Dr. Christoph Ungerer & Dr. Lili Liu, Macroeconomics & Fiscal Management (MFM) Global Practice, Governance Global Practice, Equitable Growth, World Bank. Presentation at Ministry of Finance, P.R. China-World Bank Summit on Subnational Debt Management and Restructuring, Nanning, Guangxi Province, P.R. China. October 22, 2015.

1. Fiscal Rules and Debt Restructuring
The European Union Experience
Country Cases for Ireland and Greece
Dr Christoph Ungerer & Dr Lili Liu
Macroeconomics & Fiscal Management (MFM) Global Practice,
Governance Global Practice,
Equitable Growth, Finance and Institutions (EFI) Vice-Presidency

2. Country Context and Initial Regulatory Framework
• European Union (EU) as “country” made up of 28 Member States (MS)
• Analogy especially applicable to Eurozone (vs EU)
• Much more decentralized than an actual country (EU budget 1% of GDP)
• EU fiscal framework
• Maastricht Treaty
• Rules-based approach: Stability and Growth Pact (SGP) in the 2000s
– Key metrics: budget deficit under 3% of GDP & debt below 60% of GDP
• Regular monitoring through EC
• No bail-out clause
• No formal sovereign insolvency procedure
• EU sovereign debt crisis offers valuable lessons
• EU has struggled controlling MS budgets for years
• Eurozone sovereign debt crisis as example of severe fiscal adjustment programs
• Importance of fiscal-banking nexus
• Reform of EU fiscal framework and banking union as response to the crisis
• This presentation focusses on the Greek and Ireland fiscal adjustment programs

3. Fiscal Vulnerabilities build up in the 2000s and lead to Crisis
• Very limited market discipline
• EU no-bail out commitment not credible
• Loose monetary conditions
• Undifferentiated bank capital risk weights
• SGP implementation issues
• Quality of statistics
• Macroeconomic and financial bubble hides fiscal weakness
• Difficulty enforcing excessive deficit procedure (EDP)
0
2
4
6
8
10
12
14
2000 2002 2004 2006 2008 2010
Long term (10Yr) interest rate (%)
Germany Greece Ireland
Source: ECB Data Warehouse
Source: IMF World Economic Outlook (April 2015)
-35
-30
-25
-20
-15
-10
-5
0
5
10
-12
-10
-8
-6
-4
-2
0
2006 2007 2008 2009 2010
General Government Primary Balance
relative to GDP (%)
Greece (LHS) Ireland (RHS)

4. Economic Adjustment Programs
• Troika (EC/ECB/IMF) financial assistance
• Financial assistance conditional on policy reform, including:
• Fiscal
– Expenditure review, pension & health sector reform
– Parameterization of tax system & tax administration reform
– Public Financial Management Fiscal-Structural Reforms
• Financial
– Banking recapitalization & stress tests
– Resolution of non-performing loans
• Structural
– Product Market Liberalization
– Labor Market Liberalization
– Privatizations
• Public debt restructuring

5. Program Timeline
Budget deficit statistics
revised; Start of 1st
Program
(financial assistance:
120bn EUR or
~60% of GDP)
2nd debt restructuring, incl.
- Debt buy-back
- Rescheduling
=> Lowers 2020 debt /GDP
by ~16pp
Start of Program
(financial assistance:
85bn EUR
or ~60% of GDP)
Ireland:
Greece:
End of
program
Property bubble
bursts; creation of
bad bank; 1st bank
capital injections and
nationalization
(46bn EUR or ~30%
of GDP)
Bank recapitalization
(envelope:
~25% of GDP)
Ireland returns to
market
2009 20142011 2012 20132010 2015
PCAR 2011 stress
test results
(needs: 24bn EUR
or ~15% of GDP)
1st debt restructuring
(Private sector
haircut 53.5% on
197bn EUR of debt)
2nd Program
(additional
130bn EUR or
~60% of GDP)
3rd Program
(additional
86bn EUR)
Key take-aways:
• Close link between fiscal
and financial imbalances
• Program costs can quickly
become very large
• Contrast between smooth
Irish program and stop-go
of Greek program

