COMMISSION STAFF WORKING DOCUMENT Economic Adjustment Programme for Ireland Winter 2012 Review Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/77/EU on granting Union financial assistance to Ireland
Date: 2012-12-19
Institutions: European Commission
Subjects: Community loan, EU aid, Ireland, administrative reform, aid for restructuring, banking system, debt reduction, economic stabilisation, financial aid, job creation, macroeconomics, public debt, reflation, tax reform

EUROPEAN 
COMMISSION 

Brussels, 19.12.2012  
SWD(2012) 456 final 

COMMISSION STAFF WORKING DOCUMENT 

Economic Adjustment Programme for Ireland 

Winter 2012 Review 

Accompanying the document 

Proposal for a  

COUNCIL IMPLEMENTING DECISION 

amending Implementing Decision 2011/77/EU on granting Union financial assistance to 
Ireland 

{COM(2012) 792 final} 

EN 

   EN 

 
 
 
 
  
 
 
 
 
European Commission 

Directorate-General for Economic and Financial Affairs 

Economic Adjustment Programme for Ireland 

Winter 2012 Review 

2 

 
 
 
 
 
 
 
 
 
 
 
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. 

Contributors: 

Davide  Lombardo,  Quentin  Dupriez,  Gabor Koltay,  Sven  Langedijk,  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, Sean Berrigan, Marcin Cecot, 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 15/187 
B-1049 Brussels 
E-mail: martin.larch@ec.europa.eu 

3 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contents 
Executive Summary 
Introduction 
1. 
2.  Macro-fiscal and financial developments 
3.  Programme implementation 
4.  Macroeconomic outlook 
5.  Policy Discussions 
Fiscal policies 
Financial sector policies 
Structural reforms 

5.1 
5.2 
5.3 

6.  Financing issues 
7.  Risks 
List of abbreviations 
Annex 1: Debt sustainability analysis 
Annex 2: Supplementary tables 
Annex 3: Draft updated programme documents 

Figures 
Figure 1: Productivity, competitiveness, and rebalancing 
Figure 2: Employment and real GDP growth 
Figure 3: Fiscal performance in 2012 
Figure 4: PCAR banks' funding developments 
Figure 5: Covered bonds issued by select European banks, 2012 
Figure 6: Evolution of key lending rates 
Figure 7: PCAR banks' loan developments 
Figure 8: Developments on the Irish government bond market 
Figure 9: Labour market and contributions to potential growth 
Figure 10: The wealth effect of the housing bust, aggregate and by cohorts 
Figure 11: Gross value added by sector 
Figure 12: Health spending as a proportion of national income (2010) 
Figure 13: Total pharmaceutical expenditure per capita (2010) 
Figure 14: Salaries of medical specialists in some EU countries 
Figure 15: Changes in public wage bill 
Figure 16: Reductions in gross voted expenditures, outturn vs. targets 
Figure 17: Covered banks' funding gap 
Figure 18: Mortgage arrears 
Figure 19: Drivers of covered bank profitability 
Figure 20: Actual and simulated population on live register by duration 
Figure 21: evolution of legal services prices vs. other services 
Figure 22: Debt-stabilising primary balance in baseline projections (% of GDP) 
Figure 23: Government debt projections (% of GDP) 

Tables 
Table 1: Revised macroeconomic framework 
Table 2: Fiscal adjustment commitments 2013-2015, EUR billion 
Table 3: Financing requirements 

4 

5 
7 
7 
15 
17 
21 
21 
32 
38 
44 
45 
47 
48 
50 
57 

8 
9 
10 
11 
12 
13 
14 
15 
18 
19 
20 
24 
25 
25 
29 
31 
33 
34 
37 
40 
43 
49 
49 

21 
27 
45 

 
 
 
 
Boxes 
Box 1: Maximising efficiencies to achieve better health outcomes 
24 
Box 2: A significant unexplained wage gap between public and private sector wages?  29 
31 
Box 3: Experience with expenditure ceilings under the programme 
Box 4: Restoring bank profitability 
37 
Box 5: Breaking the  cycle  of  long-term unemployment: activation,  re-skilling and 
job creation 
Box 6: Increasing competition in the provision of legal services 

40 
43 

5 

 
 
 
Executive summary  

A joint EC-ECB-IMF mission visited Dublin during 16-25 October to conduct the 8th review 
of  the  EU/IMF  financial  assistance  programme  for  Ireland.  The  mission  updated  the 
programme  macroeconomic  framework  by  revising  down  somewhat  the  forecast  for  real 
GDP  growth  in  2013,  mostly  as  a  reflection  of  the  lower  pace  of  economic  activity  now 
envisaged  for  Ireland's  key  trading  partners  and  somewhat  weaker  domestic  demand. 
Forecasts for key aggregates in nominal terms for 2013 have been kept broadly unchanged, 
however,  reflecting  higher-than-expected  inflation.  Unemployment  is  envisaged  to  remain 
broadly stable at around 14.8% in 2013, but is increasingly long-term in nature—a key policy 
concern. 

Programme implementation remains strong overall:  

•  As regards fiscal consolidation, central government cash figures through September 
2012  were  better  than  profiled,  mostly  on  account  of  over-performance  in  tax 
revenue and lower-than-profiled capital spending, but the social welfare and health 
budget  lines  recorded  overruns.  Despite  weakening  in  tax  revenue  in  the  fourth 
quarter, the 8.6%  of GDP deficit ceiling is within reach. Two pieces of legislation 
advancing  the  reform  of  the  structural  fiscal  framework  (one  formalizing  the  fiscal 
council and enabling ratification of the fiscal compact and the other giving a  legal 
basis to medium-term expenditure ceilings introduced last year on an administrative 
basis) were also published. 

•  As  regards  banking  supervision  and  financial  sector  reform,  several  pieces  of 
legislation  were  introduced  to  the  Dail  by  end-September  as  required.  While  their 
content  was  broadly  in  line  with  programme  understanding,  Commission  services 
found  that  the  unduly  high  EUR 3 million  cap  on  eligible  secured  debt  raises 
implementation risks for the new personal insolvency regime. Separately, the credit 
institutions resolution fund levy, which in some key respects (notably, the basis of the 
levy  and  the  target  size  of  the  resolution  fund)  is  not  in  line  with  the  European 
Commission proposal for the EU directive establishing a framework for the recovery 
and  resolution  of  credit  institutions  and  investment  firms  will  have  to  be  reviewed 
when  the  EU  legislation  is  published.  An  advisory  service  for  distressed  mortgage 
borrowers  was  also  introduced.  Banks  continue  to  make  progress  towards  their 
deleveraging targets and to advance operational restructurings, but concerns remain 
on  the  prospects  for  their  profitability  in  the  medium  term  and  the  scarcity  of  new 
lending to underpin economic activity.  

•  Progress  continued  on:  (i)  reforming  labour  market  activation  policies,  though  the 
pace should be accelerated and their coverage extended to reach a greater share of 
long-term  unemployed;  (ii)  putting  water  service  provision  on  a  sound  footing, 
though implementation risks are important as meter installation has yet to start and 
the  authorities  are  concerned  that  there  might  be  resistance  to  introduce  charges 
ahead  of  a  full  roll-out  of  meters;  (iii)  preparing  select  state  assets  for  eventual 
disposal;  and  (iv)  reforming  the  sectoral  wage  setting  mechanisms  (legislation  for 
which has been passed).  

Policy discussions were, as usual, frank and constructive and underscored that key risks and 
challenges remain:  

•  Authorities  reiterated  their  commitment  to  observe  the  agreed  fiscal  consolidation 
path. In particular, they have committed to deal in a durable way with the spending 
pressures  experienced  in  the  health  sector  (estimated  to  have  caused  the  health 
budget  baseline  to  increase  by  EUR 700 million).  The  mission  stressed  the  need  to 

6 

 
 
ensure  that  measures  are  durable  and  growth-friendly  and  that  they  minimise  the 
burden of adjustment on the most vulnerable. The estimated 2012 outturn weakened 
somewhat  as  from  October  2012  with  higher  expenditure  overruns  and  somewhat 
lower-than-previously-expected  tax  revenue  projections.  Against  this  backdrop,  the 
2013 budget targets the agreed deficit ceiling of 7.5% of GDP in 2013 by introducing 
the  order  of  EUR 1.4 and 1.9 billion 
in 
revenue  and  expenditure  measures 
respectively, as well as increasing dividends from state-owned companies. The deficit 
target for 2013 is predicated upon a macro scenario that is slightly more optimistic 
than the one contemplated by the Troika. Revenue measures include the introduction 
of  a  value-based  property  tax,  a  broadening  of  the  labour  tax  base,  as  well  as 
increases in motor tax and excises. Expenditure savings are expected to be achieved 
by  reducing  child  benefit  rates,  further  reducing  the  number  of  public  service 
employees, increasing student contributions and through other saving measures. The 
authorities also confirmed their commitment to reduce the deficit to 5.1% of GDP in 
2014 and 2.9% in 2015, in line with the programme. 

In  the  financial  sector,  key  challenges  include  how  to  address  the  banks'  growing 
arrears backlog and ensure that they can resume playing an active role in support of 
the  recovery.  While  the  pace  of  mortgage  arrears'  formation  has  decelerated  in 
recent  months,  progress  in  dealing  with  long-term  non-performing  loans  has  been 
slow and needs to be accelerated under active supervision by the authorities. Failure 
to decisively act on the mortgage arrears would pose increased risks to banks' future 
capital  positions.  The  mission  also  emphasised  that,  for  the  reformed  personal 
insolvency regime and the mortgage arrears strategy to be effective, it is essential to 
remove  the  identified  impediments  to  repossession  of  collateral  as  a  last  resort  to 
dealing  with  unsustainable  debts,  while  recognising  that  it  is  desirable  to  keep 
families  in  their  homes  wherever  possible.  There  was  broad  agreement  that  bank 
profitability  should  be  enhanced  with  continued  progress  on  operational 
restructuring and a concerted exit from expensive liability guarantees amid growing 
market  confidence  in  Irish  banks.  Another  key  policy  priority  is  to  ensure  that 
potential obstacles to credit extension for SMEs are identified and addressed, given 
the importance of this sector for future job creation.  

• 

•  The  increasingly  long-term  nature  of  unemployment  is  a  particular  source  of 
concern. While there is scope to speed up the pace and expand the coverage of active 
labour  market  policies,  the  bursting  of  the  real  estate  bubble  has  generated  a 
structural  shift  in  the  labour  market  and  rising  skills  mismatches.  Averting  a  "lost 
generation"  will  require  a  convergence  of  efforts  to  improve  the  functioning  of  the 
labour market, re-skill the long-term unemployed, foster job creation, and ensure that 
an  adequate  incentive  structure  is  in  place  to  optimally  benefit  when  economic 
recovery gathers pace. 

•  As  far  as  the  sovereign  funding  outlook  is  concerned,  in  the  course  of  2013  the 
authorities  intend  to  maintain  a  comfortable  cash  position  covering  broadly 
12 months of future financing needs in preparation for the exit from the programme.  

Disbursement 

Successful  completion  of  this  review  would  trigger  the  release  of  EUR 0.8 billion  from  the 
EFSM/EFSF,  EUR 0.9 billion  from  the  IMF,  and  EUR 0.5 billion  from  the  UK  under  its 
bilateral loan. 

7 

 
 
 
1. 

Introduction 

This  report  covers  recent  macroeconomic  and  financial  developments,  programme 
implementation,  and  the  main  challenges  ahead,  as  assessed  by  the  joint  EC/ECB/IMF 
staff mission to Dublin on 16-25 October 2012 in the context of the eighth review of the 
economic  adjustment  programme,  as  well  as  the  associated  policy  discussions  with  the 
Irish authorities.1 

Successful completion  of  this  review would  trigger the release of EUR 0.8 billion from 
the EFSM/EFSF, EUR 0.9 billion from the IMF, and EUR 0.5 billion from the UK under 
its bilateral loan. This would bring disbursements to EUR 56.6 billion, representing 84% 
of the total international assistance of EUR 67.5 billion under the programme.  

2.  Macro-fiscal and financial developments  

Macroeconomic  developments  in  the  second  quarter  of  2012  were  broadly  in  line 
with  programme  projections.  There  was  essentially  no  quarter-on-quarter  (q-o-q) 
growth  in  real  GDP  in  the  three  months  to  June  in  seasonally  adjusted  (sa)  terms. 
Domestic  demand  continued  to  be  weak,  with  declines  both  on  q-o-q  (sa)  and  annual 
terms in all of its components, and especially the volatile investment category. The 0.4% 
(q-o-q, sa) decline in private consumption represented a notable slowdown in the pace of 
contraction,  in  line  with  high-frequency  indicators  such  as  retail  sales,  which  were 
essentially flat.  Exports fell in quarterly terms, as goods exports were hit by weakening 
demand from trading partners as well as possible first signs of the recent strong growth of 
chemical  exports  reversing  (the  so-called  "patent  expiration  cliff",  Figure  1).  The 
year-on-year (y-o-y) increase in export growth of 2.1% continued to be robust, especially 
in the services category, supported by some regaining of the competitiveness lost in the 
pre-crisis boom (Figure 1). Together with relatively weak imports, this led the balance of 
payments to record a surplus of about 8% of GDP, suggesting that Ireland is well on its 
way to a third year of surplus in the external accounts. The strong q-o-q increase of GNP 
(+4.3%  ,  sa)  was  a  welcome  development,  but mainly  reflects  factor  inflows  from  Irish 
multinationals  unrelated  to  the  performance  of  the  Irish  economy.  The  net  international 
investment  position  improved  marginally,  a  reminder  that  the  unwinding  of  external 
imbalances incurred prior to the crisis takes time. Competitiveness indicators continued to 
improve steadily, although not at the pace observed in the immediate wake of the crisis.   

1 This report reflects information available as of 13 December 2012. 

8 

 
 
 
                                                 
Figure 1: Productivity, competitiveness, and rebalancing 

Increasing labour productivity… 

… has supported regained competitiveness… 

REER (euro-area as trading partner)

110

108

106

104

102

100

98

96

94

92

90

…and helped Ireland  rebalance towards realizing 
its full export potential.  

As a result, the current account has moved into 
surplus territory… 

2
0
0
0
Q
1

2
0
0
0
Q
4

2
0
0
1
Q
3

2
2
0
0
0
0
2
3
Q
Q
2
1
   Ireland

2
0
0
3
Q
4

2
0
0
4
Q
3

2
0
0
5
Q
2

2
2
2
0
0
0
0
0
0
6
6
7
Q
Q
Q
1
4
3
   Germany

2
0
0
8
Q
2

2
0
0
9
Q
1

2
0
0
9
Q
4

2
2
0
0
1
1
0
1
Q
Q
3
2
   Greece

2
0
1
2
Q
1

   Portugal

   Spain

Share in real GDP

   Total domestic demand

   Net trade in  goods and services

100

90

80

70

60

50

40

30

20

10

0

1
9
9
7

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

2
0
1
4

2
0
1
5

…thanks to a strong growth in exports of services.

Exports of goods and services (billion EUR)

Services

Goods

180

160

140

120

100

80

60

40

20

0

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

Sources: CSO and Eurostat 

40

30

20

10

0

-10

-20

-30

-40

Current account balance (billion EUR)

12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12

1
9
9
8

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

Trade Balance
Income Balance
Current account balance (r.h.s.)
Note: 2012 refers to first six months only

Services Balance
Current Transfers, net

Good exports—while broadly flat—have 
experienced an important reorientation. 

100

Selected merchandise exports (billion EUR)

90

80

70

60

50

40

30

20

10

0

1
9
9
0

1
9
9
1

1
9
9
2

1
9
9
3

1
9
9
4

2
0
0
5

2
0
0
4

2
0
0
3

2
0
0
2

2
0
0
0

1
9
9
9

1
9
9
8

1
9
9
7

1
9
9
6

1
2
9
0
9
0
5
1
Chemicals and related products, n.e.s. (5)
Machinery and transport equipment (7)
Miscellaneous manufactured articles (8)
TOTAL

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

indicators  have  been  somewhat  mixed.  The 
More  recent  high-frequency 
manufacturing and services PMI grew strongly in November and are at historically high 
levels, although the rates of increase slowed in manufacturing output and new orders. On 
the other hand, industrial production fell by almost 18% in annual terms in October after 
an  unexpectedly  large  fall  in  September  on  an  annual  and  monthly  basis  led  by 
developments  in  the  pharma-chemical  sector.  Early  indicators  of  domestic  demand 
showed  a  more  coherent  picture,  with  the  services  index  expanding  at  an  accelerating 
pace  in  annual  terms  in  November.  Although  residential  property  prices  are  still  down 
compared  to  last  year's  levels  (by  8%  on  an  annual  basis  as  of  October)  there  are 

9 

 
 
 
 
emerging signs of stabilization, especially in urban areas, with a slowing pace of annual 
decline and some increase in rents.  

Inflation has been moderating in recent months. With relatively strong price pressures 
from energy and services (especially insurance)  earlier in the year and temporary VAT 
effects  moderating,  HICP  inflation  fell  in  October,  bringing  the  annual  average  rate  in 
January-October 2012  to 2.0%.  

Despite  a  slight  further  deterioration  of  labour  market  conditions  in  the  third 
quarter, the situation appears to have broadly stabilised. Employment fell by 0.3% on 
a quarterly basis (sa) in Q3, following similar declines in the first two quarters (Figure 2). 
The  y-o-y  rate  of  decline  in  employment  decreased  from  1.3%  in  Q2  to  0.2%  in  Q3. 
Declines  in  Q3  originated  mainly  from  the  public  service, where  the  head  count  fell  by 
4.1%  in  annual  terms  on  the  back  of  retirements  triggered  by  expiring  favourable 
treatment  of  pensions  and  lay-offs  of  temporary  Census  workers.2  Private  sector 
employment appears to be stabilising with marginal declines in the last two quarters. Due 
to  migration-driven  decreases  in  the  labour  force,  the  unemployment  rate  was  virtually 
unchanged at 14.8% (sa) for the third consecutive quarter in Q3 although the number of 
unemployed individuals fell for the first time since early 2005.  

Figure 2: Growth in employment and real GDP  

8

6

4

2

0

-2

-4

-6

-8

-10

-12

-14

-16

y-o-y %

Total employment

Private sector

2
0
0
5
Q
2

2
0
0
5
Q
4

2
0
0
6
Q
2

2
0
0
6
Q
4

2
0
0
7
Q
2

2
0
0
7
Q
4

2
0
0
8
Q
2

2
0
0
8
Q
4

2
0
0
9
Q
2

2
0
0
9
Q
4

2
0
1
0
Q
2

2
0
1
0
Q
4

2
0
1
1
Q
2

2
0
1
1
Q
4

2
0
1
2
Q
2

6

4

2

0

-2

-4

-6

q-o-q % sa

y-o-y % sa

2
0
0
5
Q
2

2
0
0
6
Q
2

2
0
0
7
Q
2

2
0
0
8
Q
2

2
0
0
9
Q
2

2
0
1
0
Q
2

2
0
1
1
Q
2

2
0
1
2
Q
2

8

6

4

2

0

-2

-4

-6

-8

Source: CSO 

Fiscal performance weakened in the second half of 2012. Tax revenue was better than 
expected in the first half of the year but underperformed later in the year and is estimated 
to be 0.4% of GDP below the 2012 budget plans (Figure 3). This shortfall is partly offset 
by  higher-than-budgeted  revenue  from  the  sale  of  mobile  telephony  licences  (0.2%  of 
GDP). Spending pressures in social and health services continued into the second half of 
the  year,  on  account  of  higher-than-budgeted  unemployment  numbers  and  continued 
slippages/delays  in  the  implementation  of  planned  health  measures  (these  account  for  a 
large  part  of  the  health  overruns—see  Section  5  below  and  Table  A1).  The  overruns  in 
health  and  social  protection  (0.4%  of  GDP)  are  expected  to  be  partly  offset  by  capital 

2 The window for favorable treatment, which allowed for pension entitlements to be calculated based on a 
pre  pay-reduction  basis,  exprired  in  February.  Retirements  have  nevertheless  continued  in  the  following 
quarters.  

10 

 
 
 
 
 
                                                 
expenditure  savings  (0.1%  of  GDP)  and  lower-than-planned  spending  by  other 
departments (0.1% of GDP). While cash interest expenditure is expected to be lower than 
planned,  an  increase  in  negative  interest  cash-accrual  adjustment  implies  a  lower  net 
effect  on  the  general  government  balance  (0.3%  of  GDP).  Table  A2  compares  the 
expected  2012  fiscal  outturn  with  the  budget  plans.  The  2012  fiscal  deficit  outturn  is 
estimated  at  8.2%  of  GDP,  compared  to  the  target  of  8.1%  of  GDP  on  a  like-for-like 
basis3. 

Figure 3: Fiscal performance in 2012  

Tax revenue performance against projections 

Expenditure savings against plans 

800
600
400
200
0
-200
-400
-600
-800
-1 000

EUR million

EUR million

800

600

400

200

0

-200

-400

-600

-800

J
a
n

F
e
b

M

a
r

A
p
r

M
a
y

J
u
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J
u
l

A
u
g

S
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p

O
c
t

N
o
v

D
e
c

J
a
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e
b

M

a
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A
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r

M
a
y

J
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J
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S
e
p

O
c
t

N
o
v

D
e
c

Temporary factors

Excise duties

VAT

PRSI

2012

Other

Corporation tax

Personal income tax

Total revenue

Temporary factors
Other
Health
Expenditure

2012

Capital expenditure
Education
Social Protection

Source: 2013 Budget, Department of Finance and Commission service estimates 
Notes: Figures are consistent with the monthly projections published in May 2012 with corresponding adjustments for the previous 
months. Tax and expenditure items are adjusted for timing-related temporary factors, which in particular improved corporation tax 
outturn against profile in February-June and net health expenditure in July-August. Expenditure includes departments' own receipts 
(appropriations-in-aid), except for PRSI revenue, which is presented among tax revenue. Capital expenditure is showed separately 
from current departmental expenditure. 

Banks continue to deleverage their balance sheets. BOI has already met its 3-year non-
core asset disposal target and AIB achieved 83% of its original 3-year deleveraging target 
by end-October, (both banks have done so in line with PLAR-assumed discounts). PTSB's 
progress  to  date  has  been  limited,  with  EUR 3.8 billion  of  net  customer  loan  balance 
reduction  and  no  material  asset  disposals  completed  by  end-September.  Following 
agreement  with  programme  partners,  in  September  the  CBI  informed  the  bank  that  it 
would await the outcome of ongoing discussions on its revised restructuring plan before it 
considers PTSB's future deleveraging requirements. As of end-September, total net loan 
balances  at  the  covered  banks4  have  decreased  by  almost  EUR 50 billion  from  end-
December 2010 (of which EUR 13.8 billion year to date), representing over 70% of the 

3  The  budget  for  2012  announced  in  December  2011  targeted  a  deficit  of  8.6%  of  GDP.  The  April  2012 
stability programme updated the deficit target to 8.3% of GDP, including developments since the budget. 
An  upward  revision  of  nominal  GDP  since  the  stability  programme  further  reduced  the  deficit  target  to 
8.1% of GDP. 
4 Banks covered by the 2011 PCAR/PLAR exercise, i.e. BOI, AIB/EBS, and PTSB. 

11 

 
 
 
 
 
 
                                                 
original  3-year  programme  deleveraging  target.5  An  additional  EUR 13.1 billion  of 
deleveraging has been completed by IBRC over the same period. A further EUR 2 billion 
of asset disposals have been sale-agreed as of mid-November, and are expected to settle 
by year-end.  

Figure 4: PCAR banks' funding developments 

Deposit stock increased for fifth consecutive 
quarter despite recent outflows... 

...reducing reliance on central bank funding to 
its lowest level since programme inception. 

3

2

1

0

-1

-2

-3

-4

-5

-6

EUR billion

YoY inflows of EUR 10.9bn (+7.6%)

Recapitalisation 
completed

J
a
n
-
1
1

F
e
b
-
1
1

M

a
r
-
1
1

A
p
r
-
1
1

M

a
y
-
1
1

J
u
n
-
1
1

J
u
l
-
1
1

A
u
g
-
1
1

S
e
p
-
1
1

O
c
t
-
1
1

N
o
v
-
1
1

D
e
c
-
1
1

J
a
n
-
1
2

F
e
b
-
1
2

M

a
r
-
1
2

A
p
r
-
1
2

M

a
y
-
1
2

J
u
n
-
1
2

J
u
l
-
1
2

A
u
g
-
1
2

S
e
p
-
1
2

O
c
t
-
1
2

Source: Department of Finance 
Note:  Figures 
inflows/outflows for foreign subsidiaries of PCAR banks. 

consolidated 

and 

are 

include  deposit 

EUR billion

ECB

ELA

180

160

140

120

100

80

60

40

20

0

D
e
c
-
1
0

J
a
n
-
1
1

F
e
b
-
1
1

M

a
r
-
1
1

A
p
r
-
1
1

M
a
y
-
1
1

J
u
n
-
1
1

J
u
l
-
1
1

A
u
g
-
1
1

S
e
p
-
1
1

O
c
t
-
1
1

N
o
v
-
1
1

D
e
c
-
1
1

J
a
n
-
1
2

F
e
b
-
1
2

M

a
r
-
1
2

A
p
r
-
1
2

M
a
y
-
1
2

J
u
n
-
1
2

J
u
l
-
1
2

A
u
g
-
1
2

S
e
p
-
1
2

O
c
t
-
1
2

N
o
v
-
1
2

Source: Central Bank of Ireland, Department of Finance 
Notes:  Data  covers  BOI,  AIB/EBS,  PTSB  and  IBRC;  ELA  is 
proxied by the CBI's "other assets" series through March 2012 
and  by  "other  claims  on  euro  area  credit  institutions" 
thereafter; November data is through 7 November only.  

These  deleveraging  efforts,  continued  deposit  inflows  and  recent  market  issuance 
have  contributed  to  a  gradual  decline  in  covered  banks'  reliance  on  central  bank 
funding. Despite recent outflows (EUR 1.1 billion in August-September) their combined 
deposit  stock  was  about  EUR 11  billion  higher  in  October  than  a  year  earlier,  having 
recorded net inflows of EUR 14.7 billion since the third quarter of 2011. As a result, loan-
to-deposit ratios at the pillar banks have steadily declined, with AIB's falling below 120% 
by end-October and BOI's below 130% in November. Reliance on central bank funding 
has  reduced  correspondingly,  and  was  more  than  EUR 55  billion  (36%)  lower  in  early 
November relative to the February-2011 peak (Figure 4). In addition, in mid-November 
BOI  issued  a  EUR 1 billion  unguaranteed  covered  bond,6  collateralised  by  Irish 
residential  mortgage  loans,  the  first  such  issuance  since  before  the  launch  of  the 
programme,  followed  by  a  similar  issuance  of  EUR  500  million  by  AIB  later  in  the 
month. The relatively competitive pricing (Figure 5) and strong (largely foreign) investor 
demand are important signs of improved market funding prospects for Irish banks.  

5 The original programme deleveraging target required a EUR 70.2 billion net loan balance reduction across 
the covered banks by end-2013, reflecting non-core asset disposals, amortisation and FX/other adjustments. 
The programme deleveraging monitoring framework was since modified (see Commission Services report 
on the 7th programme review (e.g., page 25). 
6 This is not reflected in the above figure for the reduction in the banks' reliance on central bank funding. 

12 

 
 
 
 
 
                                                 
Figure 5: Unguaranteed covered bonds issued by select European banks, 2012 

Pricing on Irish banks' recent covered bond issues compare favourably with European peers' 

Issue Date

Borrower

Moody's/S&P/Fitch Country

Issue Size (€ bn) Coupon (%) Maturity

Spread

1-Feb-12

6-Feb-12

7-Feb-12

8-Feb-12

22-Feb-12

24-Feb-12

Santander

Banco Sabadell

Banesto

Caixabank

Bankia

Cajamar

12-Mar-12

Bankinter SA

21-Mar-12

Banco Popular

18-Apr-12

14-Aug-12

3-Sep-12

10-Sep-12

Unicredit

Unicredit

Unicredit

Banesto

11-Sep-12

Banco Sabadell

17-Oct-12

18-Oct-12

Unicredit

Bank

13-Nov-12

Bank of Ireland

22-Nov-12

Intesa Sanpaolo

26-Nov-12

BBVA

Aaa

Aaa

Aaa

Aaa/AAA

A2/AA

AA-

Aa2

Aa2

Aaa

A2/AA+/A

Aa1/AAA

A3

A3

A2/AA+/A

A3/A

Baa3

A2

A3

28-Nov-12 Allied Irish Bank

30-Nov-12

La Caixa

Baa3/A/A

Aaa/AAA

Spain

Spain

Spain

Spain

Spain

Spain

Spain

Spain

Italy

Italy

Italy

Spain

Spain

Italy

Spain

Ireland

Italy

Spain

Ireland

Spain

2.00

1.20

0.50

1.00

0.50

0.50

1.00

0.60

0.50

0.75

0.50

0.50

0.50

0.25

0.50

1.00

1.25

2.00

0.50

0.20

3.250

3.625

3.750

4.000

4.000

5.000

4.125

4.125

2.625

4.000

1.875

4.750

4.250

4.000

3.875

3.125

3.625

3.500

3.125

5.000

17-Feb-15

16-Feb-15

17-Jun-16

16-Feb-17

28-Feb-14

28-Feb-16

22-Mar-17

30-Mar-17

25-Apr-19

31-Jan-18

12-Sep-22

24-Jan-17

19-Sep-14

31-Jan-18

30-Oct-15

20-Nov-15

5-Dec-22

5-Dec-17

4-Dec-15

22-Feb-16

210

250

235

248

290

390

268

255

88

290

22

395

375

190

335

270

200

260

270

450

Source: Bloomberg, Bond Radar 
Note:  Spread  and  ratings  indicated  as  at  times  of  issue;  all  unguaranteed  covered  bonds  issued  by  banks  from  vulnerable  or 
programme countries through 5 December 2012 included. 

