IMF Reaches Staff-level Agreement with Ireland on 22.5 Billion Extended Fund Facility Arrangement
Press Release No. 10/462
November 28, 2010
Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today on Ireland:
The Irish authorities have today proposed a clear and realistic package of policies to restore Irelands banking system to health and put its public finances on a sound footing. Immediate actions to tackle vulnerabilities in the banks and continued strong fiscal adjustment are set in a multi-year policy framework for sustained growth and job creation.
In recent years, Ireland has resolutely carried out bold policies in a very challenging environment, and I have confidence in its ability to implement this new program. Supported by substantial financing, this program can underpin market confidence and bring Irelands economy back on track.
The strategy for the financial system rests on twin pillars: deleveraging and reorganization; and ample capitalization. A fundamental downsizing and reorganization to restore the viability of the system will commence immediately.
At the end of this process, a smaller, more robust, and better capitalized banking system will emerge to effectively serve the needs of the Irish economy. The transition to this goal will be buttressed by substantial recapitalization based on higher capital standards and stringent stress tests and asset valuation to accurately determine the quality of banks loan portfolios. In addition, structural measuresa special resolution scheme for deposit-taking institutions and a further strengthening of the supervisory systemwill impart greater stability.
On the fiscal side, the program incorporates a comprehensive National Recovery Plan that covers a period of four years. The plan will form the basis for the 2011 budget and also details fiscal consolidation measures through 2014. The process of budget formation will be reformed to safeguard these gains and bring greater sustainability to public finances.
The fiscal plan strikes an appropriate balance between revenue and spending measures, and maintains Ireland's due regard to a social safety net.
To restore strong sustainable growth the program includes a strategy to remove potential structural impediments to enhancing competitiveness and creating new employment opportunities. It also details appropriate sectoral policies to encourage exports and a recovery of domestic demand, thereby supporting growth and reducing long-term unemployment.
A financing package of 85 billion (about US$113 billion) will support Irelands effort to get its economy back on track. Of this, the European Union and bilateral European lenders have pledged a total of 45.0 billion (about US$60 billion). The Irish authorities have decided to contribute 17.5 billion to this effort from the nations cash reserves and other liquid assets. The Funds contribution would be through a three-year SDR 19.5 billion (about 22.5 billion; or US$30.1 billion) loan, representing about 2,320 percent of quota, under the Extended Fund Facility (EFF). The IMF has activated its fast-track procedures for consideration of Irelands funding request, and I expect the EFF will go to the IMF Executive Board for approval in December.
The choice of an EFF offers Ireland a facility with a longer repayment period, with repayments to the Fund starting after four and a half years and ending after 10 years. The IMF charges member countries a uniform interest rate on nonconcessional loans, which is a floating rate based on the SDR interest rate, which is updated weekly. (The SDR interest rate is a weighted average of yields on three-month Treasury bills for the United States, Japan, and the United Kingdom, and the three-month Eurepo rate.) For amounts up to 300 percent of quota, the lending interest rate is currently 1.38 percent, while the lending rate on amounts over 300 percent of quota includes a surcharge that is initially 200 basis points and rises to 300 basis points after three years. At the current SDR interest rate, the average lending interest rate at the peak level of access under the arrangement (2,320 percent of quota) would be 3.12 percent during the first three years, and just under 4 percent after three years.