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Ireland: Twelfth Review Under the Extended Arrangement and Proposal For Post-Program Monitoring—Supplementary Information

Author(s):
International Monetary Fund. European Dept.
Published Date:
December 2013
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This supplement provides information that has become available since the issuance of the staff report on December 2, 2013. The information does not alter the thrust of the staff appraisal.

Recent high-frequency indicators continue to signal stronger economic growth in H2. The unemployment rate eased to 12.5 percent in November, its lowest reading since June 2009. Although PMIs for manufacturing, services, and construction all eased in November, they all remained significantly above the 50 mark signifying expansion. In November, the KBC Ireland/ESRI consumer confidence index retreated from a six-year high reached in the prior month, perhaps reflecting the impact of Budget 2014, but the index level remained relatively high. HICP inflation edged up to 0.3 percent y/y in November as increases in excise duties in Budget 2014 came into effect.

A survey of Small and Medium Enterprises found a significant improvement in trading conditions in Q2-Q3 along with a rise in credit approvals rates. The survey found 34 percent of SMEs experienced an increase in turnover, up from 25 percent in the previous six months, turning the net increase in turnover positive for the first time since the survey’s inception in 2011. Trading conditions improved for all sizes of SME, with micro and small-sized companies gaining most. Although fewer SMEs sought credit, they report 80 percent of applications were approved in full or partially (excluding pending applications), an improvement of 4 percentage points. To further improve financing conditions for SMEs, the Department of Jobs, Enterprise, and Innovation will follow up on the expert review of the SME Credit Guarantee Scheme, which proposes several amendments to increase its take-up and future performance.

Irish SMEs Business Turnover in the Last 6 Months

(percent)

Sources: RedC survey; and DoF.

November exchequer figures suggest the general government deficit target for 2013 will be achieved with a more comfortable margin. Budget outturns for November showed strong revenues while spending remained within allocations. Cumulative revenues (after adjusting for one-offs) through end November were slightly above budget projections, as corporate tax, Pay Related Social Insurance, and stamp duties continued to over-perform, and earlier shortfalls on VAT and excise duties narrowed somewhat, indicative of rising consumer spending. Cumulative primary expenditure (excluding ELG payments stemming from the liquidation of IBRC) was 0.4 percent of GDP below the authorities’ profile, though some of this underspending is likely to unwind by year end. The cumulative exchequer primary deficit through end November was 1.9 percent of GDP, 0.5 percent of GDP below the authorities’ profile. Overall, these figures suggest a general government deficit closer to 7 percent of GDP in 2013, somewhat below the staff report estimate of 7.3 percent of GDP, resulting in a larger buffer relative to the target of 7.5 percent of GDP for 2013.

Cumulative Exchequer Out-Turn vs. Authorities’ Profile, January to November 2013(Percent of GDP)
Out-turnAuthorities’ ProfileOut-turn
Nov-13Nov-13Nov-12
Revenue29.729.628.9
Tax revenue27.427.126.3
Other revenue2.42.52.6
Expenditure35.736.136.0
Current primary29.629.730.4
Interest payments4.14.13.5
Capital2.02.32.1
Overall balance−6.0−6.5−7.1
Primary balance−1.9−2.4−3.7
Sources: Department of Finance; and IMF staff estimates.Note: To facilitate comparability: (i) 2012 tax revenues do not include the €251 million corporation tax payment delayed from December 2011; (ii) outlays in respect of Irish Life (€1.3 billion) and credit unions (€250 million) are excluded from 2012 capital spending; (iii) proceeds from the sale of Bank of Ireland contingent capital notes (€1 billion) and Irish Life (€1.3 billion) are excluded from 2013 other receipts; and (iv) Eligible Liabilities Guarantee scheme payments linked to the promissory note transaction of €1 billion are excluded from 2013 current expenditure.
Sources: Department of Finance; and IMF staff estimates.Note: To facilitate comparability: (i) 2012 tax revenues do not include the €251 million corporation tax payment delayed from December 2011; (ii) outlays in respect of Irish Life (€1.3 billion) and credit unions (€250 million) are excluded from 2012 capital spending; (iii) proceeds from the sale of Bank of Ireland contingent capital notes (€1 billion) and Irish Life (€1.3 billion) are excluded from 2013 other receipts; and (iv) Eligible Liabilities Guarantee scheme payments linked to the promissory note transaction of €1 billion are excluded from 2013 current expenditure.

Balance sheet assessment (BSA) results had limited impact on financial markets. The CBI finalized intensive work on bank diagnostics in late November as scheduled, and communicated the results to each of the three banks covered by the assessment. Banks in turn made short announcements. Secondary market yields on three-year covered bonds from BoI and AIB as well as Irish government bond yields remained stable. BoI’s share price declined about 3 percent on the day of its announcement of the BSA results.

