Council Implementing Decision of 7 December 2010 on granting Union financial assistance to Ireland (2011/77/EU)

Council Implementing Decision

of 7 December 2010

on granting Union financial assistance to Ireland

(2011/77/EU)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism(1), and in particular Article 3(3) thereof,

Whereas:

(1) Ireland has recently come under increasing pressure in financial markets, reflecting rising concerns about the sustainability of the Irish public finances in view of comprehensive public support measures to the weakened financial sector. Due to its excessive exposure to real estate and construction projects, the domestic banking system has experienced large losses in the aftermath of the collapse of those sectors. The current crisis in the economic and banking sectors has also had a dramatic impact on Ireland’s public finances, compounding the impact of the recession. Falling tax revenue and an increase in cyclical expenditure, in particular due to rising unemployment, have contributed to a high general government deficit and a steep increase in debt, compared to the favourable pre-crisis positions and despite the implementation of five important fiscal consolidation packages since mid-2008. Support measures for the banking sector, including significant capital injections, have added greatly to the deterioration in the public finance position. Current market concerns primarily reflect the fact that the solvency of the Irish sovereign and the banking system have become inextricably linked in the crisis; they have led to a steep increase in Irish sovereign bond yields, while the domestic banking system is effectively cut off from international market funding.

(2) In view of this severe economic and financial disturbance caused by exceptional occurrences beyond the control of the government, the Irish authorities officially requested financial assistance from the European Union, the Member States whose currency is the euro and the International Monetary Fund (IMF) on 21 November 2010 with a view to supporting the return of the economy to sustainable growth, ensuring a properly-functioning banking system and safeguarding financial stability in the Union and in the euro zone. On 28 November 2010, an agreement at technical level was reached in respect of a comprehensive policy package for the period 2010-2013.

(3) The draft economic and financial adjustment programme (the ‘Programme’) submitted to the Council and the Commission aims at restoring financial market confidence in the Irish banking sector and the sovereign, enabling the economy to return to sustainable growth. To achieve these goals, the Programme contains three main elements. First, a financial sector strategy which comprises fundamental downsizing, deleveraging and reorganisation of the banking sector, complemented by appropriate recapitalisation to the extent needed. Second, an ambitious fiscal consolidation strategy, building on the National Recovery Plan 2011-2014 published by the Irish authorities on 24 November 2010. The plan sets out detailed fiscal consolidation measures aiming at putting gross public debt on a firm downward path in the medium term. The authorities are committed to reducing the deficit to below 3 % of GDP by 2015, the revised deadline set by the Council on 7 December 2010. Third, also building on the National Recovery Plan, the Programme sets out an ambitious structural reform agenda, notably in the labour market, with a view to facilitating adjustment and strengthening the economy’s growth potential. In support of this ambitious policy package, the Irish authorities are requesting financial assistance from the Union and the Member States whose currency is the euro, and bilateral loans from the United Kingdom, Sweden, Denmark and the IMF.

(4) Under the Commission’s current projections for nominal GDP growth (1,4 % in 2011, 2,7 % in 2012 and 3,8 % in 2013), the fiscal adjustment path specified in Council Recommendation of 7 December 2010 with a view to bringing to an end the situation of an excessive deficit in Ireland is consistent with a path for the debt-to-GDP ratio of 98,9 % in 2010, 113,5 % in 2011, 120,0 % in 2012 and 121,8 % in 2013. The debt-to-GDP ratio would therefore be stabilised in 2013 and be placed on a declining path thereafter, assuming further progress in the reduction of the deficit. Debt dynamics are affected by several below-the-line operations, which are projected to increase the debt-to-GDP ratio by 5,3 percentage points (pps.) of GDP in 2011 and 0,8 pps. of GDP in 2012, and to reduce it by 1,3 pps. of GDP in 2013. These include projected capital injections into banks in 2011, reductions in cash reserves, and differences between accrued and cash interest payments.

(5) The assessment by the Commission, in liaison with the European Central Bank (ECB), is that Ireland needs financing of a total amount of EUR 85 billion (85 000 million) over the period from December 2010 to the end of 2013. Notwithstanding the significant fiscal adjustment, the financing gap for the sovereign may amount to EUR 50 billion over the period of the Programme. This assumes roll-over rates for maturing long-term debt of 0 % until the end of 2011, 20 % in 2012, and 80 % in 2013. Conservative roll-over assumptions are also made regarding short-term debt. The financial sector strategy contained in the Programme to restore confidence in the Irish banking system on a sustainable basis contains a banking support scheme of up to EUR 35 billion. This comprises an immediate capital injection of up to EUR 10 billion into selected banks to bring their core tier 1 capital ratio to 12 %, while also funding early measures to support deleveraging and taking account of haircuts on the additional loans to be transferred to the National Asset Management Agency (NAMA). Further provisions of contingency capital of EUR 25 billion should provide assurance that banks are able to meet current and future capital requirements. Actual funding needs may, however, be substantially lower, in particular if market conditions improve significantly and no severe unexpected banking losses materialise during the period of the Programme.

(6) The Programme would be financed through contributions from external sources and the use of Irish financial buffers. The Union’s assistance to Ireland would reach up to EUR 22,5 billion under the European financial stabilisation mechanism (EFSM) established by Regulation (EU) No 407/2010. This would be part of total support provided by Ireland’s European partners amounting to EUR 45 billion. Further to the support from the EFSM, loans from Ireland’s partner countries in the Union would include contributions from the European Financial Stability Facility (EUR 17,7 billion), and bilateral lending support from the United Kingdom, Sweden, and Denmark (EUR 4,8 billion in total). In addition, Ireland has requested a loan from the IMF of 19,5 billion Special Drawing Rights (equivalent to around EUR 22,5 billion) under an Extended Fund Facility. The Irish contribution would be EUR 17,5 billion, and would come from the use of the existing Treasury cash reserve and contributions from the National Pensions Reserve Fund. The support from the EFSM needs to be supplied on terms and conditions similar to those of the IMF.

(7) The Council should review on a regular basis the economic policies implemented by Ireland, in particular in the context of the annual reviews of Ireland’s update of the stability programme and implementation of the National Reform Programme, as well as under the excessive deficit procedure.

(8) The Union financial assistance should be managed by the Commission. The specific economic policy conditions agreed with Ireland should be laid down in a Memorandum of Understanding on Specific Economic Conditionality (the ‘Memorandum of Understanding’). The detailed financial terms should be laid down in a Loan Facility Agreement.

(9) The Commission, in consultation with the ECB, should verify at regular intervals that the economic policy conditions attached to the assistance are fulfilled, through missions and regular reporting by the Irish authorities, on a quarterly basis.

(10) Throughout the implementation of the Programme, the Commission should provide additional policy advice and technical assistance in specific areas.

(11) The operations which the Union financial assistance helps to finance must be compatible with Union policies and comply with the law of the Union. Interventions in support of financial institutions must be carried out in accordance with the Union’s rules on competition. The Commission, working together with the ECB and the IMF, intends to involve Member States as appropriate in the design and implementation of the prudential liquidity assessment (PLAR) and in the development of the strategy for the future structure, functioning and viability of Irish credit institutions.

(12) The assistance should be provided with a view to supporting the successful implementation of the Programme,

HAS ADOPTED THIS DECISION:

(1)

OJ L 118, 12.5.2010, p. 1.