The Celtic Tiger and the biggest banking-property crash in world: Politics and Economics in Ireland
Oliver O’Connor12 March 2012
Irish Economy – Profile
• GDP– €156bn 2010; GNP, €128bn– GDP (nominal) lost €33bn since 2006, huge -17%– Bottomed out: growth now 1% - 3% by 2015?– Ireland is relatively wealthy, even after the crash– GDP per capita €34.6bn, GNP per capita €28.4bn– Compares well internationally
European GDP per capita 2010 in PPP
Source: Eurostat
EU 27 = 100
GDP per capita PPP 2010
Assumed Irish GNP per capita 20% less than GDP per capita at 102 EU 27 = 100
Population Long Term Trend Up
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 20300
1000
2000
3000
4000
5000
6000
Population of Ireland 1950-2030
ActualForecast
Source: OECD
000s
What went wrong? A play in Five Parts
• 1987-93 – new economics, new politics, slow improvement
• Arrival of ‘Celtic Tiger’ 1994-2000/01• 2001-04: slowdown, dot com crash• 2004-08: ‘Boom becomes boomier’; loadsamoney • 2008-10: Masssive crash, international crisis and
EU-IMF bailout
Some sourcesPatrick Honohan – pre-Governor papers
http://www.tcd.ie/Economics/staff/phonohan/European CommissionNational Competitiveness Council
www.ncc.ieNational Treasury Management AgencyPost crash reports:
Governor HonohanRegling WatsonNyberg
On-goingIrisheconomy.ieKarl Whelan; Kevin O’Rourke; Philip Lane; Colm McCarthy
House Prices
Investment in housing
Jobs in Construction 1990-2009
Relative earnings path
Loss of Price Competitiveness
Irish Competitiveness Index
Banks boom – aided from abroad
Domestic loans up by 147% in four years; reaching 210% of GNP
Domestic deposits up 70%
Shortfall of €176bn, financed externally in euro
Irish Banks – Loans mountain
Explosive growth
• ‘The domestic banking sector—made up of those banks that had a majority exposure to the domestic economy—had, nevertheless, quadrupled its size in the six years from 2003 to 2009, having grown from €200 billion to €800 billion’
Gary O’Callaghan, Dubrovnik International University
Or put another way…
• “By early 2008, net foreign borrowing by Irish banks had jumped to over 60 per cent of GDP from 10 per cent in 2003.
• “Up to 2003, the property boom was financed without significant recourse to foreign borrowing, but after then the banks started to borrow heavily from abroad.
• “This was an effortless undertaking thanks to the removal of currency risk and went essentially unnoticed by analysts, the focus of policy attention having shifted away entirely from balance of payments concerns. “– Honohan, 2009
Banks – Ireland and Eurozone
Government Money: Irish 10 Yr Bond Spread over German Bund 1991-2010
14/0
6/19
91
14/0
1/19
92
14/0
8/19
92
14/0
3/19
93
14/1
0/19
93
14/0
5/19
94
14/1
2/19
94
14/0
7/19
95
14/0
2/19
96
14/0
9/19
96
14/0
4/19
97
14/1
1/199
7
14/0
6/19
98
14/0
1/19
99
14/0
8/19
99
14/0
3/20
00
14/1
0/20
00
14/0
5/20
01
14/1
2/20
01
14/0
7/20
02
14/0
2/20
03
14/0
9/20
03
14/0
4/20
04
14/1
1/200
4
14/0
6/20
05
14/0
1/20
06
14/0
8/20
06
14/0
3/20
07
14/1
0/20
07
14/0
5/20
08
14/1
2/20
08
14/0
7/20
09
14/0
2/20
10
14/0
9/20
10-50
0
50
100
150
200
250
300
350
400
450Irish 10-Year Bond Spread over Germany since 1991
Bas
is P
oint
s
Bank Recapitalisation
Bank Worries
Anglo Nationalisa
tion
EMUEMU
Bank Recapitalisation
Bank Worries
Anglo Nationalisation
Source: NTMA
Cheap money…
• “real interest rates 1998-2007 averaged minus 1 per cent, compared with over 7 per cent in the ERM period (even excluding the crisis of 1992-3) and 3¾ in the floating rate period between the two. The fall in nominal interest rates was even steeper. “
– Honohan 2009
But not so cheap after all….
Sourced by NCB Stockbrokers
With nearly two-thirds of that cost for Ireland coming from one bank alone, Anglo Irish
Fiscal policy – too loose or too dependent?
Honohan, 2009
Fiscal Balance 1995-2008
Correction 2002-04
Future of Government debt
Interest up but not to 1985 levels
Competitiveness Scorecard 2011
www.competitiveness.ie/media/Forfas060911_Irelands_Competitiveness_Scorecard_Presentation.pdf
Competitiveness Scorecard
www.competitiveness.ie/media/Forfas060911_Irelands_Competitiveness_Scorecard_Presentation.pdf
Dramatic changes in party support
Questions to discuss• “Why didn’t someone see this coming?”• Did euro membership cause the crash?• Did Irish politics cause it?• Did Irish public administration fail?• What would have prevented it?• Has euro membership made solving it harder?• After the crash, what’s the economic future?• What’s the political future?
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