Irish Financial Crisis

The Roots of the Irish Financial Crisis

The financial crisis in Ireland resembled the US-style collapse following the easy-money bubble that hit its real estate segment. It emerged from the availability of cheap credit accessible to almost all families desiring to buy and build houses. The process began in the 1980s through the 1990s when Ireland experienced steady economic growth. The rapid economic boom would trigger a mass exodus of people with Irish ancestral roots motivated to return home (Roche et al., 2013, p. 21). The high economic growth enticed individuals to seek employment internally, backed by blossoming industries. The national unemployment rate fell steadily from 15.7% in 1998 to 4% in 2004 (Conefrey et al., 2014, p. 18). The high growth witnessed from 1997 to 2007 transformed Ireland from a poverty-stricken nation into joining the wealthiest class.

Driving Forces Behind Economic Growth

Behind the high economic growth was mass job creation. The resulting increase in disposable income levels in the Irish economy attracted foreign investors. The low-tax rate for the corporate world saw more foreign companies set operating bases in Ireland. The government offered more enticing opportunities with free higher education accessible to European Union (EU) citizens. The increased number of graduates formed a pipeline of the ready labor market (Conefrey et al., 2014, p. 18; Ruane et al., 2010, p. 80). It coincided with expanding the trading market on the international platform, itself attracting more people to work in Ireland. Within fifteen years from 1990, the labor market grew from slightly more than a million workers to nearly two million.

The Real Estate Boom and Banking Practices

Ireland aligned itself with pillars that ensured sustained economic growth, making it the Celtic Tiger. Increased job creation, combined with economic growth, motivated more Irish to embrace development. Developers started mass construction of houses banking on the projected wave of emigration. They anticipated that the rapid economic growth would support a second wave of immigrants who could eventually purchase the houses (Norris & Coates, 2014, p. 299). Real estate developers sought lending from Irish banks. Increased lending allowed the banks to grant record loans. The high demand for construction funds necessitated mass borrowing by the Irish banks themselves to sustain the domestic borrowing (Norris & Coates, 2014, p. 306). Such practices manifested in the foreign borrowings by Irish lenders, from €15 billion in 2004 to €110 billion by 2008, responsible for €148 billion in EU residential mortgage debt (Duffy & O’Hanlon, 2014, p. 329). The Irish banks adopted a three-month rollover approach to obtain foreign funds. Unknowingly, the property sector boom led to oversupply, leaving most banks strangled with the classic asset-liability mismatch (Hall, 2009, p. 430). The Irish government embraced the forecast by banks and developers that such lending presented opportunities to expand the ‘Celtic Tiger.’ Neither party worried about the accumulating debt in 2006, with then Prime Minister Bertie Ahern declaring, “The boom is getting boomier.”

Pre-Crisis Economic Transformation

Before the financial crisis, Ireland experienced fifteen years of sustained economic growth and a faster development trend. It transformed the country into one of the region’s fastest-growing and strongest economies, measured in GNP per capita. The occurrence of the Irish financial crisis was beyond its horizon as it realized two decades of economic alignment and political efforts to catch up with other EU member countries (Boullet, 2015, p. 18). Ireland embarked on initiatives to steer growth for its GNP per capita. The consistent adoption of growth-oriented policies enabled it to realize the desired growth at constant prices. By 2001, its growth rate averaged 5.6%, reflected in the reduction of its public debt from 110% in 1987 to 25% of its output in 2007 (Gärtner et al., 2013, p. 360). The transformation became the Celtic Tiger period that allowed the government to realize a marginal positive balance.

The Collapse and Its Aftermath

Poor positioning for its macroeconomic policy led Ireland to a hard landing. The Irish housing bubble burst with the collapse of the US financial firm, Lehman Brothers. The situation triggered a chain of events that endangered the banking system by plunging it into an endless crisis. It forced the government to initiate an unconditional guarantee amounting to €440 billion to cover liabilities for the primary Irish banks (Yurtsever, 2011, p. 690). At this time, national unemployment tripled to 14.4% by 2011, while the GNP per capita declined by 10% and 12% in 2008 and 2009 respectively (Duffy & O’Hanlon, 2014, p. 330). The outcome left everyone affected by the crisis, with households dealing with budgetary cuts, declining welfare rates, and declining disposable income by ten percent. Furthermore, it rekindled the net emigration that stopped during the Celtic Tiger period. Poor macroeconomic management cost Ireland the achievements realized within its twenty years of economic reforms and the adoption of budgetary discipline.

References

Boullet, D. (2015). Economic Alignment in the EU: The Irish Experience. Dublin: Irish Economic Press.

Conefrey, T., Fitz Gerald, J., & Honohan, P. (2014). Managing the Irish Economy in Good Times and Bad. In Economic and Social Review, 45(1), 1-26.

Duffy, D., & O’Hanlon, N. (2014). The Irish Housing Market: An Overview. Quarterly Economic Commentary, 329-332.

Gärtner, M., Griesbach, B., & Jung, F. (2013). PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies. International Advances in Economic Research, 19(3), 360-370.

Hall, P. A. (2009). The Political Origins of Our Economic Discontents: Contemporary Adjustment Problems in Historical Perspective. Harvard University Press.

Norris, M., & Coates, D. (2014). How Housing Killed the Celtic Tiger: Anatomy, Consequences and Lessons of Ireland’s Housing Boom and Bust. Journal of Housing and the Built Environment, 29(2), 299-315.

Roche, M. J., & O’Reilly, G. (2013). Irish Economic Development: The Path to Success. Irish Studies in International Affairs, 24(1), 21-35.

Ruane, F., & Gorg, H. (2010). The Impact of Multinationals on the Irish Economy. International Business Review, 19(1), 80-89.

Yurtsever, C. (2011). The Irish Banking Crisis: A Comparative Context. In Journal of Banking Regulation, 12(3), 689-699.