European Commission

Directorate-General for Economic and Financial Affairs

Economic Adjustment Programme for Ireland

Spring 2013 Review

EUROPEAN ECONOMY Occasional Papers XXX

ACKNOWLEDGEMENTS

The report was prepared in the Directorate General for Economic and Financial Affairs under the direction of István P. Székely, Director and European Commission mission chief to Ireland, and Martin Larch, Head of Unit for Ireland, Poland and Lithuania.

Contributors:

Davide Lombardo, Quentin Dupriez, Martin Larch, Kristin Magnusson, Danila Malvolti, Jānis Malzubris, Marie Mulvihill, Nigel Nagarajan, Wolfgang Pointner, Graham Stull, Jacek Szelożyński and Rada Tomova. Input and comments from Álvaro Benzo (DG ECFIN), Brigitte Brockmoeller (DG EMPL), Martin Cecot (DG ECFIN), Giuseppe Carone (DG ECFIN), Pierre Gaudillat (DG ECFIN), Dirk Van Den Steen (DG SANCO), Ana Xavier (DG ECFIN) and the financial crisis task force of the Directorate General for Competition are gratefully acknowledged.

Comments on the report would be gratefully received and should be sent, by mail or e-mail to:

Martin Larch,

European Commission,

Head of Unit responsible for Ireland, Lithuania and Poland

CHAR 14/174

B-1049 Brussels

E-mail: martin.larch@ec.europa.eu

Contents

Executive summary 6

1. Introduction 9

2. Recent economic developments and outlook 9

3. Policy outlook 18

3.1 Fiscal policies 18

3.2 Financial sector policies 26

3.3 Structural reforms 30

4. Financing issues 37

5. Risks 38

List of abbreviations 40

Annex 1: Programme Implementation 41

Annex 2: Debt sustainability analysis 46

Annex 3: Supplementary tables 48

Annex 4: Updated programme documents 51

Figures

Figure 1: Real GDP growth and contribution from select components Error! Bookmark not defined.

Figure 2: HICP price levels Error! Bookmark not defined.

Figure 3: Unemployment 11

Figure 4: Annual change in residential property prices 11

Figure 5: Structural employment indicators 12

Figure 6: Yields on select Irish and peripheral banks' covered bonds 14

Figure 7: Retail and corporate deposit flows and interest rates 14

Figure 8: Eurosystem funding 15

Figure 9: Lending to households and NFCs 15

Figure 10: New mortgage lending flows 15

Figure 11: New business rates: mortgage and NFC loans, HH and NFC deposits 15

Figure 14: General government balance projection Error! Bookmark not defined.

Figure 15: Nominal GDP projections Error! Bookmark not defined.

Figure 12: Pre-crisis gains in per-capita consumption and post-crisis declines 17

Figure 13: Problems facing Irish SMEs 18

Figure 16: Deficit projections and EDP ceilings 23

Figure 17: Revenue and expenditure growth 23

Figure 18: The role of Individual Health Identifiers (IHI) in a functional eHealth system 25

Figure 19: water services, efficiency and cost indicators 35

Figure 20: Legal services costs in perspective 36

Figure 21: Debt repayment schedule Error! Bookmark not defined.

Figure 22: Debt-stabilising primary balance in baseline projections 47

Figure 23: Government debt projections 47

Tables

Table 1: Revised macroeconomic framework 16

Table 2: 2013 fiscal accounts 21

Table 3: Budgetary projections of the stability programme 24

Table 4: Financing requirements Error! Bookmark not defined.

Boxes

Box 1: Ireland's 2013 Stability Programme 22

Box 2: eHealth priorities remain key to structural improvements in health care 24

Box 3: Activation effectiveness of employment support schemes 32

Box 4: The high cost of legal services continues to cause problems 35

Executive summary Ireland has come a long way towards addressing the external and internal macroeconomic imbalances accumulated prior to the crisis. On the back of strong political ownership, coupled with appropriate programme design, the steadfast implementation of the Irish adjustment programme is increasingly delivering in terms of regaining market access and making progress towards sustainable economic growth. In view of the size of the macro imbalances and banking problems at the start of the programme, there is a need to safeguard achievements against complacency and to complete the adjustment process, as imbalances in some areas remain significant. The economic recovery is continuing at a moderate but steady pace. Output is growing above the euro area average and employment has started rising. The drag from domestic demand was lower than previously anticipated in 2012, on account of better-than-expected resilience in private consumption and some initial recovery in investment. Private sector employment has also grown on a yearly basis for the last two quarters of 2012. Market confidence in Ireland's prospects continues to improve, with yields on medium-term bonds back to pre-crisis levels. Recent policy decisions of the EU and the ECB have strengthened market confidence further. In particular, the Council agreed in principle in April 2013, to extend the maximum average maturity of EFSM and EFSF loans by 7 years; the decision will be formalised end June 2013. In addition to the arrangement on the promissory notes, this has facilitated two successful sales of new Irish debt, including with a 10-year maturity in March, with steadily declining yields in secondary markets. It has also enabled Ireland to build significant cash buffers, which are projected to amount to EUR 22 bn at the end of 2013. Against this backdrop, the authorities' compliance with programme conditionality remains generally strong. Most milestones for 2013Q1 were met in a timely fashion (the exception was a report on comparative health costs, which has been outsourced and is now expected to be delivered in the next few weeks). Progress on some structural reforms initiated earlier in the programme (e.g., the introduction of household water charges, the reform of the legal services, and the establishment of a central credit register) has been slower than expected. Fiscal consolidation objectives have so far been achieved, but the deficit remains high. The 2012 deficit was significantly below the programme ceiling, though this reflected in part favourable one-off developments. The structural adjustment of the fiscal position is expected to continue in 2013, although a series of deficit‑increasing one-off elements means that only a marginal reduction in the headline deficit is expected in 2013. Fiscal data (on a cash basis) through April have also evolved broadly in line with programme expectations. Yet continued effort is required to remain within the agreed programme ceiling of 7.5% of GDP for 2013 (including in particular the effective implementation of the recent agreement with public service trade union to deliver further cuts in the public pay and pension bill), further reduce the deficit over the medium-term as per the outstanding excessive deficit procedure, and put the public debt ratio on a firm downward trajectory. Important challenges remain also in other policy areas, requiring continued determined action. These include the high unemployment rate and its worryingly large long-term component, the large and still growing (albeit at declining pace) bank arrears, the large debt overhang on both households and corporates (especially SMEs), and banks' weak profitability. Unless these challenges are vigorously addressed, they could stifle the demand and supply of credit, put a brake on the incipient recovery of domestic demand, endanger the prospects for continued successful fiscal adjustment, and further weigh on the banks' profitability. With the appropriate input from the national supervisor and regulator, banks need to step up their efforts to address troubled loans. Some momentum on mortgages is visible, as a result of the recent establishment of targets by the Central Bank of Ireland (CBI) for banks to offer sustainable restructuring solutions to troubled mortgages. But SME loans also require immediate attention (some 25% of SME/corporate loans were impaired at end December 2012, more than half of the total stock of outstanding SME lending is property-related). Addressing the extensive debt overhang in this key sector is equally important to support the economic adjustment and recovery. At the same time, it is essential that payment discipline is not compromised. The soon-to-be-operational personal insolvency framework represents a key step towards facilitating private sector balance sheet repair (and as such it should be equipped with all necessary infrastructures, in terms of a sufficient number of licensed practitioners and adequate dedicated resources for the courts, from the start). To avoid adverse effects on borrowers' payment discipline, it needs to be supported by the completion of other ongoing reforms, such as the elimination of the legal impediments for banks to repossess their collateral when necessary and the revision of the code of conduct on mortgage arrears to better clarify mortgage borrowers' rights and the obligations (especially in terms of good-faith cooperation). Addressing structural issues in the labour market remains a priority. Over the past few years the labour market has experienced a sharp increase in overall unemployment (particularly acute for the youth) and rising skills mismatches. Government policies to address these issues have rightly focused on putting in place activation policies, reforming vocational education and training and seeking to foster job-creation. Progress however could have been faster in light of the scale of the problem. Some bottlenecks are especially evident when it comes to providing a uniform level of service to unemployed across the country. Other reforms are also continuing, though in some cases delays are accumulating. The authorities have identified new programme milestones to guide the reform of the health sector, while postponing to 2014Q4 (from January 2014) the introduction of water charges for households, to allow for more dwellings to be metered and thus enhance the acceptability of this measure. Another important reform facing obstacles on the way towards completion is that of the legal services, which remain sheltered from competition and a drag on the economy's overall competitiveness. More efforts are needed to overcome the current deadlock so as to complete the parliamentary treatment of the Legal Services Regulation Bill, which was first published by the government under the programme in October 2011. The strategy to subject PCAR banks to a meaningful capital assessment under the programme has been adapted in light of the evolving calendar for the next European stress testing exercise, envisaged to take place in 2014, before the ECB fully assumes its supervisory role under the Single Supervisory Mechanism (SSM). The diagnostic of the Irish banks will be conducted ahead of, but in close proximity to, the forthcoming SSM/European Banking Authority (EBA) test and is likely to take place in H1 2014. This will ensure the maximum possible extent of consistency in terms of methodology, scenarios, capital requirements, etc. In the meanwhile, and in preparation for the SSM/EBA exercises, a series of supervisory steps will be undertaken by the Irish authorities in consultation with the troika and with the participation, where appropriate, of external consultants. In particular, a balance sheet assessment will be completed before the end of the programme, to inform the supervisor and the banks, as well as the Troika, about actions that can be taken to strengthen banks' balance sheets ahead of the SSM/EBA exercises. A successful completion of the 10th review triggers a disbursement of EUR 1 bn from the EFSF. The IMF and the UK will disburse, respectively, EUR 1 bn and EUR 0.5 bn. This will bring the total amount authorised for disbursement under the programme to 92.9% of the overall international assistance of EUR 67.5 bn.

