This article was contributed by Dick Roche. Dick was Ireland's Minister for European Affairs until March 2011. At this time, national elections resulted in a loss of the Fianna Fail party, which had been in power during the 2008-2011 Irish financial crisis. In this article, Dick Roche provides an exclusive, inside view of the state of public finances, the impact of bank lending to the real estate sector, and the negotiations which led to the Irish bailout.
This is part of a paper delivered to the "Quo Vadis Europe" conference organised by Suomen Keskusta, the Finnish Centre Party and the European Liberal Democrat and Reform Party (ELDR), held in Helsinki on Monday 14 November. Dick is Vice President of the ELDR and a member of the European Consulting Network's Advisory Board.
A year on since the IMF and ECB arrived and the events of the first 3 weeks of November 2010 are still shrouded in something of a fog. It will take time before a full, dispassionate and objective history of all the events of those fateful November days is written. It is instructive none-the-less to look back a year later at the events that convulsed the nation and that brought about such a fundamental political change.
THE CREDIT CRUNCH: A DOUBLE WHAMMY
Between 1995 and 2006 the Irish economy boomed, fuelled in part by cheap capital raised in the interbank market. New operators arrived on the banking sector with ‘less restrictive’ policies an issuing loans. The ‘new competition’ and ‘greater flexibility’ in banking was widely welcomed at the time.
The massive inflow of cheap capital and the dumping of traditional banking standards fed a property bubble of historic proportions.
From the mid 1990s to 2007 property prices rose to astronomical levels. This in turn triggered an explosive expansion in the building industry, particularly home building.
In spite of record housing output, property prices continued to escalate: the ‘law’ of supply and demand was stood on its head – a classic property bubble.
Employment in the building industry rocketed. Tax take from that sector boomed so much so that there where demands for cuts in stamp duty.
The ‘Celtic tiger’ lost its stride in 2007. It came to a juddering halt in 2008. Following the Lehman debacle credit virtually disappeared. Banks that had been pushing loans would not part with a cent. Building projects were abandoned, property sales crashed, prices plummeted, major developers failed and tens of thousands of building workers lost their jobs.
State tax revenues went through the floor. Irish public finances that had been in a state of rude good health for years became terminally ill.
From mid 2007 the Irish banking system experienced serious difficulty financing day-to-day operations.Alarm amongst senior bankers grew and as the summer of 2008 drew to an end, turned to outright panic.
A final blow for the ‘Celtic tiger’ came in September 2008. Inadequate and lax supervision by the Irish regulatory bodies and criminally irresponsible behavior by some bankers had undermined the entire banking system. The Irish Government was asked to rescue the banks.
Faced with the prospect of a bank meltdown the Irish Government introduced its controversial, but later widely copied, bank guarantee scheme.
Two years later and Irish banking was still on life support, kept afloat through ECB intervention, state recapitalization, by selling off non core businesses and by being relieved of its assets (including some regarded as ‘toxic’) at written down prices by the creation of a state asset management agency. Non-Irish players were getting out of Irish banking.
On top of all the other woes Eurostat demanded a reclassification that had the effect of revising Ireland’s budget deficit upwards to 14.3 % from 11.7 %. The Finance Minister pointed out that "There is no additional borrowing associated with this technical reclassification” and that it would not deflect from reducing the deficit to below 3 percent of GDP by 2014," Lenihan said.
Dramatic and painful steps were also taken on public expenditure.
By October 2010, €15 billion in adjustments had already been implemented. A further €6 billion in spending adjustments were signaled for Budget 2011.
It was planned that by December 2011 Ireland would be 2/3 of the way to meeting the EU target of bringing our deficit below 3% of GDP by 2014, in spite of the Eurostat reclassification.
On the surface, things were beginning to look positive. Exchequer returns for end October showed tax take ahead (1%) of profile. Exchequer spending was below expectations. Ireland was fully funded until mid 2011. There was a cash balance of €22bn in NTMA and an additional €25bn in the National Pension reserve.
Work was underway on a four-year plan to map out a way forward to national recovery. There was even a degree of political consensus on what had to be done.
Ireland’s efforts to halt the slide were widely acknowledged.
Commissioner Olli Rehn pointed out that Ireland had formidable strengths; strong economic fundamentals; well-educated labour force, strong export growth and a strong private sector.
A communiqué issued by the EU Economic and Finance Council acknowledged the ‘significant efforts of Ireland’ to address our problems, welcomed the four year budgetary strategy, expressed ‘full confidence’ that it would ‘firmly anchor’ the 2014 date Ireland’s deficit.
The Council also approved Ireland’s intended frontloading a further €6 billion in adjustments in 2011 and acknowledged that proposed ‘structural reforms’ would result in Ireland being able to ‘return to a strong and sustainable growth path’.