The Government has satisfied the EU-IMF Programme requirements for Quarter 2 of 2011 and is currently working on those for the third quarter. Re-structuring of the banking system remains central to implementation. eolas examines the progress of the second and third quarters.
At the beginning of July representatives of the ‘troika’ (the EU, ECB and IMF) were back in Dublin for another progress review. The press conferences of government ministers and the troika confirmed that Ireland continues to meet its quarterly targets for measures required by the programme.
Of the €67.5 billion in funding available through the EU-IMF deal, over half is for banking recapitalisation. This reflects the centrality of banking reforms to the programme. At the core of the deal the Government and the Central Bank have to ensure a downsizing and restructuring of the banking system based on several objectives: a system based on two pillar banks (AIB and Bank of Ireland) and resolving the unviable banks; a recapitalised and deleveraged (reduced borrowing compared to equity) sector; reformed governance standards; asset recovery procedures; crisis preparedness and better planning.
Fiscal policies are based on bridging the gap between exchequer spending and revenue to 3 per cent of GDP by 2015, changes to the budgetary regime, whilst the labour market reforms are centred on opening up competition in shelter sectors and reform of labour laws, particularly concerning pay.
Quarter 2 Progress
Some of the measures implemented in the second quarter were among those secured by the new Government in its revised memorandum of understanding (MoU) with the EU-IMF. Among the differences between the revised MoU and the original one were a reversal of the cut in minimum wage (offset by a halving of the lower rate of employer PRSI on jobs that pay up to €356 a week until the end of 2013) as part of the jobs initiative announced in June, a comprehensive spending review, and a cessation of the transfer of smaller loans to NAMA. Following lower than expected recapitalisation requirements for the banks, the Government secured agreement with the troika on changes to the timing of the drawdown.
At the end of the first quarter the Prudential Capital Assessment Review (PCAR) 2011 revealed that €24 billion was needed for the four main banks (Bank of Ireland, AIB, the EBS and Irish Life & Permanent), €21 billion in the form of Core Tier 1 capital and €3 billion in contingent capital. The Prudential Liquidity Assessment Review (PLAR) 2011 of the same banks produced plans for deleveraging that will result in a 122.5 per cent loan to deposit target by 2013. The authorities and the banks have produced plans for managing deleveraging to meet these targets and the banks revised their deleveraging plans in light of the new Government’s decision not to transfer land and development loans below €20 million to NAMA.
Work began in the second quarter on minimising the principal owed to the banks’ subordinated debt holders by way of liability management exercises, whilst an independent review on the future credit losses of Anglo and the Irish Nationwide Building Society was carried out. The conclusions of the exercise, released by the Central Bank in May, showed the previous loan loss assessments remain valid.
The Central Bank and Credit Institutions (Resolution) Bill, published in May, is currently before the Oireachtas. The Bill creates a special resolution regime to deal with the eventuality of bank insolvencies and a framework for the introduction of a bank levy. Some of the mechanisms provided for by the Bill include the ability to transfer a bank’s assets and liabilities to another institution; the establishment of a ‘bridge bank’ to hold the assets or liabilities of a financial institution in difficulty, and a resolution fund to minimise taxpayers’ exposure to difficulties in the financial sector.
Other fiscal and structural reforms implemented, as required by the programme, were social protection legislation to increase the pension age to 66 years in 2014, 67 in 2021 and 68 in 2028, and the establishment of a Fiscal Advisory Council. The council will independently comment on whether the Government is meeting its own stated budgetary targets and objectives as well as assessing the soundness of macroeconomic projections.
Third quarter
Under the revised MoU the capital targets of Bank of Ireland, AIB, EBS and Irish Life & Permanent must be met by the end of the third quarter. The Central Bank and the authorities are expected to have identified separation of core and non- core assets and implemented the appropriate structure for the deleveraging of non-core assets. Progress is expected on establishing targets for loan to deposit ratios.
Earlier this year Anglo’s deposits were transferred to AIB, whilst those of INBS were transferred to Irish Life & Permanent. On 1 July EBS was merged with AIB and INBS was merged with Anglo Irish Bank, thus creating the Irish Bank Resolution Corporation.
The end of July was the target date for submission by the Irish authorities of five year bank restructuring plans to the troika. In the final week of the Dáil’s summer session the Government introduced the Central Bank (Supervision and Enforcement) Bill 2011, which strengthens the supervisory role of the Central Bank, including giving it the power to enforce the 122.5 per cent loans to deposit ratio requirements on the banks.
Labour market reforms required of the Government during the third quarter include the establishment of an independent regulator for the legal profession (a Legal Services Bill is expected in the autumn) and implementation of competition recommendations to reduce costs. The medical profession is also due to see changes, with the ending of restrictions on the number of GPs qualifying as well as other barriers.
The remit of the Competition Authority is to be strengthened, as is competition law. A time-bound plan is to be agreed with the European Commission Services by the end of September regarding the issue of retail premises sizes. An independent assessment of electricity and gas sectors is due to start during the third quarter.
Plans to reform the joint labour committees system have been stalled following a High Court ruling that the legislation providing for it permits an excessive delegation of law-making power to the Labour Court. The Minister for Enterprise, Jobs and Innovation had been working on proposals for reform following a review of the issue. The EU- IMF programme commits the Government to discussing the findings of the review with the European Commission Services during this quarter.
Following the High Court ruling Minister Bruton said he will produce legislation to completely overhaul the system, and it will receive priority drafting.
Fiscal reforms will include the much anticipated comprehensive expenditure review. The review, the first of its kind in Ireland, is expected to include three year expenditure allocations for departments, underpinned by Ireland’s fiscal targets as outlined in the EU-IMF programme.
The public service pension system for new entrants is to be reformed and to take effect in 2011. Pensions will be based on career earnings, index-linked to consumer prices and the retirement age linked to the social welfare pension age. New entrants to the public service will be paid 10 per cent less than current workers on the same grade.
Finally, the Irish auth
orities are committed to implementing measures to limit the local government contribution to general government borrowing.
Opposition
Whilst the Government may be pleased with progress to date, it continues to receive criticism on the programme, both inside and outside the Dáil. Fianna Fáil had focused on the Government’s failure to get the deal’s interest rate until it was achieved, and has started questioning its commitment to positively engage with proposals on a common consolidated corporate tax base (CCCBT), which the Taoiseach has previously criticised. Sinn Féin has focused on the cost of the deal to the taxpayer and the loss of sovereignty. Protests about the deal continue to take place sporadically, whilst protests about cuts in public services increasingly link such decisions to the programme’s requirements.