1. Introduction

A joint European Commission (EC)/European Central Bank (ECB)/International Monetary Fund (IMF) (henceforth, the "troika") mission visited Dublin during April 23-May 2 2013 for the 10th review of Ireland's EU/IMF‑supported economic adjustment programme. Compliance with the programme milestones set for the first quarter of 2013 remained strong overall though with occasional delays—see the compliance monitor in Annex 1 for a detailed account.

The mission discussed recent economic and financial developments as well as the outlook (section 2), the main policy challenges (section 3),[1] and the government funding situation (section 4). The updated Memorandum of Understandings on Specific Economic Conditionality (MOU), reflecting exchanges and agreements with the authorities, is included in Annex IV, together with other updated programme documentation.

The mission also held constructive discussions on how best to underpin exit from the programme, including in consideration of the evolving calendar for the next round of European banks' stress tests prior to the ECB fully assuming its supervisory role under the Single Supervisory Mechanism (SSM) and currently envisaged in the early part of 2014. No final conclusions have been drawn and discussions will continue in the coming months.

2. Recent economic developments and outlook

The recovery in the Irish economy continued in 2012, and is becoming more broad-based. Real GDP grew by 0.9% in 2012 (0.7% was projected at the time of the 9th review). Domestic demand growth has also proved stronger than anticipated. Private consumption fell by 0.9% in annual terms, almost a full percentage point less than expected, on the back of modest but positive annual growth in the second half of 2012. Also government consumption declined somewhat less than had been estimated at the time of the 9th review. Gross fixed capital formation expanded by 1.2% after contracting by double-digit figures for four consecutive years. While this expansion was mainly driven by investment in aircrafts, other investment categories also appeared to have bottomed out. Nominal GDP grew by 2.9% in 2012, supported by favourable terms of trade developments while inflation continued to be muted in April (0.5% annually) on the back of declining price pressures from energy and mortgages. Aggregate income as captured by real GNP grew even more strongly in 2012 (by 3.4%, after falling by 2.5% in 2011), though this series is traditionally very volatile as it reflects large and lumpy flows related to the profits in the multinational sector.

Figure 1: Y-o-y real GDP growth and contribution from select components || Figure 2: HICP price levels

||

Source: CSO. Note: Annual growth rates; contributions may not add due to chain linking || Source: Eurostat. Note: Refers to HICP index, rebased to January 2004 = 100. The straight line refers to the hypothetical HICP level resulting from a 2% annual growth rate approximating the ECB's definition of price stability, i.e. to maintain inflation rates below, but close to, 2% over the medium term.

High-frequency indicators suggest that the modest economic expansion has continued in the beginning of 2013. Industrial production grew by 2.5% q-o-q on a seasonally adjusted basis in quarter of 2013, reversing some of the weak performance of the high-tech and chemical sectors seen during the second half of 2012. The most recent survey indicators such as manufacturing and services PMIs suggest that a relatively modest expansion can also be expected going forward. Retail sales, services indices and housing market indicators have been relatively weak with flat or small annual negative growth rates during the first quarter of 2013, although this might to some extent be driven by temporary factors such as inclement weather and changed incentives for timing of car and first home purchases.

External performance continues to be solid despite headwinds from weak demand from European trading partners. The current account surplus surged to 4.9% of GDP in 2012, reflecting not only the contraction in domestic demand, but also the competitiveness gains achieved through increased productivity, inflation continuously below the euro area average, and cost-cutting measures including on wages. However, recent research suggests that a large share of the current account improvement is due to firm-specific factors and cannot all be ascribed to competitiveness gains.[2] Persistent weakness in trading partner demand is nevertheless affecting demand for merchandise exports, which fell by 4.9% on a seasonally adjusted basis during the first quarter of 2013 compared to the last quarter of 2012, also on account of the anticipated expiration of pharmaceutical patents. Given the high service import content of pharmaceutical sector exports, growth rates of services imports were comparatively weak in the second half of 2012 and most likely buffered the effects on the trade balance. The rise in services exports, which have expanded by around 10% in annual terms every quarter since the second half of 2010, has partly substituted for weak goods export developments.

Encouraging private sector employment gains have been recorded, though against a labour market still fraught with serious structural weaknesses and challenges. Private sector employment showed small but positive annual growth rates during the last two quarters of 2012, contributing to stabilising the unemployment rate at 14% of the labour force for the third consecutive month in April 2013, a full one percentage point less than a year earlier. This was also enabled by a shrinking labour force and significantly higher reliance on part-time work, especially for males, although the latter phenomenon is not unusual in the initial stages of recovery. However, the long-term unemployment rate remains high among all age groups for both sexes, with the situation particularly severe for the youth and the low-skilled (Figure 5). The crisis has reinforced the structural shift in the labour market towards more highly qualified jobs, as employment among those with tertiary education steadily increased in the past few years while employment among those with primary and secondary education declined significantly.

At the same time credit extension to the domestic economy remains weak (Figure 9, Figure 10). Credit advanced to households decreased by 4.1% year-on-year (yoy) in March 2013 (reflecting a 12.1% decline in consumer lending). Loans to Irish resident non-financial corporations (NFCs) declined by 4.1% yoy at a similar pace to preceding months (Figure 9). The stock of mortgage loans is 6% higher on an annual basis at the end Q1 2013, though this reflects increased activity in Q4 2012 (56% annual increase reported in Q4 2012) as, according to data released by the Irish Banking Federation (IBF),[3] there was a decrease in mortgage lending of 65.8% quarter-on-quarter (qoq) in Q1 2013 and a fall of 21.4% yoy. While the IBF reports that the first quarter is traditionally the weakest in any year and quarterly data tends to be volatile, the decrease between Q4 2012 and Q1 2013 was more than double that experienced between Q4 2011 and Q1 2012. This sharp decrease may reflect the end of the tax incentive at the end of 2012 for first time buyers whose share of mortgage lending fell to the lowest levels since Q2 2011.

Figure 3: Unemployment || Figure 4: Annual change in residential property prices

||

Source: CSO. Note: In percent. || Source: CSO. Note: In percent.

Figure 5: Structural employment indicators ||

Unemployment rates increased sharply across all age groups for both men and women between Q4 2007 and… || … Q4 2012, with a particularly acute situation for young male job seekers. ||

|| ||

Temporary contracts have become significantly more prevalent… || …while part-time employment among men has more than doubled. ||

|| ||

Employment never ceased increasing for people with higher education … || … while low-skilled young people have suffered the most from the rising unemployment rate. ||

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Source: Eurostat || ||

Fiscal consolidation objectives have continued to be met. The 2012 fiscal deficit (net of one-off financial sector support measures, which are excluded from the EDP deficit ceilings for Ireland) was substantially lower than the programme ceiling (7.6% of GDP versus 8.6% of GDP), reflecting continued determined budgetary implementation and strong revenue collection, but also favourable surprises in one-off revenues. As regards 2013, the cash deficit through April is broadly in line with the programme profile, and some 14% lower than the same period last year, mainly due to the proceeds from the sale of contingent capital notes in BOI and the yoy reduction of voted expenditure, partially offset by the ELG payments in March 2013 following the liquidation of IBRC (Table 2).

Banks continue to make progress towards a more sustainable funding structure and, more slowly, adequate profitability. Deposits in the three Irish-owned banks (BOI, AIB, PTSB) have remained resilient[4] despite significant reductions in offered rates (Figure 7), the phasing out of the ELG and the haircuts imposed on non-insured deposits in Cyprus. The reliance on Eurosystem funding has also been further significantly reduced,[5] mostly as a result of the liquidation of IBRC (Figure 8). Cost reductions are also progressing, though much more remains to be done in this area to bring down costs in line with the reduced size of banks' balance sheets. Net Interest Margins (NIM) have improved for BOI in 2012H2, while staying broadly flat-to-marginally-declining for AIB and PTSB. This reflects mostly developments on the funding side (Figure 6), though of note some adjustment has taken place also on the lending rates (most recently AIB increased the lending rate on its SVRs, while BOI increased the spread on part of its UK residential mortgage book—see also Figure 11). The recent removal of the ELG at end March continues to improve the NIM as the guarantee rolls off maturing deposits.

However, concerns with respect to asset quality remain. Arrears continue to trend upward, though at a somewhat slower pace. At the end of Q1 2013, non-performing loans (NPLs) accounted for almost 24% of the total loan books for the domestically-owned banks. This increase from 18% at end Q1 2012 is the result of a combination of deleveraging of the loan books and a further deterioration in asset quality. The book that has seen the greatest increase in the proportion of NPLs over the period is the residential mortgage book, particularly the Irish buy-to-let (BTL) segment, where NPLs increased by 16% yoy. The levels of NPLs at end-Q1 2013 were higher than the PCAR 2011 base case across all loan categories.

The outlook for profitability also remains subdued, especially for banks with a large proportion of low yielding "trackers" on their balance sheets.[6] From 2003 to 2008 the tracker rate and the Standard Variable Rate (SVR) closely followed each other. However, since 2008 they have diverged widely[7], with a SVR for a new mortgage ranging between 4.04% - 4.3%[8] at the domestically owned banks. Given that nearly 54% of the domestically owned banks' Irish mortgage books are tracker mortgages they represent a considerable drag on the banks' profitability outlook for years to come.[9] The Net Interest Margin for each of the banks fell in the past two years ranging from 0.92% - 1.4% in 2011 to 0.72% - 1.25% in 2012 (excluding ELG fees). Interestingly, although they feature substantially lower interest rates, trackers have a delinquency rate not dissimilar to that of the SVRs, possibly reflecting their higher loan-to-value (LTV) ratios on average (itself a reflection of their vintage, with approximately 85% of trackers provided between 2004 and 2008).

