EC4024
Lecture 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 Time
Period 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
Real GDP Growth, Change Year on Year
Tiger Ends
Tiger Starts
0.10
0.08
0.06
1995 1998 2000 2002

Why did it end?
None of the benefits existed anymore.
(Yet: Caution on Wage Argument)

Cue Property Boom
12% 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

Project Atlas - Anglo Irish Bank Corporation plc
Summary Report Extracts
20 February 2009 Strictly Private and Confidential
Transaction Services

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 Time
Financial 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.