Letter of intent
Letter from Brian Lenihan and Patrick Honohan formally applying for support from EU and IMF
Dublin, December 2010
Jean-Claude Juncker, president, Eurogroup Didier Reynders, European Union presidency, Olli Rehn, commissioner, European Commission, Jean-Claude Trichet, president, European Central Bank
Dear Messrs Juncker, Reynders, Rehn and Trichet,
1. Ireland faces an economic crisis without parallel in its recent history. The problems of low growth, doubts about fiscal sustainability, and a fragile banking sector are now feeding on each other, undermining confidence.
To break this vicious circle, we are proposing a strong, wide-ranging reform programme, backed by a substantial international financing package, to restore confidence and return the economy to a path of sustained growth and job creation.
2. At the root of the problem is a domestic banking system which, at its peak, was five times the size of the economy and now is under severe pressure. The Irish-owned banks were much larger than the size of the economy. The fragility of the banking sector is undermining Ireland’s hard-earned economic credibility and adding a severe burden to acute public finance challenges. Decisive actions to restore the strength of the financial sector and re-establish fiscal credibility are needed now.
3. The Irish authorities have already undertaken major steps to address these challenges. For the financial sector, these include measures to facilitate funding of banks, separate good assets from bad, asset disposals and bank recapitalisation. On the fiscal side, we have pursued a large consolidation programme since 2008 and have announced a National
Recovery Plan that accelerates the process
of putting public finances on a sound
4. But we recognise that more needs to be done. A fundamental downsizing and reorganisation of our banking system is essential. We are immediately undertaking several bold measures to achieve a robust, smaller and better-capitalised banking system that will effectively serve the needs of the economy. Restoring the banks to viability will also help insulate public finances from further pressures. We are mindful that the transition to a healthy banking sector will need to be actively managed to avoid fire sales of assets and reduce market uncertainty. We are, therefore, expeditiously raising capital standards, stepping up efforts that will ensure that banks’ losses are promptly recognised and creating a mechanism to inject needed capital into the banks.
5. In addition, we are also pressing ahead with our commitment to achieving a sustainable budget position. The National Recovery Plan lays out our strategy for staying the course of needed reform in a way that is socially fair and protects the most vulnerable. Recognising that Ireland already has put in place a business-friendly environment, our plan also lays out a range of structural reforms that will be implemented to underpin economic stability and enhance growth and job creation.
6. We turn to our European and international partners for support as we implement these far-reaching objectives. We therefore request support from the European Financial Stability Mechanism/European Financial Stability Facility, which can be drawn down over a period of 36 months, as well as bilateral loans from the United Kingdom, Sweden and Denmark; the overall total of this support will be €45 billion. We also send a parallel request for financial assistance to the IMF for a total amount of €22.5 billion. The judicious use of our own existing financial resources (€17.5 billion) will also help ensure financial stability as we restore market confidence and return to durable growth.
7. The attached Memorandum of Economic and Financial Policies (MEFP) outlines the economic and financial policies that the Irish Government and the Central Bank will implement during the remainder of 2010 and the period 2011-13 to strengthen Ireland’s banking sector and fiscal position. An annexed Memorandum of Understanding (MoU) specifies detailed economic policy measures that will serve as benchmarks for assessing policy performance in the context of the quarterly reviews under the financial assistance programme.
We are confident that the policies set forth in these memoranda are adequate to achieve the objectives under the programme. We stand ready to take any corrective actions that may become appropriate for this purpose as circumstances change.
8. The implementation of our programme will be monitored through quantitative performance criteria and structural benchmarks as described in the attached MEFP and through the detailed and specific economic policy criteria in the MoU. There will be quarterly reviews of the arrangement, in co-ordination with the IMF.
The reviews will assess progress in implementing the programme and reach understandings on any additional measures that may be needed to achieve its objectives.
9. The programme is designed such that it best reflects the interest of Ireland and the international community. We have explored options for the provision of collateral for support under the EFSF and found legal and economic constraints that would risk undermining the goals of the programme. The conditionality under the programme provides substantial comfort that the programme will be delivered and that the support will be repaid. We will ensure that the financial assistance in the context of the EFSM and EFSF and bilateral lenders to be provided to Ireland will be subject to the loan terms and conditions that will protect the EU’s and the euro area and EU member states’ financial and legal interests in a non-discriminatory way as compared to the assistance provided by the EU to other member states under its balance of payments facility and for the EFSF adapted to take into account its structure and credit enhancement mechanism.
10. The Irish authorities believe that the policies set forth in the attached memorandum are adequate to achieve the objectives of our economic programme, but stand ready to take any further measures that may become necessary for this purpose. The authorities will stay in close contact and consult with the European Commission, the ECB and the
IMF on the adoption of these measures and in advance of revisions to the policies contained in the MEFP and the MoU. All available information requested by the European Commission, the ECB and the IMF to assess implementation of the programme will be provided.
We are copying this letter to Mr Strauss-Kahn, managing director of the IMF.
Minister for Finance
Governor of the Central Bank of Ireland