The Irish economy experienced a dramatic crisis from 2008-2010. It had seen strong growth during the Celtic Tiger period from the 1990s-2000s, fueled by foreign investment and a construction boom. However, the government relied heavily on tax revenue from the overheated property sector. When a global financial crisis hit and the housing bubble burst, Ireland's economy collapsed as the banking sector failed and the government deficit ballooned. An EU-IMF bailout program was implemented to restructure the banks and implement fiscal austerity. While Ireland recovered slowly, it provides lessons about risks of over-reliance on property markets and the need for macroprudential regulation and oversight of the eurozone.

1. 2008-2010: Irish Crisis

2. • The Irish Crisis is perhaps the most dramatic
turnaround of any country in the euro zone
• Many had rated Ireland high in its economic
achievements
– High rates of economic growth and low unemployment
combined with budget surpluses
– The country appeared to be well placed to cope with any
slowdown
• However...
– Irish Government was unable to manage economic crisis on its
own

3. The Celtic Tiger
• Refers to economy of Ireland from mid-1990s to mid
2000s
– A period of real economic growth fuelled by foreign direct
investment
• Pre-Tiger era
– In 1960s, Ireland moved away from protectionist trade policy
– January 1,1973: Ireland joined European Economic Committee
– Export oriented industrial policies
– Gradual Improvement in Education Standards

4. • Pre-Tiger era(contd.)
– However Ireland’s macroeconomic stabilization policies were
not so good
1970s Global
Slowdown
Ireland reacted
by running Very
large fiscal
deficit
Resulted into
1980s Debt
crisis
In 1979, traditional currency link
with Sterling was dropped
Resulted into unstable monetary
regime featuring regular
devaluations
• By mid 1980s Ireland had Public debt-GDP ratio over
110 per cent
• Tax rates had raised to punitive levels
• Growth had stagnated

5. Ireland’s famed Celtic era began
• The period from 1987 onwards saw fiscal problems dealt
with via a program that focused on restraining spending
• By 1989, Ireland’s debt dynamics had clearly moved in
direction of sustainability
• European Monetary System(EMS) started delivering a
period of monetary stability
• As a result Irish economy began to grow at an
impressive rate

6. Fraction of Population Aged 15-64
By late 1990s, Ireland had a higher fraction of its population in
working age bracket than either the US or the UK

7. Labor Force Participation Rate
When economy recovered, Irish people abroad began taking jobs
at home
A large female labor supply actively participated in economy

8. Drop in Unemployment Rate
Employment rose steadily from 1.1 million in late 1980s to 2.1
million in 2007

9. • Steady improvements in productivity resulted into
extraordinary economic growth
– From 1987 to 2007, economic growth averaged 6.3 per cent
per year
• Irish Government lowered tax rates and increased public
spending year in and year out
• Yet economic growth delivered sufficient tax revenues
to Government to a string of budget surpluses
• High productivity and a business friendly environment
enabled Ireland to position itself well as a gateway to
EU markets & primarily to US FDI

10. The Housing Boom
• At the turn of the millennium, Ireland still had a
relatively small housing stock
• Ireland had the smallest per capita housing stock in the
EU
Rapid
expansion in
Incomes
Low
mortgage
interest
rates
Increase in
housing
demand

11. Decrease in Mortgage Interest Rates

12. House Prices in Ireland and US
As a result house prices quadrupled between 1996 and 2007

13. • Response to this increase in housing demand was an
extraordinary construction boom
• Construction became a dominant factor in Irish economy
• By 2007, construction accounted for 13.3 per cent of all
employment, the highest share in OECD
• Much of the labor employed in construction boom came
from new EU member states
• Inward migration itself further fuelled demand for
housing

14. Year The Total Stock of Dwellings
1991 1.2 Million
2000 1.4 Million
2008 1.9 Million
Year House Completions
1990 19000
2000 50000
2006 93000

15. House Completions Per Thousand People

16. The Bubble Pops
• Irish house prices had became increasingly over-valued
• As world entered into severe recession in 2008, Irish
Government believed economic growth slowdown would
occur at an acceptable degree
• As a result very little was done by the Government or
central bank to cool the property market
• A number of political parties campaigned during the
2007 election for abolition of stamp duty to assist young
buyers

17. • When International financial crisis had gotten into full
swing, Irish house prices began to fall from peak levels
• Prices fell Demand for new houses collapsed
• Attitude of potential buyers changed swiftly from being
desperate to wait to get better price later
• In mid-2008, house prices fell about 50 per cent from
their peak values

18. Collapse in Housing Construction

19. Fraction of Labor Force in Construction : Decreased
Unemployment: Increased

20. Booming Housing Activity
Surging House Prices
During the periods of boom, Ireland’s tax revenue was
primarily collected from asset based taxes
 Stamp duties
 Capital gains tax
 Capital acquisition tax
Reduction in share of
revenues collected from
income taxes
Share of asset-based tax
revenue increased rapidly
&
The Fiscal Crisis