Monetary  conditions  have  broadly  continued  to  ease.  Interest  rates  on  new  loans  to 
non-financial corporations (NFCs) have been on a declining path for the past 12 months, 
reflecting  reductions  in  Euribor,  as  have  interest  rates  on  new  mortgages.  They  remain 
volatile,  however,  and  banks  increased  their  variable  rates  by  21  bps  on  average  in 
September to improve their net interest margins (Figure 6). Rates on consumer credit not 
related to house purchase have also been on a steady downward trend since the beginning 
of the year, with floating and up to one-year fixed rates lower by almost 80 basis points 
since January. 

13 

 
 
 
 
 
Figure 6: Evolution of key lending rates 

5.5

5

4.5

4

3.5

3

New lending to NFCs, 3-months ma 
%

S
e
p
-
1
0

N
o
v
-
1
0

J
a
n
-
1
1

M

a
r
-
1
1

M
a
y
-
1
1

J
u
l
-
1
1

S
e
p
-
1
1

N
o
v
-
1
1

J
a
n
-
1
2

M

a
r
-
1
2

Euro area

IE

M
a
y
-
1
2

J
u
l
-
1
2

S
e
p
-
1
2

3.7

3.5

3.3

3.1

2.9

2.7

2.5

New mortgages, 3-months ma 

%

Euro area

IE

S
e
p
-
1
0

N
o
v
-
1
0

J
a
n
-
1
1

M

a
r
-
1
1

M
a
y
-
1
1

J
u
l
-
1
1

S
e
p
-
1
1

N
o
v
-
1
1

J
a
n
-
1
2

M

a
r
-
1
2

M
a
y
-
1
2

J
u
l
-
1
2

S
e
p
-
1
2

Sources: ECB, Central Bank of Ireland.  
Note:  Loans  up  to  EUR  1  million  at  floating  rate  or  floating 
rate after a period of fixed rate for up to one year. 

Sources: ECB, Central Bank of Ireland.  
Note: Loans for house purchase at floating rate or floating rate 
after a period of fixed rate for up to one year. 

Yet  the  flow  of  credit  to  the  economy  remains  weak.  Net  lending  to  households  has 
continued to contract, though the flow of loans for house purchase in the third quarter of 
2012—EUR 0.7  billion  of  new  mortgages  issued  (drawn  down)—was  the  largest  since 
Q4  2010  and  almost  27%  more  than  in  Q2  2012.  Over  90%  of  these  loans  went  to  the 
first-time  buyer  and  mover-purchaser  segments  (Figure  7).  This  is  consistent  with 
emerging  signs  of  stabilisation  in  domestic  residential  property  prices,  although  many 
transactions  continue  to  be  carried  out  in  cash.7  Net  lending  to  NFCs  also  continues  to 
decline, though this partially reflects lower demand for investment spending, the gradual 
shift to shorter-term  facilities  such as  overdrafts (which continue to increase, albeit at a 
slower  pace),  and  the  sector's  high  leverage,  including  as  a  result  of  legacy  real  estate 
exposures. Credit to indigenous SMEs (excluding property and financial intermediation) 
is still contracting, though the annual rate of decline fell to 4.9% by end-September from 
8.9%  a  year  earlier.  Profitability  challenges  and  the  still-sizeable  funding  gap  might 
hinder banks' capacity to extend new lending, which could represent a downside risk for 
the  recovery.  Other  constraints  include  the  difficulty  of  disentangling  viable  SME 
activities  from  their  legacy  debts  and  the  need  for  banks  to  enhance  their  capacity  to 
assess SMEs' creditworthiness based on their cash flow rather than—as was often the case 
during the boom years—on their property collateral (see Section 6). Foreign-owned Irish-
resident banks are also contracting their exposure to domestic agents.  

7 Based on the recently-launched residential property register data base, in the first three quarters of 2012 
approximately 45% of transactions have been carried out in cash. 

14 

 
 
 
 
 
                                                 
Figure 7: Bank loan developments 

Lending to households and NFCs continues to 
contract, though mortgage credit showing signs of 
stabilisation 

First-time-buyers and mover-purchasers account 
for the largest share of new mortgage lending 

10

8

6

4

2

0

-2

-4

-6

Top-up

Re-mortgage

Residential Investment Letting

First-time Buyer Purchaser

Mover Purchaser

Households

Mortgage loans

NFCs

3,000

2,500

2,000

1,500

1,000

500

J
a
n
-
0
9

M

a
r
-
0
9

M
a
y
-
0
9

J
u
l
-
0
9

S
e
p
-
0
9

N
o
v
-
0
9

J
a
n
-
1
0

M

a
r
-
1
0

M
a
y
-
1
0

J
u
l
-
1
0

S
e
p
-
1
0

N
o
v
-
1
0

J
a
n
-
1
1

M

a
r
-
1
1

M
a
y
-
1
1

J
u
l
-
1
1

S
e
p
-
1
1

N
o
v
-
1
1

J
a
n
-
1
2

M

a
r
-
1
2

M
a
y
-
1
2

J
u
l
-
1
2

S
e
p
-
1
2

0

2
0
0
9
Q
1

2
0
0
9
Q
3

2
0
1
0
Q
1

2
0
1
0
Q
3

2
0
1
1
Q
1

2
0
1
1
Q
3

2
0
1
2
Q
1

2
0
1
2
Q
3

Source: Central Bank of Ireland 
Notes: (i) Lending to NFCs includes SMEs which account  
for  about  60%;  (ii)  lending  to  households  includes  mortgage,
consumer and other loans 

Source: Irish Banking Federation 
Note:  Figures  relate  to  all  new  lending  (flows)  secured  by 
residential property extended by IBF's  members  (95% of total 
market) 

Despite recent signs of stabilisation,  the increasingly long-term nature of mortgage 
arrears  is  a  persistent  source  of  concern.  While  arrears  balances  on  owner-occupier 
mortgage  accounts  less than 90  days past due (dpd) contracted over the two quarters to 
end  June  2012  (by  5.6%  and  1.9%  QoQ  respectively),  an  increase  was  recorded  in  Q3 
which however was reportedly due to a technical timing issue.8 Excluding the impact of 
this,  a  decline  of  [1.3%]  in  arrears  balances  of  less  than  90  dpd  is  estimated  for  the 
quarter. The deceleration in the pace of formation of new arrears reflects a stabilisation in 
the  macroeconomic  environment  and  some  initial  effectiveness  in  covered  banks' 
strengthened  efforts  to  tackle  arrears  early  on.  However,  arrears  balances  on  accounts 
more  than  180  dpd  continue  to  increase  reaching  over  14%  of  the  total  stock  of  owner 
occupier and investment property mortgages at end September. This highlights the urgent 
need  for  banks  to  implement  advanced  loan  modification  options  to  their  long-dated 
arrears'  stock  in  earnest.  Curing  late  arrears  is  of  paramount  importance  for  restoring 
profitability and minimising potential further loan losses.  

Taking advantage of improved sentiment towards Irish bonds, the authorities have 
added to their cash buffers. Yields on Irish government bonds have declined steadily in 
recent  months  and  markedly  since  the  supportive  statements  from  euro  area  leaders  in 
June and July (the yield on the 2020 bond fell from 6.2% in July to 4.5% in December). 
While the ratings by the major credit rating agencies have remained unchanged since the 
downgrades at the beginning of last year, one rating agency upgraded Ireland's outlook to 
stable from negative in mid-November (Figure 8). After the summer issuances of short-
term  T-bills  and  long-term  bonds,  Ireland  made  two  T-bill  issuances  in  October  and 
November, with further reductions in the yields (0.55% in November, down from 0.7% in 

8 See Information release of the Central Bank of Ireland on Mortgage Arrears and Repossessions Statistics  
for the third quarter of 2012.  

15 

 
 
 
 
 
 
 
 
 
 
 
  
 
                                                 
October  and  1.8%  in  July)  and  comfortable  bid-to-cover  ratios.  The  increased  market 
appetite likely reflects the continuously strong program implementation and progress on 
European initiatives to strengthen the institutional architecture of EMU. These issuances 
enabled  a  significant  increase  in  cash  balances,  which  stood  at  EUR  23.4  billion  at  the 
end of September (see also Table 3 on page 45), with corresponding upwards revisions to 
the interest bill and gross debt.  

Figure 8: Developments on the Irish government bond market  

Irish bond yields have declined steadily in 2012…  …while ratings have stayed flat. 

in %
8,5

8,0

7,5

7,0

6,5

6,0

5,5

5,0

4,5

4,0

Yield on 2020 Irish Government Bond

(S&P, Fitch)

(Moody's)

AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
CCC
CCC-
CC

S&P
Fitch
Moody's

Jan 09

Jan 10

Jan 11

Jan 12

Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca

Source: Bloomberg, Fitch and S&P.  

3. 

Programme implementation 

Programme implementation remains strong 

• 
Fiscal policy/framework. Cash figures through September showed a better-than-
profiled  central  government  balance  (the  IMF  quantitative  performance  criterion  on  the 
cumulative  primary  exchequer  balance  for  Q3  has  been  met  by  a  sizeable  margin,  i.e. 
EUR  1.3  billion).  Two  Bills  were  published  as  per  the  programme  requirement.  The 
Fiscal  Responsibility  Act9  places  the  Irish  Fiscal  Advisory  Council  on  a  statutory  basis 
and  implements  budgetary  rules  and  debt  rule  in  line  with  the  Treaty  on  Stability,  Co-
ordination  and  Governance  in  the  Economic  and  Monetary  Union,    The  other  piece  of 
legislation  will  provide  legal  basis  for  already  operational  medium  term  expenditure 
ceilings  (Ministers  and  Secretaries  (Amendment)  Bill  2012)10.  Health  measures  were 
specified to address the health overruns, although their implementation and effectiveness 
was not as anticipated (see section 5 below). 

• 
Financial  sector  reforms.  In  recognition  of  the  progress  achieved  towards  the 
programme's  deleveraging  objectives  discussed  in  section  2,  the  modified  deleveraging 
monitoring 
through  official 
communications by the central bank to covered institutions, and the first report under the 

framework11  has  been 

formally  operationalised 

9 http://www.finance.gov.ie/documents/pressreleases/2012/mn109append.pdf 
10 http://www.oireachtas.ie/documents/bills28/bills/2012/8112/b8112.pdf 
11 Described in the report on the 7th programme review (see, e.g., page 25). 

16 

 
 
 
 
                                                 
new monitoring arrangements was provided in accordance with programme requirements. 
The  authorities  have  also  provided  their  routine  reports  on  banks'  performance  with  the 
work-out  of  arrears  and  unsustainable  mortgage  and  SME  loans.  The  financial 
supervision  framework  continues  to  be  updated.  In  line  with  programme  requirements, 
two  pieces  of  legislation  were  published  to  (i)  strengthen  the  credit  union  legislative 
framework and (ii) establish a Central Credit Register. Further benchmarks were observed 
through the introduction of regulations to (i) require credit unions to maintain an amount 
in  the  Deposit  Protection  Account  of  the  CBI  and  to  (ii)  institute  a  credit  institution 
resolution  levy  to  recoup  EUR 500  million  in  Exchequer  resources  provisioned  for  the 
resolution of troubled credit unions. The latter is, in some key respects (notably, the basis 
of the levy and the target size of the resolution fund), not fully in line with the European 
Commission's  proposal  for  the  EU  directive  establishing  a  framework  for  the  recovery 
and  resolution  of  credit  institutions  and  investment  firms,  and  the  authorities  have 
undertaken  to  review  it  when  the  EU  legislation  is  published.  Individual  banks' 
operational reorganisations also continue to progress, with an updated restructuring plan 
submitted by AIB's management to the European Commission for assessment under state 
aid rules.  

• 
Structural reforms. Legislation reforming sectoral wage setting arrangements to 
increase  labour  market  responsiveness  to  changing  economic  conditions  was  enacted  in 
July,  and  the  authorities  have  updated  the  Troika  on  the  actions  they  are  taking  to 
strengthen  their  labour  market  activation  policies,  including  in  terms  of  data  collection 
and provision (progress is being made, but the challenge is enormous and efforts could be 
stepped  up  accordingly,  see  section  7).  A  programme  facilitating  access  to  professional 
financial  advisory  services  for  distressed  borrowers  was  put  in  place.  Finally,  progress 
continued in terms of bringing identified non-strategic state assets closer to the point of 
sale and detailing the implementation strategy for the reform of water services, although 
delays  to  the  latter  appear  to  be  accumulating,  especially  as  regards  the  metering 
programme (see section 7), and implementation risks correspondingly growing.  

New  conditionality  milestones  were  agreed,  and  an  existing  financial  sector 
benchmark  was  postponed  by  a  quarter.  New  programme  conditionality  was 
introduced including to guide the process leading to the introduction of water charges, to 
monitor  closely  the  banks'  progress  on  resolving  longer-dated  arrears,  to  amend  the 
Company act making for cheaper and easier debt resolution processes for SMEs, to assess 
the  costs  of  health  service  provision  in  comparison  with  other  countries,  and  to  ensure 
that  the  new  personal  insolvency  framework  operates  amid  balanced  incentives  by 
restoring banks' ability to repossess their collateral as an appropriate last resort measure. 
Taking account of recent developments concerning the EBA stress test, now expected in 
the second half of 2013, and given prior understanding that  the two exercises would be 
aligned  in  terms  of  timing,  it  was  agreed  to  postpone  the  programme  requirement  to 
complete  the  next  PCAR  from  the  second  to  the  third  quarter  of  2013  (see  updated 
programme documents in Annex 3). 

4.  Macroeconomic outlook 

The  growth  forecast  underpinning  the  programme  remains  unchanged  for  2012, 
albeit  with  a  slightly  different  composition,  but  it  has  been  revised  down  for  2013. 
The overall growth story for the coming years is unchanged, with net exports as the main 
driver  of  growth,  although  domestic  demand  is  expected  to  be  slightly  weaker  than 

17 

 
 
previously assumed.  As outlined earlier, data released since the seventh review continue 
to be broadly consistent with real GDP growth of 0.4% in 2012. The contributions from 
net  exports  have  been  revised  up  somewhat  for  2012-2013,  however,  mainly  due  to 
imports recently being weaker than expected. Private consumption has accordingly been 
revised  down  marginally  for  the  coming  years.  Export  projections  for  2012  have  been 
kept  at  previous  levels  despite  the  worsening  external  environment.  For  2013  the 
downgrade  of  the  external  environment  projections  compared  to  the  seventh  review  is 
expected  to  bring  down  export  growth  somewhat,  although  the  resilience  of  exports 
(particularly services) in recent years will likely act as a buffer. A gradual slowdown of 
growth  in  goods  exports  as  patents  expire  is  built  into  the  projections,  as  well  as  more 
modest  growth  rates  of  services  exports  than  what  has  been  observed  recently.  The 
contribution  to  growth  from  net  exports  is  set  to  stay  largely  unchanged  as  further 
contractions  are  expected  across  all  domestic  demand  components,  which  will  dampen 
imports correspondingly. As a result, 2013 GDP growth has been revised down to 1.1% 
from 1.4% at the seventh review. 

The outlook for nominal GDP growth in 2013 is, however, broadly unchanged.  The 
HICP inflation forecast has been revised up to 2.0% for 2012 following relatively strong 
increases  earlier  in  the  year  (even  after  taking  the  recent  moderation  into  account). 
Inflation  is  expected  to  decline  in  the  coming  years  as  temporary  price  pressures  are 
unwound, thus supporting continued gradual improvement in competitiveness relative to 
the  euro  area,  before  inching  up  again  towards  2%  by  2015  in  line  with  expected 
developments in the euro area.  Although recent terms-of-trade developments have partly 
offset the effects of higher inflation on the GDP deflator, the net effect is positive, which 
results  in  higher  projected  levels  of  nominal  GDP  in  2012-2013  compared  to  those 
underpinning the 7th review despite the lower real GDP growth rate in 2013.  

Weak labour market developments and their knock-on effects on domestic demand 
are expected to weigh on real GDP growth into 2014. The anatomy of the shock to the 
labour  market  has  been  outlined  in  previous  reports—massive  job  losses  both  in  the 
construction and industrial sectors being followed by loss of services jobs (Figure 9)—but 
recent data again suggest that previous projections were somewhat optimistic as regards 
to  when  employment  would  start  growing  and  unemployment  fall  substantially.  As  a 
result of weaker labour market projections, domestic demand and GDP growth for 2014 
have  also  been  reduced.  Since  the  start  of  the  crisis,  potential  growth  has  been  driven 
solely  by  total  factor  productivity  amid  extensive  labour  shedding  and  extremely  low 
levels  of  investment,  in  marked  contrast  to  the  prior  period  (Figure  9).  The  mission 
continues to believe that the Irish economy has the potential to grow around 3% per year 
towards the end of the projection period, although the continuous edging up of the share 
of  long-term  unemployed,  the  risk  of  cemented  skills  mismatches  and  the  uncertain 
investment outlook are increasing threats to that assessment.  

18 

 
 
Figure 9: Labour market and contributions to potential growth 

75

50

25

0

-25

-50

-75

-100

-125

-150

Contribution of selected sectors to changes in 
employment (year on year), thousands

Industry (B to E)

Accommodation and
food service (I)
Wholesale and retail
trade, moto repairs (G)
Construction (F)

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

Source: Central Statistical Office

2
0
1
2
-
Q
3

4

3

2

1

0

-1

-2

-3

Contributions  to potential growth, %

Capital accumulation

TFP

Total labour (persons and hours
worked)

2001

2003

2005

2007

2009

2011

2013

2015

Source: Commission  Services calculations

There  is  significant  uncertainty  around  domestic  demand  projections  from  the 
private  sector  debt  overhang  and  high  precautionary  savings,  and  possible  profit-
hoarding  by  some  corporates.  Property  markets  have  just  started  to  show  signs  of 
stabilisation and substantial deleveraging has so far hardly dented the elevated household 
debt to disposable income ratio, which at 200% is more than twice the euro area average. 
The  link  between  mortgage  payment  discipline  and  labour  market  status  is  also  strong 
according  to  a  recent  CBI  survey.  These  are  the  factors  underpinning  the  baseline 
scenario where balance-sheet adjustment due to the large hit to household net worth (see 
Figure 10) will continue to weigh on domestic demand. On the upside, positive surprises 
relative to the baseline could result from the unwinding of precautionary savings, which 
appear  to  be  very  significant  at  least  among  those  cohorts  (loosely,  the  very  young  and 
old—see Figure 10) where many households are without mortgages. Such unwinding of 
precautionary  savings  could  unleash  substantial  pent-up  demand  once  macroeconomic 
uncertainty dissipates or bequests are realized. 

Figure 10: The wealth effect of the housing bust, aggregate and by cohorts 

Change in net worth and non-financial assets as 
percent of nominal disposable income, 2007-2012 
1/ 

House ownership by cohort  

0

-50

-100

-150

-200

-250

-300

Net worth

Non-financial assets

No mortgage

Mortgage

50

45

40

35

30

25

20

15

10

5

0

Ireland

UK

U.S.

1/ Last observation Q4 2010 for U.K. and U.S.  
Source: OECD, Goodbody. 

19 

24-34

35-44

45-54

55-64

65 and above

Source: CSO 

 
 
   
 
 
The  non-financial  corporate  sector  is  not  yet  playing  a  growth-supporting  role  in 
line  with  its  potential.  Profit  shares  are  back  to  pre-crisis  levels  and  continue  trending 
upwards,  although  their  macroeconomic  importance is  difficult  to  assess  due  to  transfer 
pricing  issues  by  multinationals  (which  account  for  the  bulk  of  growth  in  gross  value 
added (GVA) in recent years, see Figure 11), and the partial decoupling of value added in 
the  sector  from  aggregate  employment  and  other  domestic  developments.  Debt  ratios 
have  stabilized  at  twice  the  euro  area  average  and  investment  rates  continue  to  decline. 
Credit  constraints,  which  appear  to  be  especially  binding  for  SMEs,  are  likely  an 
important  explanatory  factor  for  the  subdued  credit  growth,  but  so  is  the  lack  of 
confidence in future growth prospects.  

20

15

10

5

0

-5

-10

-15

Figure 11: Gross value added by sector 

Gross value added by sector, y-o-y%

Foreign-owned MNE dominated
Other
Total

Source: CSO

2006

2007

2008

2009

2010

2011

Source: CSO 

The  authorities  expect  somewhat  stronger  real  GDP  growth.12  The  Department  of 
Finance  is  more  optimistic  on  GDP  growth  than  Commission  services  throughout  the 
2012-2015  period,  with  an  annual  average  difference  of  0.3  percentage  points.  This 
results  in  its  projected  level  of  nominal  GDP  being  EUR  1.5  billion  higher  by  2015 
despite very similar projections for the GDP deflator. The main drivers of the difference 
are  larger  contributions  from  domestic  demand,  especially  through  lower  imports  and 
higher investments, as well as somewhat stronger export developments. The differences 
on the labour market side are minor, with the Department of Finance projecting slightly 
stronger employment growth in 2012-2013. 

12 See the Budget 2013, www.budget.gov.ie, published in early December. 

20 

 
 
 
                                                 
Table 1: Revised macroeconomic framework 

 Eight review forecasts (latest)

Seventh review forecasts (previous)

2011

2012

Real GDP growth
Private consumption
Public consumption
Fixed investment
Domestic demand (contribution)
Inventories (contribution)
Exports
Imports
Net trade (contribution)

Employment
Unemployment rate (level)

GDP deflator
HICP inflation

1.4
-2.3
-4.3
-12.2
-3.4
0.4
5.1
-0.3
5.4

-2.1
14.4

0.2
1.2

0.4
-2.1
-4.0
-4.0
-2.2
0.0
2.8
0.3
2.6

-1.2
14.8

1.7
2.0

2012

2011

2015

2014

2013
% change on previous year (unless otherwise specified)
1.1
-0.5
-1.7
-1.5
-0.7
0.0
3.2
2.0
1.8

1.4
-2.4
-4.3
-12.6
-3.4
0.4
5.1
-0.3
5.4

0.4
-1.9
-3.0
-4.0
-1.9
0.0
2.8
0.8
2.3

2.2
1.2
-3.0
3.0
0.3
0.0
4.2
3.2
1.9

2.8
1.8
-3.3
5.2
0.8
0.0
4.5
3.6
2.0

0.0
14.7

1.3
1.3

0.9
14.2

1.4
1.4

1.9
13.4

1.6
1.6

4.5
179.9

-2.1
14.4

0.2
1.2

-0.8
14.8

1.4
1.4

2013

1.4
-0.2
-0.7
-0.1
-0.2
0.0
3.5
2.5
1.6

0.4
14.4

1.2
1.0

2014

2015

2.5
1.4
-3.5
4.5
0.5
0.0
4.5
3.5
2.0

1.3
13.7

1.4
1.4

2.8
1.9
-3.4
5.2
0.9
0.0
4.5
3.6
2.0

2.0
13.1

1.6
1.6

1.1
159.0

2.1
161.8

3.3
166.1

4.6
172.7

4.7
180.5

Current account (% of GDP)
Nominal GDP (EUR billion)
Source: Commission services' calculations.  

3.4
166.2

0.5
159.0

2.3
162.3

4.4
172.3

5. 

Policy discussions 

5.1 

Fiscal policies 

Putting  fiscal  policy  gradually  back  on  a  sustainable  base  is  a  key  objective  of  the 
programme. The authorities continue to make good progress in this respect, having met 
so far all the quarterly fiscal targets under the programme. Yet much still remains to be 
done—including to address new spending pressures, e.g. in the health area—to close the 
still large fiscal deficit, and ensure that the debt ratio peaks next year and then embarks 
on  a  declining  path.  The  key  challenges  will  be  to  ensure  that  the  adjustment  is  as 
growth-friendly as possible and does not prejudice the quality of public services and that 
its  burden  is  fairly  allocated  (the  most  vulnerable  should  be  shielded  as  much  as 
possible). The fiscal framework continues to be strengthened, and the legislation granting 
statutory  basis  to  the  multi-year  expenditure  ceilings  should  ensure  that  these  act  as  a 
credible anchor for policies and expectations after the programme period. 

The  2012  budget  deficit  ceiling  is  estimated  to  have  been  observed.  The  draft  2013 
budget forecasts the deficit for 2012 at 8.2% of GDP, below the 8.6% programme ceiling. 
Despite  weaker  revenue  in  the  fourth  quarter,  and    expenditure  overruns  in  health  and 
social  welfare,  the  programme's  deficit  ceiling  is  envisaged  to  be  respected  thanks  to  a 
one-off higher-than-budgeted revenue from UMTS licence sales, lower-than-planned debt 
servicing costs, savings in the capital budget and the positive effect of the higher nominal 
GDP base. 

There  have  been  overruns  in  the  health  sector,  which  require  durable  reforms  to 
reduce  the  risks  of  future  spending  pressures  in  this  area.  In  July  the  authorities 

21 

 
 
 
announced a set of measures to offset the health overruns. They committed to deliver at 
least  part  of  the  savings  for  items  planned  in  the  2012  budget  and  to  take  additional 
structural  measures  addressing  spending  pressures  (see  report  on  seventhh  review). 
Discussions during the mission evidenced that those commitments have been only partly 
implemented,  resulting  in  an  estimated  overrun  of  EUR 370 million  through  November 
2012.  Combined  with  additional  spending  pressures  by  year-end  and  the  unwinding  of 
temporary  measures  next  year,  the  structural  gap  in  the  health  vote  is  about  EUR 700 
million (see Table A1 in Annex 2). 

To  deal  with  this  problem,  the  authorities  presented  a  package  of  measures  in  the 
2013  budget.  The  total  effort  addressing  the  2012  overrun  and  ensuring  the  planned 
adjustment  in  2013  amounts  to  EUR 780  million.  The  package  includes  already 
announced  and  new  measures.  The  former  include  the  October  2012  deal  with  the 
pharmaceutical  industry  (expected  to  yield  savings  of  about  EUR 145  million),  further 
exploiting  the  scope  for  flexibility  arrangements  under  the  Croke  Park  Agreement  and 
additional  pay  savings  (EUR  308  million),  and  charging  all  private  patients  in  public 
hospitals  (EUR 65 million).  The  new  structural  measures  under  the  Primary  Care 
Reimbursement  Service  (PCRS)  (EUR  163  million)  include  reducing  fees  payable  to 
health  professionals  (EUR  70  million),  tightening  eligibility  criteria  and  greater  co-
payments13 (estimated to generate savings of EUR 90 million). 

The  mission  stressed  that  the  chosen  measures  must  be  swiftly  and  fully 
implemented  in  order  to  meet  the  estimated  saving  targets.  Based  on  2012  budget 
experience, the identified measures are subject to significant implementation risks mainly 
related to the delays in publishing the necessary legislation. This is the case, for example, 
for the provisions to charge all private patients in public hospitals, which is to be adopted 
by  end  2012  and  for  which  a  clear  implementation  timeline  is  not  yet  available.  The 
authorities  have  also  begun  an  engagement  with  unions  representing  public  servants, 
including  health  sector  workers,  to  seek  additional  savings  from  the  public  service  pay 
and pensions bill, along with additional productivity reforms (including in terms of hours 
worked). The mission took the view that all options should be kept on the table and that 
additional savings in the public sector paybill should be made in a manner that does not 
compromise the delivery of key public services, including the option to review pay scales 
and allowances besides relying on further reductions in payroll numbers.   

Moreover,  the  mission  pointed  out  that  significant  scope  remains  to  increase  the 
efficiency, cost-effectiveness, monitorability and sustainability of the health system, 
including by implementing key reforms announced in the 2012 annual output statement 
for health expenditures. These include, for example, the introduction of a unique patient 
identifier,  the  enhancement  of  primary  care  reimbursement  services,  the  expansion  of 
general  practitioners'  (GPs)  after-hours  services,  fuller  cost  recovery  of  the  costs  of 
treating  private  patients  in  public  hospitals,  and  the  introduction  of  a  financing 
mechanism  based  on  the  "money-follows-the-patient  (MFTP)"  principle  to  foster 
integrated health care, better cater health service provision to individual needs, increase 
transparency and improve cost control. The rationalisation of the hospital network can be 

13  Main  savings  stem  from:  increasing  prescription  charges  for  medical  card  holders  (EUR  51  million); 
tightening  restrictions  on  medical  card  eligibility  (EUR  20  million);  adjusting  the  income  eligibility 
threshold for medical cards for over 70s to replace medical cards with GP-only cards (EUR 12 million); and 
increasing the Drug Payment Scheme (DPS) threshold (EUR 10 million) 

22 

 
 
                                                 
speeded up and the drugs bill reduced further (Ireland currently spends 34% more in per 
capita terms than the EU average – Figure 12 in Box 1), including by promoting greater 
use of generic drugs and ensuring that they are procured at prices more in line with other 
jurisdictions,  and  further  advancing  towards  performance  budgeting  and  its  integration 
with budget planning procedures. A key enabler of cost reduction would be a system of 
compulsory prescription by active ingredients and generic substitution from pharmacies, 
combined  with  regular  monitoring  of  doctors'  prescription  behaviour  to  check  their 
compliance  with  binding  prescription  guidelines.  To  ensure 
that  outpatient 
pharmaceutical  spending  does  not  exceed  the  available  annual  financial  envelope  in  the 
budget, the government could also consider putting in place a claw-back mechanism (i.e. 
a  rebate  to  be  charged  on  pharmaceutical  companies  on  a  quarterly  basis),  in  line  with 
practice in other Member States. A cost allocation formula/mechanism should be set up to 
ensure full recovery, from specialists and insurance companies, of the costs to the State 
arising from private fee-for-service practices carried out in public hospitals. Finally, the 
Government could review the fees and salaries paid to medical professionals (see Figure 
14 in Box 1), increase co-payments for products and services, and tackle the unsustainable 
growth in medical cards, including through greater use of GP Visit Cards to substitute for 
more expensive medical cards. 

