Ireland’s EU/IMF Loan Terms and Conditions by Annette J Dunlea
The Irish Government finances began to show signs of trouble in mid-2008. Our government deficits increased, many businesses closed and unemployment increased. The Irish Stock index fell. Many immigrant workers left.The Irish government was among the first in Europe to consolidate fiscal policy in the wake of the global economic crisis. However, the ongoing problems in the banking system and weak growth meant much more was needed.Ireland had to take the EU/IMF bailout. The loan is part of an international rescue package worth €85 billion that also involves the European Union, European bilateral lenders, and financing from Ireland’s own cash reserves. Continued liquidity support for Ireland’s banks from the European Central Bank is an essential component of the program.The main goal of the EU/IMF-supported package is to restore confidence and financial stability. The package includes plans to fundamentally restructure Ireland’s banking system and safeguard public finances. Reforms to restore the long-term growth potential of Ireland’s economy are also part of the program.
The previous Government agreed on Sunday, 28 November to financial support package from the EU and the International Monetary Fund (IMF) of up to €85 billion. Of the package, up to €50 billion is provided to cover the financing of the state, while the remainder is intended as support for the banking system.Crucially, from a business perspective, Ireland’s corporation tax regime has been endorsed. Irish businesses and multinational firms can rest assured that Ireland’s 12.5% corporation tax rate will remain a cornerstone of our enterprise policy for many years to come.Under terms of the deal, detailed in the 40-page draft document, the Government will have to provide the EU and the IMF with evaluation progress reports every quarter to ensure the disbursement of financial assistance.Detailed conditions for fiscal consolidation, financial sector reforms, structural reforms and structural fiscal reforms are set out for each quarterly review in the memorandum.There is a stipulation that very detailed monthly, quarterly, and weekly financial, banking and fiscal data be provided to the commission, the ECB and the IMF. The loan agreement locks Ireland into a very specific neo-liberal economic model dominated by policies that will impose immense pain on working people, communities and the poorest and most vulnerable sections of society by focusing on expenditure cuts, rather than on job creation or economic stimulus. It gives huge powers to these unelected and unaccountable lenders in terms of economic decision making and commits the government to a total of €15 billion in cuts by 2013.
Following rigorous stress tests, the banking recapitalisation requirement was €24 billion, less than the banking contingency of €35 billion.The Irish economy will have to meet reviews of conditionality every quarter.The Government said it commits to providing the European Commission, the ECB and the IMF with any and all information requested.
The Programme is financed through contributions from external sources and the use of Irish financial buffers. The Union’s assistance to Ireland would reach up to EUR 22,5 billion under the European financial stabilisation mechanism (EFSM) established by Council Regulation (EU) No 407/2010. This would be part of total support provided by Ireland’s European partners amounting to EUR 45 billion. Further to the support from the EFSM, loans from Ireland’s partner countries in the Union would include contributions from the European Financial Stability Facility (EUR 17,7 billion), and bilateral lending support from the United Kingdom, Sweden, and Denmark (EUR 4,8 billion in total). In addition, Ireland has requested a loan from the IMF of 19,5 billion Special Drawing Rights (equivalent to around EUR 22,5 billion) under an Extended Fund Facility. The Irish contribution would be EUR 17,5 billion, and would come from the use of the existing Treasury cash reserve and contributions from the National Pensions Reserve Fund. The support from the EFSM needs to be supplied on terms and conditions similar to those of the IMF.
Any subsequent loan releases shall be conditional upon a favourable quarterly assessment by the Commission, in consultation with the ECB, of Ireland’s compliance with the general economic policy conditions as defined by this Decision and the Memorandum of Understanding. Ireland shall pay the actual cost of funding of the Union for each tranche plus a margin of 292,5 basis points, which results in conditions similar to those of the IMF support.In addition, costs referred to in Article 7 of Regulation No 407/2010 shall be charged to Ireland. If required in order to finance the loan, the prudent use of interest rate swaps with counterparties of the highest credit quality shall be permitted. The Commission shall decide on the size and release of further instalments. The Commission shall decide on the size of the tranches.