For 2013 and beyond, projections of real GDP have been kept largely unchanged although the composition has changed somewhat compared to the 9th review (Table 1).[10] Following the better than expected outturn for private consumption and domestic demand during the second half of 2012, the projections for these expenditure categories have been revised up, resulting in a smaller drag on growth from domestic demand in 2013 and the coming years. At the same time, forecasts for most trading partners demand have been downgraded since the time of the 9th review which accordingly has prompted slight cuts in export growth forecasts compared to the last set of projections. Based on recent data, contributions from outward migration to the labour force are expected to be somewhat more pronounced than previously thought, resulting in a somewhat slightly lower rate of unemployment compared to the forecast at the time of the 9th review.

Figure 6: Yields on select Irish and peripheral banks' covered bonds || Figure 7: Retail and corporate deposit flows and interest rates

||

Source: Bloomberg Note: Data covers daily mid yield-to-maturity (YTM) closing levels for each bond. || Source: CBI Notes: Deposit flows data covers BOI, AIB and PTSB. Deposit rates data covers all Irish resident banks for fixed term <2 years. HH=household; NFC=non-financial corporates; NBFI=non-bank financial intermediaries. ||

Figure 8: Eurosystem funding || Figure 9: Lending to households and NFCs

||

Source: CBI, Department of Finance Note: Data covers BOI, AIB/EBS, PTSB and IBRC (up to February 2013); ELA is proxied by the CBI's "other assets" series through March 2012 and by "other claims on euro area credit institutions" thereafter. || Source: CBI Notes: Data for households includes mortgage loans. Figure shows annual rate of change (%).

Figure 10: New mortgage lending flows || Figure 11: New business rates: mortgage and NFC loans, HH and NFC deposits

||

Source: Irish Banking Federation (IBF) Note: Figures relate to all new lending (flows) secured by residential property extended by IBF's members. (4 Quarter Moving Average) || Source: CBI Notes: Rates on mortgage loans are for floating rates & up to 1 year fixation. Rates on NFC loans are for > EUR 1 mn with floating rates & up to 1 year fixation. Deposit rates cover deposits with agreed maturity.

Table 1: Revised macroeconomic framework

Source: Commission Services' calculations.

In spite of the deep macroeconomic adjustment, revisions of economic growth forecasts have been comparatively contained since the onset of the programme, and have reflected mostly deteriorations in the external outlook. However, the gap has been narrowing over time and, most importantly, economic growth stayed in positive territory. This is likely to reflect the interplay of a number of important elements, including an appropriate degree of realism of programme projections, growth-friendly design of the programme to the extent possible, and the resilience of the Irish economy, which have helped to underpin consistently strong programme implementation. The shortfall in nominal GDP (the basis for many public finance variables) vis-à-vis the projections, as shown in Error! Reference source not found.13 was also somewhat smaller than the shortfall in real GDP, which has supported the (over-) achievement of the fiscal targets.

Figure 12: General government balance projection || Figure 13: Nominal GDP projections

||

Source: Commission Services' calculations. || Source: Commission Services' calculations.

Going forward, substantial uncertainty around domestic demand projections prevails, but can be reduced with consistent policy implementation:

· On one hand, there is evidence of potential scope for a rebound in consumption. Recent research[11] has shown that Ireland's decline in per capita private consumption of over 20% since the pre-crisis peak was both about twice as large and more protracted than even the other euro area crisis countries, suggesting that there could be ample pent-up demand going forward given the component's dominant GDP weight. The fall in consumption has been especially pronounced among young households, reflecting their larger exposure to unemployment, mortgage arrears and negative equity or the risk thereof.[12] These are factors that could be influenced by the reforms outlined elsewhere in this report. One motive for cutting back on spending is likely so-called buffer stock savings, i.e. to deleverage, which has also shown up as improvements in indicators of household debt sustainability, as well as the relatively high household savings ratio (12.5% in 2012).

· On the other hand, credit constraints could stifle a recovery in investment, especially by SMEs. While the majority of Irish SMEs continues to cite demand factors rather than fear of credit applications being rejected as a factor for not seeking bank financing, the perceived risk of not getting access to finance is growing. Although two independent data sources conclude that one in nine Irish SMEs appear to be credit constrained, those lacking access to credit are concentrated among small and young firms, further underlining the importance of sticking to policy efforts in this area given the recent evidence of their importance for job creation. [13]

Figure 12: Pre-crisis gains in per-capita consumption and post-crisis declines

Source: O'Connell, O'Toole and Znuderl (2013) Trends in consumption since the Crisis. ESRI

Figure 13: Problems facing Irish SMEs

Source: O'Toole, Gerlach-Kristen and O'Connell (2013) "Measuring Credit Constraints for Irish SMEs", ESRI

3. Policy outlook 3.1 Fiscal policies

The 2013 fiscal target remains achievable, though risks remain related to the planned pay and pension bill savings, cost containment in the health sector, and the winding down of IBRC. The medium-term fiscal plans, as per the 2013 Stability Programme, are consistent with the Council recommendation under the EDP. Looking forward, a timely delineation of the specific measures which will secure the planned medium-term consolidation would help remove uncertainty and enhance the credibility of the fiscal plans. The authorities continue to align their fiscal framework with the EU guidelines and regulations, including in terms of the implications of the "two-pack" for the budgetary process.

Current forecasts indicate that the 2013 fiscal deficit ceiling remains achievable, though buffers have decreased. The structural adjustment of the fiscal position is expected to continue in 2013, although a series of deficit‑increasing one-off elements is likely to interrupt the reduction of the headline deficit. Based on data through April and in light of available information, Commission services forecast the 2013 deficit at 7.5% of GDP (7.3% at the time of the 9th review), just in line with the programme deficit ceiling (Table 2). Tax revenue is projected to exceed the budget time forecast by 0.2% of GDP based on over-performance at the end of last year. Other positive developments include a higher-than-budgeted surplus payment from the CBI and receipts from the agreed sale of Irish Life Limited (which, however, is largely a financial transaction). Against that, however, the liquidation of IBRC and the exchange of the promissory notes with long-dated government bonds are now estimated to have a deficit-worsening impact of 0.1% of GDP for 2013. The Revised Estimates show somewhat higher departmental expenditure (less than 0.1% of GDP) largely due to a revision of the public service pay bill made in the context of the allocation of the planned savings from the pay deal under discussion with the unions (see below) to individual department. In addition Ireland's contribution to the 2013 EU budget is now estimated to be more than 0.1% of GDP higher than budgeted. This is largely due to the higher outturn of 2012 GNI as compared to the estimated level used in the 2013 budget. This will be partly offset by higher-than-expected bank guarantee as a result of the ELG scheme closing on on 28 March rather than end February and a higher than estimated level of liabilities

Several risk factors warrant close monitoring of budget execution and, if necessary, compensatory actions. These include: (i) a possible higher one-off cost from the liquidation of IBRC (the State is required to make up any potential difference between the amount paid by NAMA for IBRC's assets and the valuation of those assets made by the special liquidators); (ii) the effective implementation of the planned savings on the public sector pay and pension bill (0.2% of GDP in 2013— around half of which from paybill savings in the health sector in that year—cumulating to 0.6% of GDP by 2015) in light of the recent challenges to reach and implement a negotiated agreement with trade unions; (iii) continued pressures on health care budget,[14] and (iv) the possibility that, as happened in 2012, the planned receipt in 2013 of some 0.2% of GDP in dividends from AIB in the form of ordinary shares may be offset by corresponding government expenditure.[15]

It is therefore essential that the planned savings in the public service pay and pension bill are achieved. The public service gross pay bill represents about one-third of total government expenditure so that failure to secure the planned savings could significantly derail the achievement of the government's overall consolidation objectives, both in 2013 and in the medium term. Moreover, as pointed out in previous reports[16], there is still a significant differential between public and private sector wages after controlling for such determinants as education, experience and age. Reducing the unit cost of delivering public services, rather than the number of service providers, is important to limit the adverse impacts of the necessary consolidation on the provision of public services and on access to them for the most disadvantaged. This is especially important when it comes to the health sector, where around half of the 2013 pay and pension bill savings are assumed to be obtained.

The government has sought to secure these savings in a negotiation with public sector unions, to preserve industrial peace. A first negotiated deal, the so-called "Croke Park II" deal, was however rejected by union members. A revised agreement, the so-called Haddington Road Agreement (HRA), was published on 21 May 2013 and is to be decided upon by union memberships over the next few weeks. At the same time, legislation underpinning the Haddington Agreement was published. In addition to core pay and pensions reductions measures it contains contingency measures designed to permit the authorities to make the necessary savings sought under the agreement in case the agreement was not accepted. Based on currently available information, the government expects the HRA to deliver savings that are close to the budgeted EUR 300 mn in 2013. [17] In parallel to the cost saving objective, the agreement seeks to improve the effectiveness and efficiency of government employees, encourage flexibility with regard to redeployment, and put in place and/or improve performance management and work-sharing arrangements.

