EC4024Lecture 8

Financial Crises II: What went wrong in Ireland

Last Time

1. Financial Fragility Thesis

1. Innovations in Finance destablise economy

2. Govt legitimates innovations

3. Things calm down, banks deleverage

4. Cycle restarts

This Time

Financial Fragility in Ireland: What went wrong?

Two contexts: International, and Domestic

1. International

Bears: One More TimePeriod Decline from peak to trough (%)

1834-1842 -50%

1850-1857 -62%

1905-1920 -70%

1928-1948 -56%

1968-1981 -55%

1999-2008* -51%*

* So Far.Major US Bears in Constant Dollars

This recession is different.

2. Domestic

Traditional Irish Development Model

1. Low relative w/p

2. Low inflation

3. High (ish) unemployment. No upward pressure on wages, implies dw/dt pretty static. Good for employers, lowers uncertainty for FDI investment

4. Social partnership guarantees this.

5. Business Friendly policies: low corp. tax, subsidies all over the place, etc

6. ‘loadsamoney’ from the EU

7. Demography + Education in our favour

Cue Celtic Tiger

Tiger EndsTiger Starts

1995 1998 2000 2002

0.06

0.08

0.10

Real GDP Growth, ! Change Year on Year

Why did it end?

None of the benefits existed anymore.(Yet: Caution on Wage Argument)

Cue Property Boom12% of GDP in 2007/8

6x more house starts than UK with 16x the population

1/5 men working in construction

Huge Service sector dependent on this.

Cue Property Bust

Mass Unemployment as demand drops in 2008/9

Overstocked by 40k-80k units

Drops in Y, C, I. as a result.

Cue Banking Crisis

Transaction Services

20 February 2009

Project Atlas - Anglo Irish Bank Corporation plc

Summary Report Extracts

Strictly Private and Confidential

Situation now

Economy forecast to contract by 4-6%

A Keynesian recession

Highly indebted population

Large hole in govt. finances, plugged by borrowing

What to do now?Focus on growing our own SMES: www.bizcamplimerick.com

Sort banks out

New Banks

Change Corp. Governance

Good/Bad Banks

Next TimeFinancial Fragility & Corporate Governance in Ireland, on the site.

Pilbeam, Cht 4

Donna will do Portfolio Analysis in Tutorials.

No Lecture Friday or Monday. Check site for lecture cast.