Soon afterwards, the government recouped its investment in BoI preference shares made to inject capital in 2009. The transaction consisted of two components: (i) BoI placed €580 million of new ordinary shares, repaying the state €537 million (at par) after expenses; and (ii) the government sold the remaining €1.3 billion of preference shares to private investors. The transaction reduces the government’s stake in BoI by about one percentage point to 14 percent. The authorities have recouped around €2.05 billion from the transaction, consisting of €1.837 billion in principal value, a profit of €62 million, and accumulated interest of €151 million. The CBI confirmed that, in line with EBA’s Q&A decision of October 31, 2013, BoI will be able to include €1.3 billion of preference shares sold to private investors in its common equity tier 1 calculations under Basel III grandfathering rules until end 2017. However, it is not BoI’s intention to retain the 2009 preference shares as regulatory common equity tier 1 capital after July 2016, provided the capital buffer remains adequate.

NAMA has met its target to redeem a quarter of its outstanding senior bonds by end 2013. On December 4, NAMA announced the redemption of €500 million in senior bonds, reaching its goal of €7.5 billion in total, while also holding a cash balance of €3 billion. To guide its asset disposal and other activities, the NAMA Board has set a target of redeeming another €7.5 billion in senior bonds by end 2016 and expects to redeem all €30.2 billion by 2020. NAMA also announced the redemption of €200 million in the senior bonds which had been issued following its purchase of the IBRC floating charge from the CBI when IBRC was put into liquidation in February 2013, bringing the total redemption of these bonds to €500 million.

Recent statistics on mortgage arrears show a stabilization in overall arrears in Q3 but longer dated arrears continue to rise. In relation to mortgages on primary dwellings, the value of mortgages in arrears remained stable at about 23.6 percent of the total in Q3. There was a change in the composition of these arrears, with mortgages in arrears of less than 90 days past due declining 6.5 percent by value in Q3. In contrast, mortgages in arrears of 90 days or more rose by 1.8 percent, with this increase entirely driven by rising arrears of over 720 days. For buy-to-let mortgages, the flow of mortgages into early arrears also slowed, but the share of mortgages in arrears by value edged up further, from 35.7 percent at end June to 36.2 percent at end September.

Loan modifications increased in Q3 with a continued shift away from short-term forbearance and a sharp rise in legal proceedings. For primary dwelling mortgages, 23,776 new restructuring arrangements were agreed in Q3, representing 3.1 percent of mortgage contracts. The share of short term forbearance modifications on primary dwelling mortgages, under which debtors pay interest only or less, declined further, from 37 percent of total restructurings at end June to 30 percent at end September. The share of restructured loans on which payments are meeting the terms of the arrangement improved slightly to 78.9 percent. Following the removal of the unintended legal barriers to certain repossession proceedings in July, legal proceedings to enforce collateral on primary dwelling mortgages were issued in 1,830 cases in Q3, up sharply from 270 in Q2.

On December 5 the CBI published its Mortgage Arrears Resolution Targets (MART) for end June 2014. Each bank is subject to targets for proposed solutions of 75 percent of arrears cases over 90 days by end June 2014, and for concluded solutions of 35 percent of cases. As the banks have made substantial progress in initiating proposed solutions, the CBI intends to shift its supervisory focus to conclusions of solutions and their durability. Considering that empirical experience with concluded solutions under the MART framework is still limited, the Q2 2014 targets appear to strike a reasonable balance between the challenging goal of largely completing sustainable solutions by end 2014 and the need for solutions to be durable if they are to have the benefits intended.

Residential Mortgage Arrears Resolution Targets
Targets 1/20132014
Q2Q3Q4Q1Q2Q3Q4
Sustainable solutions proposed
(percent of customers 90+ days in arrears)20305070752/2/
Arrangements concluded
(percent of customers 90+ days in arrears)No targetNo target1525352/2/
Terms being met
(percent of arrangements concluded)No targetNo targetNo target75757575
Source: CBI.

The targets cover ACC Bank, AIB, BoI, KBC Bank Ireland, PTSB, and Ulster Bank.

Announced on a rolling quarterly basis.

Source: CBI.

The targets cover ACC Bank, AIB, BoI, KBC Bank Ireland, PTSB, and Ulster Bank.

Announced on a rolling quarterly basis.

The reform of personal bankruptcy has become effective, shortening the automatic discharge period from 12 years to 3 years. The long discharge period under the original Bankruptcy Act 1988 had resulted in very little use of bankruptcy to address financial distress. Under the 2012 statutory amendments, borrowers must attest to having been unable to agree other insolvency solutions, such as a Personal Insolvency Arrangement, before pursuing bankruptcy. Once debtors are declared bankrupt, the court may require them to enter into payment plans for up to five years under which income in excess of that required to meet reasonable living expenses is distributed to creditors. Alternatives such as Debt Relief Notices and Personal Insolvency Arrangements provided for under Ireland’s new personal insolvency framework may help contain the number of bankruptcies, as was the case following the introduction of Debt Relief Orders in the United Kingdom. To ensure smooth processing, the Insolvency Service has increased its staff resources and published detailed guidance. With this step, Ireland’s reformed personal insolvency framework has become fully operational.

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