23 

 
 
Box 1: Maximising efficiencies to achieve better health outcomes 

Improving value for money is key 

While  most  indicators  show  Ireland  close  to  average  in  terms  of  health  outcomes,  health  spending, 
especially on a per capita basis, is relatively high, suggesting poor value for money (Figure 12).  In the 
period 1997  – 2007, per  capita  increases  in  healthcare  spending  in  Ireland outpaced  almost  all  other 
OECD  countries.  In  a  2010  report,  the  OECD  found  that  Ireland  had  the  greatest  potential  for 
efficiency savings in public healthcare spending, and that the potential gains in life expectancy which 
could result were the second highest in the OECD.  

Figure 12: Health spending as a proportion of national income (2010) 

12%

10%

8%

6%

4%

2%

0%

d
n
a
l
e
r
I

k
r
a
m
n
e
D

s
d
n
a
l
r
e
h
t
e
N

K
U

e
c
n
a
r
F

a
i
r
t
s
u
A

g
r
u
o
b
m
e
x
u
L

c
i
l
b
u
p
e
R
k
a
v
o
l
S

m
u
i
g
l
e
B

y
n
a
m
r
e
G

n
i
a
p
S

n
e
d
e
w
S

c
i
l
b
u
p
e
R
h
c
e
z
C

a
i
n
e
v
o
l
S

l
a
g
u
t
r
o
P

d
n
a
l
n
i
F

d
n
a
l
o
P

y
l
a
t
I

e
c
e
e
r
G

y
r
a
g
n
u
H

a
i
n
o
t
s
E

Source: Paul Redmond (2012) Expenditure and Outputs in the Irish Health System: A Cross Country Comparison; 
publicpolicy.ie. The data are adjusted to take account of a countries proportion of over-65s. For Ireland, national 
income is measured using GNI; for all other countries it is GDP. 

As discussed in Section 5, the immediate focus for health policy is on achieving budgetary targets. But 
many  of  the  factors  behind  the  overruns  (e.g.,  staffing  costs,  drugs  spending)  are  also  linked  in  the 
medium  term  to  improving  efficiencies.  Raising  the  efficiency  of  spending  towards  EU  benchmarks 
should allow for improving outcomes for patients over time while containing the level of spending.  

Better measurement is a first step 

A key first step is to put in place better measurement systems that are a) monitorable, b) internationally 
comparable  and  c)  patient-focused.  Within  this  context,  the  pilot  Government-level  performance 
measurement system under the Public Service Reform Plan (linking Government's high-level goals to 
outcomes and outputs) could be expanded to include Health, as originally planned. 

More could be done on the cost of Pharmaceuticals 

While  all  EU  countries  have  seen  substantial  increases  in  drugs  costs  since  the  turn  of  the  century, 
Ireland's increases have been among the sharpest, nearly tripling from 2000 to 2008 (Figure 13). 

In 2010, per capita spending on pharmaceuticals in Ireland was the highest in the EU, 34% above the 
average, while health outcomes are not better than the average for EU countries over a range of high-
level indicators. This suggests a potential for savings well beyond the measures already announced. 

High drug prices is an important factor. In particular in the area of generics, prices of the same drugs 
vary considerably across EU Member States, and with the patents on many branded drugs approaching 
expiration (the so-called 'patent cliff'), renewed attention could be paid to maximising the benefits of 
lower  cost  generics.  Cost  savings  from  generics  are  greatest  when  the  uptake  follows  quickly  from 
patent  expiry.  Important  savings  could  be  achieved  with  a  reform  of  the  external  reference  pricing 
mechanism.  At  present,  Ireland  sets  prices  for  drugs  based  on  an  average  of  a  basket  of  reference 
countries. Significant gains could be made by: (i) expanding the set of countries in the reference list 
and (ii) moving benchmarks from the average to the lowest prices among reference countries. On the 
demand side, prescription by active ingredient rather than by name of drug (with exceptions allowed 
only for "non-substitutability" cases to be rigorously motivated by the prescribing doctor), electronic 
monitoring and financial incentives could be employed to ensure prescribers are seeking the most cost 
effective alternatives. Provisions to these effects would significantly increase the efficiency-enhancing 
effects of the (Pricing and Supply of Medical Goods) Bill 2012. The switch to prescription on the basis 

24 

 
 
 
 
 
 
of  International  Nonproprietary  Name  (INN),  where  possible,  will  facilitate  compliance  with  the 
forthcoming  Implementing  Directive  designed  to  help  recognition  of  prescriptions  issued  in  another 
member state, which all Member States must transpose by 25 October 2013. 

Figure 13: Total pharmaceutical expenditure per capita (2010) 

EUR '000s

2000

2008

800

700

600

500

400

300

200

100

0

G
r
e
e
c
e

I
r
e
l
a
n
d

F
r
a
n
c
e

G
e
r
m
a
n
y

A
u
s
t
r
i
a

S
p
a
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n

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a
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y

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i
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L
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k

P
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r
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s

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a

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U
K

H
u
n
g
a
r
y

E
s
t
o
n
i
a

P
o
l
a
n
d

Source: OECD Health Data 2010 

Remuneration of medical staff should also be reviewed 

The  high  level  of  remuneration  of  doctors,  in  particular  specialists,  is  another  feature  of  Irish  health 
spending  which  may  warrant  attention.  OECD  data  show  that  Ireland's  remuneration  to  medical 
specialists is well above the EU average (although some caution is required in making cross-country 
comparisons). 

Figure 14: Salaries of medical specialists in some EU countries 

As a ratio of average wage 

4

3.5

3

2.5

2

1.5

1

0.5

0

d
n
a
l
e
r
I

g
r
u
o
b
m
e
x
u
L

l
a
g
u
t
r
o
P

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d
n
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e
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t
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a
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S

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r
a
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D

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i
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i
n
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E

y
n
a
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G

y
r
a
g
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u
H

In EUR thousands 
200

181

180

160

140

120

100

80

60

40

20

0

150

139

118

100 96 91

74 73 71

56

48 46

23

16

…
d
e
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i
n
U

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y
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Source: OECD Health Data 2012. Data are for 2010 except Estonia, Italy, UK and Ireland (2011); Germany (2012); 
Luxembourg (2005); Netherlands and France (2009); Portugal (2005). 
Source: For Germany, average of three 
increments for 2012, Grade Ä 4 (Western Germany only); for all other countries: OECD Health Data 2012. Data are for 2010 
except Estonia, Italy, UK and Ireland (2011); Germany (2012); Luxembourg (2005); Netherlands and France (2009); Portugal 
(2005). 

The  authorities  indicated  that  negotiations  between  the  Department  of  Health  /  HSE  and  Hospital 
Consultants  to  achieve  more  efficiency  from  existing  contractual  arrangements  have  been  recently 
completed and that the pay rate for newly appointed specialists will be cut by 30%. A comprehensive 
review of the market for medical staff could be considered, however, a some of the problem may lie in  
the low number of specialists as a proportion of all doctors. There may be value in strategies to further 
open the supply of labour to suitably qualified specialists from other countries. For instance, from 2007 
to  2011,  Ireland  recognised  151  intra-EU  qualifications  for  doctors  (per  million  inhabitants);  for  the 
UK  it  was  205  per  million  inhabitants.  For  doctors  wishing  to  set  up  practice  in  Ireland,  such 
recognition  is  a  precondition.  Outside  the  EU,  even  more  potential  exists  to  open  labour  supply; 
however, it is important that Ireland observes standards from the WHO's ethical recruitment code when 

25 

 
 
 
 
 
 
 
 
pursuing recruitment from developing countries. 

The  2013  budget  targets  a  deficit  of  7.5%  of  GDP  –  in  line  with  the  programme's 
deficit ceiling. While the previously announced aggregate consolidation commitment of 
EUR  3.5  billion  in  2013  has  not  changed,its  composition  has  shifted  slightly  more  to 
revenue  measures  compared  to  the  MTFS  projections14:  EUR  1.9  billion  in  expenditure 
and  EUR  1.4  billion  in  revenue  measures,  as  well  as  increased  dividends  from  state-
owned companies of EUR 0.1 billion. Earlier introduction of the property tax in mid-2013 
has  some  effect  on  the  split  between  new  revenue  measures  and  carry-overs.  The 
valuation-based property tax is expected to yield EUR 250 million in 2013, when it will 
be  assessed  only  on  a  half-year  basis,  and  EUR  500  million  on  a  full  year  basis. 
Additional revenue on accrual basis is expected from the property tax deferral option for 
asset-rich  but  income-poor  households.15  Other  major  revenue  measures  include  the 
broadening  of  the  base  for  social  contributions  (PRSI,  yielding  EUR  286  million),  and 
increases  in  excise  duties  on  alcohol  and  tobacco  (EUR  205  million),  as  well  as  in  the 
motor and vehicle registration tax (EUR 150 million). 

The expenditure plans for 2013 are broadly consistent with an expenditure ceiling of 
EUR 54.3 billion. The reduction of EUR 1.7 billion in the gross voted current and capital 
expenditure from the 2012 level reflects expenditure saving measures of EUR 1.9 billion 
in  an  environment  of  increasing  demand  for  social  services,  including  unemployment 
benefits, education and health care. Current expenditure adjustment amounts to EUR 1.4 
billion and capital to EUR 0.5 billion. The current expenditure measures include cuts in 
child  benefit  rates  (EUR  136  million),  further  reduction  in  the  public  service  paybill, 
including  through  reductions  in  the  number  of  public  sector  employees  (EUR  220 
million), increase in  student contributions,  many  smaller  savings  across  the government 
departments, and measures to contain health-care costs (see above).  

The  authorities  have  also  reiterated  their  commitment  to  bringing  the  government 
deficit  below  3%  of  GDP  by  2015.  The  adjustment  effort  for  2014-15  remains  largely 
unchanged,  as  well  as  previously  outlined  broad  consolidation  measures,  yet  details  on 
specific  measures  are  not  available.  On  the  basis  of  the  Commission  services'  lower 
macroeconomic  projections,  the  planned  adjustment  effort  over  the  forecast  period  may 
not be sufficient to reach the deficit targets. A new Comprehensive Expenditure Review 
will  start  in  2013  providing  options  for  further  fiscal  adjustment  in  2014-15  and 
reassessing government spending priorities.  

14  Higher  revenue  projections  include  temporary  non-tax  revenues  from  bank  guarantees,  central  bank 
profits  and  profits  of  state-owend  enterprises  which  make  up  for  lower-than-previously-expected  tax 
revenues.  
15  Appropriate  accounting  treatment  of  the  property  tax  deferral  will  be  determined  by  the  statistical 
authorities. 

26 

 
 
                                                 
Table 2: Fiscal adjustment commitments 2013-2015, EUR billion 

Permanent consolidation measures

of which new measures

Revenue

First year effect
Carryover from the previous year

Expenditure
Current 
Capital

Increased dividends (temporary)

2013
3.5
3.2
1.43
1.21
0.22
1.94
1.44
0.5
0.1

2014
3.1
2.5
1.1
0.5
0.6
2.0
1.9
0.1

2015
2.0
1.8
0.7
0.5
0.2
1.3
1.3
0.0

Source: Budget 2013 and MTFS. 

Public  service  reforms  are  ongoing.    The  implementation  of  the  Public  Service 
(Croke Park)  Agreement  2010-2014  is  progressing.  According  to  the  Implementation 
Body's Second Annual Progress Report, a substantial reduction in staff numbers (around 
11,530) took place during the review period (April 2011-March 2012).  As of mid-2012, 
public service numbers were 292,000, i.e. 28,000 below the peak of 320,000 in 2008 and 
comparable  to  2005  levels.  The  Exchequer  pay  bill  has  been  reduced  by  17.7%  in 
nominal  terms  between  2009  and  2012  (18.7%  in  real  terms),  from  EUR  17.5  billion 
(gross)  to  EUR 14.4 billion  (net  of  the  pension-related  deduction),  while  the  Exchequer 
pension  bill  has  increased  by  15.4%  from  EUR  2.6  billion  (gross)  to  EUR  3  billion 
(gross).16  The  Implementation  Body  estimated  that,  during  the  first  two  years  of  the 
agreement,  pay  and  non-pay  savings  of  EUR 810 million  and  EUR 678 million  were 
achieved,  respectively.  Over  the  period  2009-2015,  the  annual  Exchequer  pay  bill  is 
expected  to  fall  by  EUR 3.8 billion,  or  by  EUR 3.3 billion  net  of  expected  increases  in 
public service pension costs. The mission stressed once again the need to closely monitor 
the  implementation  of  the  agreement  in  order  to  ensure  that  the  desired  savings  are 
achieved,  and  that  all  options  should  be  kept  on  the  table  to  ensure  that  the  delivery  of 
essential  public  services  is  not  compromised.  Furthermore,  the  mission  reiterated  that 
reductions  in  allowances  and  salary  scales  for  some  categories  of  workers  could  be 
considered as a way to better align pay rates with those other countries. This would also 
allow  further  savings  in  the  pay  bill  to  be  made  without  compromising  the  delivery  of 
essential  public  services.  This  is  especially  the  case  in  the  health  sector  where,  as 
underlined  by  a  recent  WHO  report,17  substantial  additional  savings  through  efficiency 

16 The pay bill had increased very sharply in the pre-crisis period. Data from various issues of the Analysis 
of Exchequer Pay and Pension Bill (2000-2005; 2006-2011; and 2007-2012) show that, between 2000 and 
2008, the Exchequer Pay and Pension Bill increased by 118% from EUR 8.9 billion (gross) to EUR 19.4 
billion  (gross)  and  by  117%  from  EUR  8.6  billion  to  EUR  18.7  billion  (net).  As  a  percentage  of  GDP 
(GDP), it increased by 2 (2.3) pp from 8.4% (9.8%) to 10.4% (12.1%). See also Box 2 below. 
17  Health  system  responses  to  financial  pressures  in  Ireland:  policy  options  in  an  international  context, 
http://www.dohc.ie/publications/pdf/Observatory_WHO_2012.pdf?direct=1  

27 

 
 
 
                                                 
gains  cannot  be  made  within  the  required  timeframe  without  damaging  patient  care18 
unless high salaries and the high price of other inputs are seriously addressed. 

The  authorities  have  announced  just  before  the  eighth  review  mission  a  targeted 
voluntary redundancy scheme which they consider would facilitate meeting the 2015 
target  for  public  service  staff  numbers  of  282,500  by  2014.  The  scheme  would  be 
made  available  for  yet-to-be-identified  public  service  areas  with  staff  surpluses.    The 
terms  of  the  scheme  are  as  offered  to  HSE  employees  in  2010,  namely  a  statutory 
payment  (2  weeks  per  year  of  service,  with  the  per-week  payment  capped  at  EUR  600, 
plus  an  additional  EUR  600)  and  an  incentive  payment  (3  weeks  per  year  of  service), 
subject to an overall cap of two yearly salaries. The authorities argue that it would allow a 
substantial structural improvement in the deficit, in terms of payroll and pension savings, 
and that it will pay for itself in 3 years. Their stated objective would be to secure long-
term  structural  adjustments  by  targeting  groups  of  employees  for  whom  they  believe 
redeployment and training would not be cost-effective. 

The  mission  considers  that  the  scheme  is  costly  and  that  using  in  full  the  scope  for 
redeployment  and  retraining  under  the  Croke  Park  agreement  would  allow  a  more 
efficient use of human and financial resources, especially as the scheme's intended target 
group of employees has considerable remaining working life. In addition, there is a real 
risk that the scheme fails to reach the intended target, as employees that have few outside 
options choose not to separate. Moreover, while the scheme would generate savings in the 
longer term (as less pension rights would be accrued), it is likely to imply additional cost 
pressures for the welfare budget in the near term. Finally, the extent to which the scheme 
would  be  compatible  with  protecting  service  delivery  or  would  require  outsourcing  of 
activities is unclear, casting doubts on the sustainability of the estimated savings.  

Full  implementation  of  pension  reform  is  a  crucial  component  of  long-term 
sustainability of public finance. The Public Service Pensions (Single Scheme and other 
provisions)  Act  2012  came  into  effect  on  28  July  2012.  The  Act  caps,  for  existing 
members  as  of  1  November  2012,  pension  accrual  at  40  years,  abates  the  pensions  of 
public  service  pensioners  who  re-enter  the  public  service,  and  allows  for  money  to  be 
recovered from pension payments in certain cases of financial misconduct. Yet important 
provisions for new entrants, such as the increase in the pension age and the calculation of 
the  pension  on  average  lifetime  income,  have  yet  to  be  put  in  place,  pending  a 
commencement  order  to  be  signed  by  the  Minister  of  Public  Expenditure  and  Reform. 
Delays in the commencement of the scheme imply a permanent reduction in the structural 
savings in terms of pension liabilities. The mission sought an update on the process and 
the authorities confirmed that the bill should be fully commenced by 1 January 2013. 

18  From  this  perspective,  the  envisaged  3,000  employee  number  reductions  under  the  health  sector 
Employment  Control  Framework  (EFC),  is  a  source  of  concern,  as  it  could  lead  to  service  delivery 
pressures, besides resulting in higher agency/overtime costs which could offset the expected savings. 

28 

 
 
 
                                                 
Box 2: A significant unexplained wage gap between public and private sector wages?  

Ireland' public service pay and pension bill grew sharply in the pre-crisis years through a combination 
of pay rises and increases in public service employment (Figure 15). The authorities cut public sector 
wages  between  5%  and 15%  effective  1 January  2010 and  introduced  a  pension-related  deduction in 
2009, with rates ranging from 0% to 10.5% depending on the income bracket. This resulted in a fall in 
average  annual  (gross)  earnings  in  the  public  service  by  7.5%  between  2009  and  2010  (in  the  same 
period, the fall for private sector workers amounted to 4.5%). Since then, in line with the Croke Park 
agreement, there have been no further reductions in pay rates. 

Figure 15: Changes in public wage bill 

Change in public wage bill

140%

120%

100%

80%

60%

40%

20%

0%

-20%

DE

PT
2007/2000

IT

ES

EL

HU

IE

2009/2007

2012/2009

However, a recent study by the Central Statistics Office (CSO)19 has found that a sizeable positive gap 
remains  between  public  and  private  sector  wages  that  cannot  be  explained  by  worker  or  workplace 
characteristics.  The  analysis  takes  account  of  educational  attainment,  gender,  full-time  status,  total 
length in employment and supervisory status. Although the study does estimations for wages both with 
and  without  employer  size  taken  into  account,  the  CSO  did  not  control  for  specific  occupations/job 
types across the two sectors. The study covers 2009 and 2010 (i.e. the year of the wage cut), although 
2010  data  could  only  be  derived  from  the  2009  National  Employment  Survey  by  using  data  on  net 
incomes  from  the  Revenue  Commissioner.  The  pension-related  deduction  of  2009  is  also  excluded 
from the analysis, which applies to gross earnings.   
In  spite  of  the  academic  debate  surrounding  the  methodology,20  the  CSO  analysis  points  out  that  a 
significant  unexplained  wage  differential  in  favour  of  public  sector  workers  persists,  even  following 

19 CSO (2012). National Employment Survey 2009 and 2010.Supplementary Analysis. 
20  Several  issues  have  been  raised  in  Ireland  and  in  academic  papers  as  regards  the  methodology  of  the 
study, in particular because of the inability to control for specific occupations (a number of low-skill jobs in 
the  private  sector  do  not  exist  in  the  public  sector)  and  because  of  the  difficulty  to  properly  control  for 
organisational size. On the latter, the CSO opted to use a wide definition of the employer in the case of the 
public  service.  For  example,  all  secondary  school  teachers  are  assumed  to  belong  to  one  single  "national 
entity", rather than a smaller school-level one. To  a certain extent, the size indicator therefore becomes a 
close proxy of public sector vs. private sector. Moreover, since large multinational companies in the private 
sector pay high wages, wages in the public sector in a specification that controls for "size" of the employer 
and lumps all teachers together as having a single very large employer would be predicted to be higher just 
by this association, which is erroneous. The CSO sought to address this problem by providing results both 
with and without controlling for size. 
21 ECB working paper 1406 (December 2011) finds a conditional wage premium in favor of public sector 
employees  in  a  range  of  countries,  with  Ireland  displaying  a  relatively  high  premium.  This  study  only 
covers the period 2004–2007, however, i.e. before the public service pay cuts in Ireland. 

29 

 
 
 
 
                                                 
the  pay  cuts  of  2010.21  The  analysis  shows  that  the  unexplained  wage  gap  for  permanent  full-time 
employees (aged 25-59) was around 14-17% in 2010, down from 18-20% in 2007, if employer size is 
not factored in. Including size, with the caveat highlighted above, reduces the gap to around 7-8% in 
2010, down from 12-14% in 2007. Further analysis indicates that the unexplained wage gap is highest 
at the low-income end of the distribution, and gradually falls to nil or negative (depending on whether 
size  is  included  as  a  control  variable)  around  the  80th  or  95th  percentile  in  2010.  In  2009,  the  gap 
remained positive throughout the income distribution. 

 The  mission  also  discussed  ongoing  reforms  of  the  public  expenditure  framework. 
As mentioned above, two Bills were published in the third quarter of 2012 to establish the 
Irish Fiscal Advisory Council as an independent body on a statutory basis and define its 
mandate  and  responsibilities,  as  well  as  enshrine  its  independence,  and  to  provide  a 
statutory basis to the existing multi-annual expenditure ceilings. As regards the latter, the 
Commission's  services  are  engaging  with  the  authorities  to  ensure  that  elements  of  the 
multi-annual  budgetary  framework  are  adequately  binding  and  transparent  so  as  to 
constitute a credible policy anchor in the post-programme period. While three-year rolling 
expenditure  ceilings  are  envisaged  under  the  domestic  budgetary  framework,  the 
government has not committed to the expenditure ceilings for 2015 in the current budget, 
before the Comprehensive Expenditure Review in 2013. 

Further  improvements  are  necessary  to  the  legislation  on  expenditure  ceilings  to 
ensure  that  the  framework  constitutes  a  credible  anchor  for  fiscal  policy  (Box  3). 
Based also on the results of a comprehensive review of the national fiscal frameworks of 
all EU Member States carried out under the auspices of the Economic Policy Committee 
(EPC) during 2011-2012, Commission services and ECB pointed out that the current draft 
does  not  sufficiently  narrow  down  the  conditions  under  which  the  Government  may 
evoke an escape clause and thus be allowed to diverge from expenditure ceilings. Rather, 
the  Government  enjoys  significant  latitude  to  increase  the  ceilings  without  adequate 
accountability, as it only requires a proposal of the Minister for Finance. Moreover, the 
current  draft  does  not  provide  sufficient  assurances  that  the  current  and  capital 
expenditure  ceilings  are  met  in  practice,  since  the  Minister  for  Finance  may  only  make 
recommendations  to  the  competent  Ministers  but  is  not  actually  empowered  to  impose 
binding  ceilings.  The  mission  also  noted  that  the  de-facto  current  fiscal  rule  requiring 
local governments to have a balanced budget in the aggregate could be firmed through a 
binding  act  (e.g.  a  memorandum  of  understanding)  ensuring  that  local  authorities' 
contribution to general government will be held to zero as a rule as of 2013. 

The  provision  of  fiscal  data  has  been  improved,  and  efforts  in  this  area  continue.  
The  CSO  will  be  in  charge  of  the  EDP  reporting  as  of  March  2013  and  will  publish  a 
quarterly  government  finance  statistics  publications  from  April  2013.  To  ensure  more 
reliable  and  transparent  public  finance  data,  the  authorities  are  working  on  a 
memorandum of understanding on data exchange between the competent authorities. The 
authorities  published  for  the  first  time,  at  the  end  of  September,  an  alternative 
presentation  of  the  Exchequer  Returns,  which  enhances  budgetary  reporting  and 
transparency by showing voted expenditure (current and capital, including spending from 
departments, the Social Insurance Fund, and the National Training Fund) and all revenue 
(current and capital, including separately the monthly outturn for Appropriations-in–Aid) 
on a gross basis. Further efforts have to be made to complete the new format by reporting 
on all major Exchequer items, as compared to monthly targets. This will be an important 
step  to  further  increase  the  credibility  of  the  budgetary  framework  and  will  facilitate 

30 

 
 
access to and understanding of the fiscal data for prospective investors and the public at 
large, especially after the end of the programme.  

Box 3: Experience with expenditure ceilings under the programme 

The programme, which was largely based on the Irish authorities' 2010 National Recovery Plan, targeted a 
very  significant  reduction  in  nominal  expenditure  relative  to  their  2010  level  as  a  key  component  of  the 
necessary  fiscal  consolidation.  This  was  underpinned  by  the  multi-annual  expenditure  ceilings  for  gross 
voted expenditure introduced on administrative basis.22 Much has been achieved in this respect, with 2012 
gross voted current expenditure expected to be 4% lower than in 2010 (Figure 16).  

Alongside  these  significant  cuts,  a  closer  look  reveals  gradual  slippages  with  respect  to  original  annual 
targets    on  account  of  (i)  changed  macroeconomic  conditions  (e.g.,  greater  number  of  people  on  the  live 
register) and (ii) policy implementation (e.g., delayed/failed implementation of planned measures in health 
area).  

Figure 16: Reductions in gross voted expenditures, outturn vs. targets 

While  the  expenditure  slippages  vis-à-vis  original  targets  have  not  impeded  the  achievement  of  the 
programme targets and, thus, the establishment of a track record of good policy implementation under the 
programme  as  regards  the  general  budget  balance  to  GDP  ratio,  they  shift  the  burden  of  the  remaining 
expenditure adjustment up to 2015  as the ceilings for 2015 have actually been tightened compared to 2010. 
It is important to ensure that the on-going reforms of the multi-annual expenditure framework result in more 
binding  and  specific  rules  for  expenditure  ceilings,  so  that  they  can  act  as  a  credible  policy  anchor 
especially for the post-programme period. 

22 Gross voted current and capital expenditure cover large share of the total government expenditure and are 
under direct control of the government. They exclude non-voted expenditure, e.g. interest expenditure and 
EU budget contributions. 

31 

 
 
 
 
                                                 
5.2 

Financial sector policies  

Important  progress  has  been  achieved  across  the  three  main  components  of  financial 
sector  reform  under  the  programme:  banks  are  well-capitalised,  system  deleveraging  is 
ahead of plan, and the supervisory framework is being enhanced. However, challenges to 
restoring  profitability  and  a  sizeable  funding  gap  may  undermine  banks'  capacity  to 
support the nascent economic recovery through new credit extension. Decisively dealing 
with  increasingly  long-term  mortgage  arrears,  reducing  overall  funding  costs,  and 
for 
completing  ongoing  operational  restructurings  are 
addressing  these  challenges.  Robust  implementation  of  the  new  personal  insolvency 
regime  and  timely  reform  of  the  repossession  framework,  ensuring  a  delicate  balance 
between  debtors'  and  creditors'  rights,  are  essential  to  effectively  dealing  with  legacy 
unsustainable debts. This would also allow banks to normalise their business models and 
re-focus  operations  towards  profitable  new  lending,  which  is  essential  for  a  sustained 
recovery  and  a  reduction  of  unemployment.  Another  key  policy  priority  is  to  enhance 
SME's access to finance. 

important  pre-requisites 

The  important  improvement  in  banks'  funding  positions  is  welcome,  but  concerns 
remain regarding the funding gap at the end of the programme. As previously noted, 
deleveraging  and  stronger-than-expected  deposit  inflows  have  helped  to  significantly 
reduce the funding gap23 of domestically-owned banks24. The loss of rating-sensitive non-
resident deposits – which saw an outflow of almost EUR 70 billion between end-Q3 2010 
and  end-Q1  2011  –  resulted  in  increasing  reliance  on  central  bank  funding,  which  was 
already  apparent  before  the  start  of  the  programme.  Estimates  at  programme  inception 
had  factored  in  more  than  EUR 11  billion  of  wholesale  funding  which  have  not 
materialised to date (despite BOI's and AIB's recent return to the covered bond market), 
total  assets  are  also  higher-than-anticipated  by  some  EUR 16 
while  banks' 
billion.25Despite  these  developments,  a  small  outperformance  (of  about  EUR 1  billion) 
versus  original  funding  gap  estimates  is  expected  by  end-2012,  with  the  funding  gap  at 
end-October  having  decreased  to  about  EUR 158  billion  from  a  peak  of  over  EUR 237 
billion at end-March 2011 (Figure 17). However, given uncertain prospects for sizeable 
market funding (a challenge currently facing most euro-area banks), and considering that 
the  remaining  disposals  may  be  more  challenging  (as  outstanding  non-core  assets  are 
relatively  less  liquid  and  of  lower  quality),  the  funding  gap  could  remain  considerable, 
though  recent  bilateral  repo  transactions  by  Irish  banks  (on  Irish  assets)  with  market 
counterparties and the recent covered bond issues by BOI and AIB are encouraging.  

23 The difference between the volume of a bank's net assets and its aggregate deposit stock. 
24 AIB, BOI, PTSB and IBRC. 
25  This  reflects  EUR 13.7  billion  higher-than-forecast  customer  loans  (resulting  from  the  paused  asset 
disposals at PTSB, FX effects, etc.) and over EUR 8 billion higher other assets (largely Irish government 
securities). 