The authorities have also agreed to step up efforts to increase efficiencies in the provision of health services. As discussed in previous review reports, Ireland spends per capita comparatively more on the health sector than most EU countries, without achieving improved health outcomes. The government intends to pursue a so-called "eHealth" strategy (see Box 2), which is based on a stepped-up reliance on IT to improve allocation of resources and ultimately strengthen incentives for efficient outcomes at all levels (i.e., healthcare providers within the acute hospital sector, those in primary care, and the patient). This increased focus is welcome, considering the pressures that have been building on the health budget. Other areas that offer significant prospects of increased efficiency, as discussed in previous reports, include mandatory prescriptions by International Non-proprietary Name (INN) to encourage generic penetration,[18] a tighter internal reference pricing system (to base the reference reimbursable price on the lowest, rather than the average, price within the cluster), as well as prescribing protocols addressing therapeutic substitution in line with international best practices, and a faster entry into the market for generics once the related patent has expired.[19]

Monitoring, reporting, and evaluation of the Irish healthcare system need to be further strengthened. Currently, there are many fragmented information and monitoring systems on the provision of healthcare services, which negatively impact on the quality and timeliness of reporting. Some reports are produced on a timely basis (e.g. monthly surveys), but their accuracy is limited, mainly due to manual intervention and the need to consolidate information from many different regional databases. The authorities are committed to enhancing their monitoring capacity and tracking systems to better evaluate the effect of health reforms. By end-October 2013, a new framework will be adopted to reduce the existing fragmentation and streamline financial management and accounting systems and processes. When it comes to public hospitals, this is a priority to enable them to operate on a cost allocation basis, ensuring full recovery for the state of the costs arising from the use of public hospitals for the treatment of patients covered by private insurances. The authorities are also committed to the introduction of a case-based payment system for public hospitals. It intended that this system will commence on a shadow basis in 2013 ahead of the full implementation from 2014.

Table 2: 2013 fiscal accounts

The budgetary outlook through 2015 is consistent with programme understandings and the EDP recommendations, but greater clarity on the actual measures underpinning the planned consolidation would enhance its credibility. The 2013 Stability Programme published at end April 2013 (Box 1) presents lower fiscal deficits in 2014 and 2015 than the ceilings set in the December 2010 EDP recommendation (

Table 3), reflecting inter alia the gains generated by the promissory note operation.[20],[21] More explicit commitment and clarity on the specific budgetary measures for the outer years of the programme would enhance the credibility of the fiscal adjustment path.

Significant progress has been made to align the national budgetary framework to the EU economic governance rules. In particular, and reflecting extensive discussions with EC staff, the authorities have agreed to progress and, if necessary, amend the Ministers and Secretaries legislation (which establishes the legal basis for the already operational ceilings on aggregate and departmental expenditure), so as to ensure that they are both binding and consistent with the expenditure benchmark under the Stability and Growth Pact. Moreover, they are revising the budgetary process in line with the new "two-pack" requirements,[22] e.g. as regards the publication of the annual budget, which will be brought forward to before October 15;[23] and the conferral to the Irish Fiscal Advisory Council of the task to independently endorse the macro forecasts underpinning the Budget (legislation to this effect is being prepared).

Box 1: Ireland's 2013 Stability Programme Ireland submitted its 2013 Stability Programme (SP) to the European Commission on 30 April 2013. Over the programme period (2014-2016), the projected general government deficit, net of financial sector support measures, is within the deficit ceilings set out in the Council recommendation issued under the Excessive Deficit Procedure (EDP).[24] The programme restates the commitment to the fiscal adjustment presented in the November 2012 Medium-Term Fiscal Statement of EUR 3.1 bn (1.8% of GDP) in 2014 and EUR 2 bn (1.1% of GDP) in 2015, as well as demonstrates that savings from the replacement of the promissory notes with longer-dated government bonds are used to accelerate debt reduction. Taking into account revisions of potential output growth and revenue developments as compared to the standard budgetary elasticity, the annual average adjustment in the structural balance is estimated at around 2 % of GDP over period 2011-15. This is consistent with the structural adjustment recommended by the Council. The Irish Fiscal Advisory Council is established and active. The national fiscal framework has been strengthened by the Fiscal Responsibility Act. The already operational multi-annual expenditure ceilings will be soon put on statutory basis. A new single pension scheme for the public service employees has been introduced with pensions now calculated on the basis of career average earnings, and the minimum pension age increased to 66 years initially and to 68 years by 2028, in line with the state pension age increase. Long-term costs of the aging population are high as compared to the EU average and further pension system reforms are necessary. The 2013 SP updates Ireland's MTO to a balanced budget in structural terms (previously the MTO for Ireland was set at a deficit of 0.5% of GDP). The 2013 SP also includes the path towards the MTO beyond the programme period, i.e. beyond 2016. In particular, the MTO is expected to be achieved by 2018 when the structural budget surplus is estimated at 0.2% of GDP and is projected to improve further to 1.2% in 2019. After the correction of the excessive deficit in 2015, the structural deficit is projected to be reduced by 0.6 % of GDP in 2016 and 1% in 2017 and 2018. This is in line with the provisions of the SGP, which call for adjustment above the benchmark minimum annual improvement of 0.5 % of GDP for countries with high debt or pronounced sustainability risks. However, while the structural adjustment in 2017 and 2018 is appropriate, it could be more ambitious in 2016 in view of the high government debt level and the high risks to the long-term sustainability of public finances.[25] As to the expenditure benchmark, programme projections for 2016 and 2017 would seem to deviate from the respective provisions of the preventive arm of the Stability and Growth Pact (SGP) as the real rate of growth of expenditure net of discretionary revenue measures[26] is expected to exceed the lower reference rate of -0.7%. Moreover, the projected adjustment of the structural deficit is predicated on medium-term growth assumption that exceeds the medium-term reference potential growth rate used to calculate the expenditure benchmark. Thus, if confirmed by actual developments, Ireland faces the risk of non-compliance with the preventive arm in the future. Subject to the full implementation of the budgetary strategy, the government debt is projected to decline from around 123% of GDP in 2013 to 98% of GDP in 2019. This assumes a projected pickup in economic growth and a reduction in the currently high precautionary cash balances. The debt reduction plan in the programme exceeds the minimum linear structural adjustment required under the SGP and would ensure sufficient progress towards compliance with the debt criterion in the 2016-19 transition period (see note 5 and 6 to Table 3). Figure 14: Deficit projections and EDP ceilings || Figure 15: Revenue and expenditure growth

||

Source: Stability programme, Commission services' calculations ||

Table 3: Budgetary projections of the stability programme

Box 2: eHealth priorities remain key to structural improvements in health care Ensuring value for money in public health care in Ireland is essential if budgetary discipline is to be maintained in a way that does not compromise frontline services. In addition to immediate measures to bring wage costs under control, this will also require structural reforms to the way healthcare is delivered. eHealth policies can play a major part in this structural change. A cornerstone of any eHealth strategy must be a universal system of individual health identifiers (IHIs) for patients and healthcare professionals. As has been highlighted by Commission services in previous reports, such a system is in itself a significant means of achieving cost savings. Identifiers reduce the risk of duplication and medical error, and therefore improve operating efficiencies. But beyond this, IHIs are a first step in delivering: · More rational financial systems, such as the Money Follows the Patient model. · The roll-out of a full system of ePrescription (i.e. electronic prescribing and dispensing of pharmaceuticals). International evidence shows that ePrescription is a crucial means of achieving savings on volumes of pharmaceuticals, because it facilitates monitoring of interactions and side effects and allows for quick and rational assessment of prescribing practices, including the implementation of prescription protocols using patient-level longitudinal data. · More ambitious aspects of eHealth such as online referrals and consultations, which will drive down prices by bolstering competition. Of course, patient safety considerations must be duly respected. As with other reform initiatives in the health sector, implementation of eHealth policies has been slow in Ireland. The development of the new eHealth strategy – a programme commitment for end-Q2 2013 - is welcome, but must be sufficiently detailed and contain time bound elements that are delivered upon. Certain concrete steps in relation to the IHI – the key building block – have been agreed under the Programme, including a deadline (end-October 2013) for the introduction to the Oireachtas of the necessary legislation to establish IHIs on a statutory basis. Figure 16: The role of Individual Health Identifiers (IHI) in a functional eHealth system Considering the long lag for a full identifier system to be operational, a comprehensive effort is necessary to use and improve existing ICT systems for pharmaceutical reimbursement schemes (GMS, PCRS, etc.) to identify and eliminate waste and to create greater efficiencies. Moreover, monitoring and reporting systems should be further strengthened by streamlining the many information systems and tools in place to control healthcare services, some of which rely on manual data inputting and the consolidation of different and fragmented regional datasets. These reforms would also enable (and be further supported by) streamlining the hospital financial management and accounting systems, so that hospitals could operate on a cost allocation basis—a precondition to ensure the full recovery of the costs to the State arising from private patient treatment carried out in public hospitals.

3.2 Financial sector policies

Despite the significant progress made, concerns remain regarding the quality of Irish banks' assets. Appropriately, efforts to work through unsustainable mortgages are being accelerated, and provisioning guidelines updated. The reform of the personal insolvency regime is due to become operational in the next few weeks, and while this could provide much needed drive to deal with debt overhang in households' balance sheets in a sustainable manner, it could also undermine debt payment discipline, especially if lack of adequate resources in the court system leads to arrangements which are not sufficiently tailored to the effective capacity to repay of the individual borrower. To minimize this risk, complementary reforms such as the revised code of conduct for mortgage arrears and the removal of the legislative impediments to banks' ability to recover collateral in defaulted mortgages need to be implemented in parallel. Finally, the bank stress test timeline under the programme has been adapted in light of the evolving calendar of the next European bank diagnostic exercises in the lead-up to the SSM. The additional time needs to be used to ensure that the Irish banks are in the strongest possible shape when the ECB fully assumes its supervisory role under the SSM, presently expected at some point in the first half of next year.

The large stock of mortgage arrears remains a source of concern and risk to banks' asset quality. At the end of 2012 there were almost 123,000 primary dwelling house (PDH) and buy-to-let (BTL) mortgages in arrears for more than 90 days, representing 13% of the total mortgage books, with over 3% of all mortgages in arrears greater than two years. The provision of permanent restructurings has been limited so far with less than 10,000 (approximately 8%) permanent restructurings in place for customers in arrears greater than 90 days at end 2012.

