How the Credit Crunch Finally Arrived in Ireland

How The Credit Crunch Finally Arrived In Ireland

Queue panic: Northern Rock savers

1 2 3

13 September 2007

Northern Rock asks for and is granted emergency financial support from

the Bank of England as thousands of worried savers withdraw their money

and the bank's shares plummet. Irish savers are assured their savings are

protected.

16 March 2008

JP Morgan Chase agrees to pay the rock-bottom price of $236m to buy Wall

Street investment bank Bear Stearns, whose mortgage portfolio was worth

an estimated $33bn at the end of February this year. Without a buyer it

would have had to declare bankruptcy.

7 September

The collapse of US quasi-government housing agencies Fannie Mae and

Freddie Mac is barely averted by an announcement from Federal Reserve

chairman Ben Bernanke and US treasury secretary Henry Paulson that the

government would bail out the two agencies. Together Fannie and Freddie

are liable for about half the total mortgage debt in the US.

15 September

Investment bank Lehman Brothers becomes the biggest victim of the credit

crunch so far when it files for bankruptcy protection and hurtled towards

liquidation after failing to find a buyer.

Lehman, once the fourth-biggest US securities firm, lost 94% of its market

value this year, succumbing to the subprime mortgage crisis it helped

create.

Meanwhile the US government threw an $85bn lifeline to American

International Group (AIG), the world's largest insurer, after collapsing share

prices left it on the brink of bankruptcy. Trouble in AIG's financial products

division was at the heart of the problem, playing the counterparty in a large

number of swap and hedge transactions. It forced a major downgrade in

AIG's debt rating, requiring the company to post $15bn in additional

collateral, which prompted the rescue.

18 September

Lloyds TSB confirms it is paying £12.2bn to take over HBOS in a move

intended to create one of the strongest banks in Britain, but with

thousands of job losses and branch closures. HBOS, which owns Halifax

and Bank of Scotland, is Britain's biggest mortgage lender and has

suffered a dramatic fall in shares. Under the terms of the agreement, HBOS

investors will get 0.83 Lloyds shares for every HBOS share they own.

In Dublin, speculation in financial circles centres on Anglo Irish Bank as

the most likely suitor for Irish Nationwide, which has been on the market

since last year. Anglo had expressed serious interest in the possibility of

acquiring the building society. A takeover would protect their major

exposures, where both gave tens of millions in loans to developers.

20 September

The Brian Cowen-led government rushes to increase the statutory limit for

deposit protection schemes from €20,000 to €100,000 in an effort to

dampen growing fears of a run on banks and building societies. The cover

applies to 100% of an individual's deposit and leaves Irish savers better

protected than savers in most other European countries.

30 September

The government says it will guarantee all deposits, bonds and debts in the

country's six biggest banks and building societies for two years to

maintain financial stability.

Included are AIB, Bank of Ireland, Anglo Irish Bank, Irish Life & Permanent,

Irish Nationwide and the Educational Building Society. It's the biggest

potential exposure ever to confront Irish taxpayers. The government says

the taxpayers' interests will be protected.

Compiled by Lyndsay McGregor

October 5, 2008

IRELAND

Ireland was long one of Europe's poorest countries, with high unemployment, a

dearth of foreign investment and a skills shortage. But in the past two decades it

has become a wealthy, modern industrial state, dubbed the "Celtic Tiger", with

low taxes luring multinationals, fuelling a huge expansion in employment.

But the tiger's roar turned to a whimper as the economy was hammered, with

Ireland overdependent on housing and financial services. Irish banks funded an

unsustainable property boom that saw glitzy apartment blocks thrown up for

miles around Dublin, and thousands of investors snap up buy-to-let places. When

the bubble burst, the government was forced to guarantee the deposits of the five

biggest institutions in an attempt to prevent a Northern Rock-style bank run. With

questions over the banks' very survival, the government has since had to shore

up their assets by agreeing to take over the worst of the sector's property loans.

Tax receipts from property and financial institutions dried up and unemployment

soared, along with the public-sector borrowing requirement. A few weeks ago,

finance minister Brian Lenihan announced sweeping cuts to stabilise the

shattered public finances as he presented the harshest budget in decades. He

unveiled public-sector pay cuts and reductions in uneployment and child benefits

in a bid to achieve savings that would restrain the deficit to a projected 11.6% of

GDP next year.