32 

 
 
                                                 
Figure 17: Covered banks' funding gap 

The funding gap has gradually decreased as 
deposit inflows and deleveraging continue  
450

EUR bn

Funding gap
Corporate/NBFI deposits
Retail deposits
Net assets less capital

Funding breakdown shows funding gap is 
largely covered via central bank financing 
Corporate/NBFI deposits
450

Retail deposits

EUR bn

Debt securities

Other

Repos/other secured

Central bank funding

400

350

300

250

200

150

100

50

0

400

350

300

250

200

150

100

50

0

M

a
r
-
1
1

A
p
r
-
1
1

M
a
y
-
1
1

J
u
n
-
1
1

J
u
l
-
1
1

A
u
g
-
1
1

S
e
p
-
1
1

O
c
t
-
1
1

N
o
v
-
1
1

D
e
c
-
1
1

J
a
n
-
1
2

F
e
b
-
1
2

M

a
r
-
1
2

A
p
r
-
1
2

M
a
y
-
1
2

J
u
n
-
1
2

J
u
l
-
1
2

A
u
g
-
1
2

S
e
p
-
1
2

O
c
t
-
1
2

M

a
r
-
1
1

A
p
r
-
1
1

M
a
y
-
1
1

J
u
n
-
1
1

J
u
l
-
1
1

A
u
g
-
1
1

S
e
p
-
1
1

O
c
t
-
1
1

N
o
v
-
1
1

D
e
c
-
1
1

J
a
n
-
1
2

F
e
b
-
1
2

M

a
r
-
1
2

A
p
r
-
1
2

M
a
y
-
1
2

J
u
n
-
1
2

J
u
l
-
1
2

A
u
g
-
1
2

S
e
p
-
1
2

O
c
t
-
1
2

Source: Central Bank of Ireland 

Source: Central Bank of Ireland 

in  arrears  of  over  90  days 

The  continued  deterioration  in  banks'  asset  quality,  in  particular  the  long-term 
nature of mortgage arrears, is a persistent source of concern. The outstanding balance 
on  owner-occupier  mortgage  accounts 
reached 
EUR 16.8 billion (Figure 18), equivalent to 15.1% of the total owner-occupier mortgage 
loan  book  at  end-September  2012.  While  the  pace  of  mortgage  arrears  formation  has 
decelerated, the amount of arrears of 180 dpd or more has continued to increase and now 
stands  at  over  80%  of  total  arrears.  Similarly  for  investment  property  mortgages,  the 
outstanding  balance  of  accounts  in  arrears  of  over  90  days  reached  EUR 7.9 billion, 
equivalent  to  26%  of  the  total  value  of  this  loan  book  at  end-September  2012;  84%  of 
these arrears are 180 dpd or longer.. While the volume of loan restructurings continues to 
rise,  the  focus  to  date  has  been  on  preventing  accounts  from  falling  in  arrears  and  on 
applying  often  unsustainable  short-term  forbearance  measures.  Recently  released  data 
shows  that  almost  10%  of  the  balances  of  all  owner  occupier  and  investment  property 
mortgage loans are in arrears of more than 360 days. Due to considerable difficulties for 
borrowers  to  make  up  for  long  periods  of  non-payment  and  given  the  lower  level  of 
engagement by banks with those borrowers, these levels of arrears could have potentially 
adverse  implications  for  future  recoveries  and  expected  losses  on  those  portfolios.  To 
address  this  issue  the  banks  have  developed  a  range  of  long-term  loan  modification 
measures which are currently in the process of being rolled out, though the banks' focus 
on implementing their mortgage arrears resolution strategies needs to be intensified.26 To 
avoid  further  delays  with  implementation,  underpin  institutions'  efforts  and  monitor 
progress,  the  authorities  agreed  to  introduce  quarterly  measurable  bank-specific  targets 
for reviewing new and existing individual arrears cases from end-2012. 

26 Given the level of loans in arrears and the potential increases in modified loans, it is important that the 
banks  prudently  account  and  provision  for  all  mortgage  arrears  and  restructurings.  The  authorities  have 
committed to engage with the banks regarding the provisioning treatment for identified loan modification 
options and will, where necessary, update the 2011 Impairment Provisioning and Disclosure Guidelines to 
ensure consistency of approach across institutions. 

33 

 
 
  
 
 
                                                 
Figure 18: Mortgage arrears, end-September 2012 

Owner occupier mortgage arrears and restructures     Owner occupier and Investment property mortgages

Restructured mortgages (not in arrears)
Arrears over 180 dpd
Arrears 90-180 dpd
Total residential mortgage loans outstanding (rhs)

40

35

30

25

20

15

10

5

0

2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3

Source: Central Bank of Ireland 

 130

 125

 120

 115

 110

 105

 100

 95

 90

7%

3%

5%

10%

75%

5%

5%

Performing
In arrears 91 to 180 days
In arrears 361 to 720 days

In arrears up to 90 days
In arrears 181 to 360 days
In arrears over 720 days

Given  continued  loan  losses  and  high  funding  and  operating  costs,  prospects  for 
restoring  bank  profitability  remain  fragile.  Actions  are  underway  to  improve 
profitability,  with  banks  continuing  to  re-price  deposits  and  loan  books  and  to  reduce 
operating  expenses  in  the  context  of  their  restructuring  plans  (Box  4).  Reflecting  the 
improved  situation  and  sentiment  towards  the  Irish  banking  sector,  the  authorities  are 
prioritising  actions  for  the  withdrawal  of  the  ELG  scheme  in  2013.  Banks  forecast  that 
annual  impairment  charges  and  loan-loss  provisions  will  start  to  decline  from  2012, 
helping  to  restore  some  institutions  to  modest  profitability  by  end-2014.  This  is  very 
much dependent on an improving economic environment and decisive implementation of 
sustainable  loan-modification  options  to  treat  long-dated  arrears.  Even  if  these  factors 
materialise,  and  loan  losses  evolve  in  line  with  expectations,  there  are  concerns  about 
medium-term profitability given the level and distribution across different arrears' buckets 
of  provisions  the  banks  presently  hold  relative  to  the  level  and  age  of  arrears  in  their 
portfolios. While banks have been sufficiently capitalised to an unlikely stress scenario, it 
is  essential  that  unexpected  loan  losses  are  avoided  if  sustained  profitability  is  to  be 
achieved  in  the  near  to  medium  term,  reflecting  also  banks'  weak  internal  capital 
generation  capacity.  Work  is  ongoing  on  a  detailed  assessment  of  developments  at  the 
covered banks relative to PCAR 2011 base and stress scenarios, overall results of which 
will be published in January 2013. 

The  new  personal  insolvency  regime  should  help  facilitate  a  step-change  in  the 
resolution  of  unsustainable  debts.  The  Personal  Insolvency  Bill,  which  is  due  to  be 
passed by the Oireachtas by year-end and become operational from early February, seeks 
to  strike  a  balance  between  protecting  debt  service  discipline  and  creditors'  rights.  It 
provides  a  non-judicial  alternative  to  bankruptcy  and  will  assist  in  securing  adequate 
protections  for  debtors'  principal  private  residence,  also  safeguarding  reasonable 
standards  of  living  for  the  most  vulnerable  indebted  households.  From  this  perspective, 
Commission  services  raised  concerns  about  the  EUR 3 million  cap  envisaged  in  the 
legislation for eligible secured debt. This would appear to be unduly high, given that the 
average  mortgage  debt  is  around  EUR 300,000  and  could  induce  banks,  lawyers,  and 
insolvency  practitioners  to  focus  on  big-ticket  cases  rather  than  process  the  smaller  but 
much  more  numerous  cases  of  average  debtors,  who  are  likely  to  be  facing  greater 

34 

 
 
 
 
 
 
distress. The efficiency of the system could also be jeopardised if the Insolvency service 
is  overloaded  with  large  complex  cases,  which  could  involve  a  multitude  of  inter-
connected debts concerning not only a debtor's principal private residence, but also those 
associated  with  investment  properties  or  (sole-trader)  businesses.  The  authorities  noted 
that there are no monetary caps on either unsecured or secured debts in bankruptcy and 
that during the consultation process stakeholders and the relevant Oireachtas Committee 
argued that the cap should have been raised or eliminated. 

A functional repossession regime should, however, also be part of the tool-kit to deal 
with unsustainable legacy debts. While repossessions should remain a measure of last-
resort,  maintaining  balanced  incentives  between  mortgage  borrowers  and  creditors 
requires that the existing unintended legislative constraints identified by case law27, which 
could hinder repossession of collateral in some cases of debtor default, is removed.28 The 
authorities have committed to removing the unintended legislative constraints, and efforts 
in this direction will be monitored in future reviews. The issue is particularly pressing for 
loans related to investment properties, given the level of mortgage arrears in this segment. 
The  mission  stressed  the  desirability  of  keeping  families  in  their  homes  wherever 
possible, and thus the need to ensure that adequate measures are put in place to achieve 
this. 

Several initiatives have been launched to facilitate  credit extension to SMEs.  These 
include a EUR 90 million Microfinance fund and the Credit guarantee scheme, which is 
expected  to  provide  an  additional  EUR 150 million  in  lending  for  small  businesses  per 
year.  In  addition,  the  authorities  have  agreed  with  the  pillar  banks  specific  targets  for  a 
cumulative  amount  of  EUR 21 billion  in  SME  lending  (defined  as  the  volume  of  new 
sanctions  in  each  year  during  2011-2013),  which—while  not  corresponding  to  similar 
volumes of net new lending—has been an important anchor for bank policy in this area. 
However, given the continued decrease in the stock of credit to the sector, it is important 
that any potential impediments to SME access to finance be identified and removed in a 
timely manner.  

Yet, in view of the importance of SMEs for growth and job creation, more needs to 
be done. The mission underscored the importance of the sector for future job creation, but 
also  recognised  the  difficulty  of  correctly  identifying  whether  low  SME  lending  mainly 
reflects weak demand for credit in a low-growth/deleveraging environment or supply-side 
constraints.  As  previous  reports  have  indicated,  both  factors  appear  to  be  at  work. 
Furthermore, a particular issue facing many SMEs is adequate access to working capital 
(as  opposed  to  investment  capital)  to  overcome  liquidity  constraints  which  can  be 
exacerbated by payment delays from customers. It is acknowledged that payment delays 
between  businesses,  and  between  businesses  and  public  authorities,  can  add  to  business 

27 Jurisprudence related to the Land and Conveyancing Law Reform Act highlighted unintended constraints 
which have the effect of limiting banks' ability to realise the value of loan collateral in certain instances. In 
July 2011 the High Court ruled that a lending institution cannot apply for a repossession order if a mortgage 
was created before 1 December 2009, but a demand for full payment was not made by the lender until after 
that date. 
28 The level of repossessions in Ireland, relative to the level of mortgage arrears, is low compared to other 
jurisdictions. As at end-September 172,000 mortgages were in arrears, 89,000 of which were more than 180 
dpd,  while  cumulative  residential  mortgage  repossessions  for  the  3  year  period  to  September  2012  were 
1652. Furthermore, the costs and average length for a repossession in Ireland remain higher relative to other 
EU jurisdictions. 

35 

 
 
                                                 
costs.  Directive  2011/7/EU,  which  replaces  Directive  2000/35/EC,  will  address  this 
matter and has to be transposed into national law by March 2013. Survey evidence seems 
to  indicate  that  Irish  SMEs  may  be  more  credit-constrained  than  their  euro  area 
counterparts.29 However, unlike the latter, many Irish SMEs significantly increased their 
exposure  to  property  during  the  boom  years.  High  leverage  and  reduced  value  of  their 
collateral impaired their creditworthiness. The mission discussed with the authorities the 
importance  of  exploring  options  to  disentangle  SME  real  estate  loans  from  their  core 
business activities, which may remain viable. In principle, this problem can be reduced as 
banks  move  away  from  collateral-based  towards  cash-flow-based  lending.  But  a  final 
concern  is  that  banks'  capacity  to  adequately  undertake  cash-flow  analysis  may  be 
seriously  lacking,  particularly  at  the  branch  level.  This  reflects  a  legacy  problem  of  the 
property bubble, where banks may have failed to adequately invest in ensuring that their 
staff possess such basic banking skills. The recent initiative by one of the pillar banks to 
speed  up  the  loan-application  procedure  at  branch  level  is,  however,  welcome.  The 
mission expressed its concern that, unless the wider issue of access to credit for SMEs is 
addressed,  the  long-awaited  revival  in  credit  growth  may  encounter  bottlenecks  which 
might  hinder  the  future  recovery.  The  mission  also  called  for  carrying  out  a 
comprehensive  study  on  regulatory,  administrative  and  financial  burdens  for  SMEs,  but 
the  authorities  suggested  that  this  may  be  more  appropriately  considered  following 
completion  of  ongoing  surveys.  Welcome  steps  to  support  lending  to  the  sector  were 
made  in  Budget  2013  following  publication  of  the  10  Point  (SME)  Tax  Plan  and  the 
announcement that the NPFR will establish and invest in funds to provide equity, finance, 
restructuring and recovery investment funding for SMEs of up to EUR 400 million (0.2% 
of GDP). 

29 According to the latest ECB SAFE Survey, at 23% rejection rates in Ireland remained well above the euro 
area average (15%). A RedC survey commissioned by the Department of Finance however found that for 
the  April-September  2012  period,  the  decline  rate  from  banks  had  reduced  to  19%  from  23%  relative  to 
previous waves, amid a slight increase in demand for credit from SMEs.  

36 

 
 
 
                                                 
Box 4: Restoring bank profitability30  

Bank  profitability  remains  challenged  by  high  funding  costs,  operating  expenses  and  loan 
impairment  losses  (Figure  19).  Despite  the  sizeable  availability  of  low-cost  Eurosystem  funding, 
about  half  of  covered  bank  assets  are  deposit-funded;  hence  their  overall  financing  cost  had  been 
deteriorating  due  to  deposit  price  distortions  and  increased  ELG  fees31.  Net  interest  income  at  the 
covered  banks  decreased  by  over  40%  since  2010  due  to  higher  funding  costs  (also  compressing 
margins on new business), the low interest rate environment and limitations on banks' capacity to re-
price  large  portions  of  their  back-books.  Even  though  operating  expenses  have  remained  broadly 
stable,  their  share  of  banks'  gross  operating  income  increased  to  over  100%  on  average  from  about 
70%  in  2010.  As  loan  arrears  continue  to  increase  (albeit  at  a  slower  pace),  additional  impairment 
provisions are expected, which will continue to weigh on bank profitability. 

Figure 19: Drivers of covered bank profitability 

EUR bn

15

10

5

0

-5

-10

-15

-20

-25

-30

-35

NAMA revaluation adjustment
Other
Impairment provisions/ charges
Operating expenses
Other income
Net Interest Income
Profit Before Tax

2006

2007

2008

2009

2010

2011

2012*

Source: Covered banks' Annual reports and Interim Financial Statements 
Notes: (i) 2012 data is annualised; (ii)"Other" includes income from LMEs 

Reducing funding costs through both a withdrawal from ELG and further deposit rate decreases 
is essential to restoring profitability. ELG fees considerably reduce banks' pre-provision profits and a 
strategy for the phase-out of the scheme (already completed for the UK operations of covered banks) in 
early 2013 remains a key priority for the authorities. This could constitute aggregate 12-month savings 
of about EUR 0.9 billion32, though the full impact on bank profitability is likely to materialise only in 
2014,  given  the  current  maturity  profile  of  covered  liabilities.  The  intense  competition  for  deposits 
observed  in  the  second  half  of  2011  and  in  early  2012  has  started  to  abate  with  retail  deposit  rates 
starting to normalise particularly in the short-term product categories (e.g. redeemable at notice deposit 
rates  down  by  0.48%  since  January).  However,  further  deposit  rate  reductions  may  be  necessary  to 
contribute sufficiently to reducing banks' overall cost of funding and normalise net interest margins. As 
adjustments of funding cost will take time as banks gradually replace low-cost Eurosystem financing 
with  market-based  funding,  adequate  volumes  of  new  lending  at  appropriate  spreads  are  also  a 

30 Data corresponds to banks' Annual Reports, with 2012 figures annualised and sourced from banks' end-
June 2012 Interim Financial Statements. 
31 The average effective ELG cost for participating banks more than doubled since the scheme's inception, 
from 50 bps on average covered liabilities in Q1 2010 to about 110 bps in 1H 2012. For full details of ELG 
fee structures as of 1 January 2012 see Annex 7 of the Rules of the Credit Institutions (Eligible Liabilities 
Guranatee) Scheme 2009. 
32 Fiscal projections reflect EUR 0.4 billion of ELG fees through end-January 2013 and assume the scheme 
is not extended further. 

37 

 
 
 
 
                                                 
necessary pre-requisite to fully restoring profitability.  

Operational rationalisation is also essential for reducing costs. The banks are advancing voluntary 
severance,  redundancy  and  early  retirement  schemes,  and  pursuing  other  cost-saving  initiatives, 
including  outsourcing  of  non-core  functions,  the  closure  of  branches  (circa  80  branches  have  been 
identified  for  closure  in  2012  and  2013)  and  adjustments  to  staff  benefits  and  pensions.  All  these 
measures  combined  are  expected  to  generate  annualised  reductions  of  operating  expenses  of  over 
EUR 450  million  by  end-2013.  Despite  these  important  initiatives,  cost  bases  at  the  covered  banks 
would  likely  continue  to  remain  large  in  relation  to  gross  operating  income,  given  the  drag  of  low-
yielding  long-dated  legacy  assets,  and  limited  new  lending  and  prospects  for  increasing  non-interest 
income.  That  said,  the  three  covered  banks  plan  to  enhance  their  efficiency  considerably  in  coming 
years  through  operational  and  funding  cost  reductions  and  profitable  new  lending,  targeting 
cost/income ratios of 50-55% by 2015 (significantly below current levels of 90% - 115%).  

Serious risk to a sustained return to bank profitability in the medium term is posed by further 
increases  in  loan  impairment  charges.  Encouragingly,  the  pace  of  mortgage  arrears'  formation  has 
started  to  decelerate,  as  banks  have  enhanced  the  effectiveness  of  their  collections  and  work-out 
functions  and  sought  early  engagement  with  customers  in  difficulty.  This  addresses  a  key  near-term 
risk to bank profitability. However, concerns remain regarding low levels of cure in long-dated arrears, 
reflecting considerable challenges and unwarranted delays for banks' implementation of advanced loan 
modification options on sufficient scale. As a result, impairment losses can be expected to continue to 
increase in the near term as sizeable proportions of long-term non-performing loans may be unable to 
cure  and  may  need  to  be  written  off.  Provisions  are  also  likely  to  increase  further  weighing  on 
profitability in coming quarters, in light of further deteriorations of banks' mortgage portfolio, as well 
as SME and CRE portfolios (average coverage ratios have actually declined to 55% at end-June from 
58% at end-September 2011) and taking account of revisions, where necessary, to existing guidelines 
with regard  to  the provisioning  treatment  of  certain  advanced  forbearance  options.  In addition,  some 
structural  features  of  Ireland's  regulatory  framework,  such  as  the  existing  legal  impediments  to 
collateral repossession in some circumstances, reduce the recovery value of collateral and thus, unless 
addressed, may require an increase in provision cover. 

5.3 

Structural reforms  

Structural  reforms  to  strengthen  the  economy  in  the  medium  term  continue  to  progress 
broadly in line with programme objectives. Persistently high unemployment, increasingly 
of a long-term nature, is a major social and economic concern that needs to be addressed 
forcefully.  The  functioning  of  the  labour  market  is  being  improved,  including  through 
more  effective  activation  policies  and  greater  flexibility  in  sectoral  wage  setting 
arrangements,  with  a  view  to  ensuring  a  job-rich  recovery  in  the  future,  but  faster  and 
deeper progress is needed. The process to transfer the ownership and operations of the 
water  sector  to  a  national  public  utility  and  introduce  water  charges  for  households  is 
advancing,  but  at  a  slow  pace.  In  turn,  the  competition  framework  continues  to  be 
strengthened, and the process to dispose of selected State assets is moving according to 
plans. 

Labour  market  reforms  are  advancing  and  should  improve  Ireland's  ability  to 
generate a job-rich recovery in the future. The Industrial Relations (Amendment) Act 
2012, adopted in July, imposes a stricter legal framework for the setting of the terms and 
conditions  defined  by  Registered  Employment  Agreements  (REAs)  and  Employment 
Regulation  Orders  (EROs),  including  sectoral  minimum  wages.  The  Act  mandates  the 
Labour  Court  or  the  Joint  Labour  Committees  (JLCs)  to  examine  a  number  of  factors 
prior to registering an REA or submitting an ERO, including the impact on employment, 
the  consequences  in  terms  of  competitiveness,  and  the  relative  wage  levels  in  other  EU 
Member  States  where  relevant.  In  addition,  REAs  and  EROs  have  become  subject  to 
38 

 
 
 
Ministerial  approval.  Overall,  these  reforms  should  enhance  labour  market  flexibility  in 
the  future  and  ensure  that  proper  consideration  is  given  to  job  creation  and 
competitiveness issues in negotiating sectoral minimum wages and working conditions.33 
This,  together  with  the  measures  envisaged  and  implemented  under  the  Action  Plan  for 
Jobs, should help promote employment creation  in the future and ensure that wages are 
adequately  linked  to  productivity  levels.  The  Act  also  makes  it  easier  for  a  party  to  an 
REA to call for a renegotiation of its terms. The renegotiation process mandated by law 
remains relatively slow and burdensome however, and the impact of the amendment will 
have to be monitored in the year ahead. 

The  authorities  launched  Intreo  in  October  as  an  integrated  platform  for  labour 
activation  services.  Under  the  Pathways  to  Work  initiative,  the  authorities  aim  to 
improve  activation  by  increasing  engagement  with  the  unemployed,  providing  more 
training  opportunities,  ensuring  proper  incentives  to  taking  up  job  opportunities, 
promoting  the  recruitment  of  the  unemployed  and  reforming  the  institutional  set  up. 
Intreo  has  been  designed  as  a  one-stop-shop  for  job  seekers  and  employers  alike.  Once 
fully phased-in, jobseekers will go to Intreo offices both to determine their entitlements 
and  to  receive  employment  services.  Employers,  in  turn,  should  receive  support  in 
identifying  suitable  candidates  to  fill  vacancies  and  obtaining  eligible  incentives.  Four 
Intreo offices were launched in October. A few more should be opened by end-2012 and 
work is under way to expand the network throughout 2013 to reach the nationwide target 
of 70 offices by 2014. 

Active engagement of the unemployed has improved, but remains insufficient. As of 
end-October, about 55,000 jobseekers had gone through group engagements (significantly 
ahead  of  target),  while  almost  42,000  had  been  individually  profiled.  Under  group 
engagements,  jobseekers  with  similar  profiles  are  provided  with  general  information  on 
the  options  and  support  measures  available  to  them.  Individual  profiling,  in  contrast, 
offers more tailored support and is an essential component of the labour activation policy. 
At this stage, individual profiling and group engagement are prioritised on new entrants 
on the Live Register because of resource constraints. It is crucial, however, that the long-
term unemployed become engaged in labour activation measures rapidly as they are at an 
increasing risk of complete marginalisation from the labour market and as their numbers 
are bound to increase in the near future.  

In order to address resource constraints, the authorities are taking steps to outsource some 
engagement activities to the private sector under a payment-by-results contractor model. 
While some progress has been made already, the authorities expect to finalise the contract 
design and initiate the tendering procedure only by the first quarter of 2013, with actual 
referrals  to  the  contractor(s)  commencing  no  sooner  than  the  end  of  October  2013.  As 
much as possible, this process needs to be speeded up to ensure timely engagement with a 

33  The  stricter  legal  framework  imposed  upon  the  Labour  Court  and  JLCs  in  determining  the  terms  of 
conditions  or  REAs  and  EROs  addresses  the  issue  arising  from  the  High  Court  ruling  of  July  2011  that 
declared  some  of  the  provisions  of  the  Industrial  Relations  Act  1946  and  Industrial  Relations  Act  1990 
unconstitutional,  effectively  rendering  EROs  invalid.  The  Industrial  Relations  (Amendment)  Act  2012 
mandates  all  EROs  to  be  reviewed  "as  soon  as  practical"  upon  adoption,  at  least  once  every  five  years 
thereafter.  The  review  of  EROs  has  only  just  started,  however,  and  should  take  place  over  the  next  few 
quarters.  In  turn,  renegotiations  of  REAs  will  take  place  upon  the  initiative  of  individual  parties.  The 
authorities will report on the impact of the review and renegotiation process in the second quarter of 2013. 

39 

 
 
                                                 
larger  proportion  of  the  long-term  unemployed  and  reduce  risks  that  emerging 
mismatches  remain  entrenched  and  human  capital  is  forsaken.  Partial  outsourcing  has 
been  used  successfully  in  a  number  of  EU  countries  already  and  should  usefully 
complement  Intreo's  services  and  enable  the  provision  of  employment  services  at  the 
lowest possible cost. In order to ensure optimal outcomes, the procurement process will 
need to be as competitive as possible. The performance of providers should be monitored 
in the future, with the low-performing ones eliminated from the market. 

The impact of labour market reforms on unemployment has remained muted so far 
but should pay off once the recovery gathers pace. Economic growth over the past two 
years  has  not  been  sufficient  to  generate  net  job  creation,  and  activation  policies  alone 
will  not  be  sufficient  to  bring  about  a  sharp  drop  in  unemployment.  The  authorities  are 
aware of this and adopted the Action Plan for Jobs in an effort to promote growth through 
an  improved  business  climate  and  sectoral  initiatives.  Significant  progress  has  been 
achieved in implementing the Action Plan for Jobs, but higher growth will be needed to 
achieve significant cuts in unemployment. Addressing high and long-term unemployment 
will  require  a  combination  of  growth-induced  job  creation,  improved  labour-market 
functioning, and a better match between the demand and supply for skills (Box 5). 

The  Competition  Authority  is  finally  receiving  its  scheduled  staff  boost,  meant  to 
ensure  that  the  Competition  (Amendment)  Act  2012  translates  into  an  improved 
monitoring  and  enforcement  of  competition  rules.  Three  of  the  10  supplementary 
professional  staff  members  had  been  recruited  by  end-October,  and  applications  were 
being  received  for  the  remaining  7  posts.  The  additional  staff  will  represent  a  mix  of 
economists and lawyers, who are all scheduled to work as case handlers.  

Box 5: Breaking the cycle of long-term unemployment: activation, re-skilling and job creation  
Unemployment has ceased to increase in 2012, but this provides little comfort as the rate is stuck at a 
high of about 14.8% and as joblessness is increasingly long-term in nature. By September 2012, close 
to 60% of the people on the Live Register had been unemployed for more than a year. In addition, the 
majority of the long-term unemployed are at the low-end of the skill range, and their employability is 
further affected by the length of time they remain away from activity. 
Addressing  the  (long-term)  unemployment  issue  is  an  increasingly  pressing  policy  concern  that 
requires a comprehensive reform strategy. Under a baseline scenario of a gradual return to pre-crisis 
exit rates, it appears that the number of people on the Live Register would decrease only very gradually 
to around 220,000 by end-2016, and that the long-term nature of unemployment would actually worsen 
further,  with  close  to  65%  of  people  on  the  Live  Register  for  more  than  one  year.  While  such  a 
simulation needs to be taken with extreme caution when it comes to precise numbers, the main findings 
are  robust  regardless  of  the  scenarios  envisaged  and  highlight  two  key  policy  issues:  (1) a  job-rich 
recovery will be essential to make a sharp indent in unemployment levels; and (2) major efforts will be 
required to further improve labour activation policies and generate much higher exit rates for the long-
term unemployed, including through re-skilling and training. 

Figure 20: Actual and simulated population on live register by duration 

40 

 
 
400.000

>6years

350.000

5-6years

300.000

250.000

4-5years

3-4years

2-3years

200.000

1-2years

<=1year

150.000

100.000

50.000

0

2
0
0
5
Q
4

2
0
0
6
Q
2

2
0
0
6
Q
4

2
0
0
7
Q
2

2
0
0
7
Q
4

2
0
0
8
Q
2

2
0
0
8
Q
4

2
0
0
9
Q
2

2
0
0
9
Q
4

2
0
1
0
Q
2

2
0
1
0
Q
4

2
0
1
1
Q
2

2
0
1
1
Q
4

2
0
1
2
Q
2

2
0
1
2
Q
4

2
0
1
3
Q
2

2
0
1
3
Q
4

2
0
1
4
Q
2

2
0
1
4
Q
4

2
0
1
5
Q
2

2
0
1
5
Q
4

2
0
1
6
Q
2

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Simulated

Current

<=1year 1-2years 2-3years 3-4years 4-5years 5-6years >6years

Sources: Department of Social Protection and European Commission calculations. 

As indicated earlier, 50% of the population currently on the Live Register previously held occupations 
in craft, sales or plant and machine operations, i.e. towards the low-end of the skills distribution. The 
National  Skills  Bulletin  2012  by  the  Expert  Group  on  Future  Skills  Needs,  in  turn,  indicates  that 
Ireland currently suffers from skills gaps in a number of areas, including science, engineering, IT and 
certain segments of sales and marketing, craft and transport. 
While it would be illusory to aim at fundamentally reshaping the skills of people currently on the Live 
Register on a large scale, a core element of the labour activation policy must be to offer additional or 
new  training  to  the  unemployed,  particularly  the  long-term  ones,  on  a  timely  and  targeted  basis.  As 
such, a faster implementation of the establishment of SOLAS to better coordinate and direct the local 
Education and Training Boards (ETBs) is essential. Regularly reviewing ETBs' curricula and trainings 
offers to ensure they are relevant to employer's needs and demands will also be important in the future. 
The  relevance  and  effectiveness  of  Intreo's  services  to  job  seekers  and  employers  will  need  to  be 
reviewed as offices are phased in nationwide in 2013. Reaching targets on the number of people to be 
profiled or sent to group engagement will not be sufficient. The quality and relevance of the individual 
profiling  and  group  sessions  will  be  at  least  as  important,  and  Intreo  will  have  to  ensure  that  it 
adequately  services  the  needs  of  job  seekers  in  terms  of  guidance  and  training  and  the  needs  of 
employers in identifying and short-listing potential candidates to fill vacancies. 
Aside  from  forceful  implementation  of  the  labour  activation  policy  defined  in  Pathways  to  Work, 
further  action  will  be  needed  to  improve  the  demand  side  of  the  labour  market.  The  solid 
implementation  record  on  the  Action  Plan  for  Jobs  in  2012  should  be  continued  looking  forward. 
Efforts  should  also  be  made  to  ensure  that  the  increased  labour  market  flexibility  intended  to  be 
achieved through the Industrial Relations (Amendment) Act 2012 actually materialises. 

The Legal Service Regulation Bill, a programme requirement, has completed second 
stage and committee stage is planned for early 2013. Amendments are to be introduced 
to  reflect  concerns  over  the  independence  from  government  of  the  new  Regulatory 
Body.34 With the bill's passage, the authorities should work to ensure speedy and effective 
implementation of the reforms, which are important to competitiveness (Box 6). 

