Transcript of a Conference Call on the Conclusion of an IMF Mission to Ireland
July 18, 2013Washington, D.C.
Thursday, July 18, 2013
Craig Beaumont, IMF Mission Chief for Ireland
Ángela Gaviria, IMF Media Relations
MS. GAVIRIA: Hello, everyone. I am Angela Gaviria with the Communications Department of the IMF. Welcome to this conference call on the conclusion of the mission discussing the 11th review of the Extended Fund Facility arrangement with Ireland. This conference call is not embargoed. A joint statement from the IMF with the European Commission and the ECB will be released soon after this call.
Let me now introduce the speaker, Craig Beaumont, who is the mission chief for Ireland. He'll make a few points to get started, and then he will be happy to take your questions.
MR. BEAUMONT: Thanks very much, Angela. Just a few introductory points about the economy. We saw recent National Accounts data that were weaker than previous data. At the same time, there are a number of high-frequency indicators which are more positive and the labor market has been showing signs of improvement in terms of employment growth. Overall, we still expect modest positive growth this year as the external environment is expected to improve and as the domestic economy stabilizes.
On the fiscal side, the budget is on track as usual in Ireland. We very much welcome the broad acceptance of the agreement on public sector pay, the Haddington Road Agreement, because it will facilitate needed pay-bill savings while protecting core public services.
Looking ahead to the 2014 budget, it should continue Ireland's track record of steady fiscal consolidation efforts. As you all know well, the government is in the driving seat in terms of the nature of the specific measures that are in the budget. We would urge measures which are of a more structural reform nature, which have less impact on growth, and which have more durable benefits.
On the financial sector, there's been good progress on the way to deal with non-performing loans. The framework for that is now coming together, so banks are now expected to accelerate their work on durable solutions for borrowers who are in unsustainable positions, while other borrowers who can afford to pay need to come back to full debt service. SMEs also need to be worked out because they're major potential sources of job creation. I'm talking about those SMEs which are in arrears or otherwise distressed.
The last major challenge that's being worked on is unemployment, which is very high, at just under 14 percent. We see that the government's policies are very much moving in the right direction in terms of the Pathways to Work initiative. But more resources are needed to have stronger engagement with unemployed job seekers to direct them to the right type of training and to incentivize them to take up jobs when they do arrive.
That's the introductory points I'd like to make. Thank you.
QUESTIONER: On the budget, are you telling the government to stick to the original €3.1 billion figure of tax increase and spending cuts, or to hit the 5.1 percent target? Which is it?
MR. BEAUMONT: The budget is going to be finalized later this year in September and October, and we'll have to take into account how the budget performed this year and economic growth developments and prospects. As usual, the overall parameters will be agreed in consultation with the European Commission, the European Central Bank, and ourselves. We have a starting point which is that agreed consolidation of €3.1 billion, but there are still discussions ongoing.
QUESTIONER: I wanted to talk about the exit from the program and see what discussions had happened over the 11th review about what can be done to expedite the package or whether that question has been deferred until the final inspection in three months time.
MR. BEAUMONT: We did have some further discussions about the potential modalities, pros and cons, and timing. But the real discussions will be after the authorities have made their decision, which may be in the autumn. And then the October mission would really go into it in more detail.
QUESTIONER: Just for clarity's sake then, it's a decision that will be formally made after the 2014 budget has been delivered in October?
MR. BEAUMONT: I'm not sure exactly at what time the authorities will make that decision.
QUESTIONER: But it's up to the Irish authorities to decide the exact time at which they want to make a full re-entry?
MR. BEAUMONT: Yes, yes, yes.
QUESTIONER: Hello, I'm wondering about any discussions you may be having on precautionary credit lines or backstops for 2014. The government seems to have already funded itself, but at the same time the NTMA today said that investors would be reassured if there were a backstop in place. How far along the line have you gotten in terms of identifying what kind of lines might be useful and over what length of time they would be available?
MR. BEAUMONT: A number of countries have exited their programs in the past with the support of some kind of backstop arrangement. It's an insurance policy to help ensure that funding for the government from the market is stable. We won't reach a view on the exact facility that will be utilized until later in the year when we know what the conditions are at the time.
