANKOVA: Well, thank you very much for joining us today and have a good day.