The recent target-based framework appears to have spurred banks' efforts to address mortgage NPLs, but it is important that the loan modifications are sustainable. The banks report they are making good progress towards the recently announced mortgage restructuring targets[27] but the sustainability of the modifications is essential. To tackle this issue and ensure consistency[28] in treatment of distressed borrowers the authorities will, by the end of June, issue guidance to the banks relating to sustainable restructuring arrangement. The assessment of the sustainability of a proposed restructuring is to be based on affordability and sustainability of the arrangement from both the borrower and the lender’s perspective. The lender must evaluate, on a case by case basis, the actual and prospective servicing capacity of the borrower in relation to all outstanding debts and the capital implications for the credit institutions in terms of their prudential responsibility to minimize losses.

The target-based framework is now being developed for the distressed SME loan portfolios. The weakness in domestic demand continues to impact on asset quality in the SME loan portfolios and. at end 2012 25% of the domestically owned banks' SME/Corporate loan book was impaired. The workout of this loan book is further complicated by the overhang of property related debt; more than half of the total stock of outstanding SME lending (52%) is property related as opposed to trade related lending. Thus this sector poses a comparable threat to the health of the banks' balance sheets as the mortgages, and yet efforts to deal with unsustainable loans to SMEs have lagged. Dealing resolutely with these arrears is also important to reduce the debt overhang in this key sector. Key performance indicators (KPIs) designed by the CBI, to track SME debt resolution have been established and the banks are reporting on these since the end of March. Targets requiring the banks to complete a substantial share of durable restructuring arrangements for SME loans in arrears in 2013 are currently being finalized. Given the complexities of connected borrowers and to minimize undue adverse effects on payment discipline, it is essential that sustainable solutions are found on a case-by-case basis.[29]

More needs to be done to address BTL arrears. At the end of 2012 there were over 24,000 BTL properties in arrears greater than 90 days (about 1/3 of which were in arrears for more than 2 years), representing 27% of the total value of this loan book. The banks have begun to engage the services of rent receivers to directly collect the income from these loan assets. This approach has been successfully adopted by NAMA in relation to its portfolio of loan assets and has resulted in significant greater cash flow receipts from these assets.[30] Given the volume of long dated arrears in the BTL sector the number of receivers appointed to date appears low. The appointment of a rent receiver is not without costs, as a court order has to be attained and the receiver's fees have also to be paid, but given the inefficiencies and lengthy delays of the repossession system in Ireland there are many cases where a rent receiver may be a preferable choice to repossession. Obviously as this option is increasingly relied upon, a functional system of registration and notification of the appointment of rent receivers needs to be put in place to provide clarity for tenants.

In light of these elevated NPLs, and of the expected increase in restructurings, the authorities have updated the provisioning guidelines to ensure conservative provisioning across the domestically owned banks. A key objective is to provide greater clarity regarding the underlying health of the books e.g. by setting out the prudent criteria for a restructured loan to be classified as cured and the possibility for some of the provision to be released (importantly, under the updated guidelines, a loan cannot be deemed to be cured until there has been payment of principal and interest for at least one year). Furthermore, to promote greater consistency of provisioning treatment across institutions, the authorities will assess the banks' provisioning models against benchmarks parameters.

These amendments to the guidelines are welcome, as they enhance the transparency of the banks' provisioning levels while ensuring a cautious and conservative approach, to further strengthen banks' incentives to identify sustainable restructurings, the authorities intend to introduce an extra layer of rules-based provisioning with effect from 1 January 2014. For banks' assets that are (i) more than 90 days in arrears and (ii) for which no sustainable restructuring has taken place, banks would be allowed to use a valuation based on the expected net proceeds of collateral disposal only (i.e. banks would no longer be allowed to incorporate assumed or expected future cash flows from other sources in the valuation of these assets, as may be the case currently).

Moreover, a robust review of the underlying quality of the banks' balance sheets is required prior to programme exit, to inform banks' provisioning and financial planning going forward and help identify and remove any impediments to the provision of credit. In line with the evolving timeline for the forthcoming European stress test in the context of the ECB fully assuming its supervisory role under the SSM, the timeline for such diagnostics under the programme has been adapted. Specifically, the assessment exercise of the Irish banks' will now be broken down into a series of diagnostics in preparation of the full stress test, in accordance with the new EU methodology, ahead of though in close proximity to the upcoming SSM/EBA exercises. It is envisaged that this exercise will be held in the first half of 2014.

A key building block of the preparatory diagnostics will be a comprehensive Balance Sheet Assessment, to be finalised by end-November 2013. This will provide greater clarity regarding the underlying quality of the banks' balance sheet and the appropriateness of their risk-weighted asset (RWA) calculations for determining regulatory capital requirements. This assessment will consist of two elements: (i) an asset quality review, based on the updated Impairment Provisioning and Disclosure Guidelines of the CBI and (ii) a review of the appropriateness of RWA calculations, including sensitivity analysis to alternative assumptions and inputs. The first step will provide the supervisor with a quantitative assessment of impairment provisions and a review of the appropriateness of risk classification for all loan portfolios. The results will be communicated to the banks to help inform their assessments of loan loss provisions and any mitigating actions. The methodology for the asset quality review will take into account progress in developing the relevant SSM methodology and will be agreed with the troika by end July 2013.

This will be complemented by other work streams aimed at ensuring that the Irish banks are well placed for the SSM entry exercise. The authorities will assess banks' current capital positions relative to the requirements under CRD IV/CRR, and their profitability outlook through a forward-looking operating profit analysis under various funding costs scenarios. Options to potentially lower the funding cost of the banks' tracker books in order to enhance the banks' profitability outlook will also continue to be explored. This set of comprehensive measures will increase banks' incentives to pursue sustainable solutions for problem loans and provision in a prudent and conservative manner, and will also assist the banks with their financial planning. The process will also allow for the implementation by the authorities of specific mitigating actions prior to the European stress tests.

Institutional reform is being advanced to deal with the debt overhangs in private sector balance sheets:

· The personal insolvency system is on track to start accepting applications by end June [31] The Insolvency Service Ireland[32] (ISI) was officially launched on 18 April 2013 with the launch of its website and the publication of reasonable standard of living guidelines[33], which will ensure consistency in the calculation of debtor's debt servicing capacity for all personal insolvency applicants. The guidelines provide an extensive breakdown of the estimated costs of living for individuals and families in a broad range of scenarios. As they appear to be lower than what banks are currently offered as part of their long-term sustainable mortgage solutions, they do provide an incentive for the borrower to seek first a negotiated agreement with the bank and to resort to the Personal Insolvency route only when all else fails. One concern remains that —given the expected level of applications[34] relative to the current number of bankruptcies cases—the system might quickly run into capacity constraints. The authorities will shortly appoint a cadre of specialist judges to deal specifically with personal insolvency cases. Any other necessary steps should be taken to ensure the court system is sufficiently resourced in a timely manner.

· A protocol to deal with the situation of multiple creditors and unsecured debt has been brokered by the CBI[35] to facilitate resolution arrangements acceptable for both secured and unsecured creditors as well as for the individual consumer without the need to proceed to a full Personal Insolvency Arrangement (PIA) or bankruptcy.[36] At present, many debtors continue to prioritise unsecured debt over secured debt in order to maintain access to these credit lines, or resort to borrowing unsecured even after being offered a restructuring arrangement on the secured part of their debts. The pilot scheme is a welcome attempt to address the problem of unsustainable debts with multiple creditors, however the rejection of the pilot by the Irish League of Credit Unions (ILCU) is regrettable considering that approximately 1/3 of total unsecured debt (estimated at EUR 15 bn) is owed to the Credit Unions. It will be important that Credit Unions which participate in the pilot represent a cross-section of the broader population of credit unions to ensure the pilot examines the case of a representative sample of borrowers.

· The code of conduct on mortgage arrears is being revised to clarify the definition of "contact" and "co-operating borrower". This should facilitate pre-PIA restructuring agreements between the bank and a borrower by providing greater certainty regarding the appropriate terms of engagement and the obligations expected of both sides. The troika considered that the code should also be modified to permit modifications of the interest rate setting mechanism when these are advantageous to the borrower in the long term (e.g., moving with his/her agreement a customer from a tracker to an alternative mortgage product as part of a wider sustainable solution). This possibility is only envisaged in a limited number of cases, i.e. only where the alternative may be the loss of the family home.

Several pieces of important legislation will be enacted in the coming weeks, though progress on the introduction of a credit register remains slow. The Central Bank (Supervision and Enforcement) Bill, strengthening the ability of the CBI to impose and supervise compliance with regulatory requirements and to undertake timely prudential interventions, and the Land and Conveyancing Law Reform Bill, removing unintended constraints on banks' ability to realise the value of loan collateral in certain instances while providing additional new safeguards for the family home in repossessions proceedings are both set to be enacted by the end of the current Parliamentary session. However, limited progress has been made on the introduction of a credit register, and in fact the timeline envisaged for introduction has been further delayed since the last mission, with the authorities now intending to phase in the introduction of the credit register during 2015/2016, from early 2014 previously (the legislation was published in 2012 and the introduction of the register has been part of the programme since inception). The limited priority that the authorities assign to this important reform is surprising, considering how this institutional lacuna enabled the proliferation of multiple loans to the same borrower in the run up to the crisis,[37] and considering that problems with prioritising of secured loans and ensuring the stability of debt restructuring plans continue to occur (see above the discussion on arrears in multiple creditors' settings).[38]

3.3 Structural reforms

There have been dramatic structural changes in the labour markets over the past few years, not only with the sharp increase in overall unemployment, but also through the development of rising skills mismatches and the surge in youth unemployment. Government policies to address these issues have rightly focused on putting in place activation policies, reforming vocational education and training and seeking to foster job-creation. Progress has not been sufficiently fast in light of the urgency and scale of the situation, however, and more needs to be done on these three fronts. Delays have also been experienced in some other priority areas for structural reforms, including regarding the legal services and water sectors.