But the move was opposed by trade unions, which had been pushing for an

alternative plan that envisaged 300,000 public-sector workers taking 12 days'

unpaid leave in 2010, as well as agreeing to reforms in working practices.

Despite signs of industrial unrest, there are indications that the worst is over:

Dublin said recently that GDP expanded by 0.3% in the three months to

September, though it had shrunk by 7% over the previous year. Kevin Gardiner,

the economist who coined the phrase "Celtic Tiger", predicts that the economy

will do no worse than bump along the bottom in 2010, with growth turning

positive by the end of the year.

But Ireland will take years to recover from a crash that has dented national pride

and could yet result in a winter of discontent as Lenihan's brutal budget takes

effect.

Irish Economy

Current Trends

Annual figures for GNP and GDP growth, consumer price inflation, employment,

wage growth and other economic data, together with our current short-term

forecasts, are presented in the Summary Table of the latest Quarterly Economic

Commentary. Forecasts over a longer time horizon are available in Recovery

Scenarios for Ireland and the Medium Term Review.

The latest ESRI research on the Irish economy may be viewed on the Irish

Economy Today page of our website.

The authoritative source for most Irish economic data is the Central Statistics

Office. Links to their latest publications for the main variables of interest are

provided below:

GNP, GDP (Annual): National Income & Expenditure Accounts

GNP, GDP (Quarterly): Quarterly National Accounts

Consumer Prices (Monthly): Consumer Price Index

Employment (Quarterly): Quarterly National Household Survey

For information related to the public finances, the Department of Finance

publishes regular updates on exchequer returns and other budgetary data.

Overview

Ireland is a small, open, trade-dependent economy. It accounted for

approximately 2.1 per cent of overall output in the Euro Area in 2007. Its

openness is reflected in the international mobility of its labour and capital,

demonstrated by strong migratory flows and high levels of foreign direct

investment. Its high level of external trade is signalled by a high share of

combined exports and imports in Gross Domestic Product (GDP) which was just

under 150 per cent in 2007. In recent decades the Irish economy has been

transformed from being agrarian and traditional manufacturing based to one

increasingly based on the hi-tech and internationally traded services sectors. In

2007, the services sector accounted for 64 per cent of Irish GDP, while industry

accounted for 33 per cent and agriculture just 3 per cent.

Economic Growth

2010 is an ESRI estimate and 2011 is a forecast, see latest Quarterly Economic

Commentary .

Beginning in the early 1990’s, unprecedented economic growth saw the level of

Irish real GDP double in size over the course of a little more than a decade.

There have been many reasons advanced for Ireland’s success over this period,

including EU membership and access to the Single Market; Ireland’s low

corporation tax rate and a large multinational presence; a high proportion of the

population of working age; increased participation in the labour market especially

by females; a reversal of the trend of emigration toward immigration; sustained

investment in education and training; co-ordinated social partnership agreements

and a more stable public finance position.

The pace of economic growth decelerated in the second half of 2007, largely due

to a contraction in housing construction. In 2008, output fell for the first time since

1983, and the recession deepened in 2009. House prices increased substantially

in the late 1990’s and in the first half of this decade, and investment in housing

as a percentage of GNP rose from around 6 per cent in 1996 to almost 15 per

cent in 2006. Given this weight of house building in total economic activity, the

slowdown in the construction sector has acted as a significant drag on overall

economic growth. In addition, the difficulties in the international financial markets

that emerged in 2007, and worsened throughout 2008 and 2009, have

compounded Ireland’s economic and financial challenges. The global credit

crunch and the associated recession in the economies of all of our major trading

partners reduced external demand for Irish exports.

Consumer Prices


Commentary

In terms of price developments, the rapid growth in the economy resulted in high

levels of CPI inflation in the first few years of this decade. Inflation slowed in

2004 and 2005 but rising interest rates and soaring commodity prices, together

with the boom in construction, contributed to higher inflation in 2006 and 2007.

