Irish Finance Minister on the EU/IMF programme for Ireland

Wednesday, December, 2010

This afternoon, the Irish Minister for Finance, Brian Lenihan TD, issued a statement on the EU/IMF Programme for Ireland and the National Recovery Plan 2011-2014.

The statement states that the Minister is making available the documents that set out the policy conditions for the provision of financial support to Ireland by the EU and the IMF.  The documents are: the Memorandum of Economic and Financial Policies 2010 (MEFP); the Memorandum of Understanding on Specific Economic Policy Conditionality (MoU); the Letters of Intent to the IMF and the EU Authorities; and the Technical Memorandum of Understanding (TMU) attached to the Letter of Intent (LoI) to the IMF.

According to the press statement, “these documents are not yet finalised but they are not expected to change in substance”.  The main opposition parties (Fine Gael and Labour) may not agree.

Interestingly, the MEFP refers to “banking reorganisation” as well as fiscal consolidation (i.e. further austerity) and renewing growth.  The latter two are potentially contradictory – the IMF itself has recently written about the contractionary effects of fiscal consolidation measures in its World Economic Outlook (Oct 2010).  See also the Nov 2010 PMCA Economic Commentary article on this.

The statement proceeds to talk about strong export growth and economic growth next year.  The growth forecasts for 2011, at approximately 1.75%, are still on the optimistic side, even though they are substantially lower than the previous estimates of the Department of Finance and the publicly-funded ESRI (Economic and Social Research Institute).  See, for example, the PMCA Economic Commentary on exports, employment growth and on GDP growth (Nov 2010).

The statement goes on to clarify the average interest rate of 5.8% on the external loans, which PMCA agrees is not a bad rate given the alternative rate the country would have to endure if it re-entered the bond markets.  Here the Minister’s statement is on firmer ground.

Then the statement goes on to clarify that the primary aim of the re-structuring programme agreed last weekend is to support the recovery and restructuring of the Irish banking system.  In this regard, it states that a “key objective is to ensure that the size of the domestic banking system is proportionate to the size of the economy”.  In this regard, a lot of attention, at least initially, will be focused on Anglo Irish Bank and Irish Nationwide – whose follies have given a whole new meaning to the word ‘hubris’.

According to the Minister’s statement, the Central Bank is going to require the banks to meet a Core Tier 1 capital ratio of 12%.   In the event that the banks cannot meet this target, the Irish government will attempt to inject the necessary capital.  This will be facilitated by drawing from the  €10bn available from the overall re-structuring programme fund.  A further €25bn will be available to the banks on a contingency basis, according to the Minister’s statement.

The Central Bank will undertake an updated prudential capital assessment review (PCAR) exercise on the capital position of the banks in early 2011 based on stringent stress-testing and detailed reviews of asset quality and valuation. This exercise will take into account updated assessments of the macroeconomic environment.   It  will ensure that over the coming years,  the banks’ capital ratios do not fall below 10.5%. 

The Minister’s statement gives some comfort to depositors that all deposits held in the Irish banking system are safe and covered by the Deposit Protection Scheme for sums up to €100,000. In addition, deposits in participating institutions under the Eligible Liabilities Guarantee Scheme are guaranteed in line with the terms of the scheme for sums over €100,000.  The scheme has been extended in national law to the end of 2011. 

The statement also treats the issue of ‘burning the bond holders’.  The strongly held belief among Ireland’s European partners is that any (unilateral) move to impose burden-sharing on this group of investors would have the potential to create a huge wave of further negative market sentiment towards the eurozone and its banking system.  That apprehension was confirmed by Professor Patrick Honohan, the Governor of the Irish Central Bank, in an interview last Monday, when he said there was no enthusiasm in Europe for this course of action.

PMCA is inclined to agree with Professor’s Honohan’s assessment.  A country that (unilaterally) reneges on its bonds risks destroying confidence in international capital flows markets and therefore bringing down other economies, which would add to Ireland’s severe woes.  It would also send out a terrible signal in respect of Ireland as a host location for foreign direct investment (FDI).  Ireland’s economic credibility would be completely in tatters.

To be fair to the Minister, the statement is an attempt to clarify and inform, and to reach out to the wider public.  But one cannot help feeling that some elements of the statement come across as self-serving, such as the self-congratulatory tones in respect of the austerity measures applied by the Irish government to date.

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