Plans  to  transfer  the  ownership  and  operation  of  the  water  sector  to  a  national 
public  utility  and  introduce  charges  for  households  have  firmed  up.35  Aside  from 
settling  on  the  public  utility  model,  a  number  of  important  decisions  have  been  taken, 

34  As  these  amendments  have  not  yet  been  made  available,  it  cannot  be  assessed  whether  these  concerns 
will be fully addressed. 
35 As reported in previous reviews, the Government settled on a national public utility model to operate the 
water  sector  following  an  independent  assessment  published  in  November  2011.  An  implementation 
strategy to transfer operations from local authorities to Irish Water was finalised in July 2012. 

41 

 
 
  
 
 
                                                 
including  that:  (1) Irish  Water  will  be  an  independent  State-owned  company  under  the 
Bord  Gáis  Group;  (2) the  water  sector  will  be  subject  to  the  independent  regulatory 
oversight  of  the  Commission  for  Energy  Regulation  (CER);  (3) water  charges  will  be 
generalised  to  all  consumers  (residential  as  well  as  non-residential)  by  1 January  2014; 
(4) a sustainable funding model for the sector will be established, with the aim to make 
Irish Water self-funded eventually; and (5) the transfer of ownership and operations of the 
sector from local authorities to Irish Water will be phased in gradually over a period of 
around 5 years extending to 2017. 

The  implementation  of  the  water  reform  strategy  has  so  far  been  slow.  The  reform 
has nevertheless been planned since the beginning of the programme and is critical on a 
number  of  counts,  including:  (1) to  foster  an  efficient  and  rational  use  of  a  scarce  and 
valuable  resource;  (2)  to  ensure  the  viability  of  the  sector's  business  model;  and  (3)  to 
enable the financing of essential infrastructure investments, including to reduce leakages 
and ensure adequate service provision to suit the needs of businesses. Making Irish Water 
mostly  self-funded    like  any  other  public  utility  will  also  generate  significant  structural 
savings for the Exchequer as operating and capital costs represent around EUR 1.2 billion 
per  annum,  with  revenues  from  charges  to  non-residential  users  accounting  for  only 
EUR 200 million.  Yet,  concrete  steps  have  been  taken  slowly.  Among  other  things, 
progress towards the installation of water meters has lagged. The procurement processes 
for the supply of boundary boxes and the installation contracts are yet to be completed, 
and  the  authorities  recognise  that  actual  installation  of  boundary  boxes  and  meters  will 
not start until the third quarter of 2013. The full roll-out of meters is likely to take years 
and extend well beyond the scheduled date for the introduction of water charges, which 
will create additional difficulties regarding the pricing mechanism. 

Landmark decisions are needed in the coming months to achieve the commitment of 
introducing  water  charges  for  households  by  the  end  of  the  programme  period. 
Given the delays experienced so far, a number of key steps and decisions will have to be 
taken rapidly, including: (1) the enactment of legislation to grant regulatory oversight to 
the CER; (2) the enactment of a comprehensive Water Services Bill; (3) the establishment 
of  Irish  Water  first  on  an  interim  basis  and  later  in  its  final  form;  (4) the  installation  of 
meters;  (5) the  determination  of  a  pricing  methodology  for  households  and  non-
residential  users  (both  before  and  after  meters  are  in  place,  i.e.  respectively  on  a 
presumptive  and  on  an  effective-consumption  basis);  and  (6) a  decision  on  the  level  of 
Exchequer funding in the years to come and until Irish Water is put on self-funded basis. 
The  latter  two  issues  are  closely  interconnected,  as  the  level  of  Exchequer  support 
required  for  Irish  Water  will  depend  on  the  revenues  that  can  be  collected  through  the 
introduction  of  water  charges  for  households.  These  steps  are  reflected  in  the  revised 
memorandum  of  understanding,  and  the  authorities  are  committed  to  engage  with  the 
European Commission in developing the new legislative arrangements for the sector.  

42 

 
 
Box 6: Increasing competition in the provision of legal services 

Whereas other sectors of the economy have experienced considerable cost adjustments since the onset 
of  the  crisis,  legal  services remain  expensive  in  Ireland  (Figure 21).  After  rapid  increases  during  the 
boom, the cost of legal services only adjusted slightly, and still remained 12.1% above their 2006 level. 
This contrasts markedly with the post-crisis development of other services, whose prices did not rise as 
much to begin with and have since adjusted quickly back to 2006 levels (Figure 21). The World Bank 
Doing  Business  2012  report estimates  that,  as  a percentage of  the value  of  a  standardised  claim  in  a 
commercial dispute, the enforcement cost is 26.9% in Ireland, versus an OECD average of 20.1%. Of 
this, more than 2/3 (i.e. 18.8%) is accounted by attorney costs. 

Figure 21: evolution of legal services prices vs. other services 

125

120

115

110

105

100

95

Evolution of prices of legal services compared 
to all services (index numbers, 2006=100)

Legal Services

All Services

2
0
0
7
Q
1

2
0
0
7
Q
2

2
0
0
8
Q
2
Source: CSO, Service Producer Price Index

2
0
0
8
Q
3

2
0
0
8
Q
4

2
0
0
9
Q
1

2
0
0
9
Q
2

2
0
0
9
Q
3

2
0
0
9
Q
4

2
0
0
8
Q
1

2
0
0
7
Q
3

2
0
0
7
Q
4

2
0
1
0
Q
1

2
0
1
0
Q
2

2
0
1
0
Q
3

2
0
1
0
Q
4

2
0
1
1
Q
1

2
0
1
1
Q
2

2
0
1
1
Q
3

2
0
1
1
Q
4

2
0
1
2
Q
1

2
0
1
2
Q
2

The high cost of legal services continues to pose problems for Ireland:  

•  Cost competitiveness, in particular for SMEs, for which the high level of legal costs can act as 
an impediment to business success, particularly in contentious contract law issues. Since non-
tradables like legal services also feed into the cost base in the Irish export sector, high legal 
service costs also hamper external competitiveness; 

•  Equity concerns, as low income households who cannot afford high legal fees may be locked 

out of equal access to justice; 

•  Fiscal  issues,  as  the  State  is  the  largest  buyer  of  legal  services,  making  high  legal  costs  a 

further challenge in terms of meeting fiscal targets under the Programme. 

A 2006 study by Ireland's Competition Authority36 identified anti-competitive practices in the market 
for  legal services,  such  as  the  potential  conflict  of  interest  between  the regulatory  and representative 
role of the Law Society, the Bar Council and (for qualification and disbarment of barristers) the King's 
Inns.  Unnecessary  barriers  to  competition  include  bans  on  advertising,  bans  on  the  formation  of 
partnerships  and  restrictions  in  the  free  availability  of  training  and  accreditation  into  the  profession. 
The lack of a separate profession of conveyancer also works to constrain labour supply.  

The  Legal  Services  Regulation  Bill,  a  programme  requirement,  addresses  many  of  these  issues,  in 
particular  through  the  establishment  of  a  new  Legal  Services  Regulatory  Authority,  which  will  have 
overarching regulatory control over the Law Society and Bar Council. Further, its establishment is  a 
vital first step in the implementation of further potential reforms. Renewed consideration should also 
be given to some recommendations of the 2006 study, notably the prohibition of the 'solicitor's lien' (by 
which solicitors may hold a client's file pending payment of fee). It is important as well to note that the 
full  cost  savings  in  legal  services  requires  further  modernisation  and  higher  efficiency  of  judicial 
procedures  and  the  entire  judicial  system.  Finally,  the  authorities  should  ensure  timely  and  effective 
implementation of the measures to achieve the benefits quickly.  

36 Competition in Professional Services: Solicitors and Barristers, Ireland's Competition Authority (2006) 

43 

 
 
 
                                                 
Non-strategic  state  assets  in  the  energy  sector  identified  for  disposal  by  the 
government are nearing the point of sale, with some uncertainty around the use of 
proceeds. The financial and legal advisors for the sale of Bord Gáis Energy (BGE) have 
been appointed recently, and other necessary steps are being taken to initiate the sale in 
early 2013. Progress towards the sale of selected non-strategic power generation assets of 
the  Electricity  Supply  Board  has  been  slower,  and  no  final  decision  has  been  taken  on 
which units will be privatised. The authorities nevertheless aim to initiate the transaction 
procedures in the first half of 2013. They are also committed under the programme to use 
at least half of the privatisation proceeds for debt reduction, with the balance invested in 
growth-enhancing projects of a commercial nature. Precise projects which would benefit 
from funds from privatisations receipts have yet to be identified.  

6. 

Financing issues 

The completion of this review would trigger a disbursement of EUR 0.8 billion from 
the  EFSM/EFSF.  The  IMF  will  disburse  an  additional  EUR  0.9  billion  and  the  UK  a 
bilateral loan of EUR 0.5 billion.  This will bring disbursements at end-2012 to EUR 56.6 
billion,  representing  84%  of  the  total  international  assistance  of  EUR  67.5  billion 
available under the programme. 37  

The  improved  market  sentiment  discussed  earlier  in  the  report  has  allowed  the 
authorities to plan for further debt issuances in 2013. Ireland plans to issue short-term 
T-bills regularly in the future, establishing again a stable market presence. The authorities 
also want to step-up the issuance of long-term bonds. Long-term debt can be expected to 
be issued in bond auctions or syndications, while additional funding options such as more 
amortising bonds designed for the domestic pension fund industry are also considered.  

The  latest  funding  plans  have  resulted  in  upwards  revisions  of  the  projected  cash 
balances compared to previous missions. By the end of 2013, the treasury's cash buffer 
should stand at EUR 17.4 billion (Table 3), which is about the equivalent to the financing 
needs for the following year.38 The substantial pre-funding of the cash buffer also serves 
as  a  positive  signal  to  bond  investors  and  should,  together  with  continued  strong 
programme implementation, make for favourable trends in yields and investor appetite for 
sovereign  bonds.  The  authorities  have  also  signalled  their  interest  in  discussing  during 
coming  reviews  how  best  to  support  continued  market  access  once  the  economic 
adjustment program expires at end-2013. 

37 The EFSM/EFSF is expected to disburse the EUR 0.8 billion associated with this review in early 2013. 
38 Including the EUR 7.6 billion bond redemption in January 2014. 

44 

 
 
 
                                                 
Table 3: Financing requirements 

2010
Dec

2011
Year

Q1

Q2

2012
Q3

Q4

Year

Q1

Q2

2013
Q3

Q4

Year

2010-2013
Total

5.4

2.5
0.0

0.0

0.0

0.0
0.0
0.0
0.0

0.5
0.0

18.4

4.3

6.9

1.7

4.2

17.1

4.7

6.6

1.4

2.6

15.4

56.3

9.7
4.8

6.3
5.6

-0.6
0.0

-0.7
-0.3

4.7
0.0

9.7
5.4

1.5
0.0

7.1
5.6

1.5
0.0

1.0
0.0

11.2
5.6

33.0
15.8

16.6

0.0

1.3

0.0

0.3

1.6

0.0

0.0

0.0

0.0

0.0

18.1

0.7

0.2

-0.9

0.0

1.3

0.6

1.0

0.0

0.0

0.5

1.5

2.8

34.5
21.5
0.5
12.6

1.4
0.0

10.5
6.2
1.1
3.2

0.4
0.0

4.4
2.8
0.2
1.5

3.4
3.1

3.7
2.3
0.5
0.9

6.5
5.1

2.7
1.0
0.8
0.9

2.0
0.0

21.3
12.3
2.5
6.4

12.4
8.1

4.1
2.4
0.7
1.0

5.1
3.0

2.9
1.4
0.5
1.0

4.2
2.5

2.4
1.4
0.3
0.8

3.7
2.0

2.3
1.2
0.4
0.7

3.2
2.0

11.7
6.4
1.8
3.5

16.1
9.5

67.5
40.2
4.8
22.5

30.4
17.6

22.3

12.9

13.1

14.2

23.4

17.6

17.6

19.6

12.9

16.1

17.4

17.4

A. Exchequer cash deficit 1/

B. Debt redemption 2/

of which: long term bonds

C. Bank recapitalisation

D. Other Financing needs 3/

E. EU-IMF loan disbursement

EFSM/EFSF
Bilaterals 5/
IMF

F. Market Funding

of which: long term bonds

Memorandum item:
Cash balances, eop 

Notes:
1/ Includes promissory note payments 
2/ Includes long-term bonds, T-bills, commercial paper and others
3/ Include contingencies
4/ Includes Treasury cash reserves and NPRF assets
5/ UK, Sweden and Denmark.

7. 

Risks 

Despite  the  considerable  progress  made  and  the  early  signs  of  returning  investor 
confidence,  the  Irish  economy  faces  several  key  challenges  and  risks,  as  fully 
addressing  legacy  imbalances  from  the  bubble  period  (e.g.  public,  private  and  external 
debt) and returning to sustained and job-rich growth will take time and continued policy 
determination.  

The main risks stem from: 

• 
A further deterioration in the growth outlook. Further delays in sustained and 
substantial  recovery  and  potential  downward  revisions  in  the  medium/term  growth 
outlook would increase fiscal, banking and political risks. 

• 
Dwindling political support for fiscal consolidation. Further decisive action is 
required to reduce Ireland's budget deficit, which remains the largest in the euro area, and 
put  the  debt  ratio  on  a  firmly  downward  path.  While  the  government's  commitment  to 
meeting fiscal targets is not in doubt, doing so in an equitable manner will require it to 
make some hard choices and confront some vested interests. Thus, a key risk stems from 
the difficulty of maintaining broad-based political support for fiscal consolidation.  

• 
Banks' large arrears and weak profitability. Irish banks have been capitalised 
to  a  very  high  level  relative  to  peers  in  other  European  countries  and  relative  also  to  a 
conservative  adverse  scenario  based  on  highly  credible  stress  tests.  Yet  the  risk  of 
possible  further  capital  needs  in  the  future  cannot  be  fully  excluded,  especially  if  the 
growth  outlook  deteriorates  beyond  what  is  currently  expected.  To  minimise  this  risk, 
banks need to take decisive action to address arrears and further reduce operating costs.  

• 
Impaired  credit  intermediation.  Bank  lending  to  the  private  sector,  and  in 
particular to SMEs, may fail to revitalize unless banks cleanse their loan portfolios from 
45 

 
 
 
unsustainable  debts  and  develop  their  capacity—especially  at  the  branch  level—to  lend 
based on cash-flow analysis rather than merely on the value of property collateral, as was 
too often the case in the boom years.  

• 
Increase  in  structural  unemployment.  Despite  a  positive  start  under  the 
Pathways  to  Work  initiative,  labour  market  activation  policies  need  to  be  significantly 
strengthened  to  avoid  a  situation  where  the  unemployed  remain  too  much  time  out  of 
work and end up not having the appropriate skills to match future jobs when employment 
growth starts to pick up. 

• 
Market  sentiment  still  fragile.  The  recent  decline  in  spreads  reflects  strong 
programme implementation and expectations of programme enhancements following the 
supportive statements from the euro area leaders in June and July. There is, therefore, a 
risk that hard-earned gains might unravel if progress on this front takes longer than can 
reasonably be expected. 

46 

 
 
Allied Irish Bank 
Bank of Ireland 
Bord Gáis Energy 
Buy-to-Let 
Central Bank of Ireland 
Commission for Energy Regulation 
Consumer Price Index 
Central Statistics Office 
Days Past Due 
European Commission 
European Central Bank 
Excessive Deficit Procedure 
European Financial Stability Fund 
European Financial Stabilisation Mechanism 
Eligible Liabilities Guarantee 
Economic and Monetary Union 
Employment Regulation Order 
Education and Training Board 
Gross Domestic Product 
Gross National Product 
General Practitioner 
Gross Value-Added 
Harmonised Indices of Consumer Prices 
Health Service Executive 
Irish Business and Employers Confederation 
Irish Bank Resolution Corporation 
International Monetary Fund 
Joint Labour Court 
Moving average 
Memorandum of Economic and Financial Polities 
Memorandum of Understanding 
Medium Term Financial Statement 

List of abbreviations 
AIB 
BOI  
BGE 
BTL 
CBI 
CER 
CPI 
CSO  
dpd 
EC 
ECB 
EDP 
EFSF 
EFSM 
ELG 
EMU 
ERO 
ETB 
GDP 
GNP 
GP 
GVA 
HICP 
HSE 
IBEC 
IBRC 
IMF 
JLC 
ma 
MEFP 
MOU 
MTFS 
NAMA  National Asset Management Agency 
Non-Financial Corporation 
NFC 
Organisation for Economic Co-operation and Development 
OECD 
Primary Care Reimbursement Service 
PCRS 
Prudential Capital Assessment Review 
PCAR 
Prudential Liquidity Assessment Review 
PLAR 
Purchasing Managers Index 
PMI 
Permanent TSB 
PTSB 
Registered Employment Agreement 
REA 
Real Effective Exchange Rate 
REER 
Republic of Ireland 
ROI 
Seasonally Adjusted 
sa 
Small and Medium Enterprise 
SME 
World Health Organisation 
WHO 

47 

 
 
 
Annex 1: Debt sustainability analysis  

The assessment of the sustainability of Ireland's public debt by the Commission services 
has not materially changed from the previous review. The main differences relate to the 
somewhat  higher  cash  buffers  in  the  near-term,  following  the  successful  issuances 
discussed in the paper, which also translates in somewhat higher gross debt figures. 

The programme's baseline scenario assumes a continued gradual increase in the primary 
surplus  in  the  post-programme  period,  from  0.7%  of  GDP  in  2014  to  2.1%  of  GDP  in 
2015 and to 4.8% in 2020, based on: (i) programme's projections and EDP requirements 
until  2015  and  (ii)  an  annual  adjustment  in  government  deficit  of  0.5pp  of  GDP  in 
2016-2020 (Figure 22). This path is consistent with gross debt peaking at 122.1% of GDP 
in 2013, and declining steadily thereafter to 103% of GDP by 2020. The debt at the peak 
includes sizable cash balances of EUR 17.4 billion (10% of GDP) at end-2013, which are 
assumed to be reduced to EUR 10 billion at end-2014 and EUR 9 billion at end-2015. The 
programme  debt  projections  foresee  the  full  drawdown  of  the  programme  financing 
envelope.  The  baseline  scenario  assumes  nominal  GDP  growth  of  4.4%  and  a  marginal 
interest rate of 5.5% over the period 2016-2020. The growth  rate  is higher than the 4% 
potential  nominal  growth  as  calculated  by  the  harmonised  methodology  for  2016, 
reflecting  an  assumed  faster  growth  in  investment,  allowing  the  latter  to  return  to  more 
normal  levels  (investment  under  the  baseline  is  still  forecast  at  only  12%  of  GDP  in 
2015). 

A stress scenario with a 1 pp. lower GDP growth shows that, in the absence of additional 
consolidation  measures,  debt  would  veer  away  from  the  sustainable  path.  In  particular, 
sticking to the currently agreed annual adjustment in 2013-15 in the face of lower growth, 
and thus missing the programme nominal deficit targets, would result in a deficit of 5.2% 
of GDP in 2015, well above the programme target of below 3% of GDP. Even assuming 
that the deficit ratio would be reduced by 0.5 pp. each year over 2016-20, the deficit ratio 
would only fall below 3% in 2020, and result in a debt level of 123% of GDP in 2020, 
with a peak not achieved until 2016-17. If instead additional measures are taken to ensure 
that  the  programme  and  EDP  deficit  path  is  respected,  the  debt  ratio  would  begin 
declining  in  2015,  though  of  course  the  lower  growth  (including  as  a  result  of  the 
contractionary impact of additional measures) would keep the 2020 debt ratio at a higher 
value  (around  110%  of  GDP)  than  under  the  baseline  (Figure  23).  A  scenario  with  a 
substantially  higher  marginal  interest  rate  (7.5%)  does  not  materially  alter  the  debt 
trajectory due to relatively low refinancing needs.  

48 

 
 
 
Figure 22: Debt-stabilising primary 
balance in baseline projections (% of GDP)

Figure 23: Government debt projections 
(% of GDP) 

6

4

2

0

-2

-4

-6

-8

Debt stabilising primary balance

Primary balance excl. one-offs

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

9
1
0
2

0
2
0
2

Source: Commission service's estimates 

Notes:  

130

110

90

70

Baseline
1pp lower growth and fiscal slippage
1pp higher GDP growth
Marginal interest rate 7.5%
Lower growth and additional fiscal effort

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

9
1
0
2

0
2
0
2

Baseline  assumptions:  Programme  projections  until  2015  (including  cash  balances  of  EUR 18.1 billion  at  the  end  of  2012, 
EUR 17.4 billion  at  the  end of 2013,  EUR 10 billion  at  the  end of  2014 and  EUR 9 billion at  the  end of  2015).  After  2015,  general 
government deficit is reduced by 0.5pp annually until balance is reached; real GDP growth of 2.8% (4.4% nominal growth); marginal 
interest rate on new government bonds of 5.5%; cash balances of EUR 9 billion  maintained in each year. Some 10% of the general 
government  debt,  including  short-term  debt,  local  government  debt  and  other  general  government  liabilities  assumed  to  remain 
unchanged/rolled over at constant rates without contributing to analysis dynamics. 
Stress scenario assumptions: GDP scenarios assume lower/higher nominal GDP, and a 0.5 sensitivity of fiscal balance to GDP. In the 
scenario with no policy response (represented by the dark blue in the figure above) the planned annual fiscal consolidation effort until 
2015 is maintained, while annual fiscal deficit targets may not be met. The budget deficit in this scenario would be 5.2% of GDP in 
2015 and 2.7% of GDP in 2020. In the scenario with additional fiscal effort (grey line in figure above), the government ensures that the 
fiscal  deficit  targets  under  the  programme/EDP  are  met,  even  though  this  requires  additional  consolidation  measures  and  has  an 
additional contractionary impact on growth. For both these two latter scenarios, from 2015 onwards the general government deficit is 
reduced by 0.5 pps annually until balance is reached (for comparison, in this scenario the budget deficit in this scenario would be 3% 
of GDP in 2015 and -0.5% of GDP in 2020). 

49 

 
 
 
 
 
Annex 2: Supplementary tables 

Table A1: Health expenditure overruns in 2012 

7th review

8th review

cash

accrual

cash

accrual

EUR million

A

Savings envisaged in 2012 Budget

Hospital income from private health insurance
Demand Led Schemes
Employment numbers and pay
Long stay repayment scheme
Efficiencies in disability, mental health & childcare 
Other measures (procurement)

B

Emergent spending pressures since 2012 Budget time

Hospital activity
Pension lump sum costs
New high tech drugs
VAT
EU agency directive
Other (residual)
Additional pressures on PCRS 1/

C=  A+B

Total spending pressures relative to no-policy change baseline underlying 
2012 bugdet

D

Savings expected from measures effectively implemented

Hospital income from private health insurance
Demand Led Schemes
Employment numbers and pay
Long stay repayment scheme
Efficiencies in disability, mental health & childcare 
Other measures (procurement)

E

Envisaged addditional measures

Intensification of agency, overtime 
Exchequer funding of HSE pensions
Additional savings on generic drugs costs
Medical Defence Union receipts
Transitional Care Programme
Time related savings in mental health/primary care
Savings on National Treatment Purchase Fund expenditure
Capital expenditure savings
Other savings
Additional savings in Vote 38 1/

F=   D-E Remaining estimated overrun

Note: 1/ New information as of October 2012 review mission.
Source: DPER, Ministry of Health

543
143
124
145
11
50
70

317
150
46
15
50
15
41

860

503
125
119
135
11
25
88

357
129
46
20
45
16
53
10
28
10

0

543
143
124
145
11
50
70

317
150
46
15
50
15
41

860

378
0
119
135
11
25
88

205
129
46
20
0
0
0
0
0
10

543
143
124
145
11
50
70

357
150
46
15
50
15
41
40

900

233
0
69
75
11
-10
88

146
100
46
0

543
143
124
145
11
50
70

357
150
46
15
50
15
41
40

900

348
115
69
75
11
-10
88

343
100
46
0
45
16
53
30
28
10
15

277

209

521

50 

 
 
 
 
 
Table A2: Fiscal performance in 2012 

Jan-Nov 2012
SPU
target

Outturn
vs
target

SPU
target

2012

Budget for  Estimate

2013

EUR million

Revenue

Tax revenue

Personal income tax

VAT

Corporation tax

Excise duties
Social contributions (PRSI)  1
Other taxes

Non-tax Revenue

Central Bank Surplus Income 

Bank Guarantee Fees

National Lottery Surplus

Interest on contingent capital notes

Other

Capital receipts 2

EU agricultural funds (FEOGA)
Sale of Mobile Telephony Licences
Other

Expenditure

Current voted (net)

Social Protection  1
Health
Education
Other 

Current non-voted 2
Debt Service
EU Budget Contribution
Other non-voted (ex-SF)

Capital expenditure

Exchequer capital funding (net)
FEOGA and other EU payments
Other

Main below-the-line financial transfers

Promissory Notes  3
Loans to Insurance Compensation Fund
Irish Life Limited
ESM capital payment
Credit Union Funding

Outturn

43 483

39 901

13 872

9 966

3 810

4 064

6 128

2 061

2 713

958

1 025

175

300

255

869
720
0
149

54 167

44 316
19 017
11 592
6 883
6 824

7 279
5 810
1 270
199

2 572
2 446
125
1

2 284
25
450
1 300
510

40 449

14 103

9 786

3 831

4 244

6 504

1 981

-547

-231

180

-21

-180

-376

80

44 039
18 779
11 226
6 919
7 115

277
238
366
-36
-291

6 076

-266

2 851

-405

47 292

46 881

43 462

15 300

9 995

4 020

4 815

7 087

2 245

2 730

945

982

220

300

283

1 100
720
178
202

42797

15040

10190

4010

4615

6632

2310

2770

958

1025

220

300

267

1314
720
435
159

vs
target
-411

-665

-260

195

-10

-200

-455

65

40

13

43

0

0

-16

214
0
257
-43

60 341

60 072

-269

47 881
20 474
12 095
7 635
7 676

7 984
6 318
1 340
326

4 476
3635
830
11

2 534
25
450
1300
509
250

48322
20704
12456
7635
7526

7469
5845
1390
234

4281
3520
760
1

2541
25
456
1300
510
250

441
230
361
0
-150

-515
-473
50
-92

-195
-115
-70
-10

7
0
6
0
1
0

Exchequer balance 3

-12 968

-15 583

-15 732

-149

Below-the-line financial transfers
Local government sector
Accrual adjustments and other below-the-line operations

General government balance 4

% of GDP

2534
-200
146

2541
-125
11

7
75
-135

-13 103
-8.1

-13 305
-8.2

Sources:  End-November Exchequer statement; Stability Programme; 2012 budget; White Paper; 2013 budget and Commission Services estimates
Notes:
1 Social contributions (PRSI) are included among tax revenue and excluded from net Social Protection current expenditure. Net current expenditure are 
net of departmental own receipts (appropriations-in-aid). 
2 Excludes Sinking Fund transfer from current to capital account, which is the Exchequer deficit neutral.
3 Excludes promissory note repayment to IBRC of EUR 3.06 billion, which was financed through a government bond placement.
4 The deficit-to-GDP ratios are calculated using the current 2012 GDP estimate of EUR 162.3 billion.