Oil prices peaked in July 2008 at over $140 per barrel. However, as the global

recession took hold in the second half of 2008, commodity prices fell

substantially and interest rates were slashed. As a result, the average price level

began to fall. While inflation averaged 4.1 per cent in 2008, consumer prices

have been falling since the last three months of 2008. Consumer prices fell by

4.5 per cent in 2009.

Unemployment


Commentary.

Ireland’s remarkable growth performance throughout the late 1990’s and into the

first half of this decade had strong positive implications for employment growth.

The total number of people employed rose from 1.2 million in 1990 to 2.1 million

in 2007 – an increase of 75%. The rate of unemployment dropped to historically

low levels in recent years, averaging 4.5 per cent in 2007. This period also saw a

reversal of the trend of emigration that characterised the 1980’s, and a net

inward migration of over 67,000 was recorded in 2007. The current economic

downturn has already manifested itself in the labour market. The number of

people on the Live Register increased by 70% in 2008. The average rate of

unemployment for 2009 reached almost 12 per cent, and is expected to average

over 13 per cent in both 2010 and 2011.

Public Finances

The strength of the Irish economy in recent years contributed to healthy public

finances. In 2006, a General Government Surplus of 3 per cent of GDP was

recorded. However, the current downturn has seen the public finances move into

deficit at an alarming pace. Taxation policy in Ireland over the last ten years has

led to a structural rise in the importance of capital taxes as a source of revenue.

As a result, the downturn in the property market has led to a sharp reduction in

tax revenues. The situation worsened throughout 2008, as the slowdown in the

residential sector spread to other sectors of the economy, affecting both

consumption and employment and therefore leading to a more general slump in

tax revenues. The implications for the borrowing requirement have been severe,

with the General Government Deficit reaching 14 per cent of GDP in 2009. The

general government deficit is expected to reach 31 per cent of GDP in 2010.

These figures include the cost of the bank bailout monies for Anglo Irish Bank

and Irish Nationwide Building Society. Excluding these exceptional payments to

the banks, the underlying deficit in 2009 and 2010 would be 12.1 per cent and

11.5 per cent respectively. It is estimated that the level of national debt will

exceeded 68 per cent of GDP in 2010, up from 12 per cent in 2007.[1]

For the latest analysis and short-term forecast for the Irish economy see the

Quarterly Economic Commentary.

For a medium-term forecast for the Irish economy see Recovery Scenarios For

Ireland: An Update and the Medium-Term Review.

Ireland's Economy: Celtic Crunch Time

By ADAM SMITH / DUBLIN Wednesday, Nov. 12,

2008

SIGNS OF THE TIME: The collapse of Ireland's frenzied real estate market has

pushed the country into recession

Photograph for TIME by Alan O'Connor

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It's been close to 140 years since Weir & Sons began trading jewelry on Grafton

Street, a hot spot for Dublin shoppers. The business has weathered the years

well. "We've seen ups and downs, wars and rebellions," says Neville McDowell,

jewelry buyer for the family-run company. The latest downturn will test it again.

After a "phenomenal" decade, McDowell says, a squeeze on spending means

sales this year are expected to dip by 10%. Even for a hardy company, says

McDowell, "business is tough."

It's a familiar refrain across Ireland. After more than a decade of runaway growth,

the good times have ended. In September the Celtic Tiger, the best performing

economy in the euro zone by some stretch in recent years, became the bloc's

first to officially slide into recession. After expanding at three times the E.U.

average between 1996 and 2007, Ireland's economy is expected to shrink by

0.75% next year, according to government predictions.

In some ways, Ireland has been a victim of its own success. Rising incomes and

government policy failures pumped up a housing bubble that is now deflating

fast, hurting Ireland's outsized construction sector. Factor in soaring

unemployment, weaker consumer spending and the gummed-up credit markets,

and Ireland is facing "the most challenging fiscal and economic position in a

generation," Finance Minister Brian Lenihan told parliament on Oct. 14. "We

must all pull together if we are to return to more prosperous times."

Ireland's attempts to navigate its way out of trouble will be watched closely by its

neighbors. The country's economic boom, which followed years of

underperformance, drew both international plaudits and curious visitors.

