But how does a country with a population of 4m get itself into this position in the first place? Whereas the rest of the world suffered a financial crisis because of very complicated debt structures like CDO’s, Ireland’s banking crisis is essentially home grown. It boils down to the bursting of one of the largest property bubbles in history.
The genesis of Ireland’s problems go back 10 years. “Until about 2000, growth had been on a secure export-led basis, underpinned by wage restraint. However, from about 2000 the character of the growth changed: a property price and construction bubble took hold,” wrote Patrick Honohan of Trinity College Dublin – now governor of the Irish Central Bank – in a report published in 2009.
Anecdotal evidence of the scale of the boom is staggering. In one prosperous Dublin suburb an acre of land sold for over €80m in 2005.
This is also a tale of hubris. Philip Lane, head of economics at Trinity College Dublin, notes that the banks are in trouble not because of homeowners defaulting on their mortgages, but as a result of a small number of property developers. These guys borrowed billions during the boom years and are now facing bankruptcy.
Taxpayers have been consigned to spending huge sums to prop up the banks, including Anglo Irish, which ran aground after making bad loans. Former chief executive Sean Fitzpatrick took $114m in personal loans over eight years at the bank, but recently declared bankruptcy. The government has been investigating.
What is most startling in Honohan’s report is his refusal to blame the international financial crisis for Ireland’s problems. It would have happened anyway, the straight-talking central banker says, and the collapse of Lehman Brothers in autumn 2008 only exacerbated the Irish banks’ funding problems.
The end of Honohon’s report sums up this chapter in Ireland’s history: “The Celtic Tiger period represented a solid convergence of Ireland to the frontier. But it ended in 2000, to be succeeded by an old-fashioned property bubble.”
At least its central bank governor is under no delusion of what caused the crisis. It took a decade to grow, it may take a decade to unwind.