István P. Székely, Director of Research in the Directorate General of the Economic and Financial Affairs, EC
Klaus Masuch, Head of EU Countries Division, ECB, and
David Hawley, Senior Advisor, External Relations Department, IMF
Dublin, Sunday, November 28, 2010
MR. HAWLEY: Good evening, ladies and gentlemen, and welcome to this press conference. I’ve got with me István P. Székely of the European Commission, Ajai Chopra of the IMF, and Klaus Masuch of the European Central Bank. I’m David Hawley from the IMF.
István Székely will make a few opening remarks, and then we’re open for your questions. Thank you very much. István Székely?
MR. Székely: Thank you, David, and good evening, ladies and gentlemen. I will be very short because (inaudible) a lot of information, so, I think this is just to tell you how we see this program, how we approach things here, what will be the way of moving forward and making things a success.
I think this is a program for Ireland, which will put together, together with Ireland, to build confidence and credibility for economic policies, and it will be a success if this program is owned by Ireland and implemented here. The solution is here and not somewhere else.
Success will require a healthy economy, a healthy financial system, healthy public finances, and a healthy society, and these four things should go hand in hand in order to rebuild confidence and credibility. (Inaudible) in prosperous Ireland is the best contribution to the safety and prosperity of Europe, and that's what we tried to achieve here. We are looking for solutions that work and that work here in Ireland for Ireland, so, we shall be very pragmatic and we’ll work with everyone who supports this goal and this approach.
This program is based on a set of policies, measures that would put together based on the information and knowledge we have at this stage, and as we go along, we’ll always carefully and critically access how these policies and measures work, how this economy is doing, and in light of that assessment, we’ll take the necessary correction and adjustment so that we always reach the target that we want to reach.
And, finally, let me, as someone coming from the European Commission, express my great appreciation for my colleagues from the IMF team and from the ECB team. I have met their outstanding professionals, and it was really a pleasure to work with them. They work day and night to make this a success together with outstanding excellent professionals on the side, the Irish side. So, I hope that this will be a contribution to the success, as well.
MR. HAWLEY: Thank you.
QUESTION: Question for Mr. Chopra. Mr. Chopra, you have experience of this. How do you rate Ireland in terms of other countries that you’ve been involved in, and what are your thoughts for our future prospects?
MR. CHOPRA: What’s been remarkable is that the Irish authorities have been very proactive in finding the solutions to get their economy back on track with stronger growth and a more healthy banking system. Many of these steps were taken over the last couple of years. Steps were taken to stop consolidating public finances. Steps were taken to stop getting the banking system on a more healthy footing.
What we’re doing right now is helping in this process and making it more robust. We’re augmenting it in some places, and we’re providing a backstop in financing. But the key thing that this is, as Mr. Székely mentioned, that this is a program that is largely designed by the Irish authorities, we’re augmenting what they did already, and the thing that has impressed me most in this regard is the sense of common purpose. The thinking ahead and making a contribution to the solution. So, it’s been very impressive what they’ve done.
MR. HAWLEY: Here.
QUESTION: There’s been a little confusion about when the negotiations for starters with the Irish Government and at what level. Maybe you could possibly, Mr. Chopra, clarify that.
MR. CHOPRA: Yes, I’d be happy to. As you already know, the IMF has an annual Article IV Consultation. This is the annual health check we do with all the countries in the IMF’s membership. But in between the annual health check, we obviously stay in touch with country authorities to find out what’s happening on the ground to understand the situation. So, over the months, we’ve been in touch, we’ve talked on the phone, we followed the developments, we’ve tried to understand the various steps that the authorities have taken. And then last week, as you know, after the Eurogroup meeting in Brussels, a small team was invited to come here for short, technical discussions. So, following the technical discussions, the authorities decided they had the basis and the need to request us to (inaudible) together with them a package of policy measures that we could support with our financing.
MR. HAWLEY: Okay.
QUESTION: Could I just get the very basic breakdown from the three gentlemen here? The EFSM, the IMF, and EFSF, 22.5 billion euro each. Can you give me the exact interest rate applying, what’s the duration of these loans? What sort of repayment mechanism is required? And, also, to Mr. Székely , the extension by one year for Ireland to reach the deficit target of 2015, are you now saying that (inaudible) the 15 billion over the next four years, that that won't be enough? Is there a further top off figure that you can now add to that?
MR. CHOPRA: Okay, maybe I will start on this, and then Mr. Székely can fill in. When we discuss a financial arrangement with country authorities, the first step is trying to figure out what is the financing need.
