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With its fiscal, competitiveness and banking crisis, Ireland is among the most severely affected
countries in the global crisis. This abstract explains how and why Ireland became bankrupt
following the 2008 recession and global economic crisis.
Since 2008, Ireland has experienced a severe financial crisis characterised by a systemic banking
crisis and a significant economic adjustment. It is an interesting boom and bust story, which
combines hubris formed during the years of solid growth, the unprecedented experience on inward
migration and the collapse of an economy heavily dependent on the commercial and residential real
estate boom. Much of the reason for the revenue collapse lies in the systematic shift over the past
two decades away from stable and reliable sources such as personal income tax, VAT and excises,
towards cyclically sensitive taxes.
Developments in the commercial property market played a pivotal role in the Irish crisis. The lowtax environment (Corporate Tax as low as 12%) lured all kinds of companies to set up their
businesses in Ireland. The Govt. thought that these companies would be able to create jobs,
increase your business, and make more investment. Irelands very low-tax environment turned it into
a favourite tax haven and led to an influx of business that wasnt really business at all: it was just
companies like Google shuffling paper through Ireland to dodge taxes. This business influx made
the Irish commercial property market to experience a significant boom with annual appreciation
rates in capital values significantly outstripping European counterparts by 2006. The principal cause
of the collapse was a plain property bubble, compounded by exceptional concentrations of lending
for purposes related to commercial property.
Given the shortage of other good investment opportunities, the money was channelled
predominantly into property development in Ireland. The greatest demand for credit from the Irish
banks and building societies came from builders and property developers. Competition between the
Irish lending institutions intensified, as they strove to hold their share of a rapidly expanding

market. This led to a significant change in the process of lending as domestic institutions, seeking to
differentiate themselves, began to offer more streamlined loan approval processes. The result of
these lending strategies was a threefold concentration of assets on the balance sheets of the Irish
banks. This featured loan to the property sector in general; loans to commercial property
specifically; and within this latter group, development loans to interests associated with a limited
number of key developers of commercial property. The effect was to give an enormous boost to the
construction industry. The country was exceptionally dependent on construction activity as a classic
property bubble developed.
But when the economy went sour, mainly due to global recession, many of the companies left or cut
back drastically, putting people out of work and denting government revenue. The lenders
pressurised the government to raise taxes so it could pay back the money it borrowed to maintain
spending deficits exacerbated by low tax revenue. The Irish government, following a late-night
meeting with all the senior banking officials in the country on September 30 2008, agreed to cover
all of the banks debts. This bank debt was added to an already significant budget deficit, causing
international investors to question the sustainability of Irish sovereign debt. In April 2009, the
government proposed a National Asset Management Agency (NAMA) to take over large loans from
the banks, enabling them to return to normal liquidity to assist in the economic recovery. The costs
of the bank rescues, NAMA and government deficits over the period look set to push Irish National
Debt up to a ratio of 125% of GDP by 2015.
There are four key areas in which bank management and governance contributed to the Irish
banking crisis. First, management failed to appreciate the risk entailed by the significant
concentration of bank assets in activities related to property, and especially non-household based
commercial property, as described above. Secondly, lending guidelines and processes appeared to
have been quite widely circumvented. A third contributing factor involved very specific and serious
breaches of basic governance principles concerning identifiable transactions in specific institutions
that went far beyond any question of poor credit assessment. The fourth key corporate governance
failure identified was poor remuneration policies which encouraged and rewarded risk-taking. In
particular, they criticized management bonuses and awards of substantial stock options to top and
middle management.
The government negotiated a financial assistance package with the EU and the IMF. The financing
provided by the programme partner helped to cushion the very large shock which Irelands
economy and public finances have suffered as a result of the bursting of the bubble. It is helping to
keep vital public services running. Implementation of the programme is a matter for the Irish
government, which has a democratic mandate from the Irish people. Recapitalisation of the
domestic banks has been completed. The budget deficit target for 2012 was met and for 2013 is
forecast to be within the programme ceiling (of 7.5% of GDP). The government is committed to

reducing it to below 3 % by 2015. The government has reformed sectorial labour market
agreements, and is undertaking measures to improve labour market activation for the unemployed.
Despite these achievements, challenges remain. Irelands budget deficit is still among the largest in
the euro area, and it also has a high level of government debt. Unemployment is increasingly longterm in nature. Irish financial institutions have not yet reached full capacity to support the recovery
through new lending, including to SMEs which can play a key role in future job creation. Continued
steadfast implementation of the EU/IMF programme will be needed to address these issues.
Submitted by
Arun Varghese Roy
Group 8, Marketing B