IMF Staff report on First and Second Reviews of Ireland's Bailout Agreement and related documents

Posted on Friday, 20 May 2011

Background.

A three-year EFF arrangement with access of SDR 19.5 billion was approved on

December 16, 2010. Following elections on February 25, a new coalition government with a

comfortable majority took office on March 9. In light of a delay in the first review made necessary by

the early elections, the authorities request to combine the first and second program reviews and, given

the smaller immediate external financing needs, also request a rephasing of the arrangement.

Mission. Discussions were held in Dublin during April 5–15, 2011.

The IMF team comprised A. Chopra (head), C. Beaumont, J. Mathisen, and B. Barkbu (all EUR), S. Abbas (FAD), D. Hawley and

O. Stankova (EXR), B. Kelmanson (SPR), M. Luedersen (LEG), L. Cortavarria, and P. Bologna

(MCM). Teams from the EC and ECB participated in the discussions. P. McGoldrick (OED) attended

the meetings.

Performance under the program.

Policy implementation is off to a strong start. All relevant

performance criteria for the first and second reviews, and all but one of the structural benchmarks

were observed. In particular, at end March the authorities announced comprehensive banking reform

and recapitalization plans which were well received by financial markets and analysts.

Program discussions. The discussions focused on the implementation of the banking sector reforms

and on fiscal consolidation. Specifically, focus was on (i) the schedule and sources of funding for

recapitalizing the four guaranteed banks; (ii) timetables and steps for reorganizing domestic banks and

the framework for the deleveraging of banks during 2011–13; and, (iii) ensuring that any adjustments

in fiscal plans include compensating measures so that the program targets for 2011 and beyond remain

achievable, while allowing the automatic stabilizers to operate.

Program risks.

Risks to the program, already high at program approval, have increased in some

respects while declining in others. Slower growth and higher unemployment, further ratings

downgrades, and developments in other Euro Area crisis countries—have contributed to a rise in bond

spreads that hinders Ireland’s prospects to regain market access on affordable terms in the near future.

Policy recommendations. The program risks must be actively managed with support from a more

comprehensive European plan. Timely implementation of the banking strategy—recapitalization,

reorganizing and deleveraging the viable banks, and resolving the non-viable banks—remains critical

for program success in restoring the banking sector to healthy functionality so it can begin to

contribute to renewed growth.

This intensive effort must continue to be underpinned by fiscal

consolidation and structural reforms to overcome doubts regarding the feasibility of the necessary

fiscal adjustment and regarding growth prospects in the medium term.