And as is well known by now, the -- if the consultation would be -- country authorities, we have come up with financing need of 85 billion euros. As you know, a portion of this is to provide a backstop so that the sovereign -- the state does not need to go to the market for at least a couple of years to borrow. That is approximately 50 billion. We’ve also built in enough resources to capitalize the banks to a healthy level. So, that’s the first step to come up with the financing need. And as you also well know by now, the Irish authorities are making a very important and significant contribution to this of 17.5 billion euros. So, that leaves 67.5 billion euros for the international partners. Since the package of -- the crisis resolution mechanism was put together in May by the European Union, by the Eurogroup, there’s been an understanding that the IMF would contribute half of what the Europeans would contribute. So, given the 67.5 billion, the IMF’s contribution is 22.5 billion of that.
QUESTION: Mrs. (inaudible) talked about the specifics of the European (inaudible), but on the matter of the interest rate, you’ve already heard from the minister on the average interest rate, and the point that he made is that this is much less than what you would be able to borrow at on the market right now. So, we see these terms as being suitable for Ireland. The IMF and the EU terms are quite similar. The details of the IMF terms are spelled out in a managing director’s press release. It outlines how the SDR rate -- the SDR being Special Drawing Rights, which is the unit of account that the IMF uses -- how that applies in all London arrangements and the maturity of the loan. In the case of Ireland, we are using what we call an extended arrangement under the extended financing facility, which gives you suitably long maturities. So, the first payment after any drawing doesn’t start for 4½ years, and it takes 10 years with 12 installments to pay off the loan. So, we see these as very appropriate terms for Ireland.
MR. Székely: Thank you. As Mr. Chopra explained, the European component would be overall in the range of 45 billion. That is from different sources. One is the EFSM, which is a European-level instrument. Then we have the EFSF, and then we also have the bilaterals. The overall rate in this, given the market rates today, is around 5.8 percent as mentioned by, today, the government. But you have to remember that this is a loan which will match the maturity of the IMF loan, so it is a 7- to 8-year maturity, and every issue, whenever it’s issued, the rate will be a fixed rate, the time when it is issued. So, there is an important value in that the rate is not changing for that issue over time. And of course that also has a need backed on what -- at what price we can issue, and for the EFSM we are particularly (inaudible) the commission, and they issue and then they give it back to the country. So, their side a little bit complex is the fishhook, so maybe they are a little bit younger than the press conference itself, but they’re more than happy to give any details on the EFSM-EFSF, and on our web site you will get all details, and if you have any question please don’t hesitate to contact us directly.
Regarding the maturity, the important thing is that we will match the maturity of the IMF loan, and that’s very important, because that will be another important source of providing stability and credibility to policies, because there’s a long-term backing to the support, and I think that’s an important element of the program design, and I think that’s a great value. Thank you.
QUESTION: (off mike)
MR. Székely: Yes, I’m coming to your second question.
In 2015 -- now, you should go back a little bit in time, and remember, when the decision, indeed, the procedure was made to say that Ireland should reduce the deficit to below or at 3 percent by 2014, that was a time when not even the first round of bank recapitalization was known. So, since then, you know, a lot happened, and the question there is and under this program as it was announced they had been up from 10 billion further capitalization. And that gives interest costs. Now, the question there to be asked: Does this make sense because of this shock to the (inaudible), shock to the public finance, to force Ireland to come back to 3 percent nonetheless, no matter what? And don’t misunderstand us. And I think this we share with other partners and the authorities -- intentions to bring back (inaudible) to sustainable fiscal position as fast as possible. It is just that we have to keep the right balance between this (inaudible), which is very important not only to us -- it’s to everybody and to the market. You remember, I said there are four elements of this problem -- a healthy economy; a healthy financial system; healthy public finances; and healthy society. The (inaudible) healthy public finances but not at the cost of the other three. So, the task here for us -- and that was what we were doing -- you know, all these excellent economists and banking experts -- is to keep (inaudible). This is (inaudible) answer, and I’m very glad that they are the political level you could listen to and your suggestion and recommendation was taken. I think it’s a good decision. It gives us space to keep the balance between these (inaudible), and we’ll be able to pay attention to the healthy society part, because that’s also important. We do believe that this program also get it only if everybody feels that it can go ahead. Credibility and confidence requires everyone to be credible and confident, and I think that the spirit in which we do this, and we think that’s the right balance, and as I said at the very beginning, as we go along wherever we’re looking to how is the economy doing, how the consolidation is doing, and let us find the best way to go forward. At least that would be our recommendation. Thanks.
