Financial Crisis in Ireland 2008 Essay

Introduction

The bursting of subprime mortgage in the United States real estate market would trigger a full-blown international financial crisis that brought the world economy nearly to its knees. It started as a bubble burst following excessive borrowing amongst homeowners encouraged by the low-interest rates. Lenders would bypass underwriting the creditworthiness of borrowers through mortgage-backed securities. It occurred after the US federal government initiated policies that overrode the anti-predatory measures enshrined in the state laws (Bartmann, 2017, p. 4). Guided by the Community Reinvestment Act, low-income earners could easily obtain mortgage loans. Securitizing the mortgage guarantees triggered risky lending to keep up with their approval rates and the vast pool of ready homebuyers (Agarwal, et al., 2012, p. 2). Ireland was no exemption from the US-style challenges that plunged it into the worst financial crisis in 2008. The effect of lax regulations, predatory lending and property market bubble burst and poor macroeconomic management would bring the fifteen-years of economic prosperity to a sudden halt. This report discusses Ireland financial crisis in 2008, its cause, effect, and road to steer the recovery.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

This study evaluates the origin of the financial crisis in Ireland for a country that enjoyed fifteen years of economic prosperity. As the first European country to experience the hard-hit effect of the global financial crisis in 2008, the study investigates the possible existence of brunt reforms in the fastest growing state in GNP per capita. The study questions the reality of Ireland crisis? What led to the sudden fall? Was the financial crisis an implosion of the real-estate bubble only? It tracks the role of European Union in the deepened crisis and existing links to engineer Ireland recovery.

Irish Financial Crisis

The financial crisis in Ireland resembled the US-style collapse following the easy-money bubble that hit its real estate segment. It emerged from the availability of cheap credit accessible to almost all families desiring to buy and build houses. The process began in the 1980s through 1990s when Ireland experienced steady economic growth. The rapid economic boom would trigger a mass exodus of people with Irish ancestral roots motivated to return home (Roche, et al., 2013, p. 21). The high economic growth enticed individuals to seek employment internally backed by blossoming industries. The national unemployment rate would fall steadily from 15.7% in the 1998 to 4% in 2004 (Conefrey, et al., 2014, p. 18). The high growth witnessed from 1997 to 2007 transformed Ireland from a poverty-stricken nation into joining the wealthiest class.

Behind the high economic growth was mass job creation. The resulting increase in disposable income levels in the Irish economy attracted foreign investors. The low-tax rate to the corporate world saw more foreign companies set operating base in Ireland. The government would offer more enticing opportunities with free higher education accessible to European Union (EU) citizens. The increased number of graduates formed a pipeline of the ready labor market (Conefrey, et al., 2014, p. 18; Ruane, et al., 2010, p. 80). It coincided with expanding the trading market in the international platform, itself attracting more people to work in Ireland. Within fifteen years from 1990, the labor market grew from slightly more than a million workers to nearly two million.

Ireland aligned itself with pillars that ensured sustained economic growth, making it the Celtic Tiger. Increased job creation blend with economic growth motivated more Irish to embrace development. Developers started mass construction of houses banking on the projected wave of emigration. They anticipated that the rapid economic growth would support a second immigrants' wave who could eventually purchase the houses (Norris & Coates, 2014, p. 299). Real estate developers sought lending from the Irish banks. Increased lending allowed the banks to grant record loans. The high demand for construction funds necessitated mass borrowing by the Irish banks themselves to sustain the domestic borrowing (Norris & Coates, 2014, p. 306). Such manifests in the foreign borrowings by Irish lenders from EUR15 billion in 2004 to EUR110 billion by 2008 responsible for EUR148 billion in EU residential mortgage debt (Duffy & O'Hanlon, 2014, p. 329). The Irish banks adopted a three-month rollover approach to obtain foreign funds. Unknowingly, the properties sector boom led to oversupply leaving most banks strangled with the classic asset-liability mismatch (Hall, 2009, p. 430). The Irish government would embrace the forecast by banks and developers that such lending presented opportunities to expand the 'Celtic Tiger.' Neither party would worry of the accumulating debt in 2006, with then Prime Minister Bertie Ahern declaring, "The boom is getting boomier."

Before the financial crisis, Ireland experienced fifteen years of sustained economic growth and faster development trend. It would transform the country to one of the region's fastest-growing and strongly placed among the wealthiest countries measured in GNP per capita. The occurrence of Ireland financial crisis was beyond its horizon as it realized two decades of economic alignment and political efforts to catch up with other EU member countries. Ireland would embark on initiatives to steer growth for its GNP per capita. The consistent adoption of growth-oriented policies enabled it to realize the desired growth at constant prices. By 2001, its growth rate would average 5.6%, reflected in the reduction of its public debt from 110% in 1987 to 25% of its output in 2007 (Gartner, et al., 2013, p. 360). The transformation would become the Celtic Tiger period that allowed to government to realize marginal positive balance.