51 

 
 
 
Table A3: Use and supply of goods and services (volume) 

Annual % change

2010

2011

2012

2013

2014

2015

  1. Private consumption expenditure
  2. Government consumption expenditure
  3. Gross fixed capital formation

  4. Final domestic demand
  5. Change in inventories

  6. Domestic demand
  7. Exports of goods and services 

  7a.  - of which goods
  7b.  - of which services

  8. Final demand
  9. Imports of goods and services 

  9a.  - of which goods
  9b.  - of which services

 10. Gross domestic product at market prices

Contribution to change in GDP

 11. Final domestic demand
 12. Change in inventories + net acq. of valuables
 13. External balance of goods and services 

0.5
-4.6
-22.7

-5.0

-4.4
6.2
5.3
7.2

1.1
3.6
-1.1
6.5

-0.8

-4.3
0.6
2.9

-2.3
-4.3
-12.2

-4.2

-3.7
5.1
2.7
7.7

1.2
-0.3
-2.3
0.8

1.4

-3.4
0.4
5.4

-2.1
-4.0
-4.0

-2.8

-2.8
2.8
2.2
3.4

0.4
0.3
0.3
0.3

0.4

-2.2
0.0
2.6

-0.5
-1.7
-1.5

-1.0

-0.9
3.2
3.2
3.2

1.5
2.0
2.0
2.0

1.1

-0.7
0.0
1.8

1.2
-3.0
3.0

0.5

0.4
4.2
4.2
4.2

2.7
3.2
3.2
3.3

2.2

0.3
0.0
1.9

1.8
-3.3
5.2

1.1

1.1
4.5
4.5
4.5

3.2
3.6
3.6
3.7

2.8

0.8
0.0
2.0  

Table A4: Use and supply of goods and services (value) 

Annual % change

2010

2011

2012

2013

2014

2015

  1. Private consumption expenditure
  2. Government consumption expenditure
  3. Gross fixed capital formation

  4. Final domestic demand
  5. Change in inventories

  6. Domestic demand
  7. Exports of goods and services 

  8. Final demand
  9. Imports of goods and services 
  10. Gross national income at market prices
  11. Gross value added at basic prices

 12. Gross domestic product at market prices

Table A5: Implicit price deflators 

-1.6
-8.8
-26.9

-8.0
-66.1

-7.4
7.8

2.5
6.6
-3.3
-1.9

-3.0

-0.8
-2.8
-13.9

-3.2
-139.4

-2.7
5.7

-1.9
2.8
-2.2
2.4

1.6

-0.2
-2.1
-2.5

-1.0
-2.0

-1.0
3.8

3.7
1.3
0.2
1.0

2.1

0.8
-0.8
2.6

0.7
3.0

0.7
4.3

2.8
3.3
1.6
2.5

2.4

2.7
-2.0
7.5

2.2
-11.0

2.2
5.2

4.0
4.4
3.5
3.4

3.7

3.4
-2.6
10.3

3.0
0.0

3.0
5.8

4.7
4.9
3.3
4.4

4.4  

% change in implicit price deflator

2010

2011

2012

2013

2014

2015

  1. Private consumption expenditure
  2. Government consumption expenditure
  3. Gross fixed capital formation

  4. Domestic demand
  5. Exports of goods and services 

  6. Final demand
  7. Imports of goods and services 

  8. Gross domestic product at market prices

       HICP

-2.1
-4.3
-5.4

-3.1
1.6

-0.6
2.9

-2.2

-1.6

1.5
1.6
-2.0

1.1
0.6

0.8
3.1

0.2

1.2

1.9
2.0
1.6

1.9
1.0

1.4
1.0

1.7

2.0

1.3
1.0
4.2

1.6
1.1

1.3
1.2

1.3

1.3

1.4
1.0
4.4

1.7
1.0

1.3
1.1

1.4

1.4

1.6
0.8
4.8

1.9
1.2

1.4
1.3

1.6

1.6

52 

 
 
 
 
Table A6: Labor market and labor costs 

Annual % change

2010

2011

2012

2013

2014

2015

1. Labour productivity
2. Compensation of employees per head
3. Unit labour costs
4. Total population
5. Population of working age (15-64 years)
6. Total employment 
7. Calculated unemployment rate - Eurostat definition (%)

3.6
-1.5
-5.4
0.3
-0.8
-4.1
13.7

3.6
2.1
2.2
0.2
-1.0
-2.1
14.4

1.7
0.7
0.2
0.4
-0.9
-1.2
14.8

1.0
0.0
-1.1
0.7
-0.5
0.0
14.7

1.2
0.1
-0.9
0.9
-0.1
0.9
14.2

0.9
0.1
-0.8
1.0
0.1
1.9
13.4  

Table A7: External balance 

levels

2010

2011

2012

2013

2014

2015

1. Exports of goods (fob)
2. Imports of goods (fob)

3. Trade balance (goods, fob/fob) (1-2)

3a. p.m. (3) as % of GDP

4. Exports of services
5. Imports of services

6. Services balance (4-5)

6a. p.m. 6 as % of GDP

7. External balance of goods & services (3+6)

7a. p.m. 7 as % of GDP

8. Balance of primary incomes and current

8a. - of which, balance of primary income
8b. - of which, net current Transfers

8c. p.m. 8 as % of GDP

9. Current external balance (7+8)

9a. p.m. 9 as % of GDP
10. Net capital transactions

11. Net lending (+)/ net borrowing (-) (9+10)

11a. p.m. 11 as % of GDP

82.6
46.9

35.8
22.8
75.2
81.5

-6.3
-4.0

29.5
18.8
-27.5
-25.2
-2.3
-17.6

2.0
1.3
-0.7

1.3
0.8

84.9
48.3

36.6
23.0
81.9
83.6

-1.7
-1.1

34.9
22.0
-34.2
-32.0
-2.2
-21.5

0.7
0.5
-0.4

0.3
0.2

87.5
48.9

38.6
23.8
85.5
84.7

0.8
0.5

39.5
24.3
-35.8
-35.0
-0.7
-22.0

3.7
2.3
-0.3

3.4
2.1

91.5
50.5

41.0
24.7
89.0
87.5

1.6
0.9

42.5
25.6
-36.9
-36.8
0.0
-22.2

5.7
3.4
-0.2

5.5
3.3

96.3
52.7

43.5
25.3
93.7
91.3

2.4
1.4

45.9
26.7
-38.4
-38.4
0.0
-22.3

7.5
4.4
-0.1

7.4
4.3

101.8
55.3

46.5
25.8
99.2
95.9

3.3
1.8

49.7
27.7
-41.6
-41.5
-0.1
-23.1

8.1
4.5
0.0

8.1
4.5  

53 

 
 
 
 
 
 
 
 
 
 
 
 
Table A8: Fiscal accounts 

Indirect taxes
Direct taxes
Social contributions
Sales
Other current revenue

Total current revenue
Capital transfers received

Total revenue

Compensation of employees
Intermediate consumption
Social transfers in kind via market producers
Social transfers other than in kind
Interest paid
Subsidies
Other current expenditure

Total current expenditure
Gross fixed capital formation
Other capital expenditure

Total expenditure

2008

2009

2010

2011

2012

2013

2014

2015

% of GDP

12.4
11.5
6.8
2.3
1.3

34.5
1.2

35.7

11.9
5.8
2.2
11.6
1.3
0.5
2.5

35.9
5.3
1.9

43.1

11.3
10.8
7.4
2.8
1.3

33.7
1.0

34.7

12.8
6.4
2.3
14.5
2.0
0.6
2.6

41.3
3.8
3.6

48.7

11.5
10.7
7.3
3.3
1.4

34.2
1.0

35.2

12.3
6.0
2.5
14.8
3.2
0.6
2.3

41.6
3.5
21.0

66.1

11.1
12.1
6.4
3.2
1.3

34.2
0.7

34.9

12.0
5.6
2.4
15.0
3.3
0.4
2.1

40.9
2.5
4.8

48.2

11.1
12.6
5.9
2.5
1.4

33.5
0.7

34.3

11.6
5.3
2.2
14.4
4.0
0.3
2.2

40.0
2.0
0.7

42.6

11.0
13.1
5.7
2.0
1.4

33.2
0.8

34.0

11.1
4.8
1.9
13.7
5.7
0.3
2.2

39.7
1.6
0.2

41.5

11.2
13.4
5.6
1.9
1.3

33.4
0.7

34.2

10.5
4.3
1.7
12.8
5.6
0.3
2.1

37.3
1.5
0.3

39.1

11.2
13.6
5.4
1.9
1.1

33.3
0.5

33.7

9.9
3.8
1.5
12.3
5.5
0.2
2.0

35.3
1.5
0.2

37.0

General Government balance (EDP)

-7.4

-13.9

-30.9

-13.4

-8.4

-7.5

-5.0

-3.3

Indirect taxes
Direct taxes
Social contributions
Sales
Other current revenue

Total current revenue
Capital transfers received

Total revenue

Compensation of employees
Intermediate consumption
Social transfers in kind via market producers
Social transfers other than in kind
Interest paid
Subsidies
Other current expenditure

Total current expenditure
Gross fixed capital formation
Other capital expenditure

Total expenditure

EUR billion

22.2
20.7
12.2
4.2
2.3

61.7
2.2

63.9

21.2
10.4
3.9
20.8
2.4
0.9
4.5

64.2
9.5
3.3

77.0

18.3
17.4
12.0
4.5
2.1

54.3
1.7

56.0

20.7
10.4
3.8
23.4
3.3
0.9
4.3

66.7
6.1
5.7

78.5

17.9
16.7
11.5
5.2
2.2

53.6
1.6

55.1

19.3
9.3
3.9
23.2
5.0
0.9
3.5

65.1
5.5
32.8

103.4

17.7
19.2
10.3
5.1
2.1

54.3
1.1

55.4

19.1
8.9
3.8
23.8
5.3
0.6
3.4

65.0
4.0
7.6

76.7

18.0
20.5
9.6
4.1
2.3

54.4
1.2

55.6

18.8
8.6
3.5
23.4
6.5
0.5
3.6

65.0
3.2
1.1

69.2

18.3
21.7
9.5
3.4
2.3

55.2
1.3

56.5

18.4
8.0
3.2
22.8
9.4
0.5
3.6

65.9
2.7
0.4

69.0

19.3
23.1
9.7
3.3
2.2

57.6
1.3

58.9

18.1
7.4
3.0
22.1
9.7
0.4
3.6

64.3
2.7
0.5

67.4

General Government balance (EDP)

-13.2

-22.5

-48.3

-21.3

-13.6

-12.5

-8.6

54 

20.2
24.5
9.8
3.3
2.0

59.8
0.8

60.6

17.8
6.9
2.8
22.1
9.9
0.4
3.7

63.5
2.7
0.4

66.6

-5.9  

 
 
 
 
 
 
Table A9: Debt developments 

2008

2009

2010

2011

2012

2013

2014

2015

EDP deficit (%  of GDP)
EDP gross debt (% of GDP)

-7.4
44.5

-13.9
64.9

-30.9
92.2

-13.4
106.4

-8.4
117.5

-7.5
122.1

-5.0
119.2

-3.3
117.3

levels, EUR billion

EDP deficit
Gross debt
Change in gross debt
Nominal GDP
Real GDP

Real GDP growth (%  change)
Change in gross debt (% of GDP)
Stock-flow adjustments (% of GDP)

-13.2
79.6
32.4
178.9
177.4

-2.1
18.1
10.8

-22.5
104.6
25.0
161.3
167.7

-5.5
15.5
1.6

-48.3
144.2
39.6
156.5
166.4

-0.8
25.3
-5.6

-21.3
169.2
25.0
159.0
168.8

1.4
15.7
2.4

-13.6
190.8
21.5
162.3
169.5

0.4
13.3
4.9

-12.5
202.9
12.1
166.2
171.3

1.1
7.3
-0.2

-8.6
205.3
2.4
172.3
175.1

2.2
1.4
-3.6

-5.9
211.0
5.7
179.9
179.9

2.8
3.2
-0.1

% of GDP

Gross debt ratio
Change in gross debt ratio

44.5
19.5

64.9
20.4

92.2
27.3

106.4
14.3

117.5
11.1

122.1
4.6

119.2
-2.9

117.3
-1.9

Contribution to change in gross debt

Primary balance
"Snow-ball" effect
of which

Interest expenditure
Real growth effect
Inflation effect

Stock-flow adjustments

6.0
2.7

1.3
0.6
0.8

10.8

11.9
7.0

2.0
2.7
2.3

1.6

27.7
5.2

3.2
0.5
1.5

-5.6

10.0
1.9

3.3
-1.3
-0.2

4.4
1.8

4.0
-0.4
-1.7

1.9
2.9

5.7
-1.2
-1.5

-0.7
1.3

5.6
-2.6
-1.7

2.4

4.9

-0.2

-3.6

-2.2
0.5

5.5
-3.2
-1.8

-0.1

Implicit interest rate

5.1

4.1

4.8

3.7

3.8

4.9

4.8

4.8

Notes: 
The projections for gross debt incorporate the completion of the outstanding financial sector capital injections in 
2012 (in the amount of EUR 1.6 billion) and other smaller financial transactions. The projections assume no use of 
precautionary contingencies foreseen in the programme's financing plan and cash balances declining from EUR 17 
billion at end-2013 and to EUR 9 billion by 2015.

55 

 
 
 
 
Annex 3: Draft updated programme documents 

Ireland 

Letter of Intent 

Dublin, 29 November 2012 

Mr Mario Draghi 
President 
European Central Bank 
Kaiserstrasse 29 
60311 Frankfurt am Main 
Germany 

Mr Jean-Claude Juncker 
Eurogroup President  
Ministère des Finances 
3, rue de la Congrégation 
L-1352 
Luxembourg 

Mr Olli Rehn 
Vice-President  of  the  European  Commission  responsible  for  Economic  and  Monetary 
Affairs and the euro 
European Commission 
BERL 10/299 
B-1049 Brussels 
Belgium 

Mr Vassos Shiarly 
Minister of Finance 
Michael Karaoli & Gregori Afxentiou 
1439 Nicosia 
Cyprus 

Dear Messrs Draghi, Juncker, Rehn, and Shiarly 

1.       The Irish Government remains firmly committed to the programme, as illustrated 

by our continued strong performance in implementing the agreed policy frameworks and 

56 

 
 
 
 
 
 
 
 
 
 
measures. This performance, and our preparation for Budget 2013, is against a backdrop 

of  an  increasingly  adverse  international  economic  environment.  Nevertheless,  yields  on 

Irish  government  bonds  have  fallen  dramatically  in  recent  months,  reflecting  our  strong 

performance as well as certain positive developments in Europe, especially the euro area 

leaders’ June 29 commitment  to  decouple the  sovereign and banking debt  issues and in 

this context to specifically examine the situation of the Irish financial sector with the view 

of improving the sustainability of Ireland’s well-performing adjustment programme. The 

ECB’s  decision  on  Outright  Monetary  Transactions  is  another  positive  development. 

These  improved  market  conditions  enabled  the  launch  of  our  first  bond  issue  under  the 

programme in late July and the renewal of regular Treasury bill auctions. As we enter the 

final  year  of  our  3yr  programme,  we  are  now  focusing  on  the  measures  necessary  to 

successfully  exit  from  the  programme.  Notwithstanding  the  external  risks,  our  policy 

efforts are aimed at further deepening our access to market funding during 2013, in order 

to exit  from reliance  on  official  financing. Timely implementation  of  euro area  leaders’ 

commitments would greatly support the effectiveness of these efforts. We are sure that we 

can  rely  on  continued  support  of  the  external  partners  and  fellow  member  states  in  this 

endeavour. 

2.       For  the  eighth  review,  we  have  once  again  met  our  commitments  under  the 

EU/IMF supported programme in terms of policy reforms as well as quantitative targets:  

•  As  regards  our  fiscal  consolidation  objectives,  the  2012  cumulative  exchequer 

balance through end-September was ahead of the programme profile and, for 2012 

as  a  whole,  the  general  government  deficit  is  projected  to  be  below  the  8.6%  of 

GDP  programme  ceiling.  We  are  alert  to  the  overruns  experienced  in  the  health 

sector, and are taking structural measures to correct them in a durable manner. We 

will also present Budget 2013 to the Dail on December 5, which will underpin our 

commitment to reduce the general government deficit in 2013 and future years in 

line  with  our  agreed  programme  consolidation  path,  despite  the  weaker  growth 

outlook. 

•  We  have  introduced  legislation  to  the  Dail  by  end-September  as  envisaged, 

including measures to: (i) reform the personal insolvency framework; (ii) establish 

a Central Credit Register; (iii) strengthen the Credit Union legislative framework; 

and    provide  the  legal  basis  for,  respectively,  (iv)  the  Irish  Fiscal  Advisory 

57 

 
 
Council and (v) the medium-term expenditure ceilings (both introduced last year 

on  an  administrative  basis).  We  have  also  launched  an  advisory  service  for 

distressed  mortgage  borrowers  and  introduced  on  a  statutory  basis  (i)  the 

requirement, under the terms of the Deposit Guarantee Scheme, for Credit Unions 

to maintain an amount in the Deposit Protection account in the central bank and 

(ii) a levy to fund the credit institutions resolution fund. Moreover, we progressed 

on reforming activation policies and preparing identified non-strategic state assets 

for  eventual  disposal,  and  reforming  the  sectoral  wage  setting  mechanisms 

(legislation for which has been approved). Finally, we are taking necessary steps 

to introduce water meters, centralize the provision of water services and ensure a 

sound financial footing for Irish Water according to the timeline envisaged under 

the programme.  

•  The  overarching  strengthening,  restructuring,  and  right-sizing  of  the  domestic 

banking and the credit union sectors are also progressing according to plan. Two 

out  of  three  PCAR  banks  are  well  advanced  in  reaching  their  end-2013  asset 

deleverage targets, and the Central Bank has formalized to the PCAR banks non-

core  asset  deleverage  targets  and  has  introduced  an  advanced  monitoring 

framework  designed  to  ensure  the  banks  take  actions  to  improve    net-stable-

funding  and  liquidity  coverage  ratios.  Revised  restructuring  plans  for  both  AIB 

and  PTSB  have  been  submitted  to  the European  Commission.  Further  actions  to 

address  loan  arrears  and  unsustainable  debts  in  banks'  mortgage  and  SME  loan 

portfolios are being implemented. 

3.      

In light of our performance under the programme and our continued commitment 

to  it,  we  request  the  completion  of  the  eighth  review  and  the  release  of  the  eighth 

EFSF/EFSM disbursement of EUR 0.8 billion. 

4.      

In the attached seventh update of the Memorandum of Understanding of Specific 

Economic Policy Conditionality (the MOU), as well as in the Memorandum of Economic 

and Financial Policies (MEFP), we set out our plans to further advance towards meeting 

the  objectives  of  our  economic  adjustment  programme.  We  also  continue  to  work  with 

staff  of  the  European Commission,  the  European  Central  Bank  and  the  International 

Monetary  Fund  on  the  follow-up  to  the  29  June  statement  by  the  Heads  of  State  and 

Government of the euro area. 

58 

 
 
5.       We consider that delivering in full our commitments under the programme, while 

progressing  towards  severing  the  pernicious  link  between  the  banks  and  the  sovereign, 

will  enable  Ireland  to  successfully  exit  the  programme  and  return  to  sustained  private 

market funding.  

6.       We  are  confident  that  the  policies  set  forth  in  the  Letters  of  Intent  of 

3 December 2010 and subsequent letters as well as this letter are adequate to achieve the 

objectives of our Programme. At the same time, while we do not envisage that revisions 

will  be  needed,  we  stand  ready  to  take  any  corrective  actions  that  may  become 

appropriate  if  circumstances  change.  We  will  continue  to  consult  with  staff  of  the 

European Commission, the ECB, and the IMF on the adoption of such actions in advance 

in  the  event  that  revision  of  the  policies  contained  in  this  Letter  and  the  attached 

Memoranda becomes necessary.  

7.       This letter is being copied to Mme Lagarde. 

Sincerely, 

_________________ 

_________________ 

Michael Noonan, T.D. 

    Patrick Honohan 

Minister for Finance 

            Governor  of  the  Central  Bank  of 

Ireland 

59 

 
 
 
 
   
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
Ireland 

Memorandum of Understanding 

On 

Specific Economic Policy Conditionality 

(Seventh Update) 

[XX] January 2013 

DRAFT 

1.  With regard to Council Regulation (EU) n° 407/2010 of 11 May 2010 establishing a 
European  Financial  Stabilisation  Mechanism  (EFSM),  and  in  particular  Article  3(5) 
thereof,  this  seventh  update  of  the  Memorandum  of  Understanding  on  Specific 
Economic  Policy  Conditionality  (MoU)  details  the  general  economic  policy 
conditions  as  embedded  in  Council  Implementing  Decision  2011/77/EU  of  7 
December 2010 on granting Union financial assistance to Ireland. 

2.  The quarterly disbursement of financial assistance from the EFSM39 will be subject to 
quarterly reviews of conditionality for the duration of the programme. Release of the 
instalments will be based on observance of quantitative performance criteria, respect 
for  EU  Council  Decisions  and  Recommendations  in  the  context  of  the  excessive 
deficit  procedure  (EDP),  and  a  positive  evaluation  of  progress  made  with  respect  to 
policy criteria in the Memorandum of Economic and Financial Policies (MEFP) and 
this updated MoU, which details and further specifies the criteria that will be assessed 
for the successive reviews up to the end of 2013. If targets are expected to be missed, 
additional action will be taken.  

3.  For the duration of the EU/IMF financial assistance  programme the  Irish authorities 
will  take  all  the  necessary  measures  to  ensure  a  successful  implementation  of  the 
programme  and  minimise  the  costs  to  the  taxpayers,  while  protecting  the  most 
vulnerable. In particular, they commit to:  

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. Any additional unplanned revenues must be allocated 

39 On 28 November 2010 Eurogroup and ECOFIN Ministers issued a statement clarifying that euro-area and 
EU financial support will be provided on the basis of the programme which has been negotiated with the 
Irish  authorities  by  the  Commission  and  the  IMF,  in  liaison  with  the  ECB.  Further  to  the  Union  support 
from  the  EFSM,  loans  from  the  EU  and  its  Member  States  will  include  contributions  from  the  European 
Financial  Stability  Facility  (EFSF)  and  bilateral  lending  support  from  the  United  Kingdom,  Sweden,  and 
Denmark.  The  Loan  Facility  Agreements  on  these  financing  contributions  will  specify  that  the 
disbursements there under are subject to the compliance with the conditions of this Memorandum. 

60 

 
 
 
 
                                                 
to debt reduction. Moreover, the nominal value of Social Welfare pensions will not 
be increased. 

Continue to strengthen the fiscal framework and reporting in line with EU requirements.  

Use at least half of the proceeds from state asset sales for eventual debt reduction while 
also reinvesting the remainder of the 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. 

Continuously monitor  financial  markets  to  exploit  opportunities  to  return  to  commercial 

funding as soon as possible.  

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). 

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. 

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  billion  worth  of  senior  bonds  by  end 
2013. 

Ensure that the restructuring of credit unions will underpin the financial stability and long 
term  sustainability  of  the  sector.  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  regulatory  approval.  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. In parallel, the Central Bank will continue its inspections to 
determine  the  financial  condition  of  the  weakest  credit  unions,  and  will  engage  its 
resolution powers as needed, drawing on Resolution Fund resources if required.  

Ensure continued compliance with the minimum Core Tier 1 Capital ratio of 10.5% for all 

PCAR banks (AIB, BOI, and PTSB). 

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.  

4.  To  facilitate  programme  monitoring,  the  authorities  will  provide  the  European 

Commission, the ECB and the IMF with: 

a.  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. 

61 

 
 
1.  Actions for the ninth review (actions to be completed by end Q4-

2012) 

Fiscal consolidation 

5.  The Government will publish a budget for 2013 consistent with a general government 
deficit ceiling of 7.5% of GDP and in line with the Council Recommendations under 
Ireland’s excessive deficit procedure.  

6.  On  the  basis  of  the  aggregate  budgetary  projections  set  out  in  the  Medium  Term 
Fiscal  Statement  (MTFS)  of  November  2011,  consolidation  measures  for  2013  will 
amount to at least €3.5 billion. The following measures are proposed for 2013 on the 
basis of the MTFS: 

o  Revenue measures to raise at least €1.25 billion40, including: 

-  A broadening of personal income tax base. 

-  A value-based property tax. 

-  A restructuring of motor taxation. 

-  A reduction in general tax expenditures.  

-  An increase in excise duty and other indirect taxes.  

o  Expenditure  reductions  necessary  to  achieve  an  upper  limit  on  voted 
expenditure  of  €54.3  billion,  which  will  involve  deficit  consolidation 
measures of €2.25 billion on the basis of the MTFS, including: 

-  Social expenditure reductions. 

-  Reduction in the total pay and pensions bill. 

-  Other programme expenditure, and reductions in capital expenditure. 

7.  Without  prejudice  to  the  minimum  consolidation  amount  referred  to  in  the  previous 
paragraph  and  to  the  requirements  to  achieve  the  agreed  fiscal  targets,  the 
Government  may,  in  consultation  with  the  staff  of  the  European  Commission,  the 
IMF,  and  the  ECB,  substitute  one  or  more  of  the  above  measures  with  others  of 
equally good quality based on the options identified in the Comprehensive Review of 
Expenditure (CRE).  

8.  The  authorities  will  take  the  measures  necessary  to  unwind  the  overrun  in  health 
spending  and  will  contain  health  expenditure  next  year  to  within  the  €13.6  billion 
departmental ceiling for 2013 set in the Comprehensive Expenditure Report 2012-14. 

40 Inclusive of carryover from 2012.  

62 

 
 
                                                 
9.  Government  will  publish  a  medium-term  fiscal  statement  covering  the  period  2013-
2015  consistent  with  a  further  reduction  of  the  General  Government  deficit  in  line 
with  the  fiscal  targets  set  out  in  the  Council  Recommendation  in  the  context  of  the 
excessive deficit procedure. 

10. DPER  and  DECLG  will  agree  a protocol  to  ensure that the local government sector 
continues to be managed in balance over the medium term and in particular to ensure 
a  balanced  budget  in  2013,  by  reference  to  the  application  of  the  financial 
management safeguards and requirements in place within the sector.  

Financial sector reforms 

Capital assessment 

11. 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 January 2013. The authorities will agree 
with  the  staff  of  the  European  Commission,  the  ECB  and  the  IMF  on  the  specific 
details of the review.  

Deleveraging 

12. 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.  

Funding and liquidity monitoring 

13. 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.  

Asset quality 

14. 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  portfolios  in  accordance  with  the  agreed  key  performance 
indicators. A set of key performance indicators for SMEs will also be developed. 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.  

15. The authorities will publish banks’ reported data on loan modifications, including re-
defaults  of  modified  loans,  to  permit  analysis  of  the  effectiveness  of  alternative 
resolution approaches in improving debt service performance. 

Reorganisation 

63 

 
 
16. The  authorities  will  report  on  progress  in  implementing  the  strategy  for  the 
reorganisation of Irish credit institutions, including any steps to strengthen the credit 
union sector, and discuss it together with the staff of the European Commission, the 
IMF, and the ECB. 

64 

 
 
Financial Supervision 

17. 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  together  with  the  staff  of  the  European  Commission,  the 
ECB and the IMF.  

18. 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. 

19. The authorities will continue enhancing their approach to Credit Risk, risk weighted 
asset  (RWA)  supervision  including    conducting  annual  model  performance  reviews, 
assessing RWA calculation and reviewing banks’ approaches to RWA forecasting and 
stress  testing  in  advance  of  PCAR  2013.  The  authorities  will  complete  the  reviews 
and issue mitigating actions for the banks concerned.  

Personal Insolvency Reform 

20. The authorities will ensure that the Draft Personal Insolvency Bill will provide for the 
framework  for  the  appropriate  licensing  and  regulation  of  Personal  Insolvency 
Practitioners.  

Structural reforms 

Enhancing access to finance for SMEs 

21. The  authorities  will  report  on  a  survey  of  SMEs  demand  for  credit  covering  the  six 
months  to  September  2012.  This  will  include  whether  or  not  SMEs  sought  credit, 
approval/refusal  rates,  conditions  and  criteria  attached  to  approvals,  reasons  for 
refusals  and  information  on  use  of  non-bank  finance,  turnover,  profitability  and 
employment  levels.  In  addition,  the  authorities  will  complete  a  separate  study 
assessing  the  effectiveness  of  the  Credit  Review  Office  to  ensure  that  SMEs  are 
getting the support on bank lending they require. 

22. The  authorities  will  also  improve  the  efficiency  of  the  corporate  insolvency 
framework  for  SMEs,  drawing  on  the  recommendations  in  the  recent  report  by  the 
Company Law Review Group. In particular, the authorities will prepare amendments 
to  designate  the  Circuit  Courts  as  competent  for  the  examinership  of  companies 
within the EU small company thresholds (e.g., balance sheet below €4.4 million).  

Competition 

23. On the basis of a report on developments to be provided by the authorities by end Q4 
2012, the authorities, in consultation with staff of the European Commission, IMF and 
the  ECB,  will  review  whether  sufficient  progress  has  been  made  toward  the  goal  of 
strengthening  competition  law  enforcement  by  ensuring  the  availability  of  effective 
sanctions for infringements of Irish competition law and Articles 101 and 102 of the 
Treaty  on  the  Functioning  of  the  European  Union  and  the  functioning  of  the 
Competition Authority, and whether additional measures will be required. 

65 

 
 
State asset disposals 

24. Government  will  complete,  if  necessary,  relevant  regulatory,  legislative,  corporate 
governance and financial reforms required to bring to the point of sale the assets it has 
identified  for  disposal.  For  each  asset  and/or  group  of  assets,  the  government  will 
provide a report to the staff of the European Commission, the IMF, and the ECB on 
progress achieved and remaining steps towards to the point of sale. 

Water services reform 

25. The  authorities  will  ensure  assignment  of  economic  regulatory  oversight  over  the 
water sector, including price setting powers, is provided for by way of legislation to 
the Commission for Energy Regulation. The Government will also ensure that interim 
arrangements are in place for the establishment of Irish Water. 

2.  Actions for the tenth review (actions to be completed by end Q1-

2013) 

Financial sector reforms 

Capitalisation 

26. The  authorities  will  report  on  the  evolution  of  regulatory  capital  within  the  PCAR 
banks  up  to  the  end  of  December  2012,  and  will  present  and  discuss  their  findings 
with the staff of the European Commission, the IMF, and the ECB. 

Deleveraging 

27. 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.  

Funding and liquidity monitoring 

28. 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.  

29. Following  finalisation  of  the  Capital  Requirements  Directive  legislative  text,  the 
authorities  will  establish  draft  guidance  for  the  creation  and  subsequent  holding  of 
liquidity  buffers  by  banks  for  issue  in  advance  of  the  entry  into  force  of  the 
regulations. 

30. In  addition,  the  authorities  will  monitor  the  liquidity  buffers  held  by  banks  in 

accordance with the Capital Requirements Regulation.  

66 

 
 
Asset quality 

31. 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. 

32. The authorities will publish banks’ reported data on loan modifications, including re-
defaults  of  modified  loans,  to  permit  analysis  of  the  effectiveness  of  alternative 
resolution approaches in improving debt service performance. 

33. 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. 

Reorganisation 

34. The  authorities  will  report  on  progress  in  implementing  the  strategy  for  the 
reorganisation of Irish credit institutions, including any steps to strengthen the credit 
union sector, and discuss it with the staff of the European Commission, the IMF, and 
the ECB. 

Financial supervision 

35. 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. 

36. 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. 

37. The  authorities  will  ensure  appropriately  prudent  provisioning  treatment  of  loan 
modifications.  The  authorities  will  continue  to  engage  with  banks  and  review  the 
proposed  provisioning  treatment  for  all  advanced  loan  modification  products  being 
introduced  as  part  of  their  mortgage  arrears  resolution  strategies.  In  addition,  the 
authorities will, in consultation with staff of the EC, ECB, and the IMF, update where 
necessary the 2011 Impairment Provisioning and Disclosure guidelines setting out the 
appropriate assumptions for all categories of advanced loan modifications.    

67 

 
 
Structural reforms 

Health sector 

38. The  authorities  will  conduct  a  study  to  compare  the  cost  of  drugs,  prescription 
practices and the usage of generics in Ireland with comparable EU jurisdictions.  

Efficient social support expenditure 

39. The authorities will complete by end January a review of the labour market activation 
policies in place to enable the unemployed to return to active employment against the 
targets set out in the 'Pathways to Work' plan, with a view to increasing the impact of 
the interventions made and services provided in this key area through; implementing 
key  service  elements  such  as  profile-based  activation  in  all  offices;  extending  one-
stop shops to more offices, bringing forward necessary steps to outsource training and 
activation, and broadening coverage of policy initiatives to long-term unemployed. 