QUESTION: Can I ask you if there was any disagreement between the partners over the issue of (inaudible) senior bank bond holders? The impression I got from the Taoiseach was that this was more in the interest of the euro zone rather than Ireland itself. I venture it’s not how far the discussions got, were there any discussions, and who decided this was not a good idea.
MR. CHOPRA: As you well know, the Irish government carried out a liquidity management exercise for Anglo Irish, for its subordinated debt. This was a successful exercise. So, as you can imagine, under the program the government is indeed exploring the option of the deeply discounted liquidity management exercise again for the subordinated debt of other institutions. And that’s all that is contained in the program on this matter.
QUESTION: A number of questions for you gentlemen. I’ll make it a couple. The first is does this mean we’re effectively looking at the liquidation of the pension reserve fund? The second is can I get you to confirm the actual raise on the overseas element of the package?
The corporate tax -- is -- (inaudible) said that that remains at the 12.5 percent, or is that issue going to be revisited? And finally, is the ECB going to continue with the liquidity funding for the banks?
MR. HAWLEY: Okay. Do you want start?
MR. CHOPRA: : Yes, I can start with the National Pension Reserve Fund. As it was explained, there is an upfront recapitalization of the banks that is cash, and that is put in by the program and by the Irish side, using their cash balances.
But the rest is contingency, and I think, generally you know, what we said is that we are in one boat. Everybody should put in whatever they have and in order to make its success. So, I think it's important that there is a large, important Irish contribution to this. And the best way of using this to say, okay, if there is a contingent element, there are here assets that can back up this contingent.
And let's hope that not the whole should be used. And you know, we will see. At this stage there is no way to tell how much precisely, as the Taoiseach himself pointed out. You'll have all sorts of steps (inaudible) when we go ahead with this program. And remember, what is this program here for? To create confidence in the market -- that whatever it takes, this financial system will be fixed and all resources are there for this purpose. And then let's work together to make it the least costly way for the Irish taxpayer. And we will do that.
MR. CHOPRA: A very simple answer on the corporate income tax. It is not the part of the program.
MR. HAWLEY: And Klaus, there was a question for you about the ECB.
MR. MASUCH: Yes, thank you. It was just mentioned that the ECB is here represented to work in liaison with the Commission and the IMF, meaning that we are not the principle negotiator, but I guess we also had also our views in the program. And as Mr. Székely mentioned, I could also support his view that the cooperation was excellent between the three institutions and the three teams and the Government and the Bank, including the Supervisor.
On your question concerning liquidity provision. Let me upfront mention: I think the Taoiseach in his press conference just a half hour, 40 minutes ago, mentioned that that he is aware of the substantial amount of support of credit, which the Irish economy -- the Irish banking system -- has received in recent months, and is currently receiving from the Euro system. These are credits, loans, which are provided currently at an exceptionally large amount to the Irish economy, the Irish banking system. And this shows, in addition to what the colleagues have outlined here, that Europe is really standing behind Ireland and helping Ireland in a difficult period.
As regards to the future of liquidity provision, I'm sure that the Governing Council will act responsibly and will do its part in facilitating the transition of the Irish banking sector to a more downsized and smaller banking sector -- and reorganized banking sector -- in line, of course, with our rules and with the treaty.
The program which has been decided has been presented by the Government, in my view, is a strong program which strengthens the soundness of the banking sector. And of course this makes it especially also coming with up to 10 billion upfront capital increase for the banking sector, as has been mentioned, and this contingency fund which will be used if further capital injections in the banking sector are needed to maintain a sound banking sector. And these capital injections cannot be provided by the private sector.
This element of the program, in our view, strengthens significantly the perspective of the banking sector. And that of course makes it easier also for the Euro system and ECB to provide liquidity at a large amount, although we are looking forward to the amount that the Euro system provides into the banking sector in terms of liquidity, that this will go down over the medium term in line with the downsizing of the banking sector. Thank you.
QUESTION: Mr. Chopra, the headline on this is an 85 billion financial support to Ireland, but then when you read it, 20 percent of that comes from Ireland.
Can I ask you which of the parties in the negotiation asked for that? Demanded that? That the National Pension Reserve Fund be used in that manner? Who raised it? That that could be used as part of the support? I mean, for Irish people, is it too simplistic that a kitty of money that had been built up for the future is now being pumped into banks?