The IMF declared that the assistance shall be managed by the Commission in a manner consistent with Ireland’s undertakings and with recommendations by the Council, in particular the Recommendations addressed to Ireland in the context of the implementation of its National Reform Programme as well as in the context of the implementation of the Stability and Growth Pact. The Commission, in consultation with the ECB, shall agree with the Irish authorities the specific economic policy conditions attached to the financial assistance as set out in Article 3. Those conditions shall be laid down in a Memorandum of Understanding to be signed by the Commission and the Irish authorities consistent with the undertakings and recommendations referred to in paragraph 1.The detailed financial terms shall be laid down in a Loan Facility Agreement to be concluded with the Commission. The general government deficit shall not exceed 10,6 % of projected GDP in 2011, 8,6 % of GDP in 2012 and 7,5 % of GDP in 2013, in order to place Ireland on track to reduce the deficit to below 3 % of GDP by 2015. The projected annual deficit path does not incorporate the possible direct effect of potential bank support measures in the context of the government’s financial sector strategy as set out in the Memorandum of Economic and Financial Polices and specified in the Memorandum of Understanding. Further, this path is consistent with the preliminary view of the Commission (Eurostat) on the ESA95 accounting treatment of time of recording of interest payments on promissory notes payable to Anglo Irish Bank, such that a revision of that view would result in a revision of the deficit path.
They stated that Ireland shall adopt the measures specified in paragraphs 7 to 9 before the end of the indicated year, with exact deadlines for the years 2011-2013 being specified in the Memorandum of Understanding. Ireland shall stand ready to take additional consolidation measures to reduce the deficit to below 3 % of GDP by 2015 in case downside risks to the deficit targets specified in paragraph 3 of this Article materialise. Ireland shall adopt the measures specified in paragraphs 7 to 9 before the end of the indicated year, with exact deadlines for the years 2011-2013 being specified in the Memorandum of Understanding. Ireland shall stand ready to take additional consolidation measures to reduce the deficit to below 3 % of GDP by 2015 in case downside risks to the deficit targets specified in paragraph 3 of this Article materialise.
It declares that to restore confidence in the financial sector, Ireland shall adequately recapitalise, rapidly deleverage and thoroughly restructure the banking system as set out in the Memorandum of Understanding. In that regard, Ireland shall develop and agree with the European Commission, the ECB and the IMF a strategy for the future structure, functioning and viability of the Irish credit institutions which will identify how to ensure that they are able to operate without further state support. In particular, Ireland shall: take action to ensure that Allied Irish Banks, Bank of Ireland, Educational Building Society and Irish Life and Permanent are recapitalised in the form of equity, if needed, so as to ensure that the minimum capital requirement of 10,5 % core tier 1 capital will be maintained, depending on the results of the Prudential Capital Adequacy Review for 2011.Implement the divestiture of participations in banks acquired during the crisis within the shortest time frame possible, in a manner compatible with financial stability and public finance considerations.Implement a specific plan for the resolution of Anglo Irish Bank and Irish Nationwide Building Society, which will seek to minimise capital losses arising from the working out of these non-viable credit institutions. By the end of 2010, we shall submit draft legislation to the Oireachtas on financial stabilisation and restructuring of credit institutions which will, inter alia, address burden sharing by subordinated debt bond holders; Oireachtas on financial stabilisation and restructuring of credit institutions which will, inter alia, address burden sharing by subordinated debt bond holders. By the end of March 2011, we must submit draft legislation to the Oireachtas on a special resolution regime for banks and building societies, and improved procedures for early intervention in distressed banks by the Central Bank of Ireland.
