Tuesday, December 17, 2013

Irish Economic Crash 2008: Bubble and bust home-made

Irish Times columnist Fintan O'Toole's claim  in this film that German banks provided funding for the property bubble, has been shown to be wrong. Throughout the 2000s, the interbank market in the UK was the predominant creditor to the Irish bank-ing system.


There were several factors that contributed to the Irish economic crash of 2008 and the overreaction of ratings agencies and bond investors (as claimed by Swiss-based economists) came after the main event. Whatever other issues that can be invoked such as low euro interest rates, the simple fact is that the bubble and inevitable bust were home-made.

The 3-year international bailout ended on Sunday and DPFOC, a Cork-based online marketing firm, has produced an infographic on the bailout (place cursor over image and maximise).

Enda Kenny, taoiseach, addressed the nation on Sunday night and it's a case of some work done and a lot to do: Kenny and Ireland's dead cat bounce

In a time of international crisis, small economies that are dependent on foreign investors to fund most of their debt sales are particularly vulnerable as the potential buyers may have limited knowledge about such economies.

In 2007 when the US subprime crisis and credit crunch signalled that the global financial sector was in trouble, Ireland and Finland, two small economies that had experienced economic crises over the previous two decades, were in sharply different positions in respect of vulnerability to an international shock.

Ireland's net public debt was 10.5% of GDP compared with Finland's minus -72.5%; household debt was at 210% of gross disposable income compared with Finland's 110%.

Both countries sharply cut public debt in the 1990s with the benefit of rising exports.

For a number of years, Ireland with less than 1% of Europe's population was getting over a quarter of US greenfield investment; there was a huge increase in labour participation with the number of dependants that every 100 workers had to support cut from 230 to 115.

FDI (foreign direct investment) peaked as a job creator in 2000 and during the 2001-2007 property bubble fuelled by tax cuts and bizarrely a raft of property tax breaks, credit growth, low euro interest rates and a large inflow of migrants from Eastern Europe, there was NO net jobs growth in the internationally tradebale sectors.

In 2007, DKM Economic Consultants estimated that Irish construction output represented 22.6% of GNP and 19% of GDP, when measured in gross output terms. The construction to GDP ratio was the second highest proportion (after Spain) and ranged from less than 8% in Sweden to over 21% in Spain and with an average ratio of around 12% in Western Europe and less than 11% in the UK.

By mid 2008, almost two-thirds of outstanding domestic Irish private bank credit of €416bn was property-related.

Icelandic and Irish banks had the highest loan-to-deposit ratios in Europe; loan to deposit ratio rose very sharply, from 136% in January 2003 to a peak of more than 193% in October 2008. PermanentTSB peaked at 277%.

One of the factors that increased market jitters was the uncertainty about the extent of bank losses.

In February 2009, exactly 2 years after the subprime crisis broke out in the US, the Irish unit of Pricewaterhouse Coopers (PwC), the biggest of the Big 4 accounting firms, delivered a report on Anglo Irish Bank to the minister of finance.

It said:

These annual impairment charges were €2.3bn and €3.0bn respectively per annum under the two scenarios for the years ended 30 September 2009 and 2010. The two PwC impairment loss scenarios exceeded Anglo’s worst case impairment loss scenario.”

Jones Lang LaSalle valued a sample of 160 properties held as security in relation to the top 20 land & development exposures on Anglo’s books.

Anglo Irish Bank reported a loss of €12.7bn for the 15 months to the end of December 2009 - the largest loss in Irish corporate history - after charging €15bn to cover bad debts.

The main Irish story was that a massive bubble was followed by a massive bust. Ratings agencies and bond investors were among the extras in the cast of villains.

The Irish banks were not only exposed to the local property market, they enabled Irish investors to become the second biggest investors in commercial property in Europe after the Germans.

About 80% of Anglo Irish Bank’s €68bn loan book was secured against Irish and British property. Bank of Ireland’s loan book in 2008 at €135bn, had 71% or €95bn secured against property. AIB’s loan book was at €150bn, and 60% was secured against property.

Irish investment of €13.9bn was put into European property deals in 2007.  In contrast, the Irish business sector did not even get a total of €200m in venture capital investment.

VOX: Whatever happened to Ireland? - Prof Morgan Kelly 2010