The document summarizes Ireland's EU-IMF program from 2010-2014 that aimed to restore financial stability and regain market access after Ireland faced severe challenges from the global financial crisis and euro crisis. The program focused on upfront actions like evaluating bank balance sheets, a clear plan for restructuring banks, and large fiscal consolidation. Euro area policies like improved financing terms and ECB commitments were also essential to the program's success. By mid-2012, Ireland began recovering as hiring and investment increased and it gradually regained market access, though work remains to fully repair the banking sector and reduce high debt levels. The IMF assessed that careful phasing of financial and fiscal reforms while protecting growth was important to program effectiveness.

1. Ireland’s EU-IMF Program A Safe Harbor in a Perfect Storm
Craig Beaumont
Bank of Latvia Economic Conference
“Have We Learnt Anything from the Crisis?”
Riga
October 17, 2014

2. Outline
I.Severe Challenges
II.Program Strategy
III.Euro Area Policies
IV.Results of Program and Euro Area Policies
V.Some Lessons

3. I. Severe Challenges

4. Major Credit Boom and Property Bubble 2004-07
Confidence: underpinned by strong FDI-led growth in 1990s
Lax bank supervision: high exposures to commercial and residential property, declining lending standards
Intense banking competition: entry from UK and EU banks, battle for market shares
Wholesale funding availability: 55% of assets by end 2008
→ Irish Banks highly vulnerable to Subprime & Lehman’s shock, intensifying bust

5. Severe Bust 3 Years Before Program (Deflation of 8% in 2009-10, 60% fall in Construction Jobs)
75
80
85
90
95
100
105
75
80
85
90
95
100
105
2007
2008
2009
2010
2011
Real GDP
Nominal GDP
Employment
GDP and Employment (2007Q1=100)
Source: IMF WEO; IMF staff calculations and estimates.
Program starts
Δ2007-10
-9.4%
-16.7%
-12.2%

6. Revenue Collapse Pushes Fiscal Deficit Over 10% of GDP (before bank costs)
35404550556065707580354045505560657075802001200220032004200520062007200820092010201120122013RevenuePrimary expenditureBoom PeriodBust PeriodEU-IMF ProgramFiscal Aggregates (Euro billions) RevenuesFall19.6% in 2 yearsAverageprimary surplus 2.3% GDP

7. Major Irish Policy Efforts Before the EU-IMF Program…
Banking measures (initially assume liquidity crisis)
Near-Blanket Bank Guarantees in Sept. 2008 (after Lehman)
Capital injections of €46.3 bn (30% of GDP) by end 2010
Nationalize 2 failed banks (Anglo Irish & INBS)
Large risky property loans to NAMA (€74 bn @ 57% discount)
But market concerns rise as banking costs grow
Fiscal efforts large (though partly reverse loose Budget 2008)
6.2% of GDP measures in 2008-10 (4.3 spend and 2.0 revenue), includes 14% cut in public wages in 2009
But deficit still 11½% of GDP in 2010 and
Public Debt near 100% of GDP (from 25% in 2007!)

8. 8
…but from 2010 Ireland
Faced a “Perfect Storm”
Irish Crisis
Banks insolvent and illiquid
High private debt, weak demand
Large fiscal deficits
Uncertain bank support costs
Euro Crisis
Greece, Portugal, …?
Bank Fragmentation
and Deleveraging
Euro itself ???

9. ...Culminating in Massive Runs of Bank Funding in late 2010
0
20
40
60
80
0
20
40
60
80
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Debt securities, net repayment
Deposits, private sector (net outflows)
ECB liquidity support
Sources: Irish Authorities; and IMF staff calculations.
Maturing bank bonds and deposit outflows (corporate
and wholesale) required large new ECB funding
in Sept.-Nov. 2010 (€65 billion, 40% of GDP)

10. Irish Government Lost Market Access as Sovereign-Bank Loop Amplified by Market Uncertainties about EA Policy
Sovereign Market Access
Public Debt Sustainability
Risks
Uncertain Cost of Bank Support
Bank Market Access
ECB Funding of Irish Banks? (High ECB exposure, solvency of banks)
Sovereign PSI?
(Deauville)
Extent of Bank Creditor
Bail in?