Ireland shall adopt the following measures before the end of 2010: adoption of a budget for 2011 including fiscal consolidation measures in a total amount of EUR 6 billion aiming at a reduction of the general government deficit within the time frame referred to in paragraph .The budget shall include revenue measures to raise at least EUR 1,4 billion in 2011, including a lowering of personal income tax bands and credits or equivalent measures to yield EUR 945 000 000 in 2011; a reduction in pension tax relief and pension related deductions to yield EUR 155 000 000 in 2011; a reduction in general tax expenditures to yield EUR 220 000 000 in 2011; increases in excises and miscellaneous tax measures to raise EUR 80 00 000 in 2011. In addition, the budget shall specify that the government will outline methods to raise at least EUR 700 000 000 in one-off and other measures in 2011. The budget shall also include a reduction of current expenditure in 2011 of at least EUR 2,09 billion, including: social protection expenditure reductions; a reduction of public service employment; a reduction of existing public service pensions on a progressive basis averaging over 4 %; other expenditure savings, including cuts in goods and services spending and in other transfer payments; a reduction of at least EUR 1,8 billion in public capital expenditure against existing plans for 2011. In exceptional circumstances, other measures yielding comparable savings shall be considered, in close consultation with the Commission.
The Oireachtas placed a special resolution regime for banks and building societies, and improved procedures for early intervention in distressed banks by the Central Bank of Ireland.Ireland sadopted following measures before the end of 2010 adoption of a budget for 2011 including fiscal consolidation measures in a total amount of EUR 6 billion aiming at a reduction of the general government deficit within the time frame referred to in paragraph 3 .The budget shall include revenue measures to raise at least EUR 1,4 billion in 2011, including a lowering of personal income tax bands and credits or equivalent measures to yield EUR 945 000 000 in 2011. A reduction in pension tax relief and pension related deductions to yield EUR 155 000 000 in 2011. A reduction in general tax expenditures to yield EUR 220 000 000 in 2011. Increases in excises and miscellaneous tax measures to raise EUR 80 000 000 in 2011. In addition, the budget shall specify that the government will outline methods to raise at least EUR 700 000 000 in one-off and other measures in 2011. The budget shall also include a reduction of current expenditure in 2011 of at least EUR 2,09 billion, including: social protection expenditure reductions; a reduction of public service employment. A reduction of existing public service pensions on a progressive basis averaging over 4 %; other expenditure savings, including cuts in goods and services spending and in other transfer payments. A reduction of at least EUR 1,8 billion in public capital expenditure against existing plans for 2011. In exceptional circumstances, other measures yielding comparable savings shall be considered, in close consultation with the Commission.
The IMF want Ireland to adopt the following measures during 2011 a 10 % pay reduction for new entrants to the public service. The Irish government shall also consider an appropriate adjustment, including in relation to the public service wage bill, to compensate for potential shortfalls from projected savings from administrative efficiencies and public service numbers reductions. The adoption of a budget for 2012 including fiscal consolidation measures amounting to at least EUR 3,6 billion and aiming at a reduction of the general government deficit within the time frame referred to in Article 3(3). The draft budget shall, in particular, include revenue measures to yield EUR 1,5 billion in a full year including, inter alia: a lowering of personal income tax bands and credits; a reduction in private pension tax relief; a reduction in general tax expenditure; a new property tax; a reform of capital gains tax and capital acquisitions tax; and, an increase in the carbon tax. The budget shall provide for a reduction of expenditure in 2012 of EUR 2,1 billion including social expenditure reductions; cuts in public sector employment; adjustments in public sector pensions and in other expenditure set out in the Programme; and reductions in capital expenditure.
The finalisation of an independent assessment of transfer of responsibility for water services provision from local authorities to a water utility, and preparation of proposals for implementation with a view to starting charging in 2012-2013. The adoption of legislation to increase the state pension age to 66 years in 2014, 67 in 2021, and 68 in 2028, with a view to enhancing the long-term sustainability of the public finances. Further, pension entitlements for new entrants to the public service shall be reformed with effect from 2011. This shall include a review of accelerated retirement for certain categories of public servants and an indexation of pensions to consumer prices. Pensions shall be based on career average earnings. New entrants’ retirement age shall be linked to the state pension retirement age. The adoption of measures reinforcing a credible budgetary strategy and strengthening the budgetary framework. Ireland shall adopt and implement the fiscal rule that any additional unplanned revenues in the period 2011-2015 will be allocated to deficit and debt reduction. In accordance with the proposal set out in the National Recovery Plan 2011-2014, Ireland shall establish a budgetary advisory council to provide an independent assessment of the government’s budgetary position and forecasts. Ireland shall adopt a fiscal responsibility law introducing a medium-term expenditure framework with binding multi-annual ceilings on expenditure in each area. This shall be adopted taking into account any revised economic governance reforms at the level of the Union and shall build on reforms already in place.
