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?