21. Collapse in Construction
Activity
Corresponding jump in
unemployment
• Ireland's apparently strong fiscal situation was heavily
dependent on health of its property sector
• When property sector collapsed, substantial source of
Government revenue disappeared almost overnight
Huge Loss in Income Tax
Revenues
Big increase in social welfare
payments
&

22. Composition of Tax Revenues

23. Impacts of fiscal crisis
Irish real GDP declined by ten per cent over 2008 and
2009
Nominal GDP contracted even more sharply, from 190
billion Euros in 2007 to 161 billion Euros in 2009
Ireland was heading for annual deficits of as large as 20
per cent of GDP

24. Measures taken by Irish Government
• From late 2008 onwards,
there had been a series of
contractionary budgets
• Public sector pay had cut by
significant amounts
• Income tax and VAT rates
had raised
• Non-welfare current
spending had cut back
• Capital spending had slashed
• As a result total amount of
discretionary tax increases
and spending cuts by 28.8
billion Euros
• These budgetary
adjustments were equivalent
to 6270 Euros per person,
one of the largest budgetary
advancements in the
advanced economic world in
modern times

25. The Banking Crisis
• Ireland’s recession became a crisis due to the collapse
of its bank
– Housing activity was largely financed by the Irish banks
• Irish banks rapidly expanded their mortgage lending
• Property related loans to construction businesses
expanded from 45 billion Euros in 2003 to a peak of 125
billion Euros in 2008
• Fate of most of these loans were dependent on rise in
property prices

26. The total stock of mortgage loans in Ireland exploded from
€16 billion in 2003 to a peak of €106 billion in 2008 about
60 percent of that year’s GDP

27. • Loans were largely concentrated in a small number of
banks
• Change in funding model
– Prior 2003, loans were mainly funded by deposits
– After 2003, loans were largely financed with bonds issued to
international investors
– This source of funding was comparably less stable
• Although Irish banks had big cushions, they were
dealing with credit concentration risk
• As Irish construction collapse, banks found it
increasingly difficult to raise funds on bond markets

28. From less than €15 billion in 2003, international bond
borrowings of the six main Irish banks rose to almost €100
billion (well over half of GDP) by 2007

29. Measures taken by Irish Government
• On September 30,2008
government decided to issue
a blanket guarantee for all of
the existing and all future
liabilities of domestic Irish
banks
• Large costs of these
measures further exacerbated
budget deficit
• Significant budget deficit
coupled with bank debt
caused international
investors to question the
sustainability of Irish
sovereign debt
• Government was effectively
locked out of international
bond markets and was
unable to borrow to fund the
deficit

30. Public debt and Deficit ratios to GDP

31. EU-IMF
• European Commission(EC) & IMF got fund commitments from
Irish government, despite no providing official money, ECB
involved seeing the birth of ‘Troika’
• Funding commitments of €67.5 billion by ECB
• Money would spend for reasons like restructure the banking
sector, implement further fiscal adjustment and restore
competitiveness and strengthen the economy's growth potential

32. Breakdown of EU-IMF financial assistance programme

33. • Banking sector reforms
Recapitalisation of the domestic banks, Deleveraging of bank balance
sheets, Renewal of bank boards
• Fiscal consolidation
Restoration of the long-term sustainability of public finances,
Reduction in budget deficit target
• Structural reforms
Reformation in sectoral labour market agreements, Improve labour
market activation, Encouragement for competition in sheltered
sectors

34. Ireland’s recovery story
• Budget deficit is projected to 7.3% of GDP in 2013, 4.3% in 2014,
2.1% in 2015. Primary budget is projected to record a surplus of 3
percent
• A gradual return to healthy economic growth for a number of
years, only to have the forecasted recovery to be continually
delayed
• Ireland’s cost competitiveness was eroded and net exports
declined as a share of GDP
• Ireland’s export growth in recent years partly reflects an
improvement in competitiveness

36. Euro zone Economic policy from Irish Crisis
• Monitoring macroeconomic imbalances is adopted by EC because
of problem caused by housing bubble and employment & tax
revenue are overly dependent
• Macro-prudential approach to regulation in which macro stress
scenarios and feedback effects are given more prominence
• Strongly in favour of the proposed harmonized approach to
banking supervision across the euro area
• Greater success in reducing costs and raising exports because
crisis has provided an illustration of the benefits of a less
regulated labour market

37. Current economic condition of Ireland
• 1.5% increase in gross domestic product (GDP) in the second
quarter
• Rise by 13% increase in exports in the second quarter and 1.8%
rise in household spending, the largest annual rise in almost four
years

38. THANK YOU