Ireland shall adopt legislative changes to remove restrictions to trade and competition in sheltered sectors including the legal profession, medical services and the pharmacy profession.The recapitalisation of Irish domestic banks to an initial level of 12 % core tier 1 capital, taking account of haircuts on the additional loans to be transferred to NAMA, and funding of early deleveraging by making available EUR 10 billion in the system. The recapitalisation shall take the form of equity shares (or equivalent instruments for the Educational Building Society). The introduction of legislation to reform the minimum wage in such a way to foster job creation and act to prevent distortions caused by sectoral minimum wages, and undertaking, in agreement with the Commission, an independent review of the framework Registered Employment Agreements and Employment Regulation Orders. A reform of the unemployment benefit system to enhance incentives for an early exit from unemployment. Activation measures shall be strengthened by better identifying job seekers’ needs, enhancing engagement, and developing sanctions to ensure job search or training by beneficiaries; this shall be underpinned by more effective monitoring. The sanctions mechanism shall be set to cause an effective loss of income without being excessively penal.The publication of an in-depth review of the personal debt regime, and start of work on a reform of legislation which will balance the interests of both creditors and debtors.
The preparation of a report providing an independent assessment of the electricity and gas sectors to assist with public financing needs, as well as to increase competition.The Irish authorities shall consult with the Commission on the results of this assessment with a view to setting appropriate targets.Enhancing competition in open markets; legislation shall be reformed to generate more credible deterrence by providing for the possible imposition of fines and other sanctions in competition cases. In addition, the competition authorities will be required to identify sectors which are effectively outside the scope of competition law and identify processes to address those exclusions.Encouraging growth in the retail sector; the government will conduct a study to examine the economic impact of eliminating the current cap on the size of retail premises with a view to enhancing competition and lowering prices for consumers. Implementation of the policy of the study will be discussed with the Commission.
Ireland shall adopt the following measures during 2012 the adoption of a budget for 2013 including fiscal consolidation measures amounting to at least EUR 3,1 billion aiming at a reduction of the general government deficit within the time frame referred to in Article 3(3). In particular, the budget shall include revenue measures to raise at least EUR 1,1 billion (inclusive of carryover from 2012), including: a lowering of personal income tax bands and credits; a reduction in private pension tax relief; a reduction in general tax expenditures and an introduction of property tax. The budget shall also provide for a reduction in expenditure in 2013 of at least EUR 2 billion, including: social expenditure reductions; a reduction of public service employment; public service pension adjustments; cuts in other expenditure set out in the Programme; and reductions in capital expenditure.
The submission of legislation to the Oireachtas to reform the personal debt regime with a view to ensuring a better balance of the interests of both creditors and debtors. Oireachtas to reform the personal debt regime with a view to ensuring a better balance of the interests of both creditors and debtors. In order to ensure the smooth implementation of the Programme’s conditionality, and to help to correct imbalances in a sustainable way, the Commission shall provide continued advice and guidance on fiscal, financial market and structural reforms. Within the framework of the assistance to be provided to Ireland, together with the IMF and in liaison with the ECB, it shall periodically review the effectiveness and economic and social impact of the agreed measures, and shall recommend necessary corrections with a view to enhancing growth and job creation, securing the necessary fiscal consolidation and minimising harmful social impacts, particularly regarding the most vulnerable members of Irish society.