11. II. Program Strategy

12. Objectives
1. Immediate Need: Restore Financial Stability
Recovery and debt sustainability not feasible otherwise
2. Ultimate Goal: Regain Market Access
by reducing uncertainties around:
Public Debt Sustainability
Financial System Soundness
Sustained Economic Recovery

13. 1. Package of Upfront Actions in first quarter of 2011…
Program financing (€85 billion, frontloaded)
Reduce market concerns about near-term default or PSI
Avoid resource constraints on bank support
Evaluate Bank Balance Sheets Credibly (PCAR 2011)
Asset Quality Review by third party (BlackRock Solutions)
Stress scenario conservative, 3-years, high floor (6% CT1)
Explicitly includes bank deleveraging cost (€13.2 bn)
Financial market analysts note transparency and credibility
Clear Plan for Banks (March 31, same day as PCAR 2011)
BoI and AIB to be “pillar banks” (though PTSB less definite)
Anglo Irish and INBS in wind down, transfer of deposits

14. …Helped Restore Financial Stability in First Half of 2011
Capital need of €24 billion identified (15% of GDP)
Funds deposited in banks by April
→ Remove Doubts on ECB Funding (helpful ECB statements)
Deposit (mostly corporate) outflows slowed after Q1
ECB funding peaks at €150 billion in Feb. 2011
Public cost limited to €16.5 billion (10% of GDP), with subordinated debt operations saving €4.9 billion. Savings could have been larger with senior bank debt included.
But Irish yields only briefly fell 120 bps in April 2011, as impact overwhelmed by Euro Crisis
Political stability also critical:
Election Feb. 2011: Coalition broadly supports program goals.

15. 2. Address Public & Private Debt Issues While Protecting Growth
A.Fiscal consolidation: large, frontloaded, phased
B. Banking sector repair: Deleveraging over time
Rebuild profitability
Resolve many NPLs
C. Other structural reforms: not important in Ireland
Business environment positive, employment protection modest
Competitiveness gap not large (5-10% in mid-2012), addressed by flat nominal wages over time
2011
2012
2013
2014
2015
EDP ceiling (%GDP)
10.6
8.6
7.5
5.1
2.9
Consolidation Effort (€bn)
6.0
3.8
3.5
3.1
2.0

16. Debt Sustainability Fragile → Carefully Balanced Policy Targets and Safeguards
Trade-offs to be balanced include:
Fiscal Consolidation Speed vs. Demand Recovery
Bank Deleveraging Pace vs. Disposal Cost & Credit Growth
Loan Resolution Pace vs. Restructuring Cost & Durability
Policy
Target
Safeguards
Fiscal consolidation
Phased over 5 years
(3% by 2015)
Avoid pro-cyclical measures
for growth deviations
Bank deleveraging
Phased over 3 years to 2013
Loan to Deposit < 122.5%
Mostly offshore assets
No fire sales
NPL resolution
Mortgage arrears targets phased during 2013-14
Awaited legal reforms (insolvency and repossession)
Privatization
Up to 2% GDP
Sale depends on market conditions

17. III. Euro Area Policies

18. Euro Area Support and Policies Essential to Program Success
EU financing terms improved → Debt more Sustainable
Mid-2011: Margins on EU loans eliminated
June 2013: Maturity extension on EFSF/EFSM loans
ECB funding stabilized → Market Confidence Improved
Mar. 2011: Waiver of rating requirement for Irish collateral
Dec. 2011: 3-year LTRO stabilized bank funding
Feb. 2013: Promissory note collateral for ELA (7-8 year maturity) replaced by government bonds (25-40 years)
Mid-2012 Commitments → Uncertainties Reduced
June 29, 2012: Banking Union adopted by EA Summit
July 26, 2012: “…, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