3.  Actions  for  the  eleventh  review  (actions  to  be  completed  by  end 

Q2-2013) 

Financial sector reforms 

Capital assessment 

40. The authorities will agree with the staff of  the European Commission, the  ECB  and 
IMF  on  the  specific  features  of  the  methodology  for  the  PCAR  2013  stress  test 
exercise. 

Deleveraging 

41. 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.  

Funding and liquidity monitoring 

42. 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.  

43. The  authorities  will  also  monitor  the  liquidity  buffers  held  by  banks  in  accordance 

with the Capital Requirements Regulation. 

68 

 
 
Asset quality 

44. 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. 

45. The authorities will publish banks’ reported data on loan modifications, including re-
defaults  of  modified  loans,  to  permit  analysis  of  the  effectiveness  of  alternative 
resolution approaches in improving debt service performance. 

46. The authorities will undertake a review of progress in addressing mortgage arrears. 

Reorganisation 

47. The  authorities  will  report  on  progress  in  implementing  the  strategy  for  the 
reorganisation of Irish credit institutions, including any steps to strengthen the credit 
union sector, and discuss it together with the staff of the European Commission, the 
IMF, and the ECB. 

Financial supervision  

48. 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  together  with  the  staff  of  the  European  Commission,  the 
IMF, and the ECB. 

49. 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. 

50. The  authorities  will  review  the  implementation  of  the  2011  CBI  Provisioning  and 
Disclosure guidelines by the covered banks with reference to the end-2012 published 
financial statements. 

51. Upon publication of the EU directive establishing a framework for the recovery and 
resolution  of  credit  institutions  and  investment  firms,  the  authorities  will  review  the 
Resolution fund levy regulation. 

Structural reforms 

State assets 

52. The authorities will report to the staff of the European Commission, the IMF, and the 
ECB on the quantum of the proceeds of any realised asset sales to date. For assets yet 
to be disposed, the authorities will report on progress made and remaining steps.  

Labour market reform 

69 

 
 
53. The authorities will report to the staff of the European Commission, the IMF, and the 
ECB  on  the  impact  on  the  labour  market  of  reforms  to  sectoral  wage-setting 
mechanisms undertaken under the programme. 

Water services reform 

54. The Commission for Energy Regulation will carry out consultations to determine the 
framework for household water charges with a view to start charging by the end of the 
EU-IMF programme period. The CER will also conduct consultations in due course to 
determine the pricing methodology for the non-domestic sector.  

55. The  Government  will  publish  a  Water  Services  Bill  with  the  aim  of  defining  the 
regulatory  framework for  the water sector under a national public utility setting and 
providing for the establishment of Irish Water in its final form.   There will be prior 
engagement  with  the  European  Commission  as  appropriate,  in  developing  the 
legislative arrangements. 

4.  Actions  for  the  twelfth  review  (actions  to  be  completed  by  end 

Q3-2013) 

Financial sector reforms 

Capital assessment 

56. The authorities will complete the PCAR 2013. Building on the outcomes from PCAR 
2011 and the FMP 2012, the authorities will conduct another rigorous stress test and 
this  will  continue  to  be  based  on  robust  loan-loss  forecasts  and  a  high  level  of 
transparency. This stress test will draw on an assessment of the banks’ calculation of 
risk weighted assets, loan loss forecasting, and capital modelling. Before publication, 
the  results  of  the  PCAR  2013  will  be  discussed  with  the  staff  of  European 
Commission, the IMF, and the ECB and will be aligned with the timing of the next 
EBA exercise. The results and methodology will be published in full and on a bank-
by-bank  basis,  and  the  authorities  will  accordingly  ensure  that  banks  are  adequately 
capitalised. 

57. The authorities will report on the evolution of regulatory capital up to the end of June 
2013  within  the  banks  covered  by  the  PCAR  and  will  present  and  discuss  their 
findings with the staff of the European Commission, the IMF, and the ECB. 

Deleveraging 

58. 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.  

Funding and liquidity monitoring 

70 

 
 
59. 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.  

Asset quality 

60. 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. 

61. The authorities will publish banks’ reported data on loan modifications, including re-
defaults  of  modified  loans,  to  permit  analysis  of  the  effectiveness  of  alternative 
resolution approaches in improving debt service performance. 

Reorganisation  

62. The  authorities  will  report  on  progress  in  implementing  the  strategy  for  the 
reorganisation of Irish credit institutions, including any steps to strengthen the credit 
union sector, and discuss it together with the European Commission, the IMF, and the 
ECB. 

Financial Supervision 

63. 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  together  with  the  staff  of  the  European  Commission,  the 
IMF, and the ECB. 

64. 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. 

Structural reforms 

Access to SME credit 

65. Based  on  experience  of  the  operation  of  the  Insolvency  Service  in  the  personal 
insolvency  reform,  the  authorities  will  consider  the  appropriateness  of  further 
enhancements to the company law framework to reduce costs and achieve efficiency 
gains,  including  the  potential  for  an  administrative  body  to  facilitate  SME 
restructuring. 

Water services reform 

66. The  Government’s  budgetary  perspective  will  be  based  on  Irish  Water  becoming 

substantially self-funded over time. 

71 

 
 
5.  Actions for the thirteenth review (actions to be completed by end 

Q4-2013) 

Financial sector reforms 

Deleveraging 

67. The  authorities  will  produce  a  final  report  of  the  banks'  implementation  of  their 
deleveraging  plans  under  the  PLAR  2011.  Their  compliance  with  the  asset  disposal 
and  run-off  targets  in  nominal  value  terms  will  be  discussed  with  the  staff  of  the 
European Commission, the IMF, and the ECB.  

68. The authorities will produce a final report on progress towards compliance with Basel 

III liquidity and funding requirements by the relevant dates. 

69. The  authorities  will  also  monitor  the  liquidity  buffers  held  by  banks  in  accordance 

with the Capital Requirements Regulation. 

Asset quality 

70. 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. 

71. The authorities will publish banks’ reported data on loan modifications, including re-
defaults  of  modified  loans,  to  permit  analysis  of  the  effectiveness  of  alternative 
resolution approaches in improving debt service performance. 

Reorganisation 

72. The authorities will provide a final report on progress in implementing the strategy for 
the  reorganisation  of  Irish  credit  institutions,  including  any  steps  to  strengthen  the 
credit union sector, and discuss it together with the European Commission, the IMF, 
and the ECB. 

Financial Supervision 

73. The authorities will present a final comprehensive report on progress in implementing 
the  Central  Bank  of  Ireland’s  action  plan  for  strengthening  supervision  of  credit 
institutions and discuss it together with the European Commission, the IMF, and the 
ECB. 

74. The authorities will provide a final report on banks' progress with the implementation 
of their strategies to address loan arrears and unsustainable debts in banks' mortgage, 
and SME loan portfolios. 

75. The authorities will ensure that the Central Credit Register is operational. 

72 

 
 
Annex 1. Provision of data  

During  the  programme,  the  following  indicators  and  reports  shall  be  made  available  to  the 
staff of the European Commission, the IMF, and the ECB by the Irish authorities on a regular 
basis. The External Programme Compliance Unit (EPCU) of the Department of Finance will 
coordinate  and  collect  data  and  information  and  forward  to  the  staff  of  the  European 
Commission, the IMF, and the ECB.  

To be provided by the Department of Finance in consultation with the Department of Public 
Expenditure and Reform as appropriate 
Ref. 
F.1  Monthly data on adherence to budget targets (Exchequer 

Report 

Frequency 
Monthly, 10 days after 
the end of each month 

statement, details on Exchequer revenues and expenditure with 
information on Social Insurance Fund to follow as soon as 
practicable). 
Updated monthly report on the Exchequer Balance and General 
Government Balance outlook for the remainder of the year which 
shows transition from the Exchequer Balance to the General 
Government Balance (using presentation in Table 1 and Table 2A 
of the EDP notification). 
Quarterly data on main revenue and expenditure items of local 
Government. 

Quarterly data on the public service wage bill, number of 
employees and average wage (using the presentation of the Pay 
and Pension Bill with further details on pay and pension costs of 
local authorities).  
Quarterly data on general Government accounts, and general 
Government debt as per the relevant EU regulations on statistics. 

Updated annual plans of the general Government balance and its 
breakdown into revenue and expenditure components for the 
current year and the following four years, using presentation in the 
stability programme's standard table on general Government 
budgetary prospects.  
Data on short- and medium- /long-term debt falling due (all 
instruments) over the next 36 months (interest and amortisation) 
for Non-Commercial State Agencies 
Data on short- and medium- /long-term debt falling due (all 
instruments) over the next 36 months (interest and amortisation) 
for local authorities 
Data on short- and medium- /long-term debt falling due (all 
instruments) over the next 36 months for State- owned 
commercial enterprises (interest and amortisation) 

F.2 

F.3 

F.4 

F.5 

F.6 

F.7 

F.8 

F.9 

F.10  Assessment report of the management of activation policies and 
on the outcome of job seekers' search activities and participation 
in labour market programmes. 

To be provided by the NTMA 
N.1  Monthly information on the central Government's cash position 

with indication of sources as well of number of days covered  

N.2 

Data on below-the-line financing for central Government. 

73 

Monthly, 20 days after 
the end of each month 

Quarterly, 90 days 
after the end of each 
quarter 
Quarterly, 30 days 
after the end of each 
quarter 

Quarterly accrual data, 
90 days after the end of 
each quarter  
30 days after EDP 
notifications 

Quarterly, 30 working 
days after the end of 
each quarter 
Quarterly, 30 working 
days after the end of 
each quarter 
Quarterly, 30 working 
days after the end of 
each quarter 
Quarterly, 30 working 
days after the end of 
each quarter. 

Monthly, three 
working days after the 
end of each month 
Monthly, no later than 
15 working days after 
the end of each month 

 
 
N.3 

Data on the National Debt  

N.4 

N.5 

Data on short-, medium- and long-term debt falling due (all 
instruments) over the next 36 months (interest and amortisation) 
for the National Debt. 
Updated estimates of financial sources (bonds issuance, other 
financing sources) for the Exchequer Borrowing Requirement / 
National Debt  in the next 12 months  

To be provided by the Central Bank of Ireland 
C.1 

The Central Bank of Ireland’s balance sheet.  

C.2 

C.3 

C.4 

C.5 

C.6 

C.7 

Individual maturity profiles (amortisation only) for each of the 
domestic banks will be provided as of the last Friday of each 
month. 
Detailed financial and regulatory information (consolidated data) 
on domestic individual Irish banks and the banking sector in total 
especially regarding profitability (P&L), balance sheet, asset 
quality, regulatory capital; PLAR funding plan forecasts including 
LDR, NSFR and LCR outturns and forecasts. 
Detailed information on deposits for the last Friday of each 
month.   

Data on liabilities covered under the ELG Scheme for each of the 
Covered Institutions. 

Deleveraging committee minutes from the banks and deleveraging 
sales progress sheets, detailing pricing, quantum, and other 
relevant result metrics. 
Deleveraging reports including (i) progress achieved towards 
deleveraging in line with the 2011 Financial Measures 
Programme; and (ii) actual and planned asset disposals.  

Monthly, 15 working 
days after the end of 
each month 
Monthly, 30 working 
days after the end of 
each month 
Monthly, 30 working 
days after the end of 
each month 

Weekly, next working 
day  
Monthly, 30 working 
days after each month 
end. 
Quarterly, 40 working 
days after the end of 
each quarter  

Monthly, 30 working 
days after each month 
end. 
Monthly, 30 working 
days after each month 
end. 
Monthly, reflecting 
committee meetings 
held each month 
Quarterly, 40 working 
days after the end of 
the reference period. 

74 

 
 
 
Ireland: Memorandum of Economic and Financial Policies 

A.   Recent Economic Developments and Outlook 

1.      
Ireland’s economic recovery slowed in the first half of 2012 and the outlook is for a modest pick-
up in growth in 2013. Real GDP growth fell to ½ percent y/y in the first half of 2012 as net exports weakened. 
Net exports remained the sole driver of economic growth, with domestic demand and employment continuing to 
fall,  and  unemployment  has  remained  elevated  at  14.8 percent.  At  the  same  time,  lower  net  income  outflows 
boosted  GNP  growth  to  2¼ percent  y/y  and  the  current  account  surplus  to  2.7  percent  of  GDP,  although  a 
reversal of some of these gains may be seen in the second half. HICP inflation rose to 2.0 percent y/y during the 
first  three  quarters  of  2012  on  the  back  of  surging  energy  costs  and  administered  price  increases.  Growth 
strengthening  to  over  1  percent  is  projected  for  2013,  but  this  pick  up  may  be  impeded  by  weaker  growth 
expected  in  trading  partners.  In  addition,  further  domestic  demand  contraction  is  expected  as  financial  sector 
weaknesses,  continuing  uncertainties,  together  with  the  heavy  debt  burdens  of  households  and  SMEs,  hinder 
lending, drive saving, and curb investment.  

2.      
Ireland  has  started  to  regain  access  to  market  funding  in  recent  months,  aided  by  policy 
developments  at  the  European  level.  Irish  sovereign  bond  yields  fell  dramatically  over  the  summer, 
benefitting  from  continued  strong  program  implementation  and  the  June  29  summit  statement,  providing  an 
opportunity to re-enter the international bond market earlier and on more favourable terms than expected. Irish 
bond  markets  were  boosted  further  by  the  ECB’s  OMT  announcement  in  early  September,  with  8-year  bond 
yields  down  to  below  5  percent.  We  recognise  that  continued  strong  policy  implementation  is  essential.  In 
addition,  with  expectations  of  further  European  support  priced  in  by  the  market,  timely  delivery  on 
commitments to examine the situation of the Irish financial sector with the view of improving the sustainability 
of  Ireland’s  adjustment  program  is  necessary  to  maintain  the  positive  momentum  and  facilitate  our  efforts  to 
exit from reliance on official financing. 

B.   Fiscal Policies 

3.       We  will  meet  the  fiscal  targets  for  2012  and  extend  our  track  record  of  sound  budgetary 
management. The end-September targets on the exchequer primary balance and central government net debt 
were met with respective margins of 0.8 and 1.5 percentage points of GDP. Tax revenues are ahead of profile 
despite  more  challenging  macroeconomic  conditions,  reflecting  our  prudent  costing  of  measures  and  robust 
revenue  collection  efforts.  Strong  revenues,  along  with  spending  restraint  in  most  areas,  will  compensate  for 
overspending  in  health  and  social  welfare,  the  latter  on  account  of  higher-than-expected  unemployment. 
Overall, we are on track to deliver a general government deficit within the 8.6 percent of GDP target for 2012. 

4.       We are alert to the overrun in current health spending, and are taking the measures necessary to 
unwind  it.  We  are  committed  to  achieving  health  outcomes  in  an  efficient  manner  and  will  contain  health 
expenditure  next  year  to  within  the  €13.6  billion  departmental  ceiling  for  2013  set  in  the  Comprehensive 
Expenditure Report 2012-14, including by fully correcting the overrun from 2012. To this end, we have recently 
negotiated  a  significant  multi-year  reduction  in  the  price  of  pharmaceuticals,  and  are  seeking  further  durable 
savings, including through consideration of a range of structural reforms to:   

•  Further reduce drug costs, including by lowering the price of generic drugs and increasing the share 

of generics in prescriptions, dispensing and usage; 

•  Enhance  hospital  efficiency,  by  implementing  major  work  practice  and  rostering  reforms,  reducing 
the  average  length  of  hospital  stays,  increasing  the  share  of  day  treatments,  and  minimising 
unnecessary return visits for out-patients;  

• 

Improve  the  charging  regime  for  private  patients  in  public  hospitals  and  increase  collection  of 
charges, to fully account for costs; and  

•  Better target spending, particularly within the primary care re-imbursement scheme.  

75 

 
 
 
 
5.       The  recently-updated  Medium-Term  Fiscal  Statement  (MTFS)  demonstrates  our  continued 
commitment  to  put  the  public  finances  on  a  sound  footing.  As  set  out  in  the  table  below,  we  will  be 
implementing  consolidation  measures  of  at  least  €8.6  billion  over  the  next  three  years  to  bring  the  general 
government  deficit  below  3  percent  of  GDP  by  2015,  in  line  with  the  Stability  and  Growth  Pact  targets.  We 
consider  that  this  adjustment  path  strikes  the  right  balance  between  debt  sustainability  and  protecting  growth 
and jobs.  

Fiscal Consolidation 2013–15, in € billion 1/ 

Total 

Expenditure 

   Current 

   Capital 

Tax 

2013 

3.5 

2.25 

1.70 

0.55 

1.25 

2014 

2015 

3.1 

2.0 

1.9 

0.1 

1.1 

2.0 

1.3 

1.3 

0.0 

0.7 

1/ The amounts above include estimated tax carryovers of some €0.3 billion, €0.2 billion 
and €0.3 billion in 2013, 2014 and 2015, respectively; but exclude savings arising from 
measures  to  unwind  the  2012  overrun  in  health  spending  and  additional  general 
government balance improvements as set out  in the MTFS.  

6.       We will submit Budget 2013 to the Oireachtas on December 5 to deliver these targets for 2013 
(prior  action).  In  order  to  safely  achieve  the  general  government  deficit  below  the  program  ceiling  of  7.5 
percent of GDP, the package will include: (i) primary current expenditure adjustments of €1.7 billion (excluding 
measures  taken  to  unwind  the  2012  health  spending  over-run);  (ii)  reductions  in  capital  spending  of  €0.55 
billion, consistent with the Infrastructure and Capital Investment Plan 2012-16; (iii) new tax measures of €1 
billion;  and  (iv)  additional  general  government  balance  improvements,  including  in  respect  of  the  local 
government sub-sector, as set out  in the MTFS.  

7.       Our budget will select a balance of expenditure and tax measures to achieve the consolidation in 
a durable, equitable and growth-friendly manner.  

Current expenditure measures: 

•  Accelerated reduction in the public sector wage bill:  We will build on the recent overtime and sick 
pay reforms by targeting unjustified pay allowances for elimination, or medium-term restructuring. We 
are  considering  all  options  to  improve  the  sustainability  of  the  public  sector  wage  bill,  in  order  to 
achieve the envisaged current expenditure savings while protecting the delivery of public services. 

•  More targeted social supports and subsidies: We are reviewing a range of social transfers, including 
universal  benefits,  with  a  view  to  identifying  savings  while  protecting  the  most  vulnerable  and 
minimising  work  disincentives.  This  review  will  take  into  account  the  Comprehensive  Review  of 
Expenditure and the projected increase in age-related spending, as highlighted in the recent actuarial 
review of the Social Insurance Fund. Student contributions to the cost of tertiary education are being 
raised, and a more stringent means-test for maintenance grants for undergraduates is being introduced. 

Tax measures: 

• 

Introduction of property tax: We are rolling out a recurrent tax on the value of private residences from 
July  1,  2013  to  replace  the  household  charge.  The  tax  will  be  collected  centrally  by  the  Revenue 
Commissioners and will constitute an important and stable source of revenue. 

•  Tax  base broadening: We  are  broadening  the  base  for  personal  income  taxes  and pay related  social 

insurance (PRSI) including by better targeting reliefs and tightening allowances. 

76 

 
 
 
 
 
 
 
 
 
•  Raising  indirect  tax  revenues:  Following  an  intensive  public  consultation  on  environment-related 
taxation,  we  have  decided  to  recalibrate  the  CO2  band  structure  for  vehicle  registration  and  motor 
taxes. Options in relation to other indirect taxes, including excises, are also being considered.  

8.       At the time of Budget 2013, we will specify as far as possible the tax and spending measures for 
the 2014–15  consolidation.  We  are  confident  that  the permanent  consolidation  measures  outlined  above will 
yield significant carry-over savings for 2014–15, reducing the residual consolidation to be identified. An early 
specification of this remaining consolidation will reduce uncertainties faced by households and businesses and 
thereby help support the revival of domestic demand.  

9.       Having  completed  the  core  institutional  fiscal  reforms,  we  are  looking  to  advance  fiscal 
transparency.  The  Fiscal  Responsibility  Bill  will  be  signed  into  law  on  27  November  2012,  enshrining  the 
independence of  the Irish Fiscal  Advisory Council,  and  establishing  the  fiscal  rules for deficits  and debt. We 
have published the legislation (amendment to the Ministers and Secretaries Act) to provide a statutory basis for 
the  already  operational  multi-annual  expenditure  ceilings.  We  published  an  enhanced  Exchequer  statement  at 
end-September  2012  and  are  seeking  to  further  strengthen  the  reporting  of  general  government  accounts  and 
fiscal risks (given the state's large asset and liability positions).  

10.       We will continue to press forward with major public service reforms, which will further support 
budgetary  sustainability  into  the  medium  term.    As  the  recent  Progress  Update  on  the  November  2011 
Public  Service  Reform  Plan  shows,  major  projects  are  being  rolled  out  in  the  area  of  shared  services,  public 
procurement and the identification and evaluation of opportunities for external service delivery.  In this overall 
context,  the  Public  Service  Agreement  is  operating  as  a  key  enabler  of  reform  and  productivity,  helping  to 
eliminate waste and to manage the ongoing reduction in public sector headcount while minimising the impact 
on  service  levels.    We  will  step  up  our  engagement  with  staff  interests  to  ensure  that  all  aspects  of  the 
Agreement are leveraged to enhance public sector efficiency to the fullest extent possible.  

C.   Financial Sector Policies 

11.       The key objective of our financial sector policy is to improve the health of the banking sector and 
thereby  revive  sound  lending  in  support  of  the  economic  recovery.  While  considerable  progress  has  been 
made  in  recapitalising  and  deleveraging  the  PCAR  banks,  they  continue  to  face  significant  asset  quality, 
profitability,  and  liquidity  challenges.  Accordingly,  we  will  gear  our  efforts  towards  ensuring  the  banks  are: 
(i) managing  their  loan  portfolios  to  arrest  the  deterioration  of  asset  quality,  (ii)  improving  their  profitability 
through  reductions  in  funding  and  operational  costs,  and  (iii)  advancing  the  restructuring  of  the  banks.  The 
effectiveness  of  these  efforts  would  be  greatly  facilitated  by  the  timely  delivery  of  further  European  support 
along the lines indicated in the euro area summit statement of June 29, 2012. 

12.       We  are  driving  forward  the  effective  implementation  of  the  residential  mortgage  arrears 
resolution  process.  We  have  made  the  resolution  of  mortgage  arrears  a  top  priority  for  banks,  and  are 
supervising their efforts to (i) set up and grow efficient loan collection operations; (ii) engage effectively with 
households in arrears; and, (iii) address unsustainable debt in a durable manner.  Nonetheless, the rise in long 
dated arrears has continued. Banks have implemented pilots of mortgage resolution options and in some cases 
gone  live  with  their  strategies  and  we  are  taking  the  following  steps  to  facilitate  the  stronger  progress  on 
implementation that is needed:   

•  We will closely supervise banks’ progress in achieving a durable reduction in mortgage arrears. 
The MARS process will seek to ensure that: (i) borrowers in arrears are contacted in a timely fashion: 
(ii) subject  to  tight  eligibility  criteria,  distressed  debtors  are  offered  sustainable  loan  modification 
options;  and,  (iii)  other  durable  solutions  are  adopted  where  appropriate,  including  repossession 
proceedings,  voluntary  surrender,  or  mortgage  to  rent.  We  will  monitor  each  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. 

•  We will continue the implementation of the framework to monitor the effectiveness of the loan 
modification  process.  We  will  publish  banks’  reported  data  on  loan  modifications,  including  re-

77 

 
 
 
 
 
 
 
 
defaults of modified loans, to permit analysis of the effectiveness of alternative resolution approaches 
in improving debt service performance. 

•  We  will  ensure  appropriately  prudent  provisioning  treatment  of  loan  modifications.  We  will 
continue to engage with banks and review the proposed provisioning treatment for all advanced loan 
modification  products  being  introduced  as  part  of  their  mortgage  arrears  resolution  strategies.  In 
addition, we will, in consultation with staff of the EC, ECB, and the IMF, update where necessary the 
2011  Impairment  Provisioning  and  Disclosure  guidelines  setting  out  the  appropriate  assumptions  for 
all categories of advanced loan modifications.    

•  To encourage and facilitate more active engagement with borrowers by banks, we will review the 
Code of Conduct for Mortgage Arrears. In particular, we will conduct the review to commence in 
early  2013  to  take  account  of  developments  in  the  arrears  environment  such  as  the  forthcoming 
Personal Insolvency  legislation and  the  longer  term  loan  modifications  that  will  be rolled  out  by  the 
banks.  

•  Having secured adequate protections for debtors' principal private residence through the enactment of 
the  Personal  Insolvency  Bill,  we  will  by  end  March  2013  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.  

•  We  will  undertake  a  review  of  progress  in  addressing  mortgage  arrears  by  end-June  2013 

(proposed structural benchmark). 

13.       Establishing the new personal insolvency framework will support these efforts and help reduce 
household debt distress while maintaining debt service discipline. The Personal Insolvency Bill has passed 
the  committee  stage  in  the  Dáil  and  is  expected  to  complete  all  Oireachtas  stages  by  year-end.  We  will 
introduce  further  amendments  ahead  of  its  enactment  including  the  licensing  and  regulation  of  personal 
insolvency  practitioners  .  We  are  establishing  the  infrastructure  to  make  the  new  insolvency  framework 
operational  by  end  January  2013  or  very  shortly  thereafter.  A  newly  appointed  Director  Designate  of  the 
Insolvency Service has been equipped with the resources to (i) develop the necessary IT infrastructure as early 
as possible in 2013, (ii) hire and train staff (iii) to publish, in particular in the context of the Debt Relief Notice 
process,  and  drawing  on  relevant  research,  guidelines  for  reasonable  allowable  household  expenditures  for 
debtors and (iv)conduct an information campaign for all likely to be concerned by the new insolvency processes 
. We have also completed the establishment of the Mortgage Advisory Service accessible through the internet 
where  debtors  can  avail  of  a  consultation  with  an  independent  financial  advisor  upon  authorisation  by  their 
lender when offered advanced mortgage modification/long term forbearance under MARS. 

14.       Resolving  the  balance  sheet  challenges  of  SMEs  is  critical  to  restoring  their  capacity  to  invest 
and  create  jobs.  We  have  recently  launched  the  Temporary  Partial  Credit  Guarantee  scheme  to  facilitate 
lending to eligible SMEs. However, Irish SMEs with high indebtedness, often related to real estate investments, 
are often hampered in their ability to finance working capital and productive investments. Accordingly: 

•  The  CBI  will  monitor  banks’  implementation  of  arrears  resolution  strategies  for  SMEs.  The 
findings  of  the  CBI  review  in  this  area  were  communicated  to  PCAR  banks  in  August.  Banks  are 
strengthening their strategies and deploying adequate operational capacity to move away from short-
term forbearance to more durable restructuring solutions. 

•  We will improve the efficiency of the corporate insolvency framework for SMEs, drawing on the 
recommendations in the recent report by the Company Law Review Group.  In particular, by end-
year we will prepare amendments to designate the Circuit Courts as competent for the examinership of 
companies within the EU small company thresholds (e.g., balance sheet below €4.4 million). Based on 
experience  with  the  operation  of  the  Insolvency  Service  in  the  personal  insolvency  reform,  we  will 
consider  the  appropriateness  of  further  enhancements  to  the  legal  framework  to  reduce  costs  and 
achieve  efficiency  gains,  including  the  potential  for  an  administrative  body  to  facilitate  SME 
restructuring. 

78 

 
 
 
 
 
 
 
 
 
 
  
 
 
15.       We  are  redoubling our  efforts to  return PCAR banks to  profitability,  including  by finalising  a 
roadmap for the orderly withdrawal of the ELG Scheme. We will continue to encourage further reductions 
of  funding  costs  and  urge  continued  operating  cost  savings  in  order  to  reduce  their  pre-provision  operating 
losses. The strategy for weaning the banking system off the ELG Scheme while preserving financial stability, 
currently  being  developed  by  the  inter-agency  working  group  led  by  the  Department  of  Finance,  will  be 
finalised by end-2012. 

16.       We continue to advance bank restructuring. PTSB has undertaken its initial internal reorganisation, 
including  separation  into  three  discrete  business  units  with  separate  management  accounts.  We  will  monitor 
PTSB’s  performance  against  the  benchmarks  proposed  for  the  three  business  units.  AIB  and  PTSB  have 
submitted restructuring plans to the competent EC authority, with a view to restoring core profitability.  

17.       We are finalising the framework to restore  the viability and solvency of the credit union sector. 
Drawing  on  the  recommendations  in  the  Report  of  the  Commission  on  Credit  Unions  issued  in  March,  the 
Credit Union Bill 2012 was published on September 28. The Bill strengthens the regulatory framework of credit 
unions  with  a  focus  on  four  areas:  prudential  regulation,  governance,  restructuring  and  stabilisation.  We  are 
refining  the  Bill,  including  to  clarify,  that,  to  the  extent  any  public  resources  provided  for  the  purpose  of 
restructuring of credit unions are not reimbursed by the restructured institution, they will be recouped in full by 
means  of  a  levy  on  the  credit  union  industry.  The  restructuring  process  will  be  led  by  a  Restructuring  Board 
(ReBo), which will be mandated to underpin the sustainability of the credit union sector in a planned and time-
bound manner. The ReBo will work with credit unions to bring forward restructuring proposals, which will be 
subject to CBI regulatory approval. To facilitate this restructuring process, we will transfer €250 million to a 
Credit  Union  Fund  by  end  2012,  and  we  request  an  adjustor  to  the  performance  criterion  on  the  exchequer 
primary balance and the indicative target on the stock of central government net debt.  

18.       We will provide by end 2012 a report reviewing developments relative to PCAR 2011. The review 
will analyse indicators of banks’ financial performance versus the PCAR base and stress case assumptions, and 
will  assess  the  impact  of  the  evolution of  economic  drivers. These  indicators will  include  credit quality,  loan 
loss  provisions,  losses  from  deleveraging,  and  pre-provision  net  revenue.  The  analysis  will  take  into  account 
significant deviations from PCAR 2011 assumptions, such as in liability management exercises. The report will 
also provide details of the evolution of risk weighted assets.  