QUESTIONER: Hi, I just want to ask about where we are in the tracker mortgage situation. Are we anywhere close to coming up with some kind of solution to track the mortgages? There's been some suggestion that there would be a solution by the stress tests next year. What's your view? Are we close to a solution?
MR. BEAUMONT: It is a significant problem in terms of the drag on the bank's income and how it limits their capacity to lend, so there is significant technical work going on to arrange a solution. Obviously, we'd like it to be brought to closure and to something more final as soon as possible, so we can get the implementation under way. But at this stage, we don't have a fixed timetable.
QUESTIONER: Hello. I just wanted to clarify a previous question in connection with the precautionary credit line. Is the IMF advising that the government should use such a facility?
MR. BEAUMONT: It's very much the government that would need to request it. The government would need to make a decision itself. We can certainly see some advantages as there are still risks in the euro area, and this could be a useful cushion against those.
QUESTIONER: Minister Noonan said earlier today that the government wanted a backstop arrangement. He also indicated that such an arrangement would last for 12 months. I'm just wondering if you could talk us through the timing of the end of the current bailout plan, presuming that everything goes to plan and there are no hiccups along the way. Because we have the stress tests of the banks in the first half of next year, and as I understand it, the IMF/EU program won't officially conclude until the stress tests have been concluded. So I'm wondering if you could just take us through the timetable for the end of the program, presuming there are no hiccups, and what time frame you would envisage for any backstop arrangement that might be agreed?
MR. BEAUMONT: I can't go into the details of the backstop because it won't be finalized until later. But roughly in terms of a time frame, we have already a visit scheduled in October to review the current program. And that could also be a time when any government decision on a backstop could be converted into an actual request. We would then take it to our respective decision-making bodies.
QUESTIONER: Just in relation to the banks' stress tests that take place in the first half of next year, do we have to wait for those to be concluded before the current program is officially ended? Or, presuming there are no hiccups in the meantime, does it end at the end of this year?
MR. BEAUMONT: The IMF program ends on December 15. I think that's right. So that's already determined.
QUESTIONER: I just wanted to ask about the stress tests. The government has committed to carrying out an assessment of the bank's balance sheet ahead of that. I just wanted to check, is there any clarity about what it will look like? And would you expect it to be clear from that whether there's any capital hole in the balance sheets? Have the details been agreed by all sides at this stage?
MR. BEAUMONT: I think you're talking about the balance sheet assessment that's due by the end of this year with a preliminary version in October, and a final version by November. This is a sampling of the loan files and a review of whether the loans are classified properly in the bank's books, and if the provisioning is adequate. We would expect that it would provide useful benchmarking for the bank's provisioning, but it's not a stress test. It's not the time when any capital need will be determined. That will be part of the common European exercise, as you say, in 2014.
QUESTIONER: Just wondering about your thoughts on the promissory note savings. Where do you think that should go? Should they use it for some sort of stimulus measures, or should we put it at debt reduction?
MR. BEAUMONT: We don't look at the budget item by item. We look at the overall fiscal consolidation progress, starting from the existing path, which the government has implemented now for two-and-a-half years, and it's kept fiscal policy on track. Our starting point is to stick with the plan of steady progress, while allowing the automatic stabilizers to operate if growth is weaker or stronger, which the markets clearly have recognized as a very credible strategy.
QUESTIONER: Let me put it another way. Do you think that the economy needs a stimulus plan, and should that money be used towards it?
MR. BEAUMONT: We do look at growth prospects when looking at fiscal policy, but we're not specifically thinking of any particular stimulus. In the program it's the government that determines the mixture of measures and whether they're stimulus or other types of measures. We're more focused on the overall effort and progress being made.
QUESTIONER: You mentioned that a range of solutions were being looked at in relation to the tracker mortgage problem. What are those solutions that are currently being considered? And, also in relation to a potential backstop arrangement, you mentioned other countries have had similar arrangements. I wonder if you could talk us through some of the solutions that were used with other countries in the near past?