The government is addressing the challenges faced by the labor market via activation reforms and job creation initiatives. The authorities continue to make progress with the implementation of the Pathways to Work initiative, which seeks to establish proper activation mechanisms, have followed-up on their Action Plan for Jobs strategy with an updated plan for 2013 released in February, and are pressing ahead with reforms of the further education and training (FET) system. The pace of reforms and the resources mobilised, however, are at times insufficient given the scale and the urgency of the situation.

The capacity to meaningfully engage with job-seekers remains short. Regular engagement on a one-to-one basis is key for the effectiveness of activation services and to the provision of meaningful support to job-seekers. There are, however, currently only around 300 case workers for over 400,000 claimants on the Live Register and the Department of Social Protection (DSP) expects the number to increase only to 600 by end-2013 and perhaps up to 800 by end-2014.[39] This increase is expected to be reached through redeployment of existing staff, many of whom do not necessarily have the case-worker qualifications and would therefore need significant training of their own.

Rapid decisions and actions on the possible outsourcing of some activation services are therefore needed. The DSP has considered the outsourcing of some activation services to private providers and engaged external consultants at the end of 2012 for advice on the possible options. The analysis of options and decision-making process have been initiated in the first quarter of 2013, but progress has been slow. A decision at Cabinet level on whether to outsource (and, if so, how and to what extent) should be taken during the second quarter of 2013. A quick decision is called for and, if positive, extensive efforts should be made to ensure a rapid completion of the procurement process so as to provide the necessary support to jobseekers.

Special attention needs to be dedicated to re-skilling, up-skilling and training, in particular for the long-term unemployed and the youth. Structural labour market developments (see section 2) mean that efforts to improve the FET system and make it more attune to the needs of the labour market and of the unemployed are critical. The establishment of the SOLAS and Education and Training Boards (ETBs) should be a matter of priority. SOLAS, in turn, will need to rapidly develop a credible strategy to orient the provision of FET and ensure the delivery of high-quality and relevant programmes by the ETBs, in full consultation with relevant stakeholders. Consideration should also be given to enhancing work-based apprenticeships in collaboration with the private sector. In addition, Ireland will have to ensure that it avails of all opportunities offered to support its youth under the EU's Youth Guarantee, to which both regions will be eligible.

The level of service to unemployed across the country remains uneven. Intreo offices, essential for the provision of an integrated process of welfare and activation assistance, have only been opened in 11 locations so far, even though the reforms established under the Pathways to Work apply equally nationwide. This means that most of the population does not benefit from the "one-stop-shop" facility and the improved activation support it delivers. The authorities have encountered difficulties in establishing Intreo offices as scheduled, and indicate that they are likely to fall short of their target of 43 by end-2013. All recourses should be considered to address the planning, design and staff relocation issues that are generating these delays.

Faster action is also required to reform employment support schemes to increase their effectiveness. The authorities have started implementing some reforms following an internal review process and consultations with stakeholders in February 2013. In particular, they have initiated a pilot programme to create two strands for the community employment scheme: one properly focused on activation and progression towards the regular labour market, and one aimed at providing support to local communities for the delivery of social services. They have also recently revised the recruitment protocols for community employment to eliminate self-referral and provide a decision-making role to case officers. Although significant, these reforms are only a small component of the wider reforms proposed under the review conducted by the DSP. Many such reforms are left for further consultation and later decision, typically well into 2014. A greater sense of urgency in this reform process is warranted, and further consideration should also be given to a more fundamental rethink of some schemes to ensure that they effectively support jobseekers in returning to non-supported work (Box 3).

Job creation efforts continue, but much hinges upon a broad economic recovery. Aside from measures to improve the overall business environment and promote the development of key industries, the Action Plan for Jobs 2013 includes the launch in July of the JobsPlus scheme that directly subsidises the recruitment of the long-term unemployed. The scheme, which will replace the PRSI exemption scheme, is subject to a cap of 2,500 recruitments. It will therefore have a limited impact on job creation in the best of cases, and will be reviewed before a possible extension into 2014. Overall, the impact of the Action Plan for Jobs on job creation is unknown, but the authorities have committed to conduct a thorough evaluation of the 2012 and 2013 plans in order to guide further efforts into 2014.

Box 3: Activation effectiveness of employment support schemes Ireland has established a range of employment support/activation schemes, which were recently reviewed from a conceptual perspective. Few of them, however, have been evaluated from a cost/efficiency perspective, i.e. in terms of the extent to which they increase the ability of the unemployed to return to non-supported employment and the net benefits to the DSP. An exception is the recent independent evaluation of the JobBridge internship scheme, which shows broadly positive outcomes in terms of the relatively high transition rates from internship to full-time employment, and in terms of net benefits to the DSP (gains through reduced social payments minus internship costs). The JobBridge evaluation is a useful first step towards a comprehensive assessment of the activation effectiveness of all employment schemes. The DSP is also building up its analytical toolkit by cross-referencing feeds from various datasets, including Live Register data and Central Records systems (employment and tax data). Although this remains work-in-progress, individual-level data on unemployment, employment and activation experiences should facilitate the effectiveness assessment. Based on preliminary data made available by the DSP, some basic and tentative findings emerge: · The number of beneficiaries from employment support programmes has steadily increased from an average of around 51 000 in 2007 to 75 000 in 2012. Community Employment, which serves little activation purposes, represented about 30% of the total in 2012, with another 12% for FÁS training programmes and 31% for the Back to Education scheme. The Back to Education, Back to Work and JobBridge schemes represent most of the increase in the placement in employment schemes between 2007 and 2012. · Employment support schemes appear to have been relatively inefficient in enabling the unemployed to return to non-supported employment, and the situation has seriously deteriorated as a result of the crisis. However, it must be noted that employment data is incomplete for later time periods due to lags for returns. Exits to employment have represented around 11% of the total for people engaged in FÁS training courses since 2009, down from around 22% in 2006–2007[40]. Exits to employment for people participating in Back to Education were typically around 20% on average but have declined since the beginning of the crisis. Exits to employment for people participating in Community Employment have only declined moderately and are at around 18% of the total in the period 2008–2011. The preliminary data indicate that activation schemes, including those aimed at re-skilling and up-skilling the unemployed, have not been very successful in returning people to regular employment. This assessment remains extremely partial and tentative, however, as the micro-level data presents significant methodological issues that still have to be resolved by the DSP. However, it does highlight the need to carefully assess the effectiveness of programmes in the future.

Important State asset sales are nearing completion. The sale of Bord Gáis Energy and the Electricity Supply Board's stake in two overseas power plants is expected to be completed in coming quarters. Although the proceeds will accrue to the parent companies in the first instance, the programme gives room for Ireland to use up to half of them for reinvestment in projects of a commercial nature that meet ex-ante cost/benefit criteria and enhance employment. This job-creation opportunity should be used as long as viable projects can be identified and to complement efforts to promote public-private partnership projects in infrastructure. Such projects have gathered momentum recently with the award or publication of tenders for road, school and primary health care centre projects. The employment impact is likely to be very limited in 2013, however.

The authorities intend to postpone the introduction of water charges to late 2014. While they remain committed to and have continued to make progress on the implementation of the wider process of reforming the water sector, they intend to postpone the introduction of household charges by a few quarters to enable a sufficient percentage of households to be equipped with meters. This would avoid a situation whereby charges may be perceived as unfairly distributed between metered and non-metered households, and also ensure that sufficient metering data will have been collected to enable the determination of assessed charges on a reliable basis. They also believe that public acceptance of charges, and therefore the success of the reform, will be maximised with a higher proportion of metered households and a longer time gap between the introduction of the property tax and the phasing-in of water charges. In a statement to the Dáil, the Taoiseach indicated that water would be billed on a quarterly basis starting from Q4 2014 instead of end 2013/early 2014 as envisaged thus far under the programme.

Postponing the introduction of water charges is acceptable inasmuch as the wider reform process continues apace. The delay should not materially affect the reform process as long as it remains limited.[41] In addition, significant steps have been taken during the past quarter in view of the progressive transfer of responsibility for water services from local authorities to a national utility. The Water Services Act 2013 was adopted on 20 March 2013, which formally establishes Irish Water as a 100% publicly-owned subsidiary of Bord Gáis Éireann, provides the legal basis for the installation of meters, eliminates the ban on charges for households and grants interim regulatory powers to the Commission for Energy Regulation (CER). In turn, the tenders for the supply of meters and boundary boxes have been completed, while the contracts for installation work are to be awarded in June. Irish Water reports that it will start rolling out installation in July, with an objective of about 27,000 meters per month on average.[42]

Completing the reform process is essential for efficiency, competitiveness and a rational use of water. By abolishing water charges for households in 1997, Ireland eliminated an essential mechanism to ensure the efficient, rational and sustainable use and supply of a scarce and valuable resource. Fragmentation on the supply side has led to inefficiencies and significant charge differentials for non-domestic users, while the reliance on State funding for operating and capital expenditures has led to insufficient investment in maintenance and new infrastructure. Local authorities have proved extremely inefficient in collecting charges on non-domestic users, and Ireland currently experiences staggering 41% system losses. The provision of water supply and treatment services, including to businesses, has exerted therefore a significant drag on public finances in spite of the insufficient level of investment in the sector (Figure 17).

Key measures will have to be completed by end-2013 to ensure that the reform process remains on track. It is critical that the authorities publish a comprehensive Water Services Bill by September 2013 as expected, so as to establish the new legal framework under which Irish Water will operate and charges will be set. It is also essential that the funding model for Irish Water be firmly established and that a tentative schedule for the utility to be mostly self-funded be determined. As part of this, the CER will soon need to start drawing ahead of public consultations in early 2014 the outline of future water charges in order to ensure fairness, affordability, efficiency, conservation and the recovery of costs. The authorities will also need to ensure that Irish Water is in a position to proceed with the installation of meters without undue hurdles imposed by local authorities. In addition, given that charges will in any case be introduced before the majority of households are metered, the CER will have to determine both metered and assessed charges. The coexistence of these two systems of charges is common in other regions, including England, Scotland and Wales, and should not constitute a hurdle in Ireland either.