19.       We are continuing to strengthen financial supervision and regulation. Key deliverables will be as 
follows: 

• 

• 

• 

• 

Supervision  and  Enforcement  Legislation:  Efforts  to  finalise  the  Central  Bank  (Supervision  and 
Enforcement)  Bill  are  on-going  and  the  committee  stage  amendments  are  expected  to  be  finalised 
shortly.  We  recognise  the  criticality  of  this  legislation,  especially  with  regard  to  strengthening  the 
CBI’s investigation, direction and enforcement powers, and are determined to move the Bill forward 
expeditiously.  

Banking  supervision  and  securities  regulation:  The  CBI  has  begun  an  internal  self-assessment  of 
Ireland’s  observance  of  the  recently  revised  Basel  Core  Principles  (BCP)  for  Effective  Banking 
Supervision.  We  will  request  an  external  BCP  assessment  by  end  March  (proposed  structural 
benchmark),  with  the  aim  to  be  completed  by  end-December  2013.  We  will  also  complete  an 
International Organisation of Securities Commissions, (IOSCO) Objectives and Principles of Securities 
Regulation  self-assessment, and will request an external assessment with the aim to be completed by 
end-December 2013. 

Resolution fund levy: In September, we issued regulations for a levy on credit institutions designed to 
accumulate funding over the medium to long term to build a fund for resolution actions of €100m. We 
intend  to  recoup  the  public  resources  provided  to  the  Resolution  Fund  mainly  for  the  resolution  of 
credit  unions.  Upon  publication  of  the  EU  directive  establishing  a  framework  for  the  recovery  and 
resolution of credit institutions and investment firms, we will review this regulation. 

Risk  weighted  assets:  The  CBI  is  well  advanced  in  enhancing  its  approach  to  Credit  Risk,  risk 
weighted  asset  (RWA)  supervision  including    conducting  annual  model  performance  reviews, 
assessing RWA calculation and reviewing banks’ approaches to RWA forecasting and stress testing in 

79 

 
 
 
 
 
 
 
 
 
advance  of  PCAR  2013.  The  next  steps  will  include  completing  the  reviews  and  issuing  mitigating 
actions for the banks concerned by end 2012.  

20.       We  will  put  in  place an  effective  credit  register  to facilitate  sound  lending  decisions and  to aid 
financial supervision. Issues of data protection have delayed finalisation of the Credit Reporting Bill 2012 that 
was  published  last  September.  Following  the  publication  of  the  Bill  at  end-September  2012,  a  consultation 
process has commenced to consider potential Committee Stage amendments.  Following the completion of the 
parliamentary process, the Central Bank, as the owner, will undertake a procurement exercise, with the goal of 
having the Register operational by end 2013.  

D.   Structural Reforms 

21.       Enhancing  growth  and  job  creation  remains  our  top  priority.  Commencing  in  2013,  we  are 
supplementing  our  exchequer  capital  expenditure  programme  by  €1.4  billion  through  public-private 
partnerships  with  the  European  Investment  Bank,  the  National  Pension  Reserve  Fund,  and  private  investors. 
Projects have been identified in education, transport, health care, and justice. We are also proceeding with the 
disposal  of  state  assets  in  the  energy  generation  and  forestry  sectors  in  2013  as  planned,  while  the  sale  of  a 
minority stake in Aer Lingus hinges on market conditions and antitrust concerns. We will use at least half of the 
proceeds  from  these  asset  disposals  to  reduce  public  debt  in  due  course,  with  the  details  on  timing  and 
implementation to be agreed. Once realised, the remaining proceeds will be reinvested in job-rich projects of a 
commercial nature, consistent with our fiscal targets.  

22.       We  are  continuing  to  implement  the  Action  Plan  for  Jobs,  which  aims  to  support  employment 
creation  through  wide-ranging  set  of  measures.  We  have  implemented  almost  90  percent  of  the  planned 
measures  by  end  September,  including:  establishing  new  Technology  Centres  in  Cloud  Computing,  Learning 
Technologies  and  Financial  Services;  launching  of  the  Microfinance  Fund  that  will  provide  small  loans  to 
businesses  with  up  to  10 employees;  and  initiating  an  intra-agency  partnership  Smart  Futures  for  promoting 
careers in science. To bring down the cost of doing business, we have reduced stamp duty and have introduced 
capital gains tax incentives for certain types of properties. We will continue to identify and implement measures 
to  improve  the  business  climate  in  2013  and  beyond,  with  a  focus  on  promoting  access  to  finance  and 
investment  by  SMEs,  supporting  indigenous  start-ups  and  assisting  indigenous  business  to  grow,  and 
developing and deepening the impact of foreign direct investment. 

23.       We  are  stepping  up  our  reforms  of  activation,  training,  and  social  welfare  payments  to  help 
reduce unemployment over time:  

•  Pathways  to  Work.  We  have  launched  the  new  one-stop  shop  unemployment  support  service—
Intreo—in four locations, and expect to have ten offices operational by end-2012. By combining the 
previously separate services of the Department of Social Protection, FAS, and the Community Welfare 
Service, Intreo will provide a more coherent and tailored package of employment services. Under the 
new system, engagement with job seekers will take place on a contractual basis with welfare payments 
contingent on participation in activation programs and job search efforts, where a lack of engagement 
would result in sanctions. We will triple the number of ‘live’ offices to 30 by the end of 2013, with a 
further  30  coming  on  stream  before  the  end  of  2014.    This  roll  out  will  accelerate  profiling  of  job 
seekers and further increase engagement at both the group and the individual level.  

•  Engagement with long term unemployed. We are taking steps to increase engagement with long term 
unemployed people through their inclusion in the Intreo activation process through greater use of the 
Local Employment Services Network, more targeted use of Community Employment and other work 
placement schemes,  appropriate  training  schemes  and  through  increased  promotion  of  employer 
incentives  encouraging  the  recruitment  of  long  term  unemployed  people.    It  is  anticipated  that  these 
steps, together with external contracting (see next bullet point) will enable the delivery of the targets 
with respect to long term unemployment set out in the Pathways to Work policy document. 

• 

Involving  the  private  sector  in  employment  services  provision,  especially  for  the  long-term 
unemployed.  We  have  established  a  cross-departmental  working  group  to  oversee  the  process  of 
engaging private employment services firms, which will expand resources to service the needs of job 
seekers, helping address the current shortfall in qualified case workers. By end-February 2013 we will 
prepare  draft  remuneration  contracts  for  the  private  firms  that  are  in  line  with  international  best 

80 

 
 
 
practice with support from external experts. We plan to issue a tender for the provision of services by 
end March 2013, and these new services are expected to be operational by end-2013.  

•  Reforming  the  further  education  system,  including  for  the  unemployed.  In  order  to  strengthen 
training  provision,  we  have  recently  published  legislation  to  establish  16  Education  and  Training 
Boards, replacing the existing 33 Vocational Education Committees. The action plan for establishing 
SOLAS—an  institution  to  coordinate  and  fund  training  and  further  education  programs—will  be 
completed by end-November, and by the end-December we will publish legislation to launch SOLAS. 
We  have  completed  a  financial  review  of  the  Community  Employment  programme,  and  by  end-
January 2013 we will prepare a comprehensive review of activation programs, which will guide us in 
further reforming the activation and training services provided to the unemployed.  

•  Housing assistance. We intend to replace the current rent supplement for individuals with a long-term 
housing  need  with  a  new  Housing  Assistance  Payment  (HAP).  Operated  by  the  relevant  housing 
authority,  HAP  will  allow  rent  supplement  to  address  its  original  objective  as  a  short-term  income 
support measure and will provide for the creation of an integrated social housing market.  One of the 
benefits of HAP will be that it will be based on a differential rent, therefore enabling employment take-
up by tenants who may previously have been caught in a poverty trap if they entered the workforce. 
Before  HAP  can  be  implemented,  it  will  be  necessary  to  introduce  a  system  of  non-discretionary 
deduction  of  rent.    It  is  intended  that  this  issue  will  be  addressed  via  legislative  amendments  in  the 
Social  Welfare  Budget  Bill,  2012  (by  end  December  2012)  to  amend  the  Household  Budgeting 
Scheme and the Social Welfare & Pensions Bill, 2013 in Spring 2013 (by end June 2013) to facilitate 
non-discretionary  deduction  on  a  wider  level.    It  will  also  be  necessary  to  enact  the  Housing 
(Miscellaneous Provisions) Bill, 2012 (summer 2013). It is the intention that HAP will be piloted in the 
second half of 2013 and made fully operational in 2014 with general roll out and commencement of 
transfers from early January 2014. 

E.   Programme Financing and Monitoring 

24.       Our financing strategy aims to ensure the program is adequately financed and to help develop 
the  basis  for  moving  towards  relying  on  market  access. Following  our  return  to  Treasury  bond  and  bill 
issuances in July, we have instituted monthly Treasury bill auctions, with yields now below 1 percent, and we 
have also raised €1 billion in long-term funding with an initial issue of amortising bonds targeted at domestic 
pension  funds.  Building  on  this  progress,  we  will  seek  to  further  broaden  our  investor  base  and  increasingly 
move to regular bond issuances, which will account for a rising share of our financing. We will also continue to 
tap other sources such as amortising bonds when market conditions are favourable. In view of the external risks 
to our financing, we will continue to maintain a prudent cash buffer and aim to end the programme with a buffer 
covering around one year of financing needs to support market confidence.  

25.      
        Implementation of the policies under the programme will continue to be monitored through 
quarterly and continuous performance criteria, indicative targets, structural benchmarks, and quarterly 
programme  reviews,  as  envisaged  in  our  Letters  of  Intent  since  the  inception  of  the  arrangement  on  3 
December 2010 along with this letter. The programme also continues to be in compliance with requirements 
under  the  Memorandum  of  Understanding  on  Specific  Policy  Conditionality.  The  attached  Technical 
Memorandum  of  Understanding  (TMU)  defines  the  quantitative  performance  criteria  and  indicative  targets 
under  the  programme.  The  Government’s  targets  for  the  exchequer  primary  balance  are  monitored  through 
quarterly performance criteria and net central government debt is an indicative target (Table 2). As is standard 
in  EU/IMF  arrangements,  there  is  a  continuous  performance  criterion  on  the  non-accumulation  of  external 
payment  arrears.  Progress  on  implementing  structural  reforms  is  monitored  through  structural  benchmarks 
(Tables 1 and 3). 

 We authorise the IMF and the European Commission to publish the Letter of Intent and its attachments, 
and the related staff report. 

81 

 
 
 
 
Measure 

Date 

Status 

Table 1. Programme Monitoring 

Quantitative Performance Criteria 
Cumulative exchequer primary balance 

Indicative Target 

End-September 2012 

Observed 

Ceiling on the stock of central government net debt 

End-September 2012 

Observed 

Continuous Performance Criteria 
Ceiling  on  the  accumulation  of  new  external  payments  arrears  on 
external debt contracted or guaranteed by the central government 

Continuous 

Observed 

Structural Benchmarks 
Define the criteria to run stringent stress tests scenarios. 
Agree on terms of reference for the due diligence of bank assets by 
internationally recognised consulting firms.  
The Central Bank will direct the recapitalisation of the principal banks 
(AIB, BoI and EBS) to achieve a capital ratio of 12 percent core tier 
1. 
Submit  to  Dáil  Éireann  the  draft  legislation  on  a  special  resolution
regime. 
The  Central  Bank  to  complete  the  assessment  of  the  banks’
restructuring plans. 
Complete the diagnostic evaluation of banks’ assets.  
Complete stress tests (PCAR 2011).  
Complete a full assessment of credit unions’ loan portfolios 

End-December 2010 
End-December 2010 

Observed 
Observed 

End-February 2011 

Not  observed 
1/ 

End-February 2011 

Observed 2/ 

End-March 2011 

Observed 

End-March 2011 
End-March 2011 
End-April 2011 

Observed 
Observed 
Observed 

Finalise plans for the recapitalisation of Irish Life and Permanent. 

End-May 2011 

Observed 

Establish a Fiscal Advisory Council. 
Complete  the  recapitalisation  of  Allied  Irish  Banks,  Bank  of  Ireland, 
Irish Life and Permanent and EBS Building Society. 

End-June 2011 
End-July 2011 

Observed 
Observed  

Submit the Supervision and Enforcement Bill to Oireachtas. 

End-July 2011 

Observed  

Complete the legal merger procedures of Allied Irish Bank and EBS 
Building Society. 
Publish a memorandum of understanding governing the relationship 
of  the  Department  of  Finance  and  the  Central  Bank  in  relation  to 
banking sector oversight. 
The  merger  of  Irish  Nationwide  Building  Society  and  Anglo-Irish 
bank. 
Central  Bank  to  issue  guidance  to  banks  for  the  recognition  of 
accounting losses incurred in their loan book. 

Finalise a strategy to guide the development of broader legal reforms 
around personal insolvency, including significant amendments to the 
Bankruptcy  Act 1998  and  the  creation  of  a  new  structured  non-
judicial debt settlement and enforcement system. 

End-September 2011 

Observed 

End-October 2011 

Observed 3/ 

End-December 2011 

Observed 

End-December 2011 

Observed 

End-December 2011 

Observed 

82 

 
 
 
 
 
 
 
 
 
 
Introduce  a  medium-term  expenditure  framework  with  binding  multi-
annual expenditure ceilings with broad coverage and consistent with 
the fiscal consolidation targets. 
Updated restructuring plan for the PTSB detailing the actions needed 
to ensure viability of its core businesses.  

2012  Budget  day 
early December 2011  

in 

Observed 

End-June 2012 

Observed 

Submit to parliament, as part of the Fiscal Responsibility Bill, a legal 
framework for the Fiscal Advisory Council ensuring its independence. 

End-September 2012 

Observed 

Publish  legislation  to  strengthen  the  regulatory  framework  for  credit 
unions, 
for  effective 
governance standards and prudential requirements 

legislative  provision 

including  making 

End-September 2012 

Observed 

Approve  regulations  to  establish  a  charge  levied  across  credit 
institutions  to  recoup  over  time  the  costs  of  resolving  vulnerable 
institutions 

End-September 2012 

Observed 

1/ Central Bank directions were issued within the required timeframe. However, completion of the capital injections required was 
postponed by the Minister for Finance until after the General Election. These directions are now superseded by the Central Bank’s 
PCAR directions of 31 March 2011. 

2/ In practice this was submitted to the Seanad as discussed in paragraph 21 of the MEFP, as the Dáil was dissolved owing to the 
elections. 

3/ Effective end-October 2011 and posted on November 8, 2011.  

83 

 
 
Table 2. Ireland: Quantitative Performance Criteria and Indicative Targets  
Under the Economic Programme for 2011–13 

8
4

31-Dec-11 

31-Mar-12 

30-Jun-12 

30-Sep-12 

31-Dec-12

31-Mar-13 30-Jun 13 

30-Sep-13 

Target 1/  Outcome 

Target 1/  Outcome 

Target 1/  Outcome Target1/  Outcome

Target 

Target 

Target 

Target 

Performance 
Criterion 

Performance  

Performance  

Criterion 

Criterion 

Performance 
Criterion 

Performance 
Criterion 

Performance 
Criterion 

Indicative 
Target 4/

Indicative 
Target 4/ 

(In billions of Euros) 

-22.3 

-21.0 

-6.9 

-5.7 

-9.6 

-8.7 

-11.4 

- 10.1 

      -11.2 

-3.7 

- 4.3 

- 4.9 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

Indicative Target 

Indicative Target 

Indicative Target 

Indicative Target 

Indicative 
Target 

Indicative

 Target 

Indicative 
Target 

Indicative 
Target 

117.2 

115.7 

125.0 

123.0 

130.1 

128.2 

132.5 

130.0 

135.5 

143.1 

149.2 

150.4 

1. 
exchequer 
balance 2/ 

Cumulative 
primary 

the 
2.  Ceiling  on 
accumulation  of  new 
external 
payments 
arrears  on  external 
debt  contracted  or 
the 
guaranteed  by 
central government 3/ 

3. Ceiling on the stock 
of  central  government 
net debt 1/ 

1/ Adjusted. 

2/ Measured by the exchequer balance excluding interest payments. Cumulative from the start of the relevant calendar year. 

3/ Applies on a continuous basis. 

4/ Exchequer primary balance targets after 31-December 2012 exclude payments in respect of the IBRC Promissory Note that have thus far – for program purposes – been considered part of 
exchequer non-voted capital spending.  

84 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 3. Ireland: Upcoming Prior Action and Structural Benchmarks under the 
Programme for 2013 

Measure 

Date

Status 

Financial sector policies 
Request  an  external  BCP  assessment  in  support 
of  efforts  to  strengthen  financial  supervision  and 
regulation (MEFP ¶19). 

End-March 2013 

Undertake  a  review  of  progress  in  addressing 
mortgage arrears (MEFP ¶12). 

End-June 2013 

Proposed 
structural 
benchmark 

Proposed 
structural 
benchmark 

Fiscal policies 
Submit Budget 2013 to the Oireachtas (MEFP ¶6).  5 December  2012  Prior action 

85 

 
 
 
  
  
  
 
 
 
 
 
 
Technical Memorandum of Understanding (TMU) 

November 29, 2012 

1.      
This Technical Memorandum of Understanding (TMU) sets out the understandings regarding the 
definitions  of  the  indicators  subject  to  performance  criteria  and  indicative  targets  under  the  arrangement 
supported  by  the  Extended  Fund  Facility  (EFF).  These  performance  criteria  and  indicative  targets  are 
reported in Table 2 attached to the Memorandum of Economic and Financial Policies (MEFP). This TMU 
also  describes  the  methods  to  be  used  in  assessing  the  programme  performance  and  the  information 
requirements to ensure adequate monitoring of the targets. 

2.      
For  programme  purposes,  all  foreign  currency-related  assets,  liabilities,  and  flows  will  be 
evaluated at “programme exchange rates”, with the exception of the items affecting the government fiscal 
balances, which will be measured at current exchange rates. The programme exchange rates are those that 
prevailed 
website 
(http://www.imf.org/external/np/fin/data/rms_five.aspx,  accessed 19 January 2012),  in  particular,  €1  = 
1.2939 U.S. dollar and €1 = 0.842786 SDR.  

December 30, 2011 

shown 

IMF’s 

the 

on 

on 

as 

I.  QUANTITATIVE PERFORMANCE CRITERIA AND INDICATIVE TARGETS 

Floor on the Exchequer Primary Balance 

3.      
The  Exchequer  balance  is  the  traditional  domestic  budgetary  aggregate  which  measures  the  net 
surplus or net deficit position of the Exchequer Account. The Exchequer Account is the single bank account 
of  the  Central  Fund  and  is  held  at  the  Central  Bank  of  Ireland.  The  annual  audited  accounts  of 
the Exchequer  Account produced  by  the  Department  of  Finance  are  known  as  the  Finance  Accounts.  An 
unaudited summary  known  as  the  Exchequer  Statement  is  produced  at  the  end  of  each  month.  Under  the 
Irish Constitution, all Government receipts are paid in to the Central Fund and all Government expenditure 
is funded from it, unless provided otherwise by law.1 The Exchequer balance is the difference between total 
receipts into, and total expenditure out of, the Exchequer Account. It measures the sum of the current and 
capital balances. The current balance is defined as current receipts (tax and non-tax revenue) minus current 
expenditure (voted expenditure and non-voted expenditure charged directly on the Central Fund, including 
the  Sinking  Fund).  The  capital  balance  is  defined  as  capital  receipts  (Sinking  Fund  and  other  capital 
receipts)  minus  capital  expenditure  (voted  and  non-voted  expenditure).  The  Sinking  Fund  provision  is  a 
transfer  from  the  current  account  to  the  capital  account  to  reduce  national  debt  and  has  no  effect  on  the 
overall Exchequer balance.  

4.      
The performance criteria are set on the Exchequer primary balance which is the Exchequer balance 
excluding net debt interest payments in the service of the National Debt. From January 2013 all payments 

1 Receipts of the Central Fund comprise Exchequer tax revenues, non-tax revenues, receipts from the European Union 
and other capital receipts. Charges on the Central Fund include the expenditure of Government departments and offices, 
payments related to the servicing of the national debt, payments to the European Union Budget, the salaries, pensions 
and allowances of the President, judiciary, and Comptroller & Auditor General and the running costs of the Houses of 
the  Oireachtas  (Parliament).  Extra-budgetary  funds  (including  the  National  Pensions  Reserve  Fund),  the  Social 
Insurance Fund, semi-state bodies and local governments are not part of the Exchequer system. 

86 

 
 
 
 
 
                                                 
related to the IBRC promissory notes are excluded from the Exchequer primary balance measure used for 
programme monitoring purposes.2  

For  the  purposes  of  the  programme,  the  floor  on  the  Exchequer  primary  balance  (quantitative 

5.      
performance criterion) will be adjusted 

(i) 

(ii) 

(iii) 

(iv) 

(v) 

(vi) 

downward by payments for bank restructuring carried out under the programme’s banking 
sector support and restructuring strategy. Such payments may include, inter alia, loans to 
banks, investments in their equity (requited recapitalisation), unrequited recapitalisation, 
and purchases of troubled assets, which are carried out in line with programme objectives,  

upward by the amount of proceeds from sales of bank equity held by the government or 
NPRF that are treated as Exchequer receipts, 

upward by the amount of receipts from disposals of state assets specified in the paragraph 
21 of the MEFP dated [xx November 2012], 

downward  by  the  amount  of  these  receipts  spent  on  growth-enhancing  projects  not 
included in Budget 2013, up to no more than half of these receipts,  

downward for Exchequer contributions to the Resolution Fund for the resolution of credit 
institutions,  and  upward  for  any  Exchequer  recoupment  from  the  Resolution  Fund,  of 
such outlays.   

downward for Exchequer contributions to the Credit Union Fund for the restructuring of 
credit  unions  up  to  €250  million  cumulatively,  and  upward  for  any  Exchequer 
recoupment, from the Credit Union Fund, of such outlays. 

Any other financial operation by Government to support banks or other credit institutions including credit 
unions, including the issuance of guarantees or provision of liquidity, will be reported to EC, IMF, and ECB 
staffs.  

The floor on the Exchequer primary balance (quantitative performance criterion) in each year will 

6.      
be measured cumulatively from the start of that calendar year.  

Cumulative Exchequer primary balance 

(In billions of Euros) 

From January 1, 2012: 

End-December 2012 (performance criterion) 

End-March 2013 (performance criterion) 

From January 1, 2013 

End-June 2013 (indicative target) 

End-September 2013 (indicative target) 

-11.2 

  -3.7 

 -4.3 

  -4.9 

2 Net debt interest payments are as per the end-month Exchequer Statements. 

87 

 
 
 
 
 
  
 
 
 
                                                 
The performance criterion on the Exchequer primary balance (floor) will be adjusted upward 

7.      
(downward) for the full amount of any over-performance (under-performance)  in Exchequer tax revenues, 
pay-related social insurance contributions (PRSI) and national training fund contributions against the 
current projection which is listed below:3  

Cumulative Exchequer tax revenue & other receipts (as outlined in 
7. above) 

(In billions of Euros) 

From January 1, 2012: 

End-December 2012 (projection) 

From January 1, 2013 

End-March 2013 (projection)  

End-June 2013 (projection) 

End-September 2013 (projection) 

44.1 

10.2 

20.9 

32.2 

8.       Any  policy  changes,  including  in  administration  and  enforcement  of  taxes,  which  impact  the 
revenue  projection  set  out  in  paragraph  7  will  lead  to  a  reassessment  of  the  adjustor  in  the  context  of 
program reviews. 

Ceiling on the Stock of Central Government Net Debt 

9.      
The  stock  of  net  central  government  debt,  for  the  purposes  of  the  programme,  is  defined  as  the 
National  Debt  less  liquid  assets  of  the  National  Pensions  Reserve  Fund  (NPRF).  The  National  Debt  is 
defined as the total outstanding amount of principal borrowed by central government and not repaid as of 
the  test  date,  less  liquid  assets  available  for  redemption  of  those  liabilities  at  the  same  date.  These  liquid 
assets comprise the Exchequer cash balances (including cash in the Capital Services Redemption Account), 
Exchequer  deposits  with  commercial  banks  and  other  institutions,  and  investments  in  investment  grade 
sovereign  bills.  For  the  purposes  of  the  programme,  NPRF  liquid  assets  include  the  asset  classes  listed 
above, and also all marketable securities such as equities, government bonds and other listed investments. 
NPRF shares in domestic Irish banks, as well as the NPRF’s non-liquid discretionary portfolio are excluded 
from the definition of liquid assets.  

10.       For  the  purposes  of  the  programme,  the  ceiling  on  the  central  government  net  debt  (indicative 
target) will be adjusted4  

(i) 

upward  by  debt  arising  from  payments  for  bank  restructuring  carried  out  under  the 
programme’s  banking  sector  support  and  restructuring  strategy.  These  payments  may 
include, inter alia, loans to banks, investments in their equity (requited recapitalisation); 

3 As of November 2012, Exchequer tax receipts are comprised of income tax (including the universal social charge), 
value  added  tax  (VAT),  corporation  tax,  excise  duties,  stamp  duties,  capital  gains  tax,  capital  acquisitions,  tax  and 
customs duties and property tax (as from 2013) .  
4  Although  all payments  related  to  the IBRC  promissory  notes  are  excluded  from  the  Exchequer primary 
balance measure used for programme monitoring purposes, they are included in the Central Government net 
debt measure used for programme monitoring purposes.  

88 

 
 
    
 
 
 
 
 
 
                                                 
(ii) 

(iii) 

(iv) 

(v) 

(vi) 

unrequited recapitalisation; and purchases of troubled assets, which are carried out in line 
with programme objectives,  

downward by the amount of proceeds from sales of bank equity held by the government 
or NPRF that are treated as Exchequer or NPRF receipts,  

downward  by  the  amount  of  receipts  from  disposals  of  state  assets  specified  in  the 
paragraph 21 of the MEFP dated [xx November 2012], 

upward by the amount of these receipts spent on growth-enhancing projects not included 
in Budget 2013, up to no more than half of these receipts,  

upward  for  Exchequer  contributions  to  the  Resolution  Fund  for  the  resolution  of  credit 
institutions, and downward for any Exchequer recoupment, from the Resolution Fund, of 
such outlays.   

upward  for  Exchequer  contributions  to  the  Credit  Union  Fund  for  the  restructuring  of 
credit  unions  up  to  €250  million  cumulatively,  and  downward  for  any  Exchequer  
recoupment, from the Credit Union Fund, of such outlays. 

(vii) 

downward by the amount liquidated from the NPRF non-liquid discretionary portfolio, 

(viii) 

downward  (upward)  by  valuation  gains  (losses)  in  the  NPRF  liquid  portfolio.  The 
programme exchange rates will apply to all non-Euro denominated debt.  

11.       The  ceiling  on  the  outstanding  stock  of  central  government  net  debt  will  be  adjusted  upward 
(downward) by the amount of any final upward (downward) revision to the stock of end-June 2012 central 
government net debt. 

Central government net debt 

(In billions of Euros) 

Outstanding stock: 

End-September 2012 (provisional) 

End-December 2012 (indicative target) 

End-March 2013 (indicative target) 

End-June 2013 (indicative target) 

End-September 2013 (indicative target) 

 130.0 

 135.5 

 143.1 

 149.2 

150.4 

Non-accumulation  of  External  Payments  Arrears  by  Central 
Government 

12.       The  central  government  will  accumulate  no  external  payments  arrears  during  the  programme 
period.  For  the  purposes  of  this  performance  criterion,  an  external  payment  arrear  will  be  defined  as  a 

89 

 
 
 
 
 
 
 
 
 
payment  by  the  central  government  on  its  contracted  or  guaranteed  external  debt  that  has  not  been  made 
within  five  business  days  after  falling  due,  excluding  any  contractual  grace  period.  The  performance 
criterion will apply on a continuous basis. 

13.       The stock of external payments arrears of the central government will be calculated based on the 
schedule of external payments obligations reported by the National Treasury Management Agency.  

II. 

REPORTING REQUIREMENTS 

14.       Performance under the programme will be monitored using data supplied to the EC, IMF, and ECB 
staffs. The Irish authorities will transmit promptly any data revisions.  

•  The Department of Finance will report to the EC, IMF and ECB staff, with a lag of no more than 
seven  days  after  the  test  date  the  following  data:  the  Exchequer  primary  balance,  Exchequer  tax 
revenues,  payments  for  bank  restructuring  carried  out  under  the  programme’s  banking  sector 
support and restructuring strategy, proceeds from sales of bank equity held by the government or 
NPRF that are treated as Exchequer receipts, receipts from disposals of state assets specified in the 
paragraph 21 of the MEFP dated [xx November 2012] and associated outlays on growth-enhancing 
projects  not  included  in  Budget  2013,  Exchequer  outlays  for  the  resolution  and  restructuring  of 
credit  unions,  any  return  of  such  outlays  to  the  Exchequer  and  also  for  the  recoupment  of  such 
outlays by the Exchequer from the Resolution Fund and the Restructuring and Stabilisation Fund.  
•  The  National  Treasury  Management  Agency  will  provide  provisional  figures  on  the  outstanding 
stock of net government debt, including an unaudited analysis of NPRF holdings, with a lag of no 
more than seven days after the test date. The revised figures will be provided within three months 
of the test date. 

•  The National Treasury Management Agency will provide the final stock of the central government 
system external payments arrears to the EC, IMF and ECB staff, with a lag of not more than seven 
days  after  the  arrears  arise  in  accordance  with  the  definition  of  external  payments  arrears  as  set 
forth in paragraph 12 of this memorandum. 

•  The Central Bank of Ireland will provide on a quarterly basis, bank by bank data on the assets of 
government guaranteed banks, including loans and provisioning by period overdue (90+days and 
less than 90 days) and category of borrower, 40 working days after the end of each quarter. 

90