19. IV. Results of Program
and Euro Area Policies

20. Irish Recovery Begins After mid-2012 led by Hiring and Investment 6065707580859095100304050607080901002007Q42008Q42009Q42010Q42011Q42012Q42013Q4Employment, rhsTrough: 2012'Q3House prices, Trough: 2013'Q1Investmentex. AircraftTrough: 2012'Q3Banking Union:June 29, 2012"Whatever it Takes": July 26, 2012EU-IMFProgramEuroCrisisIntenseSources: CSO; and IMF staff calculations.

21. Fiscal deficit consistently
within EDP ceilings
Effort greater in 2012 and less
in 2014 (by 0.3% of GDP)
-12
-10
-8
-6
-4
-2
0
2009 2010 2011 2012 2013 2014 2015
Actual EDP ceiling
General Government Deficit
(Percent of GDP)
Sources: National authorities; and IMF staff estimates.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2009 2010 2011 2012 2013 2014 2015
Actual Planned 1/ Change in structural primary balance
Consolidation Effort
(Percent of GDP)
Sources: National authorities; and IMF staff estimates.
1/ National Recovery Plan 2011-14 for 2011 and Nov. 2011 MTFS for 2012-15.
Fiscal Policy Kept on Track Despite Growth
Shortfalls with Limited Adjustments in Effort

22. Banking—Much Progress but Work Remains
Capitalization and provisioning more robust
Provisioning guidelines tightened in 2011 and 2013
AQR (by CBI) in 2013 found additional provisioning needed
Capital still strong, with 13.3 percent CT1 ratio (end-2013)
Liquidity much improved
LDR reduced to 111% by end-2013, down from 190%
ECB support to open banks €90 billion → €12 billion recently
Restructuring progress but work remains
Cost cutting progress in 2012 and two larger banks show improving profitability
But smaller bank profit recovery too slow
NPL resolution rather slow (still 26% of loans), but resolution frameworks now in place

23. Market Re-entry Step-by-Step Process Starting from mid-2012
July 2012: First T-bill issuance, in week after EA summit
Sequence of well subscribed syndicated bond issues:
Moody’s last to upgrade to investment grade (Jan. 2014)
March 2014: First bond auction 10-year, €1 bn, yield 2.967%
October 2014: 10-year, €1 bn, yield 1.63%
Early repayment of IMF planned (€18.3 bn of €22.5 total)
Date
Maturity
Amount
Yield
Aug. 2012
5-year
8-year
€3.9 billion
€1.3 billion
5.9%
6.1%
Jan. 2013
5-year
€2.5 billion
3.3%
Mar. 2013
10-year
€5 billion
4.15%
Jan. 2014
10-year
€3.75 billion
3.5%

24. V. Some Lessons

25. IMF: Program Effectiveness
Ex Post Evaluation due in coming months will provide formal IMF assessment of the program
Authorities’ ownership of design and implementation of policies is key to success
Currency union policies also key, as program success hinged on calming euro crisis
Reviews are critical to fixing problems, e.g., adverse side effects of loan to deposit targets
25

26. Initial Deleveraging Targets Led to Unintended Pressure on Deposit Rates—Revised in first half of 2012
26
1.52.02.53.03.54.04.55.05.50.00.51.01.52.02.53.03.54.0Dec-09Jun-10Dec-10Jun-11Dec-11Jun-12Dec-12Jun-13Dec-13Deposits, householdsDeposits, NFCsLoans to NFCs (below 1 mln), right scalePressure on deposit rates from targetsonLoanto Deposit ratioInterest Rates onNew Business(Percent)

27. IMF: Reduce Deficits in Sustainable Manner while Protecting Growth
Growth as well as deficits matter for debt sustainability
Comment repeatedly made by investors
Phasing of consolidation should recognize:
Capacity and credibility of authorities
Protecting growth by spreading fiscal drag
Financing availability
Anchor amount of fiscal effort/measures, let automatic stabilizers work, review medium-term path if shocks persist
Authorities’ development of budgetary measures is key for ownership, social cohesion, sustainability of consolidation