Delegations from Chile to China dropped in to learn first hand from its

turnaround. But just as Ireland offered a blueprint during the good times, so its

recent stumble — and prospects for recovery — may offer lessons to others in

the grip of the global downturn.

Ireland's transformation in the 1990s was as sweeping as it was swift. Lured by

low taxes and a young, well-educated workforce, multinational firms such as

Intel, Dell and Hewlett-Packard set up shop, establishing Ireland as a bridge

between the U.S. and Europe. Exports soared, helped by billions of dollars in

E.U. development funds and the government's clever management of public

finances. Growth took off too: the Irish economy expanded at an average of 6.5%

a year during the '90s, more than double the rate of the previous decade.

Shortly after the turn of the century, though, the housing boom began to spin out

of control. As incomes and employment in Ireland rose, cheap credit and tax

incentives fueled a buying frenzy that pushed up both prices and housing stock:

the cost of an average house rose almost three-fold in the decade through 2006,

while some 40% of the country's housing was built in the last decade, according

to Brian Devine, an economist at Dublin-based stockbrokers NCB. At the

Grange, a swish 11-acre (4.5 ha) development in Dublin, realtors sold 15 luxury

apartments a week even before work started on the complex in 2006.

The construction mania fast became "a growth that squeezed all the other organs

of the economy," says John Fitz Gerald, an economist at Dublin's Economic and

Social Research Institute (ESRI). That starved Ireland's exporters of valuable

resources. The result: the country's share of euro-zone exports has slipped by a

fifth since 2001, while housing investment grew to 14% of Ireland's economy by

2006, roughly three times the European average. When values and demand

began to fall — house prices fell 10% in the year to August, while apartments at

the Grange are now selling at a rate of just one or two a week — it left a gaping

hole in Ireland's growth prospects.

Repairing that will require the nation to kick its housing addiction. In future, says

Rossa White, chief economist at Davy, a Dublin-based brokerage, "Ireland, as a

small economy, will rely on trade to generate increases in living standards. We

need to get back to that. We lost sight of it." That won't be easy, as long as major

trading partners are themselves caught up in the slowdown; the U.S., for

instance, buys roughly a fifth of Ireland's exports. It'll take some time, too, for

exporters to redeploy resources such as labor freed by the housing slowdown.

Still, Ireland remains an attractive place to do business. It's blessed with a

growing labor force of young workers, and it measures up well, too, in terms of

taxes: its corporate tax rate of 12.5% is one of the E.U.'s lowest, while levies on

labor and capital stack up well against rivals. That's one reason the world's

second biggest advertising firm, WPP, announced in September that it plans to

shift its headquarters from the U.K. to Ireland; and why pharmaceutical company

Shire and publishers United Business Media both announced similar plans earlier

this year. The arrival of new companies, and a greater emphasis on trade, should

help Ireland to average growth of around 3.5% over the next decade, according

to ESRI's Fitz Gerald, outstripping most of Europe.

Such a rebound will be welcomed by the Irish government. Thanks to the fall in

tax receipts caused by the housing-market collapse, Ireland's budget deficit is

forecast to hit 5.5% of GDP this year — well beyond the 3% limit imposed by

Brussels. That has left Dublin little room to spend its way out of trouble, a fact

made clear when Finance Minister Lenihan announced a slew of tax hikes and

spending cuts on Oct. 14.

The government is also keeping a close eye on the country's banks. Though

heavily exposed to the domestic property market, they haven't yet needed the

kind of cash injections seen elsewhere in Europe and the U.S. But with credit

markets freezing over, the government has guaranteed deposits and debts for a

handful of big lenders, amounting to well over $500 billion in liabilities, more than

twice the country's GDP. The next step will be to ensure credit gets to Ireland's

good-quality businesses over the next year or two, says Davy's White. On

Grafton Street, Weir & Sons is among the luckier ones. It owns its black-and-

gold-fronted store, so at least it doesn't have to worry about rent. And its prime

location makes the shop popular with tourists. McDowell, for all his worries,

remains bullish about Ireland's long-term prospects. "We're a very small, very

young country," he says. "It doesn't take much to get it going again."

Documents

How the Credit Crunch Finally Arrived in Ireland