MR. BEAUMONT: I'm not going to go through examples on the other countries as I would need a little preparation time for that one. Maybe you can send that in by e-mail. The tracker funding solutions involve a range of ideas, including securitization and guarantees. All sorts of financial engineering can be applied. We can't go into the details as they're still under development.
QUESTIONER: Hi, just a follow up on the tracker question. Could you put a monetary value on the tracker deal? How much it might benefit the banks? And can you give me an idea of which banks in particular are going to be involved? In addition to Irish Life and Permanent, Allied Irish Bank, you also have Bank of Ireland and Ulster Bank.
MR. BEAUMONT: On the overall impact we've done calculations that the profit drag from the trackers is about 0.4 percent of the banks' assets, which is quite significant in terms of the banks' overall profitability. And clearly it's affecting Permanent TSB significantly more than the other banks because it has a larger mortgage portfolio as a share of its balance sheet. It hasn't been determined which banks would participate. I think it would depend in part on the type of solution that would eventually be pushed forward.
QUESTIONER: Hi, again. Going back one more time on the possibilities for a precautionary credit line, I gather Mr. Noonan today was suggesting that there may not be any additional conditionality attached if such a line should be agreed. It doesn't sound like standard practice to me. How much conditionality would be required of the Irish government if it were to ask for such a line, and wouldn't it essentially be a sort of bailout light, where they were still constrained by their agreements with international agencies on exactly what they could do with economic policy in return for this backstop to sort of pacify the markets?
MR. BEAUMONT: The standard practice with an IMF supported backstop is to address any significant remaining macroeconomic and financial sector vulnerabilities. The government will be doing this anyway. Its fiscal policy is already within the Excessive Deficit Procedure, and it's moving towards joining the banking union and all the tests involved with the Single Supervisory Mechanism. So, there will be a lot of external policy guidance as part of the whole European framework that will have to be done regardless of whether there's a backstop or not. The usual practice also is that we agree on any details on the policy framework at the time of the request. So, we can't comment beyond that.
QUESTIONER: Just wanted to clarify with you on this issue of the budget deficit target again for next year. Mr. Noonan was suggesting this morning that 5.1 percent of GDP is the target for adjustments, and I think you said earlier that €3.1 billion was the target, but a lot of economists here think that if you do €3.1 billion you'll end up with a substantially improved budget deficit going beyond 5.1 percent, maybe 4.5 percent. So which of them really is the target for next year at this stage? Is it the cash number or the percentage number?
MR. BEAUMONT: Within the existing deficit procedure they certainly have an annual percentage of GDP ceiling on the deficit. But they've also expressed how they will achieve that in terms of a consolidation amount. As part of the IMF perspective on fiscal policy, we prefer to focus mostly on the consolidation amount because the deficit in percent of GDP very much depends on fluctuations in growth. But you don't want to be tightening fiscal policy in a recession, it's only going to make the situation more difficult. So, while both targets are there, we would attach priority to the amount of adjustment.
QUESTIONER: I wanted to speak about the progression of the banking union, and particularly about whether the IMF would still remain supportive in spite of what now appear to be weakening prospects of there being some sort of availability of retrospective recap for the Irish banks from the ESM funding.
MR. BEAUMONT: We've seen direct bank recapitalization as a potentially very helpful tool for the huge debts that were incurred as a result of supporting the banks. That option is still on the table, as its still part of the ESM guidelines. But we can also see advantages from having that instrument as a safeguard during the SSM stress tests which all the countries should have access to, if they need it, as a last resort backstop to the possible capital needs that could arise from that exercise.
QUESTIONER: In respect of the possibility of a retrospective recap, you don't appear to consider it as being a make or break, as to whether Ireland is able to draw back some of its investments from that source?
MR. BEAUMONT: Certainly it would help improve Ireland's debt position and debt sustainability. You'll see in our reports that we consider currently Ireland's debt sustainability as a little bit fragile because it's quite dependent on a recovery in growth. So we see that debt sustainability would be safer and it would more likely that Ireland will recover if ESM recapitalization were implemented.
MS. GAVIRIA: Okay, thanks everybody for participating.