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© 2010 International Monetary Fund

December 2010

IMF Country Report No. 10/366

Ireland: Request for an Extended Arrangement—Staff Report; Staff Supplement; Staff Statement; and Press Release on the Executive Board Discussion.

In the context of the request for an Extended Arrangement, the following documents have been released and are included in this package:

  • The staff report for the Request for an Extended Arrangement, prepared by a staff team of the IMF, following discussions that ended on November 30, 2010 with the officials of Ireland on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 4, 2010. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • A staff supplement of December 10, 2010 on the assessment of the risks to the Fund and the Fund’s liquidity position.

  • A staff statement of December 10, 2010 updating information on recent developments.

  • A Press Release summarizing the views of the Executive Board as expressed during its December 16, 2010 discussion of the staff report that completed the request.

The documents listed below have been or will be separately released.

  • Letter of Intent sent to the IMF by the authorities of Ireland*

  • Memorandum of Economic and Financial Policies by the authorities of Ireland*

  • Technical Memorandum of Understanding*

  • *Also included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: publications@imf.org • Internet: http://www.imf.org

International Monetary Fund

Washington, D.C.

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INTERNATIONAL MONETARY FUND

IRELAND

Request for an Extended Arrangement

Prepared by the European Department in Consultation with Other Departments

Approved by Ajai Chopra and Martin Mühleisen

December 4, 2010

Executive Summary

Background

  • Despite the authorities’ bold economic policies in a difficult environment, Ireland has faced intense economic and financial pressures in recent months. At the root of its problems is a critically-weakened banking sector that has yet to be restored to health and stands at the center of a dynamic that dampens economic recovery while creating pressures on an already serious fiscal challenge.

  • Layered on these difficulties is the fall in domestic consumer and international investor confidence, with implications for growth and the cost of funding.

  • The program aims to restore Ireland’s banking system to health and put its public finances on a sound footing, thus renewing confidence and a return to strong, sustained, growth.

Main elements of the program

  • Achieve a smaller, more robust banking sector to serve Irish economic needs. While this process will take time, it will start immediately and will move with deliberate speed.

  • Banks will maintain higher capital adequacy standards to minimize market perceptions of weakness, and thereby achieve improved access to funding.

  • The authorities’ National Recovery Plan will form the basis of 2011 and subsequent budgets. The Plan makes pragmatic choices to achieve consolidation in a fair manner.

  • While Ireland’s business environment is very strong, the program addresses remaining impediments that might underpin competitiveness in the years ahead, supporting growth.

  • A financing package of €85 billion will support these far reaching changes

  • In the attached Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP), the authorities request a three-year Extended Arrangement under the Extended Fund Facility (EFF) under the exceptional access policy and the emergency financing mechanism. The Fund will contribute SDR 19.5 billion (€22.5 billion, equivalent to 2,321.8 percent of quota) and make available SDR 5 billion on Board approval.

  • The Irish authorities will contribute €17.5 billion to this effort from the nation’s cash reserves and liquid assets. The European Union and bilateral European lenders will provide the remaining €45 billion on similar terms as those under the EFF, with whom the cooperation will continue. ECB liquidity support is an essential component of the program.

  • High program risks reflect uncertain bank losses, a difficult debt outlook despite an unprecedented fiscal adjustment, unclear growth prospects, continued market focus on peripheral Europe countries, and an impending general election.

    Discussions were held in Dublin during November 18–30, 2010. The IMF team comprised Ali Abbas, Bergljot Barkbu, Pierluigi Bologna, Alberto Buffa di Perrero, Ajai Chopra, Luis Cortavarria, David Hawley, Maike Luedersen, Johan Mathisen, Donal McGettigan, Ashoka Mody, Dilcia Noren, Ceyla Pazarbasioglu, Silvia Sgherri, and Olga Stankova. The mission worked in conjunction with representatives from the European Commission and the European Central Bank. The mission is grateful to the Irish authorities for the productive discussions and their hospitality.

Contents

  • I. Context and Objectives

  • II. Recent Economic and Political Developments

  • III. Overall Strategy

  • IV. Macroeconomic Framework

  • V. Returning the Banking System to Healthy Functionality

    • A. Downsizing and Reorganization

    • B. Raising Capital Standards

    • C. Reducing Risk and Increasing Shock Absorption Capacity

  • VI. Safeguarding Public Finances

    • A. Consolidation Strategy

    • B. The National Recovery Plan and Program Targets

    • C. Institutional Reforms for Fiscal Sustainability

  • VII. Structural Reforms to Raise Efficiency and Growth Potential

  • VIII. Program Modalities

    • A. Access and Conditionality

    • B. Exceptional Access Criteria

    • C. Capacity to Repay the Fund and Risks to the Program

  • IX. Staff Appraisal

  • Tables

  • 1. Selected Economic Indicators, 2005–11

  • 2. Medium-Term Scenario, 2007–15

  • 3. General Government Finances, 2005–15

  • 4. Indicators of External and Financial Vulnerability, 2003–10

  • 5. Summary of Balance of Payments, 2008–15

  • 6. External Financing Requirements and Sources, 2008–15

  • 7. Ireland: Monetary Survey, 2005–10

  • 8. Schedule of Reviews and Purchases

  • 9. Indicators of Fund Credit, 2010–24

  • Boxes

  • 1. Spillovers from Ireland

  • 2. Government Support of the Financial Sector, September 2008–October 2010

  • 3. Methodology to Conduct a Second Stress Test Exercise (PCAR 2011)

  • 4. Initial Terms of Reference for Data Quality and Asset Quality Diagnostic Review

  • 5. Ireland—Residential Mortgages

  • 6. Reducing Impediments to Competitiveness and Employment Creation

  • Appendix

  • I. Debt Sustainability Analysis

Front Matter Page

INTERNATIONAL MONETARY FUND

Ireland—Assessment of the Risks to the Fund and the Fund’s Liquidity Position

Prepared by the Finance and Strategy, Policy, and Review Departments

(In consultation with other Departments)

Approved by Andrew Tweedie and Martin Mühleisen

December 8, 2010

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December 10, 2010

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Press Release No. 10/496

FOR IMMEDIATE RELEASE

December 16, 2010

International Monetary Fund

Washington, D.C. 20431 USA

Telephone 202-623-7100

Fax 202-623-6772

www.imf.org

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Ireland: Request for an Extended Arrangement-Staff Report; Staff Supplement; Staff Statement; and Press Release on the Executive Board Discussion.
Author:
International Monetary Fund