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Financial Crisis in Ireland: Causes, Culprits and Cures Lars Frisell, Chief Economist
CPA Annual Business Lecture, 30 August 2012
Loans for house purchase - %
Change Year-on-Year
2
-5
0
5
10
15
20
25
30
35
40
Au
g/9
1
Sep
/92
Oct
/93
No
v/9
4
Dec
/95
Jan
/97
Feb
/98
Mar
/99
Ap
r/0
0
May
/01
Jun
/02
Jul/
03
Au
g/0
4
Sep
/05
Oct
/06
No
v/0
7
Dec
/08
Jan
/10
Feb
/11
* Excludes IFSC. Property-related lending refers to the construction, real estate activities, and residential mortgages sectors. Source: Central Bank of Ireland, Statistics
Property-related lending - domestic Irish
banks property related lending/total
private loans *
626464
6767
6359
56
5248
45
0
10
20
30
40
50
60
70
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 2010
%
Investment in dwellings
3
0
2
4
6
8
10
12
14
16
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
% of GDP
IE
EA-17
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
Annual production of housing units
Property related tax revenues
4
Banks’ Corporate Culture - Institutional memory - Guidelines - Incentives
Banks’ Corporate Governance - Risk control - Management - Board -
Trusted third parties - Accountants - Rating agencies - Analysts
Authorities and politicians - Tools - Resources - Mandate
Influence on business model
Culprits
Strong world-wide growth up to 2007...
Real GDP growth
Source: AMECO database European Commission .
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
USA UK JPN
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
FR DE GR
...yet persistently poor fiscal positions
General Government Deficit (% GDP)
Source: AMECO database European Commission .
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
USA UK JPN
-16
-14
-12
-10
-8
-6
-4
-2
0
2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
FR DE GR
An indebted union
Government debt, per cent of GDP
Source: Eurostat
0 20 40 60 80 100 120 140
EMU
Netherlands
France
Italy
Spain
Germany
Cures
• National budget consolidation
• Restoring competitiveness
• Bank restructuring
----------------------------------------------
• Actions by ECB/EFSF/ESM (?)
-----------------------------------------------
• Strengthened fiscal framework
• Reform of bank regulations
• Reform of bank supervision and resolution
On-going domestic measures
Near-term European measures
Long-term reforms
Debt composition
10
40%
50%
60%
70%
80%
90%
100%
110%
120%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2008 2009 2010 2011 2012 2013 2014 2015
Primary Deficit (excluding bank support) (% GDP) Interest-growth rate differential (% GDP)
Other factors (% GDP) Deficit-worsening Bank Recapitalisation (% GDP)
change in debt ratio Gross General Government Debt (% GDP) RHS
Relative Hourly Earnings (Manufacturing)
- Ireland versus main trading partners
11
90
100
110
120
130
Consumer confidence
Growth & Unemployment
Consumption & Credit
Housing market
Eurocrisis
Ireland on an export-driven path to recovery
Current account as % GDP
-7
-6
-5
-4
-3
-2
-1
0
1
2
t-3 t-2 t-1 t t+1 t+2 t+3
Finland Ireland Sweden
Source: AMECO database European Commission
70
80
90
100
110
25
30
35
40
45
2002 Q1 04 06 08 10
per c
en
t€b
illi
on
Exports (lhs)
Exports/GDP (rhs)
11 Q4
Some necessary regulatory reforms
• MUCH higher capital requirements – in particular for systemic banks
• Liquidity regulations – limit short-term market funding
• More powers to regulators – including a "macroprudential" mandate
• Efficient resolution schemes - credible burning of bondholders in all banks
Thank you
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