Ireland shall open a special account with the Central Bank of Ireland for the management of the Union financial assistance.It will take years to repair the damage done to its economy by the bursting of the bubble. The IMF loan, provided under the Extended Fund Facility (EFF), will give Ireland the breathing space it needs to rebuild its economy.Ireland’s bailout is on track but the program must be enacted strongly to limit potential contagion from the eurozone debt crisis, the International Monetary Fund says.Finance Minister Michael Noonan said :”I am pleased that the mission has concluded that Ireland is meeting all of the conditions and targets of our program.”We have met the fiscal targets. We have met the banking targets. We have met the structural reform targets.”I am also pleased that the external partners have concluded that the Irish program is on track and we are making good progress,” he added.”Ireland provides hard evidence that the EU-IMF conditional financial support approach is working,” Rehn, the EU’s economic and monetary affairs commissioner, wrote.Minister for Transport Leo Varadkar has said he sees “light at the end of the tunnel” after EU officials confirmed this week that Ireland will benefit from lower interest rates on all future EU-IMF loans.The easing of the EU-IMF bailout terms will not make the budget in December any easier, according to Minister for Finance Michael Noonan.The Minister’s comments indicate there is no prospect of significant deviation from the planned adjustment package of €3.6 billion for next year.
The latest statement on the Department of Finance’s website states that Ireland has passed our third assessment by the IMF. The government has posted a document detailing the budgetary targets that need to be met by the end of the year in order to fulfil our end of the EU/IMF bailout deal.In a bid to raise €1.5bn, income tax bands and credits will be lowered, there will be a decrease in private pension reliefs, a reduction in general tax expenditures and a property tax will be introduced.The Government has also pledged to reform the Capital Gains and Acquisitions tax, and increase the Carbon tax.
The IMF put the following statement on their website indicating Ireland’s progress. Staff teams from the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) visited Dublin during July 6–14 for the regular quarterly review of the government’s economic programme. The objectives of the programme are to address financial sector weaknesses and to put Ireland’s economy on the path of sustainable growth, sound public finances, and job creation, while protecting the poor and most vulnerable.
The teams’ assessment is that the program remains on track and is well financed. The authorities have continued to steadfastly implement programme policies. Tensions in sovereign bond markets have escalated during the visit, but programme financing is cushioning the impact of this shock on the Irish economy and public finances. Continued strong policy implementation will be important to limit potential contagion effects.
Recent developments are consistent with a return to positive growth in 2011. Real GDP stabilized in the year to the first quarter, and modest growth is expected in 2011. Strong exports, aided by progress in recovering lost competitiveness, are expected to continue driving the recovery although domestic demand will continue to contract. Growth is expected to strengthen next year and beyond as the recovery broadens and spills over into the labor market.
Reforms are being implemented to restore the healthy functioning of the banking sector. Restructuring of banks is ahead of schedule, with the merger of Allied Irish Banks with EBS Building Society, and Anglo Irish Bank with INBS, already completed. Renewal of the boards and management of banks is underway, and the recapitalization of domestically owned banks is expected be completed by end July, with the fiscal cost reduced by burden sharing with subordinated debt holders. Deleveraging of banks is making progress, and will deliver a smaller more robust system while avoiding fire sales.
On the fiscal front, the cumulative deficit for the first six months of the year was well below the programme ceiling. The budget deficit is projected to be below 10½ percent of GDP in 2011. The Government has established the Irish Fiscal Advisory Council to provide an independent assessment of public finances. Later this year, the authorities will publish a medium-term fiscal consolidation plan for 2012 to 2015, outlining the revenue and expenditure adjustment consistent with reaching a deficit target of below 3 percent of GDP in 2015, drawing on the findings of the ongoing Comprehensive Review of Expenditure.
The authorities are advancing targeted structural reforms. To boost job creation, the Government is working with the social partners to develop reform plans for sectoral wage agreements, which cover sectors where unemployment tends to be high. The government also plans to introduce legislative changes to remove restrictions on trade and competition in sheltered sectors, including the legal profession, medical services and the pharmacy profession, in order to lower costs and boost purchasing power.
The government’s program is supported by loans from the European Union and EU member states amounting to €45.0 billion and a €22.5 billion EFF with the IMF. Ireland’s contribution is €17.5 billion. Approval of the conclusion of this review will allow the disbursement of €4.0 billion in this quarter (€2.5 billion by the EU, and €1.5 billion by the IMF). Additional resources in the order of €0.5 billion are also scheduled to be disbursed under the UK bilateral loan in the third quarter. The mission for the next program review is scheduled for October 2011.
Causes Annette Dunlea Supports
The National Council of The Blind, Ireland