Figure 17: water services, efficiency and cost indicators

Local authorities are poor collectors of non-domestic charges, which also vary greatly || System losses range from 16.5% at best to 60.3% at worst, with an average of 40.8%

Sources: Service indicators in local authorities and IBEC. || Source: Service indicators in local authorities.

General government spending on water services is large in spite of insufficient capital investment || Ireland devotes more public funds to water services than other EU countries (spending as % of GDP)

Source: Eurostat, Classification of the functions of government database. || Source: Eurostat, Classification of the functions of government database.

The process of reforming legal services has been unduly and frequently delayed and needs to come to fruition rapidly. The Minister for Justice, Equality and Defence indicated that amendments to the Legal Services Regulation Bill would be completed soon and made publicly available before the Bill would be considered at Committee Stage from 10­–12 July. Legal services reforms constitute a key component of the overall strategy to facilitate regaining competitiveness by realigning domestic costs to costs in other jurisdictions. Until this reform is completed, legal services costs will remain excessively high, having for the most part failed to adjust during the crisis, unlike other sectors of the economy. Such high costs affect the competitiveness of the Irish economy as a whole (Box 4).

Box 4: The high cost of legal services continues to cause problems Structural reforms are essential for boosting growth, increasing competitiveness and enhancing the prospects for job creation, but often involve confronting vested interests. While overall the Irish economy has adjusted well since the onset of the crisis, the pace and scale of price adjustment in the non-traded sector has been uneven. This may be due in part to structural factors such as barriers to competition. In particular, the cost of legal services has not fallen significantly from pre-crisis levels. This is in contrast to other professional services for which the underlying cost dynamics should be comparable, for example accountancy services. Here, prices have adjusted more in line with developments in the economy as a whole (Figure 18). Figure 18: Legal services costs in perspective

Legal services remain costly while accountancy has adjusted since the peak (indices, 2006=100) || Legal costs for contract enforcement in IE are among the highest in the EU (% of the claim)

||

Source: CSO (2006 = 100) || Source: Doing Business, World Bank Group, June 2012

Studies show inefficiency in the legal system impacts on the economy. High legal costs feed through to higher prices for goods and services, and therefore have important implications for competitiveness. This has repeatedly been cited by the Irish Small and Medium Enterprises Association (ISME), as a constraint on Irish businesses.[43] In particular, costs may act as a barrier to small companies seeking redress for contract enforcement. Figure 18 shows that as a percentage of the claim, attorney fees in Ireland are among the highest in the EU-27.

Since 2006, a number of significant barriers to competition in the supply of legal services in Ireland have been identified[44], including in areas such as advertising, training and the formation of joint practices. In line with programme commitments, the Authorities introduced a new Legal Services Regulatory Bill in late 2011 to address many of these concerns. However, the Bill as initiated encountered vocal criticism from the legal professions and did not advanced despite repeated commitments by the Authorities to the contrary. After 19 months, the draft bill has yet to be enacted. Amendments to address concerns around the independence from the executive of the new regulatory authority have not yet been made available. As such an assessment of their potential impact on competition is not possible.

Given this lack of progress, and considering that other avenues of competitiveness improvements (such as wage containment) seem to be approaching their limit, addressing high legal costs has now become an important policy challenge, including through the timely completion of the remaining legislative and executive steps to ensure the new Legal Services Regulatory Authority is operational without any further delay.

4. Financing issues

Market sentiment towards Ireland has continued to improve, as attested by the strong demand of the 10-year bond issued in March (which had tightened by around 500bp in secondary markets in mid-May from 4.15% at issuance) and the steadily declining yield on the ongoing T-bill auctions with a three-month tenor (down to 0.129% as of mid-May).

Plans are on-track to build a sizeable cash buffer by the end of the year. The authorities have already completed ¾ of their targeted bond issuance of EUR 10 bn for 2013. Together with the possibility of more regular issuance of sovereign bonds later in the year and the remaining planned disbursements under the programme (EUR 9.36 bn[45]), this would allow Ireland to accumulate a cash buffer of approximately EUR 22.4 bn (Error! Reference source not found.)[46] at end-2013 which should be sufficient to cover total financing needs for the following 12-15 months., The ample cash reserve serves as a prudent signal to investors as the Adjustment Programme reaches its conclusion.

Table 4: Financing requirements

The recently approved extension of EFSF/EFSM loan maturities will help restore full market access in the immediate post-programme period. At their meeting on 12 April 2013, Eurogroup and Ecofin Ministers agreed to lengthen the maturities of the EFSM and EFSF loans to Ireland and Portugal by a weighted average of 7 years, conditional—in the case of Ireland—on the successful completion of the 9th programme review (which was confirmed by the European Commission this past April). Between 2015 and 2019, loans from the EFSF and the EFSM totalling EUR 15.4 bn would have matured based on the original repayment schedule. The extension of maturities will be especially targeted to reduce the redemptions of EFSF/EFSM loans in this period by shifting them beyond 2020, while avoiding redemption humps after 2020. The 7-year average extension of EFSM and EFSF loans increases the weighted average maturity of Ireland's total public debt to 12.4 years, which compares very favourably to the corresponding average debt maturity in all euro area countries (7.3 years) notwithstanding the heavy schedule of bond maturities which Ireland has in the period 2016 to 2020.[47]

The successful completion of this review would trigger a disbursement of EUR 1 bn from the EFSF. The IMF will also disburse EUR 1 bn and the UK EUR 0.5 bn under its bilateral loan. This will bring the released or approved disbursements so far to EUR 62.7 bn, representing some 92.9% of the total international assistance of EUR 67.5 bn available under the programme.

Figure 19: Debt repayment schedule

Before maturity extension || After maturity extension

||

Source: Commission Services || Source: Commission Services

5. Risks

Despite the considerable progress achieved under the programme so far, as highlighted in previous reports important challenges and risks remain, which require close monitoring and determined policy action:

o With a 2013 government deficit estimated by Commission services at 7.5% of GDP (primary deficit of 2.6% of GDP), fiscal consolidation requirements remain considerable. The initial rejection of the Croke Park II agreement, followed by a more recent agreement with trade unions (yet to be put into practice), underscores the need for continued vigilance with respect to correcting fiscal imbalances. . This needs to be carefully managed by the authorities, in particular by ensuring that the adjustment is and is perceived as equitable.

o Banks' asset quality remains a source of uncertainty. A more dragged-out process of discovery/capital assessment could stymie banks' efforts to reduce reliance on system funding, which could undermine their capacity/willingness to extend new loans in support of the recovery. Weak profitability can have a similarly limiting effect.

o The ongoing reforms in the mortgage market might result in diminished debt repayment discipline. It is essential that adequate protection is offered to cooperating distressed debtors so that they can work out a solution with their creditors. But, even after the planned reforms of the legal framework for repossessions and of the code of conduct on mortgage arrears, undue incentives may remain for strategic non-payment/default. This would harm the functioning of credit markets for the medium to long term and thus impede the efficient allocation of savings.

o The modification of the timeline for a meaningful assessment of bank capital under the programme in the wake of the evolving calendar of the EBA/SSM stress testing exercise is primarily meant to ensure consistency across successive supervisory steps and in turn to safeguard their credibility. The new staggered approach is to be taken as an opportunity to well prepare the various individual steps. Any attempt to defer or to weaken the individual elements of the process would undermine the very reason for modifying the original calendar of stress testing of banks.

List of abbreviations

AIB Allied Irish Bank

BOI Bank of Ireland

BGE Bord Gáis Energy

BTL Buy-to-Let

CBI Central Bank of Ireland

CER Commission for Energy Regulation

CPI Consumer Price Index

CSO Central Statistics Office

dpd Days Past Due

EBA European Banking Authority

EC European Commission

ECB European Central Bank

EDP Excessive Deficit Procedure

EFSF European Financial Stability Fund

EFSM European Financial Stabilisation Mechanism

ELG Eligible Liabilities Guarantee

ETB Education and Training Board

GDP Gross Domestic Product

GNP Gross National Product

GP General Practitioner

GVA Gross Value-Added

HICP Harmonised Indices of Consumer Prices

HSE Health Service Executive

IBEC Irish Business and Employers' Confederation

IBRC Irish Bank Resolution Corporation

IMF International Monetary Fund

LTV Loan-to-Value ratio

ma Moving average

MEFP Memorandum of Economic and Financial Polities

MOU Memorandum of Understanding

MTFS Medium Term Financial Statement

NAMA National Asset Management Agency

NBFI Non-Bank Financial Intermediary

NFC Non-Financial Corporation

PDH Primary dwelling house

PCAR Prudential Capital Assessment Review

PTSB Permanent TSB

qoq Quarter-on-quarter

REER Real Effective Exchange Rate

sa Seasonally Adjusted

SME Small and Medium Enterprise

SSM Single Supervisory Mechanism

yoy Year-on-year

WHO World Health Organisation

Annex 1: Programme Implementation

Compliance Monitor for Q1 2013

The conditions below are from the 8th update of the Memorandum of Understanding on Specific Economic Policy Conditionality (MoU).

