Transcript of a Conference Call on the Twelfth and Final Review under Extended Fund Facility Arrangement for IrelandWashington, D.C., December 19, 2013
Craig Beaumont, Mission Chief for Ireland, European Department; and
Olga Stankova, Senior Communications Officer, Communications Department
MS. STANKOVA: Good morning, and good afternoon. Thank you for joining us for this call on the twelfth and final review under the Extended Fund Facility Arrangement with Ireland.
The IMF’s Executive Board completed the review on December 13, and the press release on the Board decisions was issued. Today, we are releasing the staff report and hold the conference call to answer your questions. I would like to remind you that the press call and the documents are under embargo until 11:00 a.m. Eastern Standard Time.
I will pass the microphone over to Craig Beaumont, who will make introductory remarks, and then we will take your questions. Thank you.
MR. BEAUMONT: Thanks very much, Olga. Today we are publishing the staff report for the twelfth quarterly review, which concludes the EU/IMF supported program for Ireland. Ireland has maintained its track record of strong program implementation throughout. Fiscal targets for third quarter were met with a margin, and based on solid revenue results for November we expect the deficit in 2013 to be about 7 percent of GDP--inside the ceiling of 7.5 percent.
Financial reforms also continued with the mortgage resolution framework now supported by the reform of bankruptcy coming into effect, which shortens the period from 12 years to 3 years. Diagnostic work on the banks was also finalized on schedule.
Let me highlight just a few key aspects of the staff report before turning to questions.
Overall, we haven't adjusted the macroeconomic outlook significantly from the last review. In 2013, we lowered growth modestly from 0.6 to 0.3 percent. This projection is quite similar to the estimates in the budget and the recent ESRI figures. The relatively good results for Q3 would support that type of growth result for 2013.
Our outlook for gradual economic recovery in 2014 is much the same, and is supported by a range of economic indicators which signal that a pick up is emerging. We project 1.7 percent growth in 2014, a little below the budget, also below consensus projections and the ESRI, mostly because we see a more gradual pick up in domestic demand.
From 2015 on we project growth around 2-1/2 percent, and here we see the risks more tilted to the downside owing to a range of factors, including downside risks to trading partner growth--especially in the euro area--and also concerns about the strength and timing of a revival of bank lending to help domestic demand recovery become more lasting.
The NTMA’s recent early debt repayment means we now expect public debt to be about 122 percent of GDP at the end of this year, a little below the 124 percent we have in the report. Getting debt onto a downward path depends very much on the emerging recovery becoming stronger and more sustained.
Budget 2014 was adopted just before the review mission. It set a balanced fiscal adjustment path reaching a deficit of 4.8 percent of GDP in 2014 and below 3 percent in 2015. Ireland has built a very strong track record in the fiscal area, and given the high level of public debt it's essential to maintain that strength to protect the very good terms on which Ireland is accessing market funding.
The review also saw completion of the central bank's analysis of the banks that had been adopted earlier this year. In relation to the operating profits of the banks, which are key to their ability to sustain new lending, the analysis found net operating income to be improving, but there are some remaining risks linked to the broader economic recovery. IMF staff continues to see a solution for lowering the cost of market funding as an effective means to support the banks becoming a sustainable source of lending.
The other major piece of diagnostic work was the assessment of bank balance sheets, which was completed on schedule. It found a significant increase in provisioning to be appropriate, including to take into account an update of the central bank's guidelines on provisioning and disclosure. It also indicated that higher risk-weighted assets are needed at some banks.
Putting these two factors together, there would be a reduction in banks' capital ratios. Yet because these ratios start from a high level at 14.1 percent on average, exceeding the regulatory floor of 10.5 percent, there is no resulting immediate need for additional capital. The next steps are for banks’ to factor this analysis into their end year financial reporting, and we understand the banks are discussing these results with the central bank.
Based on the budget and the conclusion of these bank diagnostics, the IMF’s Executive Board was able to conclude the 12th and final review of the 3-year Extended Arrangement with Ireland. Ireland's successful completion of the program was commended, while noting the significant economic challenges that it still faces. The IMF looks forward to continued constructive engagement with the Irish authorities on economic policies to tackle those challenges.
Let me turn to questions now. Thank you.
MS. STANKOVA: Thank you, Craig. And now we will take your questions.
QUESTIONER: Hello, Craig. Just in relation to tracker mortgages. You speak of one solution that was looked at which would involve a government guarantee of asset-backed security structures. Are you talking about an Irish government guarantee in this situation? And also in relation to that, you say that, you know, the options that were looked at all had significant implementation challenges. Have you given up all hope, really, of finding a workable solution for tracker mortgages?
