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20 November 2013

Irish Minister for Finance: Statement on the Government's decision to exit the EU-IMF programme without a precautionary credit line


"The decision that the Government took is the right decision at the right time for Ireland. As a result of the commitment and determination of the Irish people to get the job done, we will be exiting the bailout in a strong position."

Banking risk as a basis for taking a precautionary credit line

There has been some suggestion that we should take a precautionary facility to address some potential risk associated with the stress test to be conducted in advance of the establishment of the Single Supervisory Mechanism (SSM) in the second half of next year.

There is no evidence that either this test, which is to take place next year, or the current asset quality review being conducted by our own Central Bank, will generate any additional capital requirements for our banks. The Irish banks have, as at the end of June, strong capital ratios compared to the European average and are making good progress in returning to profitability which is a necessity if they are to meet the new higher capital standards under CRD IV. Our banks were stress-tested in 2011, and they were substantially recapitalised on foot of those tests. It is worth reiterating here that €64 billion in total has been provided by the State to the domestic banking sector over the past five years - some 40 per cent of GDP – to ensure a stable capital base. When account is taken of the private sector contribution the figure rises to over €86 billion.

I should point out that the minimum core tier one capital requirement at the time our banks were recapitalised was 10.5 per cent. The stress tests for Spain and Cyprus were conducted on a 9 per cent ratio and the SSM test will be conducted on an 8 per cent ratio; although the exact details of what this new ratio will consist of have yet to be confirmed. In addition to this, one should bear in mind that there has been some recovery in the economy and particularly in property prices since the previous stress tests were carried out while interest rates are also substantially lower than was modelled...

The final point I would make is that applying for a precautionary credit line would not actually cover the risk should a wider problem emerge in the euro area, for example arising from the stress tests in late 2014, not that I am suggesting that such a risk might materialise.

ECB OMT

Since we announced our decision last week, the issue of eligibility for the ECB’s Outright Monetary Transactions or OMT has been raised... Having a credit line does not of itself guarantee access to OMT. It is a necessary, but not sufficient condition. In that respect, in the absence of systemic risk, the position in relation to Ireland is not fundamentally changed by the Government’s decision last week not to seek a precautionary credit line.

Post-Programme Surveillance and Economic Governance

Once we exit the programme next month we will be subject to post programme surveillance and a different form of monitoring by the EU and the IMF than when we were in a programme. There will be reviews every six months. This has been a long-standing feature of IMF programmes, and is also now a feature under the new EU governance rules.

This is quite normal and is part of the wider governance changes that have been put in place at the EU level for all Member States to improve the way the euro area functions. In fact, the new governance arrangements for all eurozone Member States help deal with some of the major problems that faced the euro area in the past and they will help avoid such problems emerging in the future. These new governance arrangements provide reassurance to the markets. They provide an early warning system if problems begin to emerge, they reduce the risk of contagion spreading from one Member State to another, and they increase peer review pressure to help ensure responsible policies are pursued by all Member States in the euro area.

These new governance arrangements are important for small Member States with very open economies such as Ireland as it ensures that large Member States are pursuing policies that are in the interests of the euro. Of course, it works both ways and we must act responsibly too and the post-programme surveillance arrangements must be seen in that context. Already, in the past two weeks we can see how these enhanced surveillance and governance arrangements will operate with the Commission giving warnings on a number of large Member States. 

Conclusion/Next Steps

All along I indicated that the decision on a precautionary credit line was finely balanced and since the announcement of the decision many commentators have also acknowledged that to be the case. That said, taking all factors into account, I am of the view that exiting our EU-IMF programme of financial assistance without a pre-arranged precautionary facility or backstop is the right decision for Ireland and now is the right time to make this decision.

This I believe, is an assessment that is widely held both in Ireland and abroad, especially based on the generally positive reaction to our decision. The complete lack of financial market reaction, in terms of no change in yields or market liquidity, illustrates the market’s view that the Government’s decision was both correct and timely. Exit without a prearranged precautionary credit line represents greater normalisation, with Ireland now subject to EU economic coordination, fiscal surveillance, and governance rules that apply to other EU and euro area Member States that are not in a programme of assistance. 

This Government decision is the latest in a series of steps to return Ireland to sustainable growth and job creation. Confidence in Ireland has improved considerably in recent months and interest rates on Irish Government bonds are at now record lows. Like most other sovereign eurozone countries, from 2014 we will be in a position to fund ourselves normally on the markets. Interestingly, our yields are now lower than the yields for some of the eurozone countries that would have had to approve a precautionary credit line for us. 

Following exit from our programme we will also have a clear strategy in place. The next steps will be to continue on the path that we have been pursuing for some time – an economic strategy that is growth-enhancing, managed within strict fiscal frameworks while reinforcing programmes supporting employment and opportunity.

We are preparing a Medium-Term Economic Strategy which will articulate the key principles that will underpin economic policy for the period to 2020. This strategy will address the key policy areas such as education and training, labour market activation, industrial/innovation, access to credit, competition and budgetary policy and will complement the more short-term focus of other related policy efforts such as the Action Plan for Jobs.

We have lived up to our programme commitments, we have stabilised public finances and introduced frameworks for economic management supported by independent oversight.  Recent indicators are showing the continuation of the recovery with higher employment, renewed growth, lower household debt and an underpinning of residential and commercial property values.  While there are challenges and risks, we are confident that over the past three years we have demonstrated a strong track record of managing the programme and of ensuring that we are now normalising the economic and financial situation into the future.

Full statement


Government wins vote over bailout

The Irish Times reports that the Government had an overwhelming 95 to 25 Dáil majority in support of its decision to exit the EU-IMF bailout without a precautionary credit line. View



© An Roinn Airgeadais (Irish Department of Finance)


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