|| Status and COM assessment

Permanent conditions

PC.1 i. Rigorously implement fiscal policy consistent with the requirements of the excessive deficit procedure. In particular, the Department of Finance and the Department of Public Expenditure and Reform will continue to ensure effective tax collection and tight supervision of expenditure commitments by the line departments to ensure that the primary deficit target in cash (see Table 1 of MEFP and the Technical Memorandum of Understanding, TMU) and the general Government nominal budget deficit on ESA95 basis as set out in the EU Council Recommendation on excessive deficit procedures are achieved. ii. Any additional unplanned revenues must be allocated to debt reduction. iii. Moreover, the nominal value of Social Welfare pensions will not be increased. || i. Observed EDP deficit ceilings were met with ample margin in 2011 and 2012 (in particular, based on the April 2013 EDP notification, the 2012 deficit outturn was 7.6% of GDP, against a programme ceiling of 8.6% of GDP, and better than the estimate as per the 9th review, i.e. 7.7% of GDP, due to small changes in cash-accrual adjustments). Commission services estimate the 2013 deficit (7.5% of GDP) in line with the 2013 EDP and programme ceiling. Supervision of health expenditure is being enhanced through dedicated data provision requirements established in the 9th review, i.e. (i) Report on implementation of budgetary measures in the health sector; (ii) report comparing (a) health expenditure by main service areas, (b) pay and non-pay element of current expenditure, and (c) capital expenditure and income collected , against the monthly targets; and (iii) report on pharmaceutical prescriptions and expenditure. Data availability is not always complete, but efforts are being made to improve it. ii. Revenue overperformance has been saved (i.e., the deficit has undershoot the programme ceiling by an amount equal to or greater than the revenue overperformance), although some expenditure have been allowed to exceed programmed amounts (for example, on unemployment benefits and health). Overall expenditure have been in line with original programme projections because of the windfall savings on the interest bill including resulting from EU policy decisions. It needs to be kept in mind that it has been agreed that some proceeds from identified asset sales will be spendable on growth-enhancing projects (see PC.3 below). iii. Observed

PC.2 Consult ex-ante with the European Commission, the ECB and the IMF on the adoption of policies that are not included in this Memorandum but that could have a material impact on the achievement of programme objectives. || Broadly observed (in some cases the consultation period before announcement has been very short).

PC.3 Use at least half of the proceeds from state asset sales for eventual debt reduction while also reinvesting the remainder of total realised proceeds in projects which are of a commercial nature, meet ex-ante cost benefit criteria, enhance employment and preserve long term fiscal sustainability, including Programme and EDP fiscal targets. || Not applicable (there have been no privatisation proceeds so far).

PC.4 Continuously monitor financial markets to exploit opportunities to return to commercial funding as soon as possible. || Observed

PC.5 Ensure that activation services are enhanced, to tackle the high and persistent rate of long-term unemployment. In particular, the Department of Social Protection will take steps to improve the ratio of vacancies filled off the live register, focus on re-training the unemployed to reduce the risk of long-term unemployment and ensure appropriate incentives through the implementation of sanctions. Generally, the government will advance its plans to introduce new activation measures building on Pathways to Work (the government's strategy for institutional reform of the activation system). || Reforms of activation policies are on-going and in line with programme requirements, though progress has at times been slower than hoped for. A key challenge appears to be ensuring proper mobilisation of resources for engagement with the long-term unemployed and for adequate reforms to further education and training system (see main report).

PC.6 Ensure that no further exemptions to the competition law framework will be granted unless they are entirely consistent with the goals of the EU/IMF Programme and the needs of the economy. || Observed

PC.7 Ensure that NAMA: (i) maintains the highest standards of governance with appropriate accountability and transparency arrangements; (ii) reduces the costs of its operations; and (iii) constructively contributes to the restoration of the Irish property market in the course of meeting the asset disposal targets established and monitored by the NAMA Board, including redemption of €7.5 bn worth of senior bonds by end 2013. || (i) Detailed set of annual accounts, an Annual Statement and quarterly reports on NAMA activities submitted to Minister for Finance and laid before both Houses of the Oireachtas. (ii) Administrative expenses fell slightly in 2012 to EUR 119 mn (2011: EUR 128 mn). (iii) NAMA is progressing with its EUR 2 bn capital investment plan which includes the completion of properties which are currently under development and the development of certain land, particularly in Dublin city centre, in anticipation of future demand. Total 2012 disposal receipts amounted to EUR 2.8 bn resulting in receipts of EUR 6.8 bn since inception. NAMA has redeemed EUR4.75 bn in NAMA senior bonds (63% of end 2013 target) and has reaffirmed the commitment to redeem EUR7.5 bn by end 2013.

PC.8 Ensure that the restructuring of credit unions, via the Credit Union Restructuring Board, will underpin the financial stability and long term sustainability of the sector. (i) The restructuring will be completed in as short a timeframe as possible under a clear plan identifying credit unions appropriate for restructuring, subject to Central Bank approval. (ii) As regards funding, the first call should be on the credit unions concerned or the sector as a whole; any Exchequer funding should be minimised, should be provided only in the context of a restructuring plan in compliance with EU state aid rules, and should be recouped from the sector over time. (iii) In parallel, the Central Bank will continue its inspections to determine the financial condition of the weakest credit unions, and may engage its resolution powers drawing on Resolution Fund resources. || Authorities' efforts continue towards these objectives and in line with the principles in (i), (ii), and (iii). (i) The Credit Union Restructuring Board (ReBo) was put on a statutory footing on 1 January 2013 and shall remain in place until 31 December 2015. Its role is to facilitate and support the restructuring of the Credit Union Sector and comprises of representatives from the Credit Union sector, the Central Bank of Ireland, the Department of Finance and a number of independent members. ReBo has established its operational team which will be engaging with credit unions in the coming months. (ii) Statutory arrangements in place to ensure all Exchequer funding is recouped from CU concerned/sector; compliance with State Aid rules provided for in Credit Union & Co-operation with Overseas Regulators Act 2012. (iii) Statutory provisions made in Credit Union & Co-operation with Overseas Regulators Act 2012 and the Central Bank and Credit Institutions Resolution Act 2011.

PC.9 Ensure continued compliance with the minimum capital ratio of 10.5 percent for all PCAR banks (AIB, BOI, and PTSB). || Observed

PC.10 Continue to strengthen the fiscal framework and reporting in line with that of the EU. || Two-pack implementation on track (in particular, as regards 2014 Budget calendar, which is being brought forward). As regards the multi-year expenditure ceilings, under the current Irish legislative proposal these would cover a somewhat different aggregate than defined by the SGP's "expenditure benchmark (see Art. 5 of Council Regulation (EC) No 1466/97). Current provisions are based on administrative circulars implementing details of the ceilings, giving considerable leeway for discretionary changes to the framework. The authorities have undertaken to ensure full consistency and robust applicability of the expenditure benchmark with required legislative amendments if necessary by June 2013 (see 9th update of the MOU)

PC.11 To facilitate programme monitoring, the authorities will provide the European Commission, the ECB and the IMF with: - All information required to monitor progress during programme implementation and to track the economic and financial situation. - A compliance report on the fulfilment of the conditionality prior to the release of the instalments. - Reliable and regular availability of budgetary and other data as detailed in Annex 1. || Observed Observed Observed

Q1: financial sector reform

The authorities will provide the staff of the European Commission, the ECB and the IMF a review of developments in the PCAR banks relative to PCAR 2011. Overall results of this work will be published by end February 2013. The authorities will agree with the staff of the European Commission, the ECB and the IMF on the specific details of the review. || Observed (small delay of publication, which took place on 1st March 2013)

The authorities, in consultation with the staff of the European Commission, the IMF, and the ECB, will assess banks' deleveraging based on the existing nominal targets for disposal and run-off of non-core assets in line with the 2011 Financial Measures Programme. Fire sales of assets will be avoided, as will any excessive deleveraging of core portfolios, so as not to impair the flow of credit to the domestic economy. || Done during the 10th review mission

The authorities will provide staff of the European Commission, the IMF, and the ECB with a detailed assessment of banks' progress towards the relevant Basel III requirements using the advanced monitoring framework. || Observed (report received on 26 March 2013).

The authorities will provide staff of the European Commission, the IMF, and the ECB with their assessment of banks' performance with the work-out of their non-performing mortgage and SME portfolios in accordance with the agreed key performance indicators. The authorities will monitor each PCAR bank’s performance relative to already-defined key performance indicators for progress in resolving problem loans, and also against bank specific targets for reviewing new and existing individual arrears cases. || Observed (report received on 27 March 2013).

The authorities will publish banks’ reported data on loan modifications, to permit analysis of the effectiveness of alternative resolution approaches in improving debt service performance. || Observed (the Q4 2012 mortgage arrears report was published on March 6 2013).

The authorities will establish by end‑March a public target requiring the principal mortgage banks to offer durable restructuring arrangements for a substantial share of problem mortgage loans during 2013. || Observed. The public target for offering durable restructures was announced on 13 March 2013.

Having secured adequate protections for debtors' principal private residence through the enactment of the Personal Insolvency Bill, the authorities will introduce legislation remedying the issues identified by case law in the 2009 Land and Conveyancing Law Reform Act, so as to remove unintended constraints on banks to realise the value of loan collateral under certain circumstances. || Observed. (The bill was published on 31 March 2013).

The authorities will present a comprehensive report on progress in implementing the Central Bank of Ireland’s action plan for strengthening supervision of credit institutions and discuss it with the staff of the European Commission, the IMF, and the ECB. || Observed. (Report received on 26 March 2013).

The authorities will report on banks' progress with the implementation of their strategies to address loan arrears and unsustainable debts in banks' mortgage, and SME loan portfolios. || Observed. (Report received on 27 March 2013).

The authorities will engage with each bank to ensure appropriately prudent provisioning including on key inputs, such as for estimating cure rates for originally performing, forborne, and modified loans, to ensure these cures reflect durable modifications. || Observed. (Letters issued 12 February 2013)

Following completion of annual model performance reviews assessing banks' risk-weighted asset calculations forecasting and stress testing in advance of PCAR 2013, the authorities will report to the staff of the European Commission, the IMF and the ECB on progress with implementation of the findings from the credit regulatory capital review process and with the specific mitigating actions communicated to the banks. || Observed. (Report received on 26 Mar