28. IMF: Careful Phasing of Financial Repairs if Debt Sustainability Fragile
Well functioning banks involves more than restoring solvency. Deeper repairs (e.g. deleveraging, loan resolution, operating cost cuts) take time and involve market transactions and negotiations.
Bank repair design, including phasing, must contain fiscal costs. Sovereign market access is a precondition for banks to regain access. Bank solvency must be maintained, but full repair of loan books or liquidity is not required for recovery or for banks to regain market access.
Phasing of loan resolution depends on the type of loan:
Corporate loans: resolve quickly to protect business value and facilitate new investment
Property loan: quick resolution may crystallize unduly large loss in illiquid market, can outweigh benefits of reduced NPLs
28

29. Ireland: Has Strengthened its’ Fiscal Policy Framework
Fiscal Council established. It independently:
Assesses soundness of fiscal stance
Endorses budget macroeconomic forecasts for Budget
Fiscal Responsibility Act approved by referendum:
General government: budget balance rule, debt rule
Expenditure ceilings at both aggregate and ministerial level, with three year horizon
But new fiscal institutions face major challenges:
Is the strong bias to procyclical budgets addressed?
Can large primary surpluses be sustained to reduce debt?
29

30. Ireland: Financial Sector Should Support Sustainable Growth
Supervision strengthened:
Increased CBI resources and new risk-based approach
Legal powers of CBI strengthened in July 2013
SSM from November
Liquidity: new Basel standards on NSFR and LCR
Lending standards: CBI proposed new LTV limits
Nonbanks for more diverse and robust financing:
REITs are bringing more equity to commercial property
Loan Origination Funds alternative for SME financing
Macro prudential tools being developed: will they be effective against procyclicality in borrower confidence, collateral values, credit ratings, wholesale funding availability?
30

31. EU/Euro Area: Many Issues Addressed but Work Agenda Remains
OMT: avoid instabilities in sovereign debt markets
Banking Union: unified and strengthened supervision & resolution
Bank Recovery and Resolution Directive: enables bail in to protect fiscal position with financial stability safeguards
Comprehensive assessment: remedial measures should be swift and transparent
Macroeconomic imbalances procedure: support appropriate policy response to imbalances including credit booms
Banking Union issues to be addressed:
Common fiscal backstop for banking union: help sever sovereign- bank links
Liquidity support for distressed banks: if banks are to remain open, arrangements need to limit uncertainties to avoid funding runs
31

32. Questions?

33. In Ireland, Other Structural Reforms Were Not Key to Program Goals
Labor market
Minimum wage to be reduced by €1 to €7.65 for new entrants.
Sectoral wage agreements. Wage floors above minimum wage for 23% of employment, mostly low skill, inc. construction. Reform aims to make wage-setting more responsive to economic conditions.
Activation of long-term unemployed through stronger employment services and training better linked to market needs.
Goods and services markets
Competition Act enforcement provisions strengthened, supported by 25% increase in resources of Competition Authority.
Legal services reform to make legal costs transparent & improve oversight.
Medical reforms reduce pharmaceutical margins & increase competition.
State asset disposals
Target of proceeds of up to €3 bn (2% of GDP), mostly power generation.

34. Other Structural Reforms—Mixed Gains
Minimum wage cut reversed: by new government as election pledge, as population considered cut unfair
Employment services strengthened but rather slowly:
Offices for integrated employment services (Intreo) being established. Modest redeployment of staff (300) to front- line case officers, but ratio to unemployed remains low.
Tendering for private providers underway (late 2013)
Report on strategic priorities for Further Education and Training, but implementation needed
State Assets: completed sale of Bord Gais for €1.1 bn
Goods and services: Legal Services Bill not yet enacted