MR. CHOPRA: I think that the basic point over here is that this is a win-win situation for Ireland. To the extent that it has cash buffers that were built up because of very sophisticated and very good debt management, with very low yields, it makes sense to use them at this time.
I think this is quite unique in these sorts of arrangements, and I think it should be taken as a sign of underlying strength. So that's the way I would look at this issue.
QUESTION: So is that your opening salvo, so--or is it the IMF (inaudible).
MR. CHOPRA: As you can imagine in these discussion there are a number of things that come up on both sides of the table. And there is a common agreement that this is a win-win situation for Ireland.
QUESTION: But who said use the National Pension Reserve Fund? That's not what you—
MR. CHOPRA: As I said, you know, there are a number of things that get discussed in the program, and I don't think it's productive to try to nail things down like that.
QUESTION: Mr. Chopra, your colleagues in Washington have indicated that the interest rate on the lending you're advancing to Ireland is in the region of 3.1 percent.
MR. CHOPRA: Yes.
QUESTION: So, can we then assume that some of the loans which are being provided by your partners in this fund are well in excess of 6 percent?
MR. CHOPRA: I think that's more a question for the partners.
MR. Székely: Yes, I mean, I already answered that the European part -- again, the average cost of what comes from Europe -- and here one has to be careful because the bilaterals, you know, we still have to see the details, and that's for those governments to negotiate and discuss between themselves. But the ESM/EFSM part -- if you take the market rate from Friday, you know, the bond rate where we start from. We are triply assured the EFSM, so we start with the bond rate, basically. That it would come to roughly around 5.8 percent, the total European -- if you did everything today, which you will not, of course, and hopefully not even during the entire program.
But again, you have to remember what is the alternative and how this whole thing works. Because by design, you can only gain on this. Why? Because if there is just one or two or five basis points to gain by turning to the market, you can be sure that your debt management agency, which is assumed a professional, may not use the expensive money. So this just by design can only help. Because you only turn to it when you cannot get anything better.
So, and in fact the whole program is built on the idea of allowing, having the financial strength not to have to go to the market, but at the same time the success is if Ireland is in the market. Not only for borrowing for the Exchequer, but generally the whole program design -- the basic approach here -- is to have as much private sector involvement in as many places of the program as we can.
So this is how it works, and this is just a support, you know, a forward that you put there that well beyond this this can go. But it can be much better. And if this program is successful, the measure of the success is that the Irish Government doesn't have to go out to this scheme, but can go onto the market and borrow there.
So this is the way to prove that there is success and there is comeback. So, I think it is by design. This is -- but the numbers are there, and as I said any number is subject to change. What is known is that the moment you borrow from this fund, it’s fixed the rate for the entire duration, so you got a long-term Euro borrowing at fixed rate. So if you compare anything with anything, and I think it’s useful to compare, you know, an orange and apple -- now not TO compare orange to apple, but try to compare, you know, the same currency, same maturity rate and, you know, if there is better, we encourage the Irish government to use that.
QUESTION: Exactly the same issue would be (inaudible) and a half. Could you tell us what the cheapest rate is on the loan and what’s the most expensive loan, and what is the most expensive rate on the loans are and to make up the 5.8 percent blend? And can you tell us what the shortest duration of the loans are and what the longest –
MR. Székely: Let me explain –
QUESTION: Just tell us what the lowest rate is and what the highest rate is of the loans?
MR. Székely : Okay. Again, I mean I’m more than happy to link you up with our finance department because let me explain to you the complexity how it works and then you understand how difficult it is to answer your question. You are trying to pin down something which, you know, on the one hand, you expect me to give you a precise, correct answer then let me explain to you how it works. What we agree on the EFSF is an average maturity for the whole support. We are issuers. We go out to the market. There is no such thing in the market as a seven and a half year bond. There is a certain segment where you can issue, and we are talking about substantial amounts. So we can only issue in that segment where there is substantial market there. So we are issued -- I mean if you have financial (inaudible) to me that there are three years, five years, ten years where you can issue. So how you do that is you issue certain amounts in order to ensure that you have an average maturity of seven-and-a-half year and it’s fixed, and you have to issue fixed because these are the amounts that you cannot issue in any other way. We issue. We go to the market. We are that kind of, you know, scheme. We are triple insured, so we have to go there, do that. Now, if you pick out of this, we also issue 10 years. We issue, let’s say, half a billion for 10 years in order to make this blend and you picked out that interest rate and then you ran away with this. I think it’s just not the way you should look at it. There’s a product here which is offered to the client –
QUESTION: 3.1 percent, is that the lowest rate of all the (inaudible)?