MR. BEAUMONT: There are a range of options for the source of the guarantee. The government could play a role, but external parties with a strong balance sheet would be very helpful. The question is that finding a party willing to participate in the transaction is difficult, as we note in the report. There's an obvious role for European support because the problem of bank funding being more costly than monetary policy rates would suggest is broader than Ireland and a wider European solution would be beneficial to economic recovery across Europe.
QUESTIONER: Hi there, Craig, thanks for taking my call. Just wanted to touch very briefly on what you mentioned about the social or the distributional impact of budget 2014. You mentioned that the --- you find some flaws with the ER model and when they tried to research the distribution that it had, but you mentioned that some of the other measures weren't particularly progressive. So I wonder if you might tease out as a whole, given that you seem to find some failings with the ESRI analysis and whether it will be the IMF's opinion that the budget was probably distributional and whether it was progressive or regressive, in any case.
MR. BEAUMONT: The ESRI analysis covers a certain part of the budget measures. Actually I think it's less than half. While recognizing this technical issue we rely on the ESRI's analysis of the distributional impact of the budget. For those measures that were measurable there was, I think, an overall regressive impact from Budget 2014. But the ESRI also published a paper more recently which looks at the cumulative impact of the budget reforms in recent years which shows that in fact that overall the budget measures have been progressive.
QUESTIONER: Hi, Craig. Just referring to your interview with Ajaiin the documents, the key –-- how much should the average taxpayer have to --- how much lay or burden would they have had to take on if there had been proper burden-sharing of the huge cost of bailing out insolvent banks? Can you say a few words about that general area?
MR. BEAUMONT: I was not a part of the team at the start of the program, but I can lay out some general principles. Clearly, if there had been more access to the possibility to bail in creditors, the overall reduction in capital needs of the banks would depend mostly on which banks participated, which liabilities were covered by the burden-sharing, and then what proportion of those liabilities were reduced by private burden-sharing.
We saw there was some burden-sharing on subordinated debt in Ireland. I think that maybe 15 billion of euro in total---I'm not sure the exact figure---of subordinated debt was subject to bail in, which gave quite significant savings in the overall recapitalization cost.
If that bail in had been extended more broadly, the additional savings would depend very much on the coverage so I can't give an estimate on the call. It really depends on which institutions are covered, which liabilities are affected, and how much you save in each case.
QUESTIONER: But just finding --- would those savings have been significant?
MR. BEAUMONT: The savings could have been significant, certainly they could have been. It would depend, on the extent of coverage. If you limited bail in to the two failed institutions, there would have been some significant benefits. If you went for a broader approach, obviously the fiscal savings would be larger but you would have greater concerns about potential implications for those banks' ability to access funding going forward.
QUESTIONER: Hi, Craig. Two questions for you. One, continuing on with this interview with you and Jay Chopra, the five lessons section of which seems to be suggesting that the authorities were somewhat slow in dealing with the banking crisis that --- although it blew up in 2008, you write that there wasn't an adequate intervention until March 2011. And the other issue comes from the main section of the report, in that talking about financial conditions, speaking about a later U.S. Federal Reserve tapering could impact on the euro area periphery more strongly. What kind of impacts do you think the U.S. tapering might have on the Irish situation in particular?
MR. BEAUMONT: On the first point, as you know, the Irish property and banking crisis unfolded over time. For example, property prices I think began to decline in 2007 but they kept on declining until quite recently. So it's understandable that the overall cost of the banking crisis was hard to pin down in those initial years. I think that helps understand why it could take some time to put a credible estimate, a credible bottom line on the overall capital need of the banks, which was done through the PCAR 2011 exercise in the first quarter of 2011.
On the tapering, we are already seeing a little tapering and the impact has been obviously well contained by the Federal Reserve. So at this stage, we see tapering as a risk factor but we don't yet see any immediate clear sign that it would have a significant spillover impact on periphery countries.
QUESTIONER: Okay, but if it were to accelerate, I mean, what are the things we should be looking for in tapering that might impact more on the euro periphery?
MR. BEAUMONT: Over time, if U.S. interest rates were to rise the search for yield by U.S. based investors could end and that could have some impact on yields on higher risk assets which may filter down towards Irish bond spreads. But the Federal Reserve has strongly signaled that it will not be raising rates for quite some time, until after unemployment goes below 6.5 percent in the U.S. So, at this stage the prospect for that type of knock-on effect on Irish bond yields doesn't seem particularly pressing.
MS. STANKOVA: If there are no further questions then we will thank everybody for joining us for the call and wish you a good day.