Poor positioning for its macroeconomic policy would lead Ireland to a hard landing. Ireland housing bubble would burst with the collapse of US financial firm, Lehman Brothers. The situation would trigger a chain of events that endangered the banking system by plunging it into endless crisis. It forced the government to initiate unconditional guarantee amounting to EUR440 billion to cover liabilities for the primary Ireland banks (Yurtsever, 2011, p. 690). At this time, the national unemployment tripled to 14.4% by 2011 while the GNP per capita declined by 10% and 12% in 2008 and 2009 respectively (Duffy & O'Hanlon, 2014, p. 330). Its outcome left everyone affected by the crisis with households dealing with budgetary cuts, decline welfare rates and declining disposable income by ten percent. Furthermore, it would rekindle the net emigration that stopped during the Celtic Tiger period. Poor macroeconomic management cost Ireland achievements realized within its twenty-years of economic reforms and adoption of budgetary discipline.

Ireland Economic Development Model

The ignition for the Ireland financial crisis in 2008 is often perceived as the real estate bubble burst. Nevertheless, its occurrence only triggered a sequence of poor positioning for the country's macroeconomic management policy. The crisis brought multi-faceted effect with the housing bubble burst leading Ireland banks to near-bankruptcy. Sudden economic contraction would then translate to rising unemployment and reduced living standards. It left ballooning state debt from the austerity measures that appeared to aggravate the crisis. However, Ireland excesses derived from the Celtic Tiger were not all directly linked towards funding the real estate boom (Duffy & O'Hanlon, 2014, p. 329). Instead, the banking sector fuelled the bubble by doubling credit to the private sector. The local banks would borrow huge amounts abroad, gradually eclipsing their capacity to repay. Again, banks and policymakers ignored the early warnings of the impending real estate bubble. They would realize their errors too late when the US subprime crisis had significantly contaminated the Ireland financial system.

The occurrence of the real estate bubble burst, and the resulting financial crisis highlighted fundamental weaknesses in the foundation of Ireland's development model. Beginning in 1958, Irish policymakers adopted export-led development strategy tied to the foreign direct investment (FDI) inflows. The state ran an attractive regime to the net inflow of FDI through open policy to international trade and provision of quality infrastructure. Its export-led initiative attracted investors seeking entry into the attractive EU region. As such, the development model leveraged reduction of operating costs, sufficient supply of skilled workforce and business-friendly tax structure. Its journey to the Celtic Tiger saw Ireland sell itself as a low-cost destination (Casey, 2011, p. 92). Its recovery from the 1980s recession saw its labor market capped at low levels, unlike other EU countries. Ireland achieved low labor costs through the social partnership agreements involving business and union members to control wages movement. Nevertheless, individual workers felt that the Celtic Tiger period increased the country's wealth. Consequently, they deserved a portion of the new wealth through better compensation. The situation evokes concern on how Ireland claims on the low-cost operating environment while realizing the highest GNPs per capita in the EU region.

The commitment by the Irish government to invest in quality education contributed towards stimulating high growth environment during the Celtic Tiger period. By mid-1960s Irish policymakers identified skilled and trained workforce would help Ireland develop the economy and attract foreign direct investment. That led to the restructuring of third-level education to produce the skilled workforce (Casey, 2011, p. 92). The onset of 1980s recession forced young people to emigrate leaving Ireland with a mass brain-drain as skilled workforce sought employment opportunities abroad. It motivated the government to attract FDI to stimulate economic growth, thereby halt brain drain. It involved running a low corporate tax rate by implementing a liberal fiscal regime. Ireland offers zero tax policy on the corporate profits derived from manufactured exports earnings. It would replace it with a ten percent rate for entire manufacturing proceeds in 1980. The increased criticism forced the authorities to bow to the EU pressure to raise the corporate tax rate to 12.5% in 2003 to ensure consistency with the harmonized stability pack (Crawford, et al., 2017, p. 36). With other EU member states competing to attract FDI, Ireland's favorable rate won many multinationals. The restructuring of its tax structure would later leave Ireland's revenues vulnerable to the crisis that disrupted cyclical sources. That occurred as severe contractions that hit the critical sources of cyclical taxes equally led to sharp unemployment rates.

Ireland economic success would fuel a significant secondary expansion of its commercial developments and real estate sector into the 2000s. Developers sought finances from Irish banks who could hardly overlook the opportunity to profit from the economic prosperity. The demand for debt financing saw the leading lending institutions among them the Allied Irish Banks, Bank of Ireland and the Anglo Irish Ba...