MR. Székely: Yes. That’s a fact.
QUESTION: What’s the highest then of the (inaudible)?
MR. Székely: I have to come back to you again that we have 5.8 percent average on this. I mean if you want to pick out one -- I cannot really tell you because I’m not the Treasury. You know, the Treasury will decide what sort of instruments (inaudible). So exposed you will see each and every issue in the market because they are, you know, these are public issues. So we can go to a web site and check it when it’s done.
MR. HAWLEY: I think we’ll move to another question.
MR. Székely: Just clarifying, the 5.8 does not include the IMF contribution. It’s the average of the European contributions. It does not include the IMF contribution.
QUESTION: What kind of hand holding will there be in these quarterly reviews? What will you be telling the Irish government to do over the lifetime of these loans and what if a new Irish government wants to deviate from the four year recovery plan?
MR. CHOPRA: The way IMF programs are structured is that we set milestones every quarter that a country needs to meet in order to qualify for the next disbursement. As Mr. Székely emphasized earlier in these milestones, one has to look at them in the context of what’s going on in the economy. So when our documents are released, it will be very transparent as to what these milestones are, which quarters they apply to and how they will be evaluated. There will obviously have to be discussions with the authorities to come to a view on whether these milestones have been met or not, and if they haven’t been met, one would have to see whether the overall objectives of the program can still be met with some other policy adjustment. So it is a process of dialog. It’s not a very rigid process. Once we come to a view, we have to present this to our Board in Washington to make a final determination on whether the milestone has been met, the benchmark has been met and then the funds get released.
QUESTION: To what point though will you be -- might you be micromanaging? Will you be telling the Irish government to cut spending and increase taxes?
MR. CHOPRA: Spending and tax decisions are made in the context of annual budgets and as annual budgets are being drawn up, there will inevitably be some discussions on the choices that countries make. In terms of the overall design and the efficiency, what typically happens is that the country makes these decisions based on its priorities. The government makes these decisions based on its priorities. We assess them and come to a view as to whether they are appropriate to meet the objectives of the program.
MR. CHOPRA: Well, again, this program was designed together with the government. The way it works is that we agree on the goals, and I think I stated what the goals of this program are, and then we start discussing what are the policies and measures that take you there, and that’s a discussion. Most of the ideas, as you see, I mean, they were in the four year plan, so it’s quite clear the ownership. But generally the ownership is shared and there is a discussion, a genuine discussion there and, as I said, these all based in what works and sometimes you try something. Sometimes it works. Sometimes it doesn’t work. On both sides there can be ideas that work and ideas that don’t work. So I do not kind of describe this as a hand holding exercise. It’s a genuine discussion between the two sides. You have here excellent economists on this side. You have excellent economists on this side. You have the political reality on the other side, which is much better understood on the other side and that’s how it works. And, as we said, this program will always be based in pragmatic approaches to see what works here now.
MR. HAWLEY: I think we have time for at least one quick -- two more questions so.
QUESTION: Yeah, let’s go over this (inaudible). You probably don’t want to come back to it, but if the IMF portion is 3.1 percent, the Irish government’s statement says that the average interest rate is going to be 5.8 percent. I’m assuming that is the --Is a number that is only coming from the European side of the equation, does that bring the overall rate down to sub 5 percent because it appears to?
MR. CHOPRA: On the IMF figures, I just want to make clear that the lowest number that you have over there, it’s linked with how long the funds have been outstanding. To the extent that the fund, any loan has been outstanding for longer than a certain period, the rate goes up a little bit. So I think this is explained quite clearly in the press statement by our Managing Director and there’s more information on that structure on the IMF’s website I’m sure.
MR. HAWLEY: One last question. Over here.
QUESTION: Yeah. Just, again, to come back to the issue of the senior bond holders. Was there ever a question that they would be asked to carry some of this burden? Is the senior bond holders (inaudible) Irish bank?
Mr. CHOPRA: As I said, I think I don’t have much to add to the previous statement that I made. The program includes the option for the government to explore further liability management exercises that apply to subordinated debt.
MR. HAWLEY: Okay. Thank you very much, ladies and gentlemen.
IMF EXTERNAL RELATIONS DEPARTMENT
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