Ireland’s Economic Crisis

For those in Canada who may not be fully aware of Ireland’s economic crisis, we thought it would be a good idea to blog about what is really going on. The country has been in recession since the second quarter of 2008.

Last Thursday the government shockingly disclosed that the final cost of bailing out the Irish banks could rise to 50 billion Euros ($60 billion) – much more than previously announced. So what could this mean  for the 5 million people who live there? It will cost roughly 10,000 Euros for every man, woman and child, huge amounts of public money will be required. The country will have to undergo major cuts in expenditure along with tax increases. For the time being, the government has promised not to borrow any more money nor will it seek any more emergency funding from international lenders at least until next year.

This all stems from reckless lending by its banks during a boom that ended in 2007, and as property prices fall, is now becoming one of the biggest busts in history. The deficit for this year will be 32% of GDP – 10 times the limit set for member countries of the EU, mainly due to the extra cost of capital for major banks. But unlike some other European economies (Greece), Ireland has acted early to tackle its debt. Greece was on a threshold before it cut public wages and raised taxes. It acted slowly to address its troubles, and only then as a condition of a 110 billion euro ($145 billion) bail-out by the European Union and the IMF.

Ireland did this early on. Markets have not yet rewarded these steps, largely due to its bank struggles. Apart from the money poured into its banking system this year, Irish government bond yields are increasing. The yield on ten-year government bonds neared 7% on September 29th, a record spread of 4.7 percentage points above those of Germany.

These increased bank losses required bail-outs which raised deficits and lead to even more budget cuts. Another shock came when Allied Irish Banks, one of the two largest financial institutions, was practically nationalized with an injection of 3 billion Euros (not to mention the sudden removal of its chairman and managing director last Thursday).

It is also speculated that if bond yields rise further, Ireland and Portugal might have to borrow from the European Financial Stability Facility (EFSF). This probably is not the case.

Reports show that Ireland has raised enough money to finance this year’s borrowing requirement (it will spread the cost of bank bail outs over several years). Portugal is also not as desperate for cash as Greece was in the spring. In the unlikely event that Ireland was forced to borrow from the EFSF, the fund might find it hard to impose conditions harsher than the ones it has volunteered for already. Click here, for an article in the Economist, and for news on further actions Ireland may be taking click here, for an article in the daily mail.

European Financial Stability Facility: €440 billion fund established in June for struggling euro-zone countries.
More information can be found here.