The Government’s efforts to ease its path through the current EU-IMF programme and to avoid another intervention are being helped and hindered by the same narrative of possible debt relief. As with political speculation before the Fiscal Treaty referendum on a possible re-structuring of the €28 billion Irish Bank Resolution Corporation promissory note, the promise to break the link between Irish sovereign and banking debt following June’s European Council summit meeting has receded.
In its Article IV and seventh programme review report, published in September, the IMF noted the potential impact of a break between sovereign and bank debt on Irish debt dynamics. If the European Stability Mechanism invested €24 billion in the banks (the value of bank equity increase under the EU-IMF programme), and the Government used the proceeds on debt reduction, government debt would drop by 14.5 percentage points to 105 per cent of GDP in 2013.
Despite the lack of clarity on debt relief, yields on Irish bonds continue to fall. Treasury bills sold in October had yields of 0.7 per cent, down from 1.8 per cent in July. The 3.6 times over-subscribed bond auction compared with a 0.77 per cent yield for similar three-month bills sold by Italy last month.
The Government’s major EU-IMF requirement for this quarter is the Budget, when it must deliver at least €3.5 billion in adjustments to reach a debt to GDP ratio of 7.5 per cent in 2013. €1.25 billion must come from tax changes: a broadening of the income tax base, a property tax, the re-structuring of motor tax, a reduction in tax expenditures, and increases in excise duty and other indirect taxes.
€2.25 billion in cuts will be found, according to the memorandum of understanding, through reductions in social expenditure, the public sector pay and pension bill and capital spending. The agreement adds that any of the measures outlined can be substituted by measures “of equally good quality based on the options identified in the Comprehensive Review of Expenditure.”
Progress assessments on the re-structuring of the banking system are scheduled for the final quarter of 2012. These include:
• a review of developments relating to the 2011 prudential capital assessment requirements;
• an update on addressing loan arrears and unsustainable debt in banks’ mortgage and SME loan portfolios, and on the Central Bank’s strengthening of financial supervision; and
• a report on steps to strengthen the credit union sector.
In its report on the programme’s seventh review, the European Commission outlined the banks’ weak profitability “reflecting still-growing non-performing loans (NPLs), a high overall cost of funding (due to high deposit rates), low margins on new business and low-yielding legacy loans, and one-off costs for operational restructuring.”
In September, the Government published the Credit Union Bill 2012 to strengthen the credit union sector. It provides new requirements in the areas of reserves, liquidity, lending and risk management. Term limits for directors (nine years in a 15-year period) are also contained in the Bill.
By the end of the year, the Government must also show the troika that sufficient progress has been made in strengthening competition law enforcement and meeting the job activation targets set out in the ‘Pathways to Work’ plan.
While the Government will have cleared a major hurdle if the Budget is passed, it is far from certain if next year will be the last in the EU-IMF programme.