IRELAND IN CRISIS

• Robert Martinez• Jeffrey Brandt

• Econ 490• Professor Ramon Castillo

History

• Conquered by England by 1603• 20th century war of independence• Republic of Ireland established 1919• Missed the Industrial Revolution• Joined European Community in 1973

The Celtic Tiger

• Began in the 1990’s• Reduced public spending• Cut taxes • Promoted competition• Google, Intel, Microsoft• Transition from agriculture to knowledge• Steady continued GDP growth

Bubble-nomics

• Steady continued GDP growth

• 2005 – The Economist rated as “Best Place to Live in the World”

Bubble-nomics

• Established the European Common Currency 1999

• Low interest rates from Euro• Currency Appreciation• Beginning of a massive property bubble

Bubble-nomics

• Sharp exchange rate appreciation dampened export activity

• Economy shifted to domestic demand, especially real estate and construction

• Banks funded by foreign capital and over specialized in real estate

Bubble-nomics

• Easy credit -> housing and development bubble

• 1/5 of employment construction industry related

• Massive portion of tax revenue from real estate market on the backs of rapidly inflating housing costs

Causes of the bubble

• Low real borrowing rates

• Irrational exuberance

• Regulatory imprudence

• Shock waves from US financial meltdown• Credit tightened dramatically• Real estate values stopped rising, sending the

whole house of cards tumbling• Real estate prices crashed

• Irish banks over invested in real estate began to fail

• Without intervention these banks would collapse and send economic shock waves

• Government stepped in to guarantee all liabilities in the largest Irish banks

• Turned the financial crisis into a government debt crisis

• From 2007-2009• Govt went from small surplus to deficit of 14%

of GDP• Govt debt rose from 25% GDP to 64%

• IMF blames low tax rates in boom years

• What is a Financial Crisis?– Financial institutions/ assets lose significant value

• What is a Debt Crisis?– Fear that Govt will not honor its debt– Rapid increase in interest rate of borrowing

Financial to Debt Crisis

• The Irish Government lost investor confidence when it guarantees all banking liabilities

• Interest rates on Irish borrowing increased dramatically

• Led to inability to finance current obligations

The Bailout

• In November of 2010 The Irish government had to accept an 85 billion Euro bailout from the IMF and EU.

• The Bailout was funded by a coalition of several key European financial institutions and governments.

• Ireland provided 17.5 billion Euros from their own pension fund.

• 22.5 billion Euro’s were provided by the IMF.• 22.5 billon Euro’s were Provided by the EU• 22.5 billion Euro’s from the European Financial stability

facility• 4.8 billion from The U.K

The Banks continue to borrow from the European Central Bank

• The most troubled Irish banks, The Anglo Irish Bank and The Irish Nationwide Building Society continued to depend deeply on emergency lending from the European Central Bank (ECB).

The Banks continue to borrow from the European Central Bank

• Less then a month ago on February 19th of 2011 both The Anglo Irish Bank and The Irish Nationwide Building Society needed 16 billion Euros in overnight emergency funds from the ECB.

In the Den With Lions

• With public anger against the Fianna-Fail led government which presided over the boom and bust years of Ireland on February 25 of the year 2011 a new government was ushered in.

• Fianna-Fail (The once dominant political Party in Ireland) lost 75% of their seats in parliament dropping from 77 members to only 20 members.

• With a large drop in the Fianna-Fail party, large gains were made by Fine Geal party, which gained 15 seats rising from 51 members to 76 parliament members.

The Latest Update

• On March 7 the Irish government is in the works of trying to negotiate new terms on the condition of The Irish bailout.

• Key budget cuts will stay in place such as 3 billon Euros in budget cuts and 25,000 lay offs in the government sector.

• Instead they will focus on new issues which they feel they can control

• The first being lowering the interest rate on their loans gained from the bailout.

• Second is reducing the deficit without raising taxes.• Third is privatizing key state assets• Fourth is finding 50 billions Euros to replace ECB

emergency funding for Irish banks.

Critics

• Many in Ireland feel that their austerity cuts are unevenly placed on Irish shoulders.

• The Irish public feel that their property bubble which led to the debt crisis was fueled by large investments from all European countries (especially French and German investors).

• Should we in America care about the Irish Debt crisis?

YES!!!!!!!!

• The Irish economy is a developed western economy. • Most people see debt crisis as a situation that only

affects lesser developed countries.• But the Irish have a high standard of living and are now

seeing that lifestyle changed dramatically.• Unemployment in Ireland is now 13 percent.• Irish GDP has contracted by 14 percent.• Most of all the Irish Debt crisis has been demoralizing

for the Irish public.

Conclusion

• Economy has only shrunk to 2002 levels• Got a taste of the good life and will only want

more

References• 1) ECB Emergency Lending http://www.ft.com/cms/s/0/932501aa-

3c41-11e0-b073-00144feabdc0.html#axzz1FtLH4sri• 2) Breakdown of the money

http://www.europeanvoice.com/article/2010/11/eu-approves-irish-bail-out/69573.aspx

• 3)The New government http://www.economist.com/node/18285942?story_id=18285942&fsrc=rss

• 4) The Status Quo http://www.independent.ie/national-news/stand-and-deliver-2568359.html

• 5) Debt Summery • http://www.economist.com/node/18176072?story_id=18176072• 6 ) The U.S. and Irish Credit Crises: Their Distinctive Differences and

Common Features www.irisheconomy.ie/Notes/IrishEconomyNote10.pdf

References

• External Surveillance of Irish Policy During the Boom www.irisheconomy.ie/Notes/IrishEconomyNote11.pdf

• CIA World Factbook www.cia.gov