6. Sharp fiscal adjustment… … some progress on structural reforms…
... signs of macroeconomic recovery … … but cost of adjustment remains heavy
Program Outcomes until end-2014…
-10
-5
0
5
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Real GDP Growth (%)
Greece Ireland
0
5
10
15
20
25
30
35
40
Greece Ireland
Days to start a business
2006 2015
0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Unemployment rate (%)
Greece Ireland
Source: IMF World Economic Outlook (April 2015)
Source: IMF World Economic Outlook (April 2015)
Source: WB Doing Business Report (2015)
Source: IMF World Economic Outlook (April 2015)
-20
-15
-10
-5
0
5
2006 2007 2008 2009 2010 2011 2012 2013 2014
Structural GG balance (% pot. output)
Greece Ireland

7. Debt Dynamics over the Crisis
0
20
40
60
80
100
120
140
160
180
200
2007 2008 2009 2010 2011 2012 2013 2014
Public Debt relative to GDP (%)
Greece Ireland European Union
Key drivers of debt
dynamics:
• GDP base
• Fiscal stance
• Interest payments
• Debt restructuring
• Banking support
• Arrears clearance
• Privatizations
Greek debt restructuring, incl.
- PSI haircut
- Debt buy-back
- Rescheduling
Source: IMF World Economic Outlook (April 2015)
Besides current debt level, key considerations are long-term debt dynamics and
short-term financing needs

8. … but new Greek Government in early 2015 has led to
Renegotiation of the Greek Program and new Uncertainty
0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 2014 2015
Long term (10Yr) interest rate (%)
Germany Greece Ireland
New Syriza-led
government and
renegotiation of
3rd programSource: ECB Data Warehouse

9. Differences between the Greek and Irish Programs
Differences Metric Ireland Greece
Type of crisis Banking crisis Fiscal crisis
Size of fiscal adjustment Adj. struct. balance (% GDP; max to 2014) 10pp 20pp
Openness of economy Export as % GDP (2014) 112% 33%
Flexibility of economy WB Doing Business Ranking (2015) 13 61
Decisive implementation Program renegotiations 0 2
Political stability Number of prime ministers (2009-pres.) 2 7
Timing of banking recap. Year since start of program -1 to +1 +2
Depth of conditionality Length of IMF MEFP (Pages, 1st Review) 14 46 (2nd Prog)
Sources: IMF World Economic Outlook (April 2015); EC AMECO Database; WB Doing Business Report (2015); IMF ex-post evaluation of the EEF arrangement with Ireland (2013);
“The Second Economic Adjustment Programme for Greece – First Review December 2012”, European Commission (2012); “First and Second Reviews Under the Extended
Arrangement and Request for Rephasing of the Arrangement”, IMF Staff Report (2011)

10. Since Crisis: Reform of the EU Fiscal Framework
• Strengthened fiscal rules, including:
• Explicit and gradual system of fines for countries under Excessive Deficit Procedure (EDP)
• Medium-term objective (MTO) for structural balance refined, automatic correction mechanism and transposition into national
legislation
• Expenditure benchmark
• Independent fiscal council
• Enhanced comprehensive monitoring of fiscal and macroeconomic imbalances
• Macroeconomic Imbalances Procedure & European Semester
• Enhanced monitoring of statistics, particularly in program countries
• Procedure to support MS in crisis
• European Stability Mechanism (ESM)
• Banking Union
• Single Supervisory Mechanism (SSM)
• Single Resolution Mechanism (SSR)

11. Final Thoughts
• EU case study highlights pitfalls of ex-ante fiscal monitoring. Key lessons:
• Fiscal rules must “bite”
• Fiscal rules are only as good as the underlying statistics
• Think beyond fiscal headline measures: macroeconomic and financial imbalances can quickly spill over
• But can fiscal rules be enforced top-down without market discipline? See US & Canada
• Greece and Ireland as prominent examples of adjustment programs. Key lessons:
• Need credible and clear upfront design of adjustment program: importance of stability and clear way out of the crisis
• Government needs to take program ownership and develop implementation capacity
• Federation needs to establish procedures to deal with crisis and firewall to avoid contagion
• But of course the Greek and Irish experiences